You will be able to explain why where a fund is registered changes how much of its dividends reach you.
Farhan's shortlist now has two funds on almost the same index of large US companies. Both have tiny expense ratios, and their tracking differences from lesson 3.2, Tracking difference is what you actually lost to the index, are close. One lists in New York, the other in London. A friend tells him the London one is better for Singaporeans because of tax, and Farhan wants to know whether that is true or just forum folklore.
It is true, and the reason has nothing to do with where the fund trades. It has to do with where the fund lives.
A fund's domicile is the country where it is legally set up and regulated. It is often different from the exchange where it trades. An ETF domiciled in Ireland can list on the London Stock Exchange and on other exchanges at the same time, and an ETF domiciled in the US usually lists in New York. Funds domiciled in Singapore and listed on SGX exist too.
You find the domicile in the fund's prospectus and on its factsheet, often next to the identifier code. Funds sold to European investors under the UCITS rules are commonly domiciled in Ireland or Luxembourg, and the word UCITS in a fund's name is a clue. The prospectus is still the place to confirm it.
Domicile matters for two reasons. It decides how much tax is taken from the dividends of the companies the fund holds before they reach you. And for US-domiciled funds, it raises a question about US estate tax that lesson 3.5 touches on and the course Investing in US and global markets from Singapore covers in detail.
When a company pays a dividend to a shareholder in another country, its home country usually keeps a slice at source, and that slice is called withholding tax. How big it is depends on the country paying the dividend and on whether that country has a tax treaty with the shareholder's country, since treaties often lower the rate.
The US is the big one for most portfolios, because US companies make up a large part of world indexes. Under US rules, the IRS withholds 30% on dividends paid to foreign investors who do not qualify for a lower treaty rate. Singapore does not have an income tax treaty with the US. So a Singapore investor holding a US-domiciled ETF has 30% withheld from the dividends that fund pays out, and since Singapore does not tax those foreign dividends for individuals, there is no Singapore tax bill to set it against.
Ireland does have a treaty with the US. An Ireland-domiciled fund that holds US shares can generally have 15% withheld at the fund level instead of 30%, as the funds' own documents describe. Ireland does not usually take a further slice when the fund passes dividends on to non-Irish investors, but the prospectus sets out the exact treatment, and that is the document to rely on. Check the current US rates on the IRS website and the fund-level tax position in the fund documents, because treaties and rules can change.
There is a second layer worth knowing about. A US-domiciled fund that holds companies outside the US first suffers each country's own withholding tax on their dividends, and then the US takes 30% when the fund pays you. Two layers of tax on the same dividend add up quickly.
Here is a made-up example. Suppose a fund on an index of large US companies has a dividend yield of 1.5% a year, and you hold S$50,000 of it.
The dividends the companies pay are about S$750 a year. Through the US-domiciled fund, 30% is withheld, so S$525 reaches you or stays in the fund. Through the Ireland-domiciled fund, 15% is withheld at the fund level, so about S$637.50 does. The gap is about S$112.50 a year, or 0.225 percentage points of the amount invested. That is larger than many TER differences between competing funds.
The higher the dividend yield, the larger the gap. On a fund that yields very little, it shrinks, but it does not disappear. Because the tax is taken inside an Ireland-domiciled fund, it shows up in that fund's tracking difference against a net index, which is one reason a fund can track better than its fee suggests.
Ireland-domiciled funds are not automatically the right choice. They may have a higher TER, a wider spread, or list on an exchange where your broker charges more or needs a currency conversion. A Singapore-listed fund may be easier to buy and hold through SRS, which module 7 covers. Your all-in cost from lesson 3.1, the tracking record from lesson 3.2 and the tax gap from this lesson all go on the same sheet, and the fund with the best total wins.
The activity asks you to find the tax wording in two real prospectuses. Look for the section on taxation, usually near the back, and read it slowly. The figures you need are in there, phrased in legal language, and finding them once makes every later fund comparison faster.
For one US-domiciled and one Ireland-domiciled fund on the same index, find the dividend tax treatment in each prospectus and estimate the yearly gap with made-up yields.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).