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International tax on global stock funds

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International tax on global stock funds

edited 30 November -1 at 12:00AM in Savings & Investments
4 replies 373 views
pensionacapensionaca
2 posts
Forumite
edited 30 November -1 at 12:00AM in Savings & Investments
Hello,
I understand the withholding taxes of dividend payments from some foreign countrie's stocks


However, there is another tax, gains tax. From an article on Investopedia I read that, for example, Italy, charge 20% tax of any gains of stocks by non-residents.


Just because I invest via a UK/Irish fund, eg a world/europe index fund, which will hold Italian shares, it seems too good to be true that I don't need to pay the 20% gains tax. And in the case that the fund pays the gains tax, when I sell, that would effect all fund unit holders I think which doesn't seem very fair either.

Replies

  • eskbankereskbanker
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    If you live in the UK and hold units of a UK-based fund then all associated taxation is based on UK rules, regardless of where the underlying investments are. The UK also has Capital Gains Tax at varying rates, also this can be avoided if using ISAs to shelter from tax.
  • EdSwippetEdSwippet
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    eskbanker wrote: »
    If you live in the UK and hold units of a UK-based fund then all associated taxation is based on UK rules, regardless of where the underlying investments are.
    I don't think that's really answering what the OP is asking about, though.

    Funds and ETFs do actually pay some taxes internally. For example the inescapable and unrecoverable 15% US treaty rate on dividends from US stocks held by a fund or ETF domiciled in the UK or in Ireland (same treaty rate for both countries). You can see this in the fund's annual report, for example for VWRL, which shows the fund received dividend income of 64,119,281, but paid 7,444,601 in foreign withholding tax.

    It can be hard to tell whether or not a fund will pay a particular withholding tax to any given country. Even though a country might generally apply some withholding tax on non-residents, for dividends, capital gains, or both, a treaty can modify this.

    I took a quick look at the Italy/Ireland tax treaty -- VWRL is domiciled in Ireland -- and from a brief skim it appears that this treaty might exempt an Ireland domiciled fund from any Italian capital gains tax. No guarantees on my accuracy here, though. Tax treaties are rarely clearly written, and even when you do find a paragraph that seems to state something with clarity, there may be one elsewhere that overrides it and that you didn't find. Reading tax treaties is a black art.
  • Thanks, I read from a topic on here about people with Santander shares having to file Spanish tax returns when they sold those shares to pay any gains tax due.

    This is the kind of the thing that I'm talking about, just because I invest in Spanish shares via a fund, this means this no longer required? Maybe there is an exception, I don't know
  • bowlhead99bowlhead99
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    pensionaca wrote: »
    Thanks, I read from a topic on here about people with Santander shares having to file Spanish tax returns when they sold those shares to pay any gains tax due.

    This is the kind of the thing that I'm talking about, just because I invest in Spanish shares via a fund, this means this no longer required? Maybe there is an exception, I don't know

    Basically if you invest in a UK or Irish domiciled fund (the two most common locations for funds attracting UK resident retail investors), you do not own any Spanish shares or any Italian shares or need to fill out any Spanish or Italian tax returns. The Spanish and Italian tax authorities don't know that you exist. The investor in the Spanish and Italian companies is a UK or Irish company.

    You own shares in that company (the investment fund) and pay your UK taxes on income or gains you make from holding the fund or selling the fund for more than you paid for it. If you are UK resident and not also resident elsewhere, you have no obligation to pay tax on that income or those gains, and no foreign tax authorities will know you made them.
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