INDEX FUNDS IRELAND : The great tax LOOPHOLE for international investors. Ireland Domicile ETF's
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The Irish Domicile ETF Tax Loophole.
Last week I posted out my video’s on my current investment portfolio and my current shopping list of stocks I want to buy.
See, I have a big portion of my portfolio (about 40%) in the two big index funds. Vanguard and Blackrock (iShares)
. And for decades Index funds have been the simplest and one of the smartest investment strategies. They still are one of the best investments you can make.
Index funds are often compared against managed funds or “professional investors”.
These professionals charge 1-3% for their services.
But only 10% of these professionals ever beat the index funds in a year, and on average over a 10 year period only 1% of professional funds beat the index, but if you factor in the higher fees, they would still lose.
The two biggest non managed index funds from Vanguard and Blackrock have fees of just 0.04%.. Managed funds are 25 – 50x more expensive. That is a really big difference over the long term.
Take a look at this graph, that shows from 1980 – 2014, how much of a difference the fees make over 25 years.
Each quarter, many of the companies inside the index fund pay a dividend to their shareholders. This dividend is essentially a share of the profit, because as a shareholder, you are a part owner in that company.
• The current annual dividend for IVV is 2.88% or $7.27 per share.
Now let’s get into exactly what the Index Irish Jig is that I mentioned at the start of the video…
According to US Tax law, if an international investor (someone who isn’t an American tax payer) receives a dividend from a US company, than this dividend is taxed at 30%. It is called a withholding, which means the dividend arrives in your account with the 30% tax already taken out.
You don’t have to do anything. But you lost 30% of your dividend to the US.
On a $10,000 investment, the dividend would be 2.88% which is $288 for the year. Take off the 30% withholding tax and you are left with, $201.6.
Are you keeping up with me so far? Luckily this is on youtube and you can watch it again if you need me to slow down. Now how does Ireland fit into this.
So, I said before the Index funds that I have are domiciled in the USA, which means they are based in the USA.
But my friend discovered last week, that both Vanguard and Blackrock index funds are also domiciled in other countries. In particular, Ireland.
Now Ireland and the USA have a special deal with each other. They have a tax treaty where any Irish domiciled funds that give a dividend, those dividends are taxed at 15%... Not the regular 30% in the USA.
This really doesn’t sound exciting does it…. Only 15% discount on the dividend tax. Who cares. This is pretty boring stuff right….
Let me try make it more meaningful.
That same $10,000 investment from earlier, and same dividend of 2.88%. Now with the 15% withholding tax because your funds are domiciled in Ireland, you end with $244.8.
So you just made an extra $43.20.
Ok, you are probably still bored and don’t really care about the $43.20 that you just made. I get it. It’s not very groundbreaking is it.
Well stay with me, let me go a little deeper.
(watch the whole video to see me go deep).
Now the last thing we need to find out is how easy is it to buy the Ireland Domicile Index fund.
Well, fortunately, the good trading platforms you can buy these just as easily as you buy the normal ETF’s.
Here are the codes
VUSA for Vangaurd S&P 500 Index ETF
CSPX for iShare (Blackrock) S&P 500 Index ETF
.
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