Dividend Tax Leakage, Differences In Funds Tracking The Same Index…Index Investing In Europe Is NOT Easy!

We were almost ready to take the plunge and put a lot of dough into the Vanguard All-World ETF at a 0.25% TER…when I started investigating the dividend leakage. I was triggered by Meesman’s article. This thing causes some serious damage to your investments placed outside of your home country. This is because the other country’s government charges a very scary thing called dividend tax. It’s illegal, it’s unfair and it’s a financial independence killer. Just read this. Yikes!

This dividend tax leakage especially hurts ETFs and index funds. This leads to an unrecoverable tracking error between the fund and its index benchmark! These European investment vehicles underperform their benchmarks by 50 to 150 basis points per year. That’s a significant cost for investors! According to the fore mentioned article the extent of tax leakage varies widely by index type. However, tax leakage represents a GREATER COST to investors than expense ratios! This is the worst possible outcome…obviously.

As Vanguard is domiciled in Ireland a Dutch investor (or any European investor not from Ireland) is charged dividend tax by the Irish government. Whereas the Irish investor can claim this dividend tax back from the government, the rest of us Europeans can’t. And we can’t claim anything on our own government either. We don’t even get to see the real dividend. We’ll receive 85% of the total dividend, and that’s that. The Irish government will already have taken its (NOT so fair) share. That comes down to adding 0.4%-0.6% to your TER. So our Vanguard All World ETF would intrinsically cost 0.65%-0.85% instead of the 0.25% we were promised. 😦

Yeah, it’s illegal and unfair. The EU already stated in 2004 that dividend tax on individuals doesn’t comply with the EU treaty. The European Commission has already told all member states to stop this unfair practice. Even the European Court of Justice ruled that member states didn’t comply with the treaty multiple times, for example in this case against the UK in 2012. Multinationals have been fighting this injustice through the ECJ for almost a decade now. Every time the ECJ rules in their favour…but there’s not one member state that complies! They will lose millions in tax income. Experts think the turning point is almost there……but should we believe these fortune tellers?

Lo and behold, there’s a solution! A smart Dutch broker decided to act and created its very own FBI (Fiscale Beleggingsinstelling, it’s this fiscal arrangement so that the funds can now be domiciled in The Netherlands) in 2010.  This year Meesman switched its Global Fund from Vanguard to accommodate it with Northern Trust making it the first MSCI World Index Fund without dividend tax leakage. This could make up for an extra 0.4 to 0.5 going to the investor per year. Yay! Problem solved! Let’s invest with ThinkCapital or Meesman! Whoohooo!

Hold your horses! Let’s get back to that MSCI World Index, now shall we? You’d think that any fund tracking that same index would have the same results, right? WRONG!

This shows the 2012 results for a couple of index funds and ETFs that track the same MSCI World index.

rendementen_2012_indexfondsen_en_etf

I nicked this graph from Ms. Verdegaal’s article which explains the situation in Dutch. She got it from Morningstar and Meesman.

A 3% difference between the best and worst performing fund! WTF?! This means you have to study all fund prospectuses. What are the costs? Is it expensive to get in and out? Who receives the dividend? How precisely does the tracker follow the index? Are you really buying stocks or just renting them? Do they rent out your stocks? If so, do you get paid rent for that service? This means you have to compare results yourself, for example, via Morningstar but that ain’t easy. Sigh!

It gets worse. I have already explained the transaction costs with Meesman will get ridiculous as soon as you want to invest or extract bigger amounts (€2.000+) and they don’t have a limit like BinckBank. However, the husband needs to calculate whether their solution to the dividend tax leakage makes up for that. Now, it’s difficult to compare because they used to invest with Vanguard (and performed really well, according to the graph!) but now with Northern Trust (I haven’t been able to find their performance in 2012 and compare that, if there’s a reader that does…?). With Vanguard they used to follow the MSCI Index very closely and you’d own a mix of all 1600 or so stocks in it. Which is what you’re after.
Okay, let’s look at ThinkCapital as well then. No dividend tax leakage either. Happy, happy, joy, joy! Oh, goody, they offer the Think Global Equity UCITS ETF and charge only 0.2% TER! Yes, yes, yes! Click! I want to get me some MSCI World Index funds without the dividend tax leakage, thank you! Since it’s in Dutch I’ll sort of translate….the Think Global Equity UCITS ETF is spread into 250 world-wide stocks and tracks the Think Global Equity Index. Eh? The results of this ETF can be COMPARED to the results of the MSCI World Index. Huh? What happened to the 1600+ stocks thingy? Where’s the diversification? Son of a ………! Oh, their own benchmark (which is NOT the MSCI World Index) in 2012 was 14.24% and their actual result was 13.59%.
Geographically you’d be investing in the U.S. (38.32%), Japan (18.56%), France (7.2%), the U.K. (7.26%), Germany (6.26%), Switzerland (4.15%), Australia (3.03%) and a bunch of other developed countries.
A huge difference with the Vanguard MSCI World Index where you’d be investing in the U.S. (53.61%), Canada (4.22%), the U.K. (9.12%), Western Europe “Euro” (12.09%), Western Europe “Non-Euro” (6.17%), Japan (9.25%) and a bit of other countries. No emerging either.
To me it looks like they’re fiddling around with their own benchmark and I have no idea whether this will turn out for the best. Tracking the complete MSCI World Index feels a lot better.
The other ETFs they offer we do not find interesting at all.

So, what’s a girl to do? Stick with Meesman and pray for the best? Dive into Vanguard and pray that member states will give up their sadistic dividend tax habits? Take a gamble and go for ThinkCapital?

Aaaaaaaarrrrrrrrgggggggghhhhhhhh! INDEX INVESTING IN EUROPE IS NOT EASY, I DON’T CARE WHO YOU ARE, IT JUST AIN’T!

Let’s move to the U.S. and invest with Vanguard directly! Yeah! 😉

Okay, stop being such a complainypants and look at the bright side. At least now you now more of what you’d be buying. Plus, you’re still much better off than investing with a managed fund because you’d still be way under 1% TER.

If you Dutchies are interested in a dividend tax leakage discussion, this is a good place to start. I will phone our tax services about our treaty with Ireland and the double taxation that now occurs. Ireland takes 15% and dividend is taxed 30% in The Netherlands. I’ll keep on investigating this very important matter…

What would you advise us to do? Anybody? Somebody?

Love,

Mrs EconoWiser

Disclaimer: I am not a professional investor nor do I claim to be one. You are solely responsible for your own financial and investment choices. I am not responsible for inaccurate information in any of my blog post. I am merely sharing ideas and findings of my very amateurish investigation in index investing.

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18 thoughts on “Dividend Tax Leakage, Differences In Funds Tracking The Same Index…Index Investing In Europe Is NOT Easy!

  1. Monique

    Ik ben sinds kort ook hiermee bezig en ik vind het allemaal maar lastige materie! Ik heb er tot nu toe gewoon nog te weinig kennis over en ik ben me aan het inlezen. Nu las ik op een forum over de dividendlek: http://www.iex.nl/Forum/Topic/1301018/1/Dividenlekkage-graag-jullie-input.aspx#6947444. Hier gaf iemand aan voor Amerikaanse ETFs op de Amerikaanse beurs bij Lynx te handelen; Lynx vanwege de lage transactiekosten en op de Amerikaanse beurs, omdat de ETFs ‘spotgoedkoop’ zijn. En wat betreft de dividendlekkage krijgt hij via het W8-BEN formulier zoveel mogelijk terug. Ik weet niet of er interessante Vanguard fondsen zijn bij Lynx. Wat jij hiervan?

    Reply
    1. econowiser Post author

      Hoi hoi,

      Het is inderdaad erg lastige materie. Pfff en indexbeleggen zou simpel moeten zijn!

      Hier ook bezig om mezelf eea bij te brengen…dan denk je dat je het zo’n beetje snapt en komt er weer wat om de hoek kijken…

      Groetjes!

      Reply
    1. econowiser Post author

      Thanks, heb ze bekeken. Zojuist met Vanguard, Lynx en de belastingdienst (het was heeeeeeel leuk, dus leuker kunnen ze ‘t inderdaad niet maken ;-)) en volgens mij heb ik de knoop doorgehakt om via BinckBank in de Vanguard All-World te gaan. Vanavond nog even overleggen met de hubby!

      Reply
      1. rationaldutch

        You mention you spoke with Lynx as well. I am doubting between using Lynx or Binck (or maybe even both). Can you please tell me why you chose Binck?

      2. econowiser Post author

        I just spoke to Lynx and Binck again. BinckBank is based in the Netherlands, whereas Lynx isn’t. In case both of them go bankrupt it would be rather easy for anybody to retrieve their stocks. Those stocks are in their name under a Dutch custodian. You can’t ever lose them. A person’s stocks with Lynx will be with an American custodian. I guess that will make matters a lot more complicated when trying to retrieve them.

        I have also been told that the W8-BEN thing is automatically solved for Binck customers…but I’m not quite sure yet. This is not the case with Lynx.

        With Lynx you have to start with an initial investment of €3.000. Binck doesn’t have a minimum.

        The only other difference are costs. Both of them don’t charge anything other than transaction costs. These are a little bit lower with Lynx, but it’s a matter of cents.

        I find the first reason the most convincing one to go with Binck. But that’s just me.

  2. a Mustachian

    Thanks for documenting the process of how you are making your investment choices. I’m in the same boat, but haven’t made up my mind yet. Leaning towards Vanguard and Think, though.

    I’m especially struggling with finding the right broker. How would you say Binck compares to ING Zelf Beleggen? With ING I’d be paying €16 plus 0.24% on all investments annually, as compared to €6.50 + 0.10% per transaction with Binck (correct me if I’m wrong). When I write it down like that it sounds almost like I’d be robbing myself by opting for ING, but the thought of transaction fees makes me a bit apprehensive.

    Reply
    1. econowiser Post author

      Hi fellow Mustachian!

      I would never choose a bank for my long-term investing, since I tend to change banks every couple of years or so. If I’m correct one can only invest through one’s bank if one holds a payment account there?

      Annual costs are killing. There aren’t any annual costs with Binck, just your transaction costs. Let’s say at one point in time you have €100.000 in investments riding with both parties. Holding that amount with Binck will cost you €0 annually whereas it would cost €16+€240=€256 a year with ING. Why would you want to pay ING for this “service”?

      I don’t think transaction fees are killing when investing larger amounts in index funds and holding on to them for some thirty odd years and thus making no costs in selling them until you retire.

      But this is just my humble view on the situation.

      Reply
      1. a Mustachian

        Thanks for your reply.

        You do indeed need a payment account with ING to open an investment account, but that would not be an issue in my case.

        You make a very strong case for Binck, and I find myself erring more towards it than ING now. The cost savings are tempting. I’d just have to keep the number of transactions to a minimum to make the most of it. Perhaps I could limit myself to two index funds (one bonds and one stocks) and only buy more once every six months. That would be quite the cost savings compared to ING. Not sure how I feel about investing in only two funds and being hampered by transaction costs (the idea of rebalancing my portfolio to the exact desired allocation every month appeals massively to my OCD). I might just come to terms with it if I keep thinking about how much a fixed service charge would cost me instead. Now to figure out what two funds I’d choose!

      2. econowiser Post author

        Haha, I LOVE your OCD! 😉 Once every six months sounds a bit too tricky when it comes to dollar/euro cost averaging. My husbands wants to invest every three months, where I would rather invest on a monthly basis.

  3. alwaysonit

    You said “As Vanguard is domiciled in Ireland a Dutch investor (or any European investor not from Ireland) is charged dividend tax by the Irish government”.

    Are you sure the Irish government tax you at all? Looking at point 1 here http://www.revenue.ie/en/tax/dwt/leaflets/dividend-withholding-tax-guidelines.html they only speak about dividends paid by IRISH companies. So if you invest in the S+P 500 (all US companies) it’s the USA withholding tax that is leaked, and nothing to the Irish government.

    If you take a look at this post I created http://www.bogleheads.org/forum/viewtopic.php?f=10&t=147562 maybe you can answer the questions, or are you as confused as I am?

    Reply
    1. Anonymous

      Do you have a link to any documentation stating this, or were you told it over a phone call?

      Did you get a chance to look at my link, would you be able to answer my hypothetical situation in it?

      In another link http://www.bogleheads.org/forum/viewtopic.php?f=10&t=98484 the two main posters seem to think that Ireland does not take DWT, so obviously it is confusing reading different views when both cannot be correct!

      Thanks in advance 🙂

      Reply
      1. mdz

        Hello there Mrs. E. Just to confirm: Am I understanding this correctly, that if a certain country has a double taxation treaty with Ireland, then the Dividend leakage should not be an issue? I think I saw your post from 2013 about Divident leakage and you recommending the US versions of Vanguard due to this fact, over their Irish counterparts (https://econowiser.wordpress.com/2013/11/29/1139/).

        Should the Dividend leakage prove a non-issue for europeans, then there would be nothing stopping us from investing in Ireland, right?

        Thanks for a quick reply.

  4. alwaysonit

    europe.etf.com/docs/presentation2011/6_ETFsAndTax.pdf
    I got linked to this from my bogleheads thread, if you look at the graphs on pages 13 and 14 you will see that USA takes 15% DWT before it is paid to the ETF, because it is domiciled in Ireland it is only 15% (Luxembourg domicile would mean a 30% DWT).
    Ireland however, does not take any withholding tax.

    Where did you get your information that an investor is charged DWT by the Irish government? Maybe you know that you lose 15% through it being domiciled in Ireland and it can’t be reclaimed but didn’t know where the 15% went (and that it is actually advantageous to be domiciled here so that only 15% of tax is leaked and not 30%)?

    I can’t understand the articles you link in Dutch, but does Meesman manage to avoid tax leakage completely? Does Netherlands have a tax treaty with USA that negates it completely? I’d assume you must still lose at least 15% in leakage or else much more ETFs would be domiciled in the Netherlands rather than Ireland.

    Reply
    1. alwaysonit

      europe.etf.com/docs/presentation2011/6_ETFsAndTax.pdf
      Pages 18-21 back up my point again, hope this helps you avoid DWT!

      Reply
    2. econowiser Post author

      Yep, I referred to the same document in December 2013 in this post: https://econowiser.wordpress.com/2013/12/21/etfs-and-tax-finally-an-overview-that-makes-sense/
      Guess I never came back on the topic.
      Indeed, the Irish government does not charge dividend witholding tax. However, the USA does (15%). Now, Meesman has solved this problem by setting up a Dutch type of brokerage.
      Luckily, there’s no double dividend witholding tax for our VWRL funds. But the 15% is lost to the USA.

      Reply
  5. free.Fr

    Hi there! This is my 1st comment here so I just
    wanted to give a quick shout out and tell you I truly enjoy reading
    through your articles. Can you recommend any other blogs/websites/forums
    that cover the same subjects? Thanks a lot!

    Reply

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