Non-American expats with U.S. listed stocks or ETFs might consider making a switch.
U.S. estate tax laws suggest if an expat owns more than $60,000 in U.S. listed stocks or funds, and gets hit by a bus or eaten by a crocodile, their heirs will feel the bite.
By investing on a different exchange, however, they wouldn’t give the U.S. government a chunk of their posthumous pie.
Canadians
Expat Canadians can use Canada’s stock market instead, via three popular international brokerages: DBS Vickers, Saxo Bank,TD International.
Vanguard Canada recently introduced some fabulous exchange traded funds.
These wouldn’t attract U.S. estate taxes because they trade on the Toronto exchange.
|
Index |
Ticker Symbol |
Expense Ratio |
|
VCN |
0.12% |
|
|
VUN |
0.15% |
|
|
VDU |
0.28% |
|
|
VSB |
0.15% |
Expatriate Canadians don’t have to pay capital gains taxes on their stock market investments if they’re held in a friendly tax jurisdiction, such as Hong Kong, Singapore or Luxembourg–and if the investor resides in a jurisdiction that would allow such an account. Canadian non-residents may also be able to open a non-resident” brokerage accounts with Toronto-based TD Waterhouse, which wouldn’t incur capital gains taxes either. But investors would need to make a trip to Canada to open such an account. Canadian accountant Ernie Nagarath suggests it would not jeopardize non residency status. Trading commissions would also be cheaper, with no additional account charges.
Dividend withholding taxes of 15% would be taken at source.
Those wishing to cut tax further may consider replacing Vanguard’s Canadian and U.S. stock market ETFs with swap-based products from Horizon. HXT tracks the 60 largest stocks in Canada, costing just 0.07%. HXS tracks the S&P 500, costing 0.15%.
Swap-based ETFs, such as these, don’t incur dividend taxes. Held by a Canadian expatriate, they would be completely tax-free. But ensure that you understand the added counter-party risk.
Writer and investment advisor Dan Bortolotti does a good job explaining how they work.
Australians
Australian expats can access their home country stock market through TD International or Saxo Bank.
Vanguard offers a list of ETFs for Aussies, some of which appear below.
|
Index |
Ticker Symbol |
Expense Ratio |
|
VGB |
0.20% |
|
|
VAS |
0.15% |
|
|
VTS |
0.05% |
|
|
VEU |
0.15% |
According to Saxo Bank Singapore’s Senior Manager, Eoh You Loong, the dividend withholding tax rate on Australian ETFs is 30% for expats.
There are no capital gains taxes if the account is located in Luxembourg, Singapore or Hong Kong.
If, for example, your investments earn 10% in a given year, with 8% coming from capital gains (price appreciation) and 2% coming from dividends, you would pay 30% tax (taken at source) on the 2% dividend.
As such, your net dividend gain would be 1.4%, providing a total net gain of 9.4%, after a pre-tax gain of 10%.
British Investors
Expatriate British investors can trade on the UK markets to bypass U.S. estate taxes. I’ve listed some portfolio builders below. TD Internationaland Saxo Bankboth offer British stock market accounts.
|
Index |
Ticker Symbol |
Expense Ratio |
|
VWRL |
0.25% |
|
|
VUKE |
0.10% |
|
|
VGOV |
0.12% |
These ETFs are domiciled in Ireland, carrying a 20% dividend withholding tax. But British expats wouldn’t have to pay capital gains taxes.
Why Vanguard?
Vanguard isn’t the only exchange traded fund provider; iShares is larger, and offers more products. But Vanguard is cheaper, because it’s a non-profit firm. Fund charges cover business costs…and that’s it.
Vanguard doesn’t trade as a public company. Unlike firms like Fidelity, Franklin Templeton or JP Morgan, no shareholder shimmers in profits. Salaries paid are modest.
How Do I Open A Brokerage Account?
As of 2014, TD International and Saxo Bank brokerages could be opened online. In some cases, you may require a notary to sign a form verifying your identity.
But there’s no need to hop on a plane to open an account if you’re living outside of Luxembourg (where TD International is based) or if you’re living outside of Singapore or Hong Kong (two capital gains free jurisdictions with Saxo Bank brokerages).
TD International, however, doesn’t invite everyone to the party. If you’re an expat living in Japan or Bangladesh, for example, you can’t join the club
Saxo Bank doesn’t seem to like Japanese based expats either.
Japanese based expats, however, can open brokerage accounts with Singapore’s DBS Vickers. But they will need to travel to Singapore to do so. Madeline Chen, of the DBS Vickers Client Services Contact Center says, “Japanese-based expats can open accounts as long as they meet the management subject of approval.” When I pressed her on what that meant, she queried her supervisor who stated, “They must first open a local POSB or DBS bank account. They must be above the age of 21; they can’t be currently bankrupt; they can’t be a delinquent. Nor can they be an ex-delinquent.” So if you wrapped your high school chemistry teacher’s Volvo with toilet paper, don’t tell DBS Vickers.
Incidentally, DBS Vickers doesn’t discriminate against anyone, except Americans.
What If Selling Your U.S. domiciled ETFs Will Cost A Small Fortune?
Trading U.S. market ETFs for those on another market could accompany steep commission costs. For example, trading $1 million of U.S. ETFs in exchange for Canadian ETFs would cost $8,500 in commissions through DBS Vickers. It costs 0.35% to sell U.S. securities, and 0.5% to buy Canadian ones.
Here’s a strategy that would reduce commission costs. You could ask DBS Vickers to transfer your U.S. shares to a Saxo Bank brokerage using a Security Outward Transfer Form. Transferring four U.S. domiciled ETFs costs $200 ($50 each). The same old U.S. indexes would arrive in your new account. So you would still need to sell them, before using the proceeds to buy ETFs off the Canadian exchange.
Saxo Bank’strading commissions are far softer than those at DBS Vickers. They charge 2 cents per share for U.S trades and 3 cents per share for Canadian shares.
I’ll use a large account to dramatize the point. If you had 12,000 shares of Vanguard’s U.S. stock market ETF, and it traded at $92 per share, you would have roughly $1.1 million in U.S. shares. Once transferred from DBS Vickers to Saxo Bank, you could sell the shares. It would cost $240 to do so.
In total, even if your account were worth a million dollars, your transfer costs, commission sales and new purchase orders would save nearly $8000, as opposed to keeping the money with DBS Vickers, and making the switch from U.S. to Canadian listed ETFs.
Saxo Bank charges lower trading commissions than DBS Vickers. But they charge a higher exchange rate fee: 0.5%. Trading U.S. market ETFs for Canadian, British or Australian equivalents will incur an exchange rate charge. Saxo Bank will waive this fee (as a one-time privilege) if you’re transferring your account to them.
They won’t do it automatically. As I found from first hand experience, you will need to ask.
Are There Other Sneaky Costs?
Banks and brokerages are in the moneymaking business—for themselves. TD International charges reasonable commission rates, but they tack an extra 0.2% cost per year on the account’s total proceeds. DBS Vickers doesn’t do so, but Saxo Bank is preparing to initiate a similar fee. Over the long term, extra annual costs of 0.2% are far more detrimental than even the highest brokerage commission rates.
Such fees (0.2% per year) are laughably low, compared to the gouging exhibited by firms like Friends Provident, Generali and Zurich International.
But they’re still a hole in the wallet.
Saxo Bank’s Eoh You Loong says the fees can be waived for premium clients, likely those with $500,000 or more in assets. Clients that trade frequently may also be exempted, as determined on a “case by case basis”. Strike a deal if you can.
After all, it’s your money. Don’t make a brokerage richer. And let the U.S. government pay its own freaking debts.
The above information was accurate, as of January 9, 2014. My book, with the working title, The Global Expatriate’s Guide To Investing, will be published November, 2014.
