ETFs (Exchanged Traded Funds) are an excellent alternative to traditional investment funds: they passively and faithfully replicate a benchmark index (the underlying), are considerably less expensive and can be traded daily during the opening hours of the relevant stock exchange.
In the event of issuer bankruptcy, ETFs do not become part of the bankrupt estate. They are considered a separate asset and therefore remain the property of the investor (unlike structured products, for example).
ETFs enable diversified investment in countries or themes for which the investor does not have the knowledge, time or financial resources required for stock picking.
For my part, I invest directly in selected Swiss equities, but I find that ETFs are a valid alternative if you want to invest in the Chinese market, for example, or in a complex theme such as robotics.
Taxation of ETFs
"The true objective for any long-term investor is maximum total real return after taxes" (John Templeton).
As with equities, assets invested in ETFs are subject to wealth tax, but price gains are tax-exempt.
A lesser-known element: ETF income (dividends or interest) is subject to income tax, regardless of whether it is distributed or reinvested.
The domicile of an ETF is a determining factor in its taxation. Thus, dividends distributed by an ETF domiciled in Switzerland are subject to a withholding tax of 35% (exactly the same as dividends on Swiss shares).
It is important to understand that it is the tax domicile of the ETF, not the market on which the shares replicated in the fund are listed, that is decisive for its taxation! If, for example, you buy a Swiss-domiciled ETF that invests in US equities, its dividends (distributed or accumulated) will be subject to Swiss withholding tax!
On the contrary, ETFs domiciled in Ireland and Luxembourg (very common in Switzerland) are not subject to withholding tax... but here's where it gets a little complicated... unless they invest in Swiss securities! Why is this? Because the ETF has to pay withholding tax, just like a private investor. In the case of an Irish ETF investing in Swiss equities, the withholding tax cannot be refunded to the investor, and is lost for good!
Where it gets interesting is for Irish and Luxembourg ETFs investing in foreign securities. In this case, the Swiss investor won't pay withholding tax on his income... but the ETF will... I know, it's a bit convoluted, so let's take an example:
A Swiss investor who buys US stocks directly will have 30% withheld from his dividends, of which 15% is refundable. If he buys an Irish ETF that invests in US equities, his dividend will only be taxed by 15% (non-refundable). This amount is calculated as follows:
- for the private investor: 0% Irish withholding tax
- for the fund: 15% withheld by the US tax authorities.
In a nutshell
- I advise Swiss investors against investing in ETFs domiciled in countries other than Switzerland, Ireland and Luxembourg. ETFs domiciled in the USA, for example, retain 30% of distributions, those in Germany 28%.
- Swiss investors should invest in the Swiss market via a Swiss-domiciled ETF. (he will be subject to withholding tax of 35%, but can claim it back on his tax return).
- Swiss investors should invest in foreign markets via an ETF domiciled in Ireland or Luxembourg. (for example, it can invest in US equities without being subject to withholding tax, which is not the case if the ETF were domiciled in Switzerland).
Conclusion
By taking into account the tax domicile of an ETF, you can invest in foreign markets while avoiding withholding tax.
This little financial stratagem is perfectly legal, and benefits both the investor in the accumulation phase and the one who lives off his passive income: the former can reinvest all his dividends without having to wait for the withholding tax refund (about a year later); the latter will appreciate immediately receiving his entire passive income to finance his lifestyle.
Disclaimer: This article is partly inspired by the book "Investing by fixed rules with ETFs and stocks" by VZ, 2019 edition.
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Thanks dividinde for this input.
I'd add that if you select your ETFs via the gateways of financial intermediaries like iShares, for example, you don't have to worry about this, since it asks you where you live and automatically suggests funds with the right tax domicile according to the underlying assets (Switzerland or Ireland in our case). Unless I'm mistaken, it's the same with UBS and CS.
Another point of clarification, you mention that ETFs domiciled in the USA are taxed at 30%, those in Germany 28%. I don't have any ETFs from these countries in my Swiss accounts, but in my opinion it's the same as for equities: half is recoverable at the time of annual taxation. On the other hand, this only applies to ETFs from these countries in Swiss accounts (and I don't know of many domiciled in these countries that can be traded via a Swiss financial institution). If you have a foreign account, for example in the US, there is only the US withholding tax of 15%, again as for equities. Ultimately, this doesn't change much, as you'll still have to declare them to the Swiss tax authorities and be taxed as income.
I agree with Luxembourg and Ireland, but I don't think the figures are right for the USA. On the contrary, I think that ETFs in the USA are more advantageous than others.
Thanks to the tax treaty with the U.S., the withholding can be reduced to 15% with form W8-BEN, which should be available from brokers. In addition, the remaining 15% can be reclaimed from the tax authorities with a DA-1 form.
Personally, I think that ETFs from the USA are the most advantageous, followed by those from Ireland.
Thank you Jérôme and The Poor Swiss for your comments.
@ Jérôme:
I've never heard of financial intermediaries offering ETFs with the right tax domicile based on the underlying asset - that's really handy!
For ETFs domiciled in Germany or the USA, I was indeed speaking from the point of view of a Swiss investor who buys them on a Swiss account (perhaps I wasn't very clear on this point). Withholding tax is indeed recoverable, but my article is really about the issue of withholding tax and not tax in general (cf. the conclusion).
@ The Poor Swiss:
I'm circumspect about your comment on US-domiciled ETFs, as it contradicts what I've read from several sources. Perhaps another reader has had other experiences on this subject and can enlighten us.
When you visit the iShares, UBS ETF and CS ETF websites, they ask you for your tax domicile. Try looking at the tax domicile of the funds according to their targets, normally it's consistent with what you indicate in the article. In most cases, it should be.
So normally the tax problem isn't really a problem, as always. Investors worry too much about these issues, when they should be worrying about what they're buying in the first place. As it happens, with an ETF, you're usually buying anything and everything. Not to mention management fees, or the virtual absence of them because the ETF practices securities lending, a risky and questionable practice. I'm not saying that ETFs should be avoided; I've used them myself for asset diversification positions. I'm just saying that ETFs shouldn't form the core of a portfolio (except perhaps for a beginner) and that the choice of underlying asset and fees is more important than the domicile (all the more so since, as we've seen, ETF issuers are kind enough to offer us the right ones).
So
1) choose what you want to buy (asset/market)
2) costs
3) domicile/taxation
Point number 1 is the most difficult to determine, but also the one that can bring in the most money... On the other hand, even if you have the most tax-optimized ETF, you'll still lose money if the underlying sinks.
I couldn't agree more Jérôme, and that's why I'd much rather buy stocks than the "potpourri" version with everything and anything in it.
I find ETFs just practical for complex themes (like biotech), commodities or for diversified investments in certain emerging countries.
Stocks are Saint-Emilion; ETFs are piquette in a bottle 😉
@dividinde
So, yes, I was only talking about investing via a foreign broker such as Interactive Brokers. And that's only if you fill in the W8-BEN form, which should be available from the big brokers. I can confirm that only 15% of my dividends on my US ETFs are retained.
And it's probably true that most Swiss people invest directly via a Swiss broker. Or even Swiss ETFs.
Mr. RIP also talked about this on his blog (https://retireinprogress.com/etf-101/), in English.
Good morning,
When investing in a US ETF, the net cash in your pocket with a Swiss broker is identical, but the path to get there is different.
By signing a W-8BEN (provided the Swiss broker offers this option), the US source tax is reduced from 30 to 15%. However, an additional withholding tax (RSI) of 15% is levied by the Qualified Intermediary (https://www.estv.admin.ch/dam/estv/fr/dokumente/verrechnungssteuer/merkblaetter/s-02-142.pdf.download.pdf/f02142.pdf).
As a result, the US dividend is still taxed at 30%, but the full tax (15%+15%) is recoverable in the tax return. 15% claimed under the CH-US double taxation agreement (DTA) and 15% under the RSI.
This makes US ETFs more tax-efficient. Ireland comes second because the CDI rate provides for US dividends to be taxed at 15% (the CDI is currently being revised...not sure it will last.). At the 2nd level, dividends paid by the ETF to the Swiss investor are not taxed at source (as explained in the article). The 15% are therefore definitively lost.
Luxembourg is the least tax-efficient because it has no DTA with the USA. Dividends taxed at 30%. At the 2nd level, dividends paid by the ETF to the Swiss investor are not taxed at source (as explained in the article). The 30% are therefore definitively lost.
There remains the alternative of investing in ETFs whose index replication is synthetic (e.g. based on a gross total return), but the risks are not the same.
Thank you Guillaume for this very detailed additional information 🙂
Good morning,
If I understand correctly, the most tax-efficient ETFs for a Swiss resident would be those domiciled in the USA (e.g. Vanguard VT). It doesn't matter whether you buy them on Degiro or IB, in both cases you can recoup 15% + 15% by different means? Sorry, just to be sure 🙂
Guillaume talks about the case when the broker is Swiss. With a foreign broker, like IB, it's simpler, there is only the US withholding tax of 15%. The rest will be taxed by the Swiss tax authorities at the time of the annual declaration.
Hello. Is this article topical since it is from 2019?
Otherwise, given the comments, I wonder what the real tax differences are between a Swiss, American, Irish or Dutch ETF? Thanks
In my opinion, there are no major changes. The answer is not simple, as it depends on where you live, the country of your broker and the ETFs you trade. For European residents, you also have to take into account that there are now protectionist regulations which apparently prevent them from buying American ETFs. No comment... In short, I haven't changed my mind on the issue. In my opinion, the question of taxation is secondary. It's better to focus on the type of ETF, then on the quality of the issuer and the fees it charges, and at the same time on the ETF's liquidity. This last point is often overlooked. For example, there are ETFs that are replicated on several exchanges, but with a trading volume that is clearly insufficient to trade properly. The tax issue comes only afterwards, if it's still relevant at all. As a general rule, I prefer to buy ETFs on the US market via IB, because volumes are high, because issuers are reliable, because ETF and transaction costs are low, and because the choice of ETFs is enormous. Incidentally, I'm only taxed on the US 15%, but I'll have to go through the Swiss tax system anyway. So it doesn't make much difference. I also sometimes trade ETFs specific to the Swiss market, in which case I usually use a Swiss intermediary.
Good morning,
If I buy an Irish ETF that holds 3% of Swiss shares. Would I then have to pay 15% in tax to Ireland and another 35% in withholding tax, as there are Swiss shares in this ETF?
Thank you for your reply!
Hi, the author of this article is unfortunately no longer active on dividendes.ch
I don't invest in Irish ETFs that own Swiss shares, so I'm not familiar with the issue. Nevertheless, in my opinion, under the double taxation treaty between Switzerland and Ireland, issuers of Irish ETFs are theoretically entitled to a full or partial refund of the IA. It remains to be seen whether they make use of this right and, above all, whether they return it to their clients.
To put all this into perspective, we're talking about a levy of 35% that would apply to dividends (yield around 3%) on a minority share of the ETF's Swiss equities (in your example 3%), i.e. 0.03% in total...