You will be able to explain why an Irish-domiciled fund holding US shares can lose less to dividend withholding.
Rachel now has her two funds side by side: a US-domiciled one listed in New York and an Irish-domiciled one listed in London, both on the same index of large US companies. A forum post says the Irish one "halves the dividend tax". She wants to know what that means in dollars on her own holding, and whether the post is right.
It is roughly right, with conditions. This lesson shows where the saving comes from and how big it is.
Start with the US-domiciled fund. The US companies inside it pay their dividends to the fund. The fund is a US entity, so no withholding is taken at that stage. The companies pay in full. Then the fund passes the dividends on to you. You are a non-resident alien and, as lesson 3.1, Why 30% of a US dividend never reaches you, explained, Singapore has no treaty with the US, so 30% is withheld before the payment reaches you.
Now the Irish-domiciled fund. The same US companies pay their dividends to a fund based in Ireland. Ireland has a tax treaty with the US. Under it, US dividends paid to an Irish fund are generally withheld at 15%, as the funds' own documents describe. So the tax is taken at the fund level, at half the rate. When the Irish fund passes dividends to you, or keeps them inside the fund, the question is whether Ireland takes anything further. For non-Irish investors, fund documents generally describe no further Irish tax on distributions, subject to the conditions they set out. The prospectus is the document to rely on for the exact treatment.
In both cases, Singapore does not tax the dividend you receive as an individual, as lesson 3.3, How Singapore treats the dividends that reach you, explained. So the comparison comes down to 30% against 15% on the US dividends.
The saving applies only to the dividend part of the return, and only to dividends from US companies. So its size depends on the fund's dividend yield.
Here are made-up figures. Say the companies in the index pay dividends worth 1.5% of the fund's value a year, and Rachel holds S$20,000. The dividends paid on her share are S$300 a year.
Through the US-domiciled fund, 30% of S$300, or S$90, goes in withholding. Through the Irish-domiciled fund, 15% of S$300, or S$45, does. The difference is S$45 a year, or 0.225% of her S$20,000.
That is the "halving" in the forum post. It halves the withholding. It does not halve her total costs, and S$45 a year will not change her life. But 0.225% a year is larger than the fee difference between many competing index funds, and it repeats every year on a growing balance. Compare it with the expense ratios in lesson 5.3 before deciding whether it matters for you.
If the fund holds companies outside the US as well, the calculation changes. Those companies' home countries take their own withholding, and the rate depends on their treaties with the fund's domicile. With a US-domiciled fund, the foreign withholding is taken first and then the US takes 30% when it pays you, so two layers come off. Build and run an ETF portfolio, lesson 3.3, Domicile and withholding tax on dividends, covers the layered case.
With the US-domiciled fund, the 30% shows on your own statement as a tax line, as in lesson 3.1. With the Irish fund, you will not see the 15% anywhere on your statement, because it is taken inside the fund before any distribution. It shows up as a slightly lower return than the index would have earned with no tax, and it is part of the fund's tracking difference. Some indexes are calculated net of withholding, which is why fund documents say which version of the index they compare against.
So read two documents. The tax section of the prospectus describes the fund's position on withholding and on distributions to investors. The annual report shows what the fund actually received and paid. Check that both are consistent with what you expect before relying on the saving.
The 15% depends on the treaty and on the fund meeting its conditions. Treaties can change. Some funds use other methods, such as holding swaps rather than shares, which change the tax picture again and are described in their documents. None of this is something to assume from a forum post. Take it from the fund's own prospectus and annual report, and check the date.
For the activity, take your two funds from lesson 5.1. Use each fund's stated dividend yield from its factsheet and your own holding size to estimate the yearly withholding cost through each, just as Rachel did. Note which documents you used.
Using each fund's stated dividend yield, estimate the yearly cost of withholding for the US-domiciled and Irish-domiciled versions of one index.
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