Do withholding taxes apply to ETF's such as VUSA?

isayhello

I've had some shares previously in an american company and became aware of a 15% withholding tax.
Now I have some VUSA etf shares inside an ISA, does the 15% withholding tax still get deducted before dividends are paid? and does that change if it's inside an ISA or outside in a general account?

Thanks

masonic

In the case of VUSA, the company that invests in the US shares making up the ETF is based in Ireland, so it benefits from a treaty that gives it a reduced rate of WHT @ 15% rather than 30% and this is withheld from dividends before they are paid to the ETF. It doesn't matter where the beneficial owner of the ETF shares holds them.

Other ETFs can differ, for example a synthetic S&P500 ETF that generates its returns using swaps, is able to replicate the total return of the index without investing in the shares, so there are no actual dividends to be subject to WHT. Whereas a physical ETF based in a different country might be subject to the full 30% WHT.

isayhello

Thanks @masonic in that case isn't it beneficial for everyone to go for the synthetic option always?

masonic

isayhello said:

Thanks @masonic in that case isn't it beneficial for everyone to go for the synthetic option always?

Not necessarily. You also need to consider the impact of costs as the cheapest ETFs are currently physical. When I've done comparisons, the benefit is negligible and synthetic ETFs have added counterparty risk from the swap provider going bust. Physical ETFs can also sometimes outperform the index due to tracking error and securities lending, as has been the case recently.