In the past days, I have been struggling to understand the differences between many similar ETFs from Ireland and the US. Even though they are all tracking the same indices, and have excellent tracking deviation, I wonder why there are so many of them, there must be some differences. This question leads me to understand the tax implications on investment, as it depends on your residency, and the treaties between the country with US.

Let me explain this to you in simple words, as I am not a tax expert nor financial advisor, I summarized the findings I got through my own research because this will definitely impact on my investments.

Dividend Tax and Implication on Investment Returns

The US sourced dividend tax for non-US residents is 30%. It means that your investment in the US-domiciled financial products will distribute you dividends after deducting 30% tax. If you get $2 dividend from your shares of a US company, you will eventually only receive $1.4. Imagine you have invested $200,000 over the years, and a 2% dividend per year is $4000 per year. But 30% is taken away as tax, and you only get $2800! It is a huge difference! However, for most of the countries that have a tax treaty with US, for example, Switzerland, Ireland and many others, the tax rate is reduced to 15%. For the same $200,000 investment value, you can receive $3400 dividends. If your resident country does not have treaty with the US, then you can buy Ireland-domiciled investment, such as the iShares ETFs and some Vanguard ETFs.

So be careful about US sourced dividends, you will pay different tax on it depends on which investment you buy.

As for people who live in the country where there is a tax treaty, and the reduced tax rate is 15% or lower, then you can buy directly US-domiciled investments, such as the US based Vanguard ETFs. They have a lower TER (Total Expense Ratio) than similar ETFs from Ireland. TER is a factor which will impact on your total earnings in the long term, so take it seriously. Here I put a table from <The Bogleheads’ Guide to the Three-Fund Portfolio>, it shows the cumulative impact of advisor and broker fees over an investment lifetime.

A 1% fee difference will turn into a 18% difference on total investment in 20 years, and 32.8% difference in 30 years. If you are 30 something, till you retired at the age of 64/65 in Switzerland, you could have 25.8% more from your investment or less, it all depends on the products you choose right now. So, take the time to study the fees, taxes on your investment, it will have a big impact on your investment in the long term.

Luckily for those who live in Switzerland or in the country where you have access to low cost ETF, either US domiciled or Ireland-domiciled, the TER of a ETF can be as low as 0.03% and you pay 15% withholding tax on dividends.

Dividend Tax and Implication on Pillar 3a

Good news for everyone who have pillar 3a contributions in US sourced investment. According to the PWC article, the withholding tax is now 0% for your US sourced dividends.

The 2009 Protocol was originally negotiated and signed by Switzerland and the US on 23 September 2009 and approved by the Swiss parliament in June 2010. Following the recent approval by the US Senate, the 2009 Protocol will enter into force as soon as Switzerland and the US exchange their respective instruments of ratification.

In your pillar 3a investment, 0% withholding will be applied on US-sourced dividends, effective from 1 Jan 2020. It means that instead of 30% for US nonresident aliens in countries without a US tax treaty (15% for Swiss residents), you now pay 0%. You can enjoy the 15% more profit from your investment from the tax savings, immediately from contributions put in from 1 Jan 2020. Looking back at the table above, 1% fee difference can make a big impact on your investment, image the impact from a 15% tax exemption!

Estate Tax

Estate Tax rate is important when your total assets are passed on to your children, spouse or relatives after you die. The tax rate is as high as 40%. Similar to dividend tax treaty, there is also a treaty between some countries and the US. In Switzerland, Swiss residents can enjoy the same estate tax policy as the US citizen according to a table summarized on the Bogel’s Forum. Current exemption value is up to $11.58 million and tax rate is at 40%. But it is not absolute. For Swiss residents, your total exemption cap depends on the ration of your US based assets vs. total assets. Then use this ratio to times $11.58million. The net amount is the your exemption cap. If you have $20million assets world wide, and $1million is a US-based assets (stocks, ETF, real estate and so on), the ratio is 1/20=5%. Your exemption cap is 11.58 x 5%= $0.579million. Then you need to pay 40% estate tax on the excess amount. For average investor, it wouldn’t be a problem. It is good that Switzerland has this treaty with US. If you are living in a country which has no estate tax treaty with US, the exception amount is then $60,000.

However, in Switzerland, estate tax and inheritance tax can exist depends on which canton you live. Here you can find out if your canton has an estate tax or inheritance tax.

Overall, I am very happy with the situation in Switzerland and have a wide range of investment choices. It is a blessing but also a curse. Do your homework and understand the fees, taxes in your investment, and you will not regret later. I hope this article is helpful. I am not a financial advisor nor a tax advisor, I wrote what I learned from my own research. If you have additional information or corrections, feel free to leave in the comments.