US Dividend Withholding Tax

As UK expat now living in a country with no CGT or income tax, without foreign income tax treaties, it’s very inefficient for me to even consider shares or ETFs where dividends are taxed at source.

Even investing in an ETF domiciled in Ireland only reduces the US withholding tax on dividends from 30% to 15% and, well, 15% is 15% more than I would pay if I invested in an ETF which ONLY bought into companies which reinvested such income into its future expansion or into share buybacks.

Over the longer term this would make a HUGE difference and is stopping me from investing anywhere but the UK which will not withhold anything at all, leaving me to sort out in my very benign jurisdiction.

Sure the UK charge 0.5% stamp duty at the time of purchase, but if I wanted to avoid this there are many other exchange worldwide where this is not the case.

If I’m correct, then I should be able to find an ETF entitled something like (jokingly) “S&P 500 no dividends”.

Am I missing something obvious here or am I on to something? It’s preventing me from spending anything at all in the US market.

2 things are certain in life Death and Taxes…

0.5% stamp duty isn’t the biggest charge in the world and is only a one time fee.

The dividend WHT on US stocks is a pain, 15% can have a reasonable impact on the compounding effect of a dividend strategy, the alternative is to invest in growth stocks that pay little or no dividend. Probably find a Nasdaq or tech startup based ETF will have minimal dividends.

The 15% WHT only impacts the dividend return from a stock, I wouldn’t necessarily avoid investing in a company because of it. The capital gain is equally important to your total return.

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2 things are certain in life Death and Taxes…

(yes, and I’d like to delay the former and minimise the latter)

0.5% stamp duty isn’t the biggest charge in the world and is only a one time fee.

(yes, 30% or even 15% WHT is the killer which I am focused on for my situation)

The dividend WHT on US stocks is a pain, 15% can have a reasonable impact on the compounding effect of a dividend strategy, the alternative is to invest in growth stocks that pay little or no dividend. Probably find a Nasdaq or tech startup based ETF will have minimal dividends.

(Thanks for that. I have looked and right now I have found nothing, so currently I am building my own “fund” based around such companies on the S&P500)

The 15% WHT only impacts the dividend return from a stock, I wouldn’t necessarily avoid investing in a company because of it. The capital gain is equally important to your total return.

(strategically, focusing on non-dividend paying companies is far more tax efficient for me)

Just chiming in a few other thoughts here for you:

Could transaction FX play a big deal too though?
Surely buying into your own version of a DIY S&P will incur more potential downside (or upside) due to the FX gain or loss.

I’m sure the real noticeable gains will come from stock price appreciation, not necessarily the dividend compounding amount. S&P500 annual dividend is like 1.5% or something in that ballpark, so worrying over 15% WHT on that amount, is only the difference of a good or bad day for the stock price? As far as I understand.

Not that it would matter much, but also worth noting is that no UK stamp duty is paid on stocks valued at less than £1. So if you had a script/program, you could technically buy a lump of £1 shares and not pay any stamp duty … but that’s really splitting hairs at that stage :smiley:

I wouldn’t dismiss the ETF route, as although there is the WHT, it spreads your eggs more efficiently than a DIY approach and I would personally just treat the WHT as a cost of doing business and simplicity. Consider it the only platform charge that has to be paid per year.

It is worth reading about synthetic S&P 500 trackers which can avoid the US withholding tax on dividends

"Foreign investors in US stocks are generally subject to a withholding tax on dividends of up to 30%, although many can reduce this to 15% through the application of tax treaties. However, under US tax law, namely the HIRE Act 871m, swaps written on indices with deep and liquid futures markets, e.g. the S&P 500, are not required to pay withholding taxes on dividends.

This means that while a European-domiciled physically replicating S&P 500 ETF will generally be able to achieve a maximum of 85% of the dividend yield, a synthetic fund can theoretically achieve up to 100% of the full gross dividend amount. With the S&P 500 yielding around 1.9% (2% on average over the past decade), this exemption means synthetic funds can potentially achieve up to 30 basis points of additional performance each year."

See here.

https://www.etfstrategy.com/why-investors-are-flocking-to-synthetic-sp-500-etfs-10339/

There are some synthetic S&P 500 trackers on the Trading 212 platform: eg SPXP. We can see in the below statistics that it has indeed outperformed VUSA by a small amount.

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That’s a very thorough reply, targeted directly to my question, Thank you for your time, you’ve given me a clear avenue to pursue.

I like the script idea, spamming shares under £1, a very neat thought. That’s probably something a more technically oriented reader might want to take a look at, but as a total tech numpty it’s beyond my pay grade. Thanks for your input and I will take on board your comment about “cost of doing business”. I’m still going to try and reduce those costs as much as I practically can though.

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That is exactly what these synthetic ETFs acheive. You question is very topical. I recall @rjh68 asking for the new iShares S&P 500 Swap UCITS ETF (I500) to be added to the platform.

To quote from here:

BlackRock launches synthetic S&P 500 ETF. Driven by increasing client demand for synthetic replication with US equities. Synthetic ETFs, such as I500, do not pay withholding tax on dividends as the substitute basket of the ETF is restricted to non-dividend paying stocks. Meanwhile, physical ETFs domiciled in Luxembourg pay 30% withholding tax on US equity dividends while Irish-domiciled ETFs pay 15%.