American vs. UCITS ETFs

13 October 2021

Investing can be fun. And hopefully profitable too. 
But there is always a flipside to it, which is much less fun for most. Taxation, regulation, and paperwork to read or, at least, to be aware of.

Taxes

American or, to be more accurate, US-domiciled ETFs can cause large portions of your gains to be paid to the IRS. If you are an expat living in a country that does not have a tax treaty with the US you will be subject to a 30% withholding tax on dividends paid, even if the underlying securities in the ETF are based outside the US. And you may even be liable for US tax estate which is even more punitive, charged at 40% on sums above $60,000.

This may pose a big issue, given the absolute dominance of US issuers in the ETF market, if it wasn’t for Ireland!

What are UCITS?

In short, UCITS are funds (mutual or exchange-traded) that are based in the European Union. UCITS stands for Undertakings for the Collective Investment in Transferable Securities and is a European regulatory framework that has introduced a harmonized regime throughout Europe for the management and distribution of funds. It is primarily intended to protect the general public and retail investors  from  unsuitable  investment vehicles, imposing standards of transparency, governance, asset segregation and risk concentration. And no doubt it has worked. 75% of European investors have their assets in UCITS structures.

Ireland – mainly

US issuers have addressed the tax implications of US-domiciled ETFs by issuing their ETFs as UCITS in the EU (primarily in Ireland which has a tax treaty with the US, and which does not charge any local withholding tax) and listing them in London and/or elsewhere in Europe. In the case of Ireland, this brings down the withholding tax on dividends from US securities to 15%, which represents half of most people’s portfolios. A word of caution though, be careful if you a tax-resident in the same country where the ETF you want to buy is domiciled, as the treatment may be different. 

Another advantage is that many UCITS ETFs can be “Accumulating ETFs”, which means that dividends will be automatically reinvested saving you the work and the trading fees. This figure does not exist for American ETFs.

Implications

There is however a – small – price to pay. Generally speaking, US ETFs carry charges that are lower as they benefit from economies of scale. But it is safe to say that, in most cases, they are more than offset by the tax benefits. 

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