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1) What are Withholding Taxes?

Withholding taxes are taxes applied to dividends received from owning foreign shares. They are a significant consideration for SG investors. For instance, with regard to US stock dividends, there’s a 30% withholding tax imposed for SG investors!

2) Examples of How Withholding Taxes are Applied

We walk through how withholding taxes are applied for US and China stocks, and differentiate between 1) direct ownership of the foreign stock, 2) ownership via a US-domiciled ETF and 3) ownership via an Ireland-domiciled ETF.

3) Summary Table of Withholding Taxes for SG Investors

We show the withholding taxes for owning foreign stocks, by different countries. In addition, we differentiate between 1) directly owning foreign stocks and 2) owning them through an Ireland-domiciled ETF.

4) (OPTIONAL) Extra Things that are Good to Note

We cover the following: 1) Where a company is listed vs. where it’s domiciled, 2) For *Non-US* Stocks, US-domiciled ETFs are really tax inefficient, 3) US-domiciled ETFs disclose “GROSS” dividends while Ireland-domiciled ETFs disclose “NET” dividends, 4) “Distributing” vs. “accumulating” Ireland-domiciled ETFs, 5) Situations where it’d make sense to use a US-domiciled ETF

5) Main Conclusions from Our Research

To minimize dividend withholding taxes for long-term foreign stock exposure:

• For exposure to US stocks, pick an Ireland-domiciled ETF.
• For exposure to Chinese stocks, either buy stocks directly or through a Hong Kong/Ireland-domiciled ETF. DO NOT pick a US-domiciled ETF.
• For exposure to Other Country stocks, check our summary table in Section 3. Irish-domiciled vehicles are most often preferred. DO NOT pick a US-domiciled ETF.

A US-domiciled ETF may still be appropriate in certain circumstances:

• When the dividend yield for the sector is low
• Where your holding period is short
• When the other costs of owning the Ireland-domiciled ETF are much higher (e.g. higher total expense ratio, lower liquidity, higher bid-ask spread, higher counterparty risk)

In our follow-up article, we have identified the most suitable ETFs for SG investors, taking into account withholding tax considerations as well as other aspects. We have compiled two lists – one for ETFs which give exposure to a particular region/country, and another for ETFs which give exposure to a particular sector.

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During our research, we stumbled across several local finance sites that have done a good job explaining on the withholding tax implications for foreign stock holdings, from the perspective of a Singapore-based investor. We hope to build upon the good work that they have done.

1. Investment Moats: Definitive Guide to Dividend Withholding Tax in Stock Investing
2. Financial Horse: Guide to Dividend Withholding Tax for Singapore Investors
3. BetterSpider: Understanding tax efficient ETFs – avoiding US withholding taxes
4. New Academy of Finance: Creating The Best Tax Efficient ETF Portfolio to Invest In?

Disclaimer: We did a lot of work on this compilation and all the information is to the best of our knowledge. BUT we give no assurances on the accuracy and reliability! We aren’t tax consultants. By our understanding, most brokers subject foreign dividends at standard withholding tax rates, rather than the reduced tax treaty rates. Our guess is that systems are not so dynamically updated or some countries require a proactive tax refund claim from the investor.

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1) What are Withholding Taxes?

Withholding taxes are taxes applied to dividends received from owning foreign shares. They apply to the dividends received, and do *not* apply to the total value of the stock/ETF you’re buying.

They are a significant consideration for SG investors. For instance, with regard to US stock dividends, there’s a 30% withholding tax imposed for SG investors!

While the US has a very substantial withholding tax on dividends, other countries also have withholding taxes. How high or low the tax is depends where the stock is domiciled, where the ETF is domiciled (which is separate from where it’s listed) and where your tax residency is. That’s because certain countries have special tax treaties with each other.

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2) Examples of How Withholding Taxes Are Applied

For a quick explanation, read below.

When one buys stocks directly, there is one layer of withholding taxes

• From Stock to SG Investor

When one buys ETFs, there are two potential layers of withholding taxes

• From Stock to ETF
• From ETF to SG Investor

Let’s compare ways of getting US stock exposure:

1. Buying US stocks directly e.g. Apple or Microsoft
2. Buying US stocks via a US-domiciled ETF e.g. SPY US or VOO US
3. Buying US stocks via a Ireland-domiciled ETF e.g. CSPX LN

For the lowest withholding taxes, SG investors should choose Option 3 – Buy US stocks via an Ireland-domiciled ETF. In that case, only 15% dividends are lost, vs. 30% dividends lost for the other two options.

Let’s compare ways of getting Chinese stock exposure:

1. Buying Chinese stocks directly e.g. Ping An Insurance
2. Buying Chinese stocks via a US-domiciled ETF e.g. MCHI US
3. Buying Chinese stocks via an Ireland-domiciled ETF e.g. CNYA LN
4. Buying Chinese stocks via a Hong Kong-domiciled ETF e.g. 2801 HK

For the lowest withholding taxes, SG investors should choose Option 1, Option 3 or Option 4. 1) Directly, 3) Via an Ireland-domiciled ETF or 4) Via a HK-domiciled ETF. Meanwhile, Option 2 (via a US-domiciled ETF) has very high withholding taxes for Singapore investors.

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3) Summary Table of Withholding Taxes for SG Investors

We trawled through several tax treaties to compile the following information. It was painful.

Disclaimer: We did a lot of work on this compilation and all the information is to the best of our knowledge. BUT we give no assurances on the accuracy and reliability! We aren’t tax consultants. By our understanding, most brokers subject foreign dividends at standard withholding tax rates, rather than the reduced tax treaty rates. Our guess is that systems are not so dynamically updated or some countries require a proactive tax refund claim from the investor.

The table below shows what the withholding tax rate is for stocks domiciled in different countries:

• Column 1: Effective withholding tax rate on dividends if an SG investor bought the stock directly off the exchange
• Column 2: Effective withholding tax rate on dividends if an SG investor bought the stock directly off the exchange and broker withholds dividends at the reduced tax treaty rates
• Column 3: Effective withholding tax rate on dividends if an SG investor got stock exposure through an Ireland-domiciled ETF

We assume that most brokers still withhold foreign dividends at the standard withholding tax rates rather than the applicable tax treaty rates. So for all practical purposes, we will compare Columns 1 and 3. We have highlighted instances where one option appears to be clearly better than the other (see green boxes). For example, for UK stocks, it is better to invest directly (0% effective withholding tax) compared to an Ireland-domiciled ETF (15% effective withholding tax).

I do have data on countries outside of the below list as well, so feel free to drop me an email or comment on any countries not found below.

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4) Extra Things that are Good to Note

Good to Note (1): Do note that for withholding tax purposes, we look at the domicile of the company and not where it is listed.

For example, Ping An Insurance Group is listed in HK but domiciled in China. Therefore, dividends paid by Ping An Insurance to a Singapore-based investor will incur 10% withholding tax.

Good to Note (2): In almost all scenarios, US-domiciled ETFs investing in non-US stocks will be extremely tax inefficient for Singapore-based investors.

Not only does a Singapore investor have to incur a hefty 30% withholding tax on the US ETF dividends, the Singapore investor might additionally be hit by a second round of withholding taxes when the non-US stock pays dividends to the US-domiciled ETF, as seen in the China stock example above.

Good to Note (3): When comparing ETFs, note that the US-domiciled ETF’s dividend yield is “GROSS”. Meanwhile, the Ireland-domiciled ETF’s dividend yield is “NET.”

In short, this means that the published dividend yield for the US-domiciled ETF has yet to subtract the 30% withholding tax. But the published dividend yield for the Ireland-domiciled ETF has already subtracted the 15% withholding tax.

Good to Note (4): There two kinds of Ireland-domiciled ETFs: “distributing” and “accumulating”. The 15% withholding tax applies to both kinds.

There are two kinds of Ireland-domiciled ETFs. (1) The “distributing” type (where they pay a dividend to shareholders) or the “accumulating” type (where they use the dividends to buy more of the underlying shares).

The 15% US withholding tax applies in both cases. For the both types, the dividends for the US stocks are taxed before they “arrive” to the Ireland-domiciled ETF. The “distributing” ETF will then distribute these dividends to their shareholders, while the “accumulating” ETF will reinvest the dividends into US stocks.

Meanwhile, US-domiciled ETFs have to distribute at least 90% of its income (read: “dividends”) to its shareholders. In this sense, they are all “distributing”.

Good to Note (5): US-domiciled ETFs are still relevant for SG investors under certain circumstances.

For US-domiciled ETFs, a commonly cited pushback is the 30% withholding tax on stock dividends. This withholding tax is automatically deducted when dividends from US-domiciled ETFs/stocks are paid out to Singapore investors.

Despite this shortcoming, US-domiciled ETFs can still be useful for Singapore investors in some cases, such as:

• When the dividend yield for the sector is low.
  • For example, the SPDR S&P Biotech ETF (XBI US) has a dividend yield of 0.02% as most biotech stocks do not pay dividends. As a result, the performance drag from dividend withholding taxes is negligible.
  • Other US-domiciled ETFs in the list that have a low dividend yield are the tech sector ETFs such as Invesco China Technology ETF (CQQQ US) and ROBO Global Robotics and Automation Index ETF (ROBO US).
• Where your holding period is short.
  • Dividends are withheld on US-domiciled ETFs only when distributions are made. If you buy and sell a US-domiciled ETF before the dividend ex-date, you will not be subject to any dividend withholding taxes.
  • Do note that the dividend for US-domiciled ETFs are paid out every quarter, with the exception of Invesco China Technology ETF (CQQQ US) and ROBO Global Robotics and Automation Index ETF (ROBO US), which have an annual dividend payout frequency.
• When costs of the Ireland-domiciled ETF is much higher.
  • Some Ireland-domiciled ETFs have a much higher total expense ratio or wider bid-ask spreads compared to its US-domiciled ETF peer. Generally, this might occur if the US-domiciled ETF has attracted a much larger AUM, resulting in much higher trading liquidity and better ability to keep overall operating costs low.

Good to Note (6): Dividends paid out by ADRs on US stock exchanges do not incur additional 30% US withholding tax.

For example, BP is domiciled and listed in the UK but it also has a US ADR listing (1 ADR is equivalent to 6 shares). For both US and non-US investors, the dividend received from the BP ADR is exactly 6x that of its UK-listing. The reason is because UK doesn’t withhold any dividends paid to the US, and the ADR doesn’t withhold any dividends paid out to international investors.

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5) Main Conclusions from Our Research

To minimize dividend withholding taxes for long-term foreign stock exposure:

• For exposure to US stocks, pick an Ireland-domiciled ETF.
• For exposure to Chinese stocks, either buy stocks directly or through a Hong Kong/Ireland-domiciled ETF.
  • DO NOT pick a US-domiciled ETF. The dividend withholding tax for SG investors will be 37%.
• For exposure to Other Country stocks, check our summary table in Section 3. Irish-domiciled vehicles are most often preferred.
  • DO NOT pick a US-domiciled ETF. The dividend withholding tax for SG investors will be at least 30%.

A US-domiciled ETF may still be appropriate in certain circumstances:

• When the dividend yield for the sector is low
• Where your holding period is short
• When the other costs of owning the Ireland-domiciled ETF are much higher (e.g. higher total expense ratio, lower liquidity, higher bid-ask spread, higher counterparty risk)

In a follow up article, we will identify the most suitable ETFs for SG investors, taking into account withholding tax considerations as well as other aspects. We will be compiling two lists – one for ETFs which give exposure to a particular region/country, and another for ETFs which give exposure to a particular sector. Do stay tuned!

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