Gyroscopic Investing

Hi everyone,

I've been trying to find the best way to make a European PP for quite some time now (and have found much useful info in this forum and in the PP books).  It seems like there are quite some pitfalls when designing a European PP, and a new one that I recently discovered is withholding tax.  It seems that several countries within the EU (and probably countries outside the EU as well) levy a tax on dividends/interest that is paid to foreign investors.  I found some interesting articles about the subject:  http://www.indexuniverse.eu/europe/publ ... Itemid=202 and http://www.indexuniverse.eu/docs/presen ... AndTax.pdf, in which it is shown that this withholding tax can have a big impact on the returns of a tracker (more than TER in their examples).  It appears to me that this withholding tax makes some of the interesting EU ETFs a lot less interesting, especially those based in Germany (such as EXSI and EXX6), at least to Europeans outside of Germany. Also ETFs that are based in Ireland and Luxembourg, that do not have to pay a withholding tax to their own governments, still suffer from withholding tax for all the shares that they hold, since most of those are in EU countries that do levy a withholding tax.

I was wondering if, considering this withholding tax, it might be a better idea for me to just buy a tracker that tracks my own country's index (The Netherlands in my case), and some Dutch bonds.  This seems to be the only way to avoid any withholding tax issues, but of course has the downside of decreased geographic diversification.  Does anyone know if my understanding of this issue is correct (I'm still somewhat new at this)?  Would be interested in your opinions/advice. 

I'm not aware of taxes, but still interested in this point.

The way I understand it is that if a foreigner like you or me (I'm assuming you're not German) holds German bonds or stocks, and receives a dividend or interest, the German goverment taxes this at a rate of about 30%.  If your country has a tax treaty with Germany (probably they will if it's within the EU), then you can fill in some paperwork to reduce the tax to about 15%.  This obviously has a big effect on the returns of the stocks/bonds/cash part of the PP.  The same applies to the ETF fund that is based in a certain location, let's say Dublin, if they hold some German stocks/bond then the German government also applies the withholding tax to the dividends/interest that are paid to the ETF fund. When you look at the graphs on the ETF website of the index that they are supposed to track, these graphs already take this tax into account.  I'm not sure what typical interest amounts are for dividend/bond returns, but in the links of my previous post they calculated that the withholding tax for some stock indices can be seen as an additional cost (in addition to the TER of the ETF) of about 0.4-0.7% per year (obviously this varies per year since the cost depends on the amount of dividend).

However, if I as a Dutch person have Dutch stocks/bonds, there is no withholding tax because it only applies to foreigners.  So effectively this makes stocks/bonds of my own country more interesting as there is less taxation on it.
Anyway, this is what I understand from my reading so far, feel free to correct me if I'm wrong (I would love to be wrong on this).

Also Dutch
And yes, you are correct
"And some paperwork" is an underestimation. I have never try it, but as far I have read about it, it is very bureacratic. You have to fill in a lot of papers and sent it tom the embassy (??). I never met anyone who has done.
So you loss something like 0.4 - 0.7 %.
However the risk in investing in only Dutch stocks is worse.
I keep track of the AEX versus the MCSI AC World standaard core since 2002. Aex is minus 31 % and the World core standaard is minus 4 %
So what we need is a Dutch located tracker. Meesman offers 4 trackers, cost: 0,5 %. No dividend, all reinvesting
But you can also buy:
iShares MSCI ACWI (IUSQ), also reinvesting, so no taxproblems on dividend.

Hi Gerard, thanks for your input on the amount of bureaucracy involved, I had no idea .  I did some more digging around about the whole withholding tax and local taxation, and it seems like I overlooked a Dutch tax on dividends of 15% (should have expected it, since there is a tax on everything...). 

So it seems to me like a ETF that is based anywhere except Ireland or Luxembourg is asking for trouble (bureaucracy hurdle to reclaim the lost 15% dividend tax).  Unfortunately this makes my ideal choice for a stock ETF, iShares EURO STOXX (EXSI) as well as my ideal choice for a bond ETF, iShares Government Germany 10.5+ (EXX6) less interesting since they are both based in Germany.

It seems to me like there are no ideal options for the European PP, a compromise must be made on either diversification (EURO MSCI 50 trackers are easy to find but not very broad), exchange rate risk (broad european (incl. non-Euro) trackers are easy to find) or tax efficiency (EXSI).  I'm not too sure what the lesser of these evils is yet.

zen wrote: Hi Gerard, thanks for your input on the amount of bureaucracy involved, I had no idea .  I did some more digging around about the whole withholding tax and local taxation, and it seems like I overlooked a Dutch tax on dividends of 15% (should have expected it, since there is a tax on everything...). 

So it seems to me like a ETF that is based anywhere except Ireland or Luxembourg is asking for trouble (bureaucracy hurdle to reclaim the lost 15% dividend tax).  Unfortunately this makes my ideal choice for a stock ETF, iShares EURO STOXX (EXSI) as well as my ideal choice for a bond ETF, iShares Government Germany 10.5+ (EXX6) less interesting since they are both based in Germany.

It seems to me like there are no ideal options for the European PP, a compromise must be made on either diversification (EURO MSCI 50 trackers are easy to find but not very broad), exchange rate risk (broad european (incl. non-Euro) trackers are easy to find) or tax efficiency (EXSI).  I'm not too sure what the lesser of these evils is yet.

Thomas Hoog wrote: Also Dutch
And yes, you are correct
"And some paperwork" is an underestimation. I have never try it, but as far I have read about it, it is very bureacratic. You have to fill in a lot of papers and sent it tom the embassy (??). I never met anyone who has done.
So you loss something like 0.4 - 0.7 %.
However the risk in investing in only Dutch stocks is worse.
I keep track of the AEX versus the MCSI AC World standaard core since 2002. Aex is minus 31 % and the World core standaard is minus 4 %
So what we need is a Dutch located tracker. Meesman offers 4 trackers, cost: 0,5 %. No dividend, all reinvesting
But you can also buy:
iShares MSCI ACWI (IUSQ), also reinvesting, so no taxproblems on dividend.

hi,

1) what about IMEU / CEU /  VGK / ERO / IQQY / DXET  for stocks? I've here the underlined written in my notes, but I don't remember andI can't check it now. Please see and say me something.


2) Tax in Germany is much higher than other countries? How much in average and how can I get that tax value?
I've checked and here I have to pay twice, first tax in germany and 2nd tax in portugal 
Do you think dividends are so big that make that difference? Where can I check dividends?


Thank you for your answers.

Regards!

Dutch tax on dividends of 15% is not a problem. You can ask it back in your Tax appliance
There is no one tracker that is perfect.
You want:
a broad EUR stock tracker
non including UK
no dividend (accumulate) (tracker (acc)
lowest TER ratio

A quick scan:
http://www.indexvolger.nl/
Aandelen: db x-trackers Euro Stoxx 50 Acc (DXET) (non UK) (Thesaurierend = accumulate ?), min investement: 75000
Ishares
iShares MSCI Europe ex-UK (IQQU, ter 0,4 %, gives dividend (non UK)

iShares MSCI Europe (Acc) (EUNK), ter 0,35 %, no dividend (accumulate)

iShares EURO STOXX (DE) (EXSI), ter 0,2 %, gives dividend (non UK)


Frugal
IMEU = iShares II plc - iShares MSCI Europe, in GBP ??
CEU = ??
VGK = Vanguard MSCI Europe ETF; includes UK, expense ratio = 0,14% gives dividend
ERO = iPATH EUR/USD Exchange Rate
IQQY = iShares II plc - iShares MSCI Europe, in EUR, gives dividend, TER: 0,35 %, includes UK

In my opion is the
iShares MSCI Europe (Acc) (EUNK), ter 0,35 %, no dividend (accumulate) the best option, but you to have research for yourself
I'm not very known with the Duitsche Bank tracker DB-xxx or Lyxor:
Lyxor ETF MSCI Europe, TER 0,35 %, non UK, gives dividend


Using Google: EFT MSCI Europa (acc) non UK gives:
Amundi ETF MSCI Europe Ex UK (I think Amindi is french domicile ?)

Or read:
http://www.investorschronicle.co.uk/201 ... ticle.html

Thomas Hoog,

another option which is not common for here:

Amundi Funds Index Equity Euro – AE

what do you think about this in terms of performance, tax, dividends, and fees ?

Regards.

Thomas Hoog wrote: Dutch tax on dividends of 15% is not a problem. You can ask it back in your Tax appliance
There is no one tracker that is perfect.

Hi,

how shall we do that. Broker doesn't know, or say it's impossible.

frugal wrote: Thomas Hoog,

another option which is not common for here:

Amundi Funds Index Equity Euro – AE

what do you think about this in terms of performance, tax, dividends, and fees ?

Regards.

I don't know exactly the difference, but it seems this one is more actieve managed in compare with Amundi ETF MSCI Europe Ex UK. According to teh PP strategy, you don't want that, just low cost
And it seems Amundi ETF MSCI Europe doesn't pay dividend,