Gyroscopic Investing

Hi,

I'm trying to set up a brokerage account in the US with HSBC. One thing they mentioned is that dividend tax applies to non resident aliens. So I did some research and found this

https://chinese.scottrade.com/documents ... %20FAQ.pdf

• Am I required to pay U.S. taxes on my Scottrade international account?
According to the U.S. Internal Revenue Service Instructions, foreign investors who have
completed Form W-8BEN and confirmed their foreign taxpayer identification are able to 
request an exemption in the U.S. stock capital gains and interest income withholding tax,
however the withholding tax from cash dividends cannot be waived. The tax rate of cash
dividends depends on the tax treaty terms between your country of residence and the
United States; currently it is 10% in China, 30% in Taiwan, and 30% in Hong Kong.

Now I reckon 30% up front is probably much worse than a US investor would pay.

I'm thinking of something like VTI, TLT, SHY, GLD. Is there any way to buy ETFs that don't pay dividends and instead reinvest the money automagically? Then I'd convert a dividend on which I lost 30% to a capital gain where I lose nothing?

I remember reading something like  - accumulating versus non accumulating funds. Or are ETFs just the wrong way to do here?

Interestingly as far as I can tell this only applies to US stocks. So I could do my permanent portfolio using non US stocks. Still the problem I'm trying to solve is to have USD denominated assets. So I don't really want to put more cash in the UK stock market.

Any ideas?

I'm pretty sure you can get the withholding tax back from your own government, at least that is how it works in Canada.  It can get very complicated, here is an article on this topic from a Canadian perspective: http://canadiancouchpotato.com/2012/09/ ... explained/

Is an ETF considered a cash dividend in this regard?

You pay 30% on dividends from US domiciled ETFs. Note, you don't pay anything on capital gains and interest. So for a US PP

- Bills: if you own them directly you do not pay any tax on interest. If you own SHY, it generates dividends and you pay 30%.
- Bonds: if you own them directly you do not pay any tax on interest. If you own TLT, it generates dividends and you pay 30%.
- Gold: either physical or ETF does not generate any dividends.
- Stocks: VTI dividends will be taxed 30%.

So, make sure you own all treasuries directly: no tax on interest and even safer than owning them through an ETF. You also don't have to pay estate tax on treasuries held directly and on ETFs you do! As a non-resident stay away from SHY, SHV, TLT, etc. They're just a convenience for the residents, although they should also own treasuries directly as it's not that hard and it's safer.

Gold, you are fine, and the only thing you end up paying tax for is the dividends generated by 25% of your total portfolio that's in stocks. If you want to reduce that too a little bit, take a look at VUSD at LSE. You might also want to keep your gold overseas. PP book recommends ZGLD (you have USD, EUR, versions too.)

Tax dividend is a problem
For EFT there are 2 way's out:
1) accumulating, marked by the extention (acc). They reinvest the dividend
2) domicile. Some Ishare funds in Europa are held in Ierland, which apply tax dividend.
Vanguard is US based, so you pay 30 %, depending on the UK tax treaty. In the Netherlands you can reclaim 15 % of the 30 % US dividend tax. Basicly the same systeme as Canada. I don't know the UK tax system.

If anyone's still following this. I am an NRA with a brokerage account in the US. I invest exclusively in stock (equity) ETFs. Is my understanding correct that

a) no US taxes apply to capital gains from these ETFs at any time
b) no US taxes apply to dividends from such ETFs as long as the dividends are reinvested

If both of the above are true, does this mean that I will, as far as current US tax law is concerned, forever be entirely tax-free on these investments so long as I reinvest the dividends? What happens when I sell an ETF? Will the accumulated, reinvested dividends be taxed at that time? 

I think you're wrong about reinvesting the dividends - whether the ETF pays out a dividend or reinvests it is treated the same way. At least I convinced myself of that Googling earlier, but I can't find a definitive source for that now.

In fact even an Irish domicilled fund is not going to be tax free, though it seems like you get a 15% hit instead of a 30% one (assuming Ireland and your country have a tax treaty).

E.g. here on page 37

http://www.blackrocklatam.com/content/g ... 186153.pdf

Maybe I am also confusing a couple of things here: dividends paid by the stocks in the ETF, and dividends paid by the ETF to its owners? How are dividends paid by the stocks in an ETF handled?

axellieb wrote: Maybe I am also confusing a couple of things here: dividends paid by the stocks in the ETF, and dividends paid by the ETF to its owners? How are dividends paid by the stocks in an ETF handled?

Its normally passed through to the unitholders, but some funds reinvest the dividends first then pay out its normal dividend yield later.  Either way, as a NRA you will be subject to 30% withholding on all dividends and interest paid out; you will have to file a 1040NR to claw it back to a reasonable level and to use tax treaty offsets.