Taxes are the largest cost block when investing in funds/ETFs but you can reduce them!
Updated: Sep 16, 2021
By selecting a Withholding tax-optimized fund domicile
Save US-withholding tax with the right choice off fund / ETF
When investing in funds / ETFs via a classical custodian account, withholding taxes can be the biggest "performance killers". The "detour" via an unit-linked Insurance Bond frees the investor from these taxes as long as the insurance bond cooresponds to the fiscal rules of the country of the domiciled client. Withholding taxes, on the other hand, have an impact on the investor, even if holds funds/ETF`s within an unit-linked insurance bond.
Withholding taxes are taxes on dividends and interest payments that are paid directly at "source", e.g. be retained by the custodian of the fund / ETF. The level of the withholding tax rate depends, among other things, on whether or not the fund / ETF, as the holder of the securities, benefits from a double taxation agreement. The level of the country-specific (reduced) withholding tax rates differs in Ireland or e.g. in Luxembourg. Different withholding tax rates therefore affect the fund's net asset value (NAV). For example, the US tax authorities retain a withholding tax of 30% on dividends from US stocks.
In order to avoid this double taxation, many European countries have concluded a so-called double taxation agreement with the USA, including Ireland and the Republic of Austria. In the context of such a double taxation agreement, to put it simply, it is regulated which state has a right to tax certain income and which tax rate (withholding tax rate) is applied. In addition, these agreements are intended to avoid double taxation of income. When selecting the fund / ETF, one should consider the domicile of the fund / ETF, as this represents a factor that reduces the return/performance.
Effects of withholding tax on the return of a fund / ETF
Let`s assume a dividend yiel payment of 3 % p.a. by a US-ETF. The paying agent of the dividend distributing US company is legally obliged to withhold 30% of this withholding tax and to pay it to the US tax authorities. The ETF only receives 70% of the original dividend. In this example that is approx 2.10% instead of 3.00%.
If the country in which the fund / ETF was launched has concluded a double taxation agreement with the USA then these products are also entitled to the agreement, the withholding tax can be reduced accordingly and reclaimed. If physical ETFs were launched in Ireland, the withholding tax on investment income / dividends is reduced from 30% to 15% due to the existing double taxation agreement between Ireland and the USA.
It is therefore not surprising that funds / ETFs launched in Ireland, with the same expense ratio, perform better than funds / ETFs that were for ex. launched in Luxembourg.
When it comes to investing in stocks, we cannot ignore the US market!
As is well known, the USA is the largest capital market in the world. In most global stock indices, US stocks make up the biggest part. The MSCI-World consists for ex. of over 60% US stocks although 23 markets are represented in this index. If you want to invest in a globally diversified portfolio, there is no getting around US stocks. It is all the more important to consider the withholding tax as well as the flat rate withholding tax and to reduce this by choosing the "right" fund / ETF domicile
What should be considered when selecting an ETF with regard to withholding tax?
The withholding tax disadvantage affects all funds / ETFs that
• mainly hold US stocks in the portfolio
• were issued in Luxembourg, Germany or France
• physically reproduce the index
The database called just- ETF-datenbank currently contains 22 ETFs with around EUR 13.7 billion in assets under management in US stocks that meet these criteria (as of July 31, 2021). Many providers, such as iShares but also UBS have already relocated physical ETFs to Ireland, although most ETFs were launched by UBS in Luxembourg. Vanguard, Invesco or Franklin Tempelton for ex. set up their ETF`s directly in Ireland.
ProtectInvest gives your customers access to all funds / ETFs proposed by the respective custodian bank. When investing in equity-funds / ETFs with a focus on the USA, make sure you chose the "right" domiciled fund which will optimise your client`s performance return.
Any questions? Your responsible contact person for Germany (click), Austria or International will be happy to assist you.
Head of Sales Austria of nl360
Tel.: +43 664 344 10 39