United Arab Emirates • Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Is interest earned taxed?

It is ... complicated.

The US has a special dividend tax exception for nonresident aliens who receive fund or ETF interest that originates from US bonds. So distributions from BND should face no US dividend tax. So far, so (sort of) good.

However, this exception does not include interest that originates from non-US bonds. So you would lose 30% of dividends paid by BNDX to US tax, even though if you held the non-US bonds themselves directly you would receive the interest tax-free. In other words, the simple presence of the US domiciled wrapper around non-US investments turns them from non-taxable into US taxable. Clearly a bad deal for you.

And is there or isn't there estate tax risk?

Here, things are simpler. You would not pay US estate tax if you directly held US bonds.

However, if you hold them through a US domiciled ETF such as BND, you hold "stock in a US corporation", and that is something the US applies its estate tax to. There appears to be no exception made for what the ETF may or may not contain within it. And you would also pay US estate tax on BNDX (assuming the dividend tax issue outlined above has not already put you off holding that).

So the answer posed in the thread's title is two-fold. Ireland domiciled bond ETFs avoid paying US tax on non-US bond returns. And they avoid the risk of US estate tax on both US and non-US bonds.

As (presumably) a resident of a country without any US tax treaty coverage, you very much want to avoid holding any US domiciled funds or ETFs. The tiny additional cost of equivalent Ireland domiciled ETFs over US domiciled ones is a bargain compared to a significant (or even huge) US dividend tax and US estate tax loss.

Statistics: Posted by TedSwippet — Wed Jul 10, 2024 3:05 am — Replies 10 — Views 380

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