An introduction to index fund domiciles

A fund domicile is the country where the fund is incorporated.

You can know a fund’s domicile by looking at its ISIN. The first two characters are dedicated to the country’s code. The fund with ISIN IE00B4L5Y983 is domiciled in Ireland – IE country code.

The domicile is important because it affects the taxes paid and that affects your returns. Additionally, if you have a particular preference for a domicile, different domiciles have a different amount of index funds available.

This matter is of particular importance for European investors because in Europe there are multiple distinct domiciles which funds use. Additionally, different European investors, live in different countries with different fiscal laws which means, what works for some investors may not work for others. This diversity of possibilities may cause some confusion among investors.

Generally speaking from a taxes point of view, a fund will pay taxes depending on the domicile of the fund’s assets and the domicile of the fund (Level 1). So if a fund holds French stocks, depending on its domicile it may have to pay dividend withholding taxes. Additionally, depending on your country of residence and the domicile of the fund you may pay taxes (Level 2). An example would be receiving dividends from a US domiciled fund while you live in Portugal and having to pay US dividend withholding taxes. From the perspective of reduction of taxes, you want to choose a fund domicile with enough tax treaties to pay the least (Level 1) taxes based on fund assets. And you want to choose a fund domicile that charges you the least (Level 2) taxes.
An earlier post goes into more details on the topic of the different levels of taxations based on the domicile of the fund’s assets, the fund, and the investor.

United States

The United States is the largest financial market in the world. Most of the index funds in the world are domiciled in the US. Funds like the VTI, SPY, VOO, VXUS, VTIAX are domiciled in the US. These are the funds you usually see in popular personal finance books.

The main issue with US domiciled funds for non-US investors is taxes. Non-US investors are subject to a (Level 2) dividend withholding tax of up to 30% and an estate tax (i.e. inheritance tax) of up to 40% on assets above $60 000. Depending on the country where you live and whether there is a treaty with the US your US tax liabilities can change. The bogleheads wiki does an awesome job of walking through the potential traps that you should avoid when picking a US domiciled fund.

The easiest recommendation for most European investors is to avoid US domiciled funds. Nevertheless, the Bogleheads wiki also has a decision table that can help you understand, based on your country of residence, if a US domiciled fund is beneficial.

Due to recent European regulations – PRIIPs – it has become harder for most investors to have access to US domiciled funds. Very few brokers provide access to these funds. I’ve read that Interactive Brokers allows some investors to have access to these funds but I haven’t confirmed this myself.

European Domiciles

European domiciles have a smaller selection of funds than what is available in the US.

Funds from European domiciles are not liable to estate taxes.

Funds from European domiciles are liable to US dividend withholding (Level 1) taxes only for the US stocks held by the fund. In contrast, US funds would be liable to US dividend withholding (Level 2) taxes for all stocks held by the fund. The US dividend withholding tax rate varies according to the specific domicile because each domicile may have different tax treaties.

Funds from different European domiciles may be liable to different (Level 2) taxes to foreign investors.

Ireland

Ireland is the most popular European domicile for index funds. Funds like IWDA, VWRL, EMIM, CSPX are domiciled in Ireland.

The US dividend withholding (Level 1) taxes for US stocks held by an Irish fund is 15% (instead of 30%) due to a tax treaty. Ireland has tax treaties with multiple countries which can reduce the tax liabilities of the fund.

Ireland does not charge any (Level 2) taxes (e.g. capital gains, dividend, inheritance) for non-resident investors of Ireland domiciled funds.

For these reasons Ireland is the recommended index fund domicile for most European investors.

Luxembourg

Luxembourg is the second most popular European domicile for index funds.

The US dividend withholding (Level 1) taxes for US stocks held by an Irish fund is 30%. Luxembourg’s tax treaty with the US only allows investors (not funds) to take advantage of the reduced dividend withholding tax. For this reason Irish index funds with US stocks are more beneficial from a tax point of view than Luxembourg index funds with US stocks.

Luxembourg has tax treaties with multiple countries which can reduce the (Level 1) tax liabilities of the fund.

Luxembourg does not charge any (Level 2) taxes (e.g. capital gains, dividend, inheritance) for non-resident investors of Luxembourg domiciled funds.

For these reasons Luxembourg is a good alternative to Ireland whenever you are not investing in ETFs that hold US stocks.

Netherlands

There are very few ETFs domiciled in the Netherlands.

Dutch ETFs are worth mentioning because some of them have a legal structure that allows them to take advantage of tax treaties which typically reduce withholding (Level 1) tax rates to 15%. Additionally, these funds can receive a tax refund from the Netherlands for these foreign dividend taxes which allows these funds to distribute 100% of the gross dividends.

Investors which receive dividend distributions of Dutch funds are subject to a withholding (Level 2) tax rate of 15%. If the investor resides in the Netherlands they can deduct these dividend distributions from their annual tax liabilities.

For these reasons Netherlands may be a good option for some Dutch investors. The Bogleheads wiki has more details on this topic.

Germany and France

I found very little information online of the Level 1 and Level 2 tax liabilities of funds domiciled in France and Germany. Therefore, a more detailed analysis of these domiciles will have to wait for another post.