Non-US resident: tax comparison for ETF domicle in US vs Ireland

Question

I am a non-US resident. I am evaluating taxation on US-domiciled ETF vs Ireland-domiciled ETF.

Assumptions

• The country of the investor's residence has tax treaty with the US (the withholding tax in the US is 15%).
• The local tax in the country of the investor's residence tax is 19%.
• The country of the investor's residence allows deduction of the withholding tax (i.e. the investor pays only the delta between the withheld tax and the local tax).

1. US-domiciled ETF distributing dividends.

• Tax rate on dividends paid from companies to the ETF is 0%.
• Withholding tax rate on dividends paid by ETF to the investor is 15%.
• Local tax rate on dividends received by the investor is 4%.

Total: 19%

2. IE-domiciled ETF distributing dividends.

• Withholding tax rate on dividends paid from companies to the ETF is 15%.
• Withholding tax rate on dividends paid by ETF to the investor is 0%.
• Local tax rate on dividends received by the investor is 19%.

Total: 31.15%

3. US-domiciled ETF accumulating dividends.

Not applicable: US-companies must pay dividends at least once a year to non-US residents.

4. IE-domiciled ETF accumulating dividends.

• Withholding tax rate on dividends paid from companies to the ETF is 15%.
• Withholding tax rate on dividends paid by ETF to the investor is 0% (no dividends).
• Immediate local tax rate on dividends received by the investor is 0% (no dividends).
• Local tax rate on realized gains after sale is 19% (no tax on unrealized gains).

Total: less or equal to 31.15% depending on the investment period

Questions

1. Is there anything wrong in the above calculations?
2. How to compare Option 4 against Options 1 and 2, assuming 10 years as an exemplary investment period?
3. In what conditions, Option 4 becomes more optimal compared to Option 1?

Update: the country of the investor's residence doesn't have any Estate or Gift Treaty with the US, but let's ignore the Estate tax for simplicity.

Answer 1

Complete Answer

1. Nothing wrong if you only consider the total dividend tax while ignoring that 4% less immediate tax each year in Option 4 provides additional chance for compounding capital gains.

2. One suggest way is to draw up spreadsheet showing year-by-year effect such as below.

3. When the dividends from Option 4 are not subject to any local tax (except capital gains on the gains of reinvested dividend), or when you consider ... the up to 40% US Estate Tax (Note: There is 1.5% overall chance of death between Age 20 and 30). The forecasted dividend yield and capital gains do not affect the winner it seems.

Assumptions:

• $100 Lump Sum investment for 10 years
• 2% Gross Dividend Yield each year
• 8% Capital Gains each year
• Reinvested Dividend (including manually)
• For Option 4, although dividend not distributed to the individual, the Net Asset Value / Price of ETF increased. Local capital gains tax of 19% applies as if the Dividends are aquired at $0 cost basis.

Here you can see that Option 1 is 1.5% better than Option 4 over 10 years.

Partial Answer

If your country of residence (not citizenship) does not have Estate or Gift Tax Treaty with the United States, regardless of the Income Tax Treaty status (except Canada), the US-domiciled ETFs (including Treasury Bonds ETFs after 2011) are subject to up to 40% US Estate Tax if held in an individual account.

IE-domiciled ETFs do not have US Estate Tax, not because of Income / Estate Tax Treaty, but because IE-domiciled ETFs are not "US Situs" assets. The companies inside the IE-domiciled ETFs are "US Situs" but the owner (i.e. the ETF itself) does not "die", hence there is no US Estate Tax triggered.