The fund is subject to the respective national regulation at its domicile. This results in different conditions depending on the fund domicile. The question therefore arises as to which is the right fund domicile if you want to invest in ETFs as a Swiss private investor. We address this question in this article.
Contents
There are three domicile levels for investments in funds
But before we start, we need to create the right basic understanding. When you invest in a fund, there are three different stages:
- Domicile of the company
- Domicile of the fund
- Your personal domicile as an investor
To reduce the complexity somewhat, we will assume in this article, that you live in Switzerland and are liable for tax. Your citizenship does not matter as long as you are not a US citizen.
Your investor domicile is therefore in Switzerland. However, depending on the domicile of the companies in which you wish to invest, a different fund domicile may be preferable.
How can you recognize the fund domicile of an ETF?
The domicile of a fund can be found in the fund prospectus. ETF providers also disclose the fund domicile in the fund’s key data. This key data is published in the fund factsheet.
In the case of European ETFs, the ISIN number can also provide information about the domicile of the fund. The ISIN number is used in Europe as the standardized identification number of a fund, with the first two characters representing the letters of the country of domicile.
For example, a fund domiciled in Switzerland:
- iShares Core SPI (CH), CH0237935652
The best fund domiciles by country
Now that we have learned the basics, let’s get started. Which fund domiciles are best suited for which investment country?
The best fund domicile for Swiss equities
Let’s start with Switzerland: If you want to invest in Swiss companies using ETFs, the matter is relatively simple. In this case, the fund domicile in Switzerland is preferable.
Justification: Swiss tax law stipulates that the income generated by a fund under Swiss law (CH fund) is attributable to the investors on a pro-rata basis. The Swiss fund itself is not a taxable entity and therefore does not have to pay income and profit tax. Withholding tax paid by companies to the federal government can therefore be reclaimed in full by the fund.
| Domicile | Non-recoverable taxes | Description | |
| Domicile of the company | Switzerland | 0 % | 35 % of the dividend must be paid to the federal government as withholding tax. The fund can reclaim 100% of this withholding tax because the fund itself is not subject to tax. |
| Domicile of the fund | Switzerland | 0 % | The fund must also pay 35% of the income (regardless of whether it is distributed or not) to the federal government (withholding tax). Investors can reclaim this withholding tax if they declare the income in their tax return. |
| Domicile of the investor | Switzerland | Income tax | The income must be taxed as income. |
The following table shows the difference in performance between two funds on Swiss equities, one domiciled in Switzerland (UBS) and one domiciled in Luxembourg (Amundi). The performance of the fund domiciled in Switzerland was more than one percent higher than that of the fund domiciled in Luxembourg. And only a small part is due to the higher costs of the Amundi fund (0.05 % higher TER). The rest of the difference is due to the fact that the Luxembourg-domiciled fund cannot reclaim withholding tax.
| ISIN | 2018 | 2019 | 2020 | 2021 | |
| UBS ETF (CH) MSCI Switzerland (CHF) A-dis | CH0226274246 | -7.27% | 30.89% | 2.75% | 23.75% |
| Amundi MSCI Switzerland UCITS ETF – CHF | LU1681044993 | -8.32% | 29.68% | 1.67% | 22.71% |
| Difference | 1.05% | 1.21% | 1.08% | 1.04% |
Stamp duty
Another reason why you should prefer the Swiss fund domicile for Swiss equities is the lower stamp duty on domestic ETFs:
| Stamp duty on ETFs | Fund domicile abroad | Fund domicile Switzerland |
| Purchase | 0.150 % | 0.075 % |
| Sale | 0.150 % | 0.075 % |
The best fund domicile for US equities
And what if you want to invest in US companies? As you know, the USA is a very important market for equity investments. In the MSCI World Index, which covers the Western world (including Japan), the USA accounts for almost 70 %.
Higher volumes and lower costs for US funds
Funds domiciled in the USA manage a significantly higher volume than their European counterparts. Experience has shown that the running costs (TER) and the trading spread are therefore lower for US ETFs. It would therefore be interesting in principle to invest in US funds. But let’s look at the other aspects first.
From a tax perspective
Funds domiciled in the USA would also be preferable from a tax perspective. And for the same reasons as in Switzerland. We remember that the fund domiciled in Switzerland does not have to pay taxes and can therefore reclaim the withholding tax. The same principle applies to US funds. They can also avoid withholding tax on US dividends.
Withholding tax is payable on the distribution from the US fund to the Swiss investor. However, these withholding taxes (US withholding tax and additional Swiss withholding tax) can be fully reclaimed or credited by the investor, as is the case with Swiss withholding tax.
| Domicile | Non-recoverable taxes | Description | |
| Domicile of the company | USA | 0 % | The USA has a withholding tax on dividends of 30%. A fund domiciled in the USA can reclaim this 30%. We do not know exactly what the procedure is, but in any case, the tax can be avoided by the fund. |
| Domicile of the fund | USA | 0 % | US withholding tax is deducted when the fund is distributed to foreign investors. If the US withholding tax is lower than 30%, there is an additional Swiss withholding tax. Both the US withholding tax and the additional Swiss withholding tax can be reclaimed by the Swiss investor if the income is declared in the tax return. |
| Domicile of the investor | Switzerland | Income tax | The income must be taxed as income. |
The buzzkill: the US inheritance tax
But, and you guessed it, there is a catch. If you hold US securities, you may be subject to US inheritance tax. This applies even if you are not resident in the USA and are not a US citizen. The tax is up to 40 percent on “US situs assets” and cannot simply be ignored due to the amount alone.
All assets with a connection to the USA are considered “US situs assets”. This includes an ETF domiciled in the USA, but not an ETF on US equities domiciled in Ireland.
However, there is an exemption limit. If the estate does not include more than USD 60,000 of such “US situs assets”, no tax is due. If the deceased’s estate contains more than USD 60,000 in US situs assets, there are two options for Swiss investors:
Variant A
You want to make use of the double taxation agreement between Switzerland and the USA. In this case, all of the deceased’s assets must be disclosed to the US tax authorities in a tax return (including translations of marriage and inheritance contracts, etc.). In other words, it can be a bit tedious. The advantage of this option is that you benefit from a higher exemption limit, which is calculated as follows:
1. Example:
- Total estate: 11,200,000
- “US situs assets: 2,500,000
Calculation:
- Share of “US situs assets” = 25%
- 25 % of the exemption limit of 11,200,000 = 2,800,000
- “US situs assets” 2,500,000 – exemption amount of 2,800,000 = 0 taxable
- US inheritance tax = 0
2. Example:
- Total estate: 11,200,000
- “US situs assets: 2,500,000
Calculation:
- Share of “US situs assets” = 22.32%
- 22.32 % of the exemption limit of 11,200,000 = 2,500,000
- “US situs assets” 2,500,000 – exemption amount of 2,500,000 = 0 taxable
- US inheritance tax = 0
3. Example:
- Total estate: 12,500,000
- “US situs assets: 2,500,000
Calculation:
- Share of “US situs assets” = 20%
- 20 % of the exemption limit of 11,200,000 = 2,240,000
- “US situs assets” 2,500,000 – exemption amount of 2,240,000 = 260,000 taxable
- US inheritance tax = 260,000*40% = 104,000
Variant B
If you do not want to disclose the data to the USA or want to save yourself the administrative effort, the tax is calculated as follows:
Example 1: (2,500,000 – 60,000) * 40 % = 976,000 tax
Example 2: (2,500,000 – 60,000) * 40 % = 976,000 tax
Example 3: (2,500,000 – 60,000) * 40 % = 976,000 taxes
Variant for US-Persons
US ETFs are interesting for US persons. US persons are subject to reporting and taxation in the USA anyway, whether they like it or not. So it makes no difference whether you own US ETFs or not.
Lack of accessibility as a private investor
One challenge for Swiss investors is the lack of accessibility to US ETFs. ETFs domiciled in the USA are almost impossible for Swiss investors to find online without a very targeted search.
This is due to the financial market regulation “MIFID”, which was introduced in the EU in 2018. As part of the regulation, ETF providers are now required to provide standardized documents on the funds, which are intended to protect investors (Key Investor Document “KID”). As many US funds do not wish to comply with the requirements, particularly for cost reasons, duplicates of the US funds have been launched at European fund domiciles, which have higher costs. Switzerland is also oriented towards European financial market regulation and has adopted much of the content of “MIFID” with the introduction of the Financial Services Act (FinSA) and other regulations.
As a result, US funds can no longer be traded for private clients via many European banks and brokers. The specific authorization requirement and thus the distribution of foreign collective investments in Switzerland is regulated in Art. 120 of the Collective Investment Schemes Act (CISA). The collective investments authorized for distribution in Switzerland are listed by FINMA. There are currently around 8,600 funds on this list, although not a single fund domiciled in the USA is included.
Access for professional customers
Professional clients or qualified investors continue to have access to funds domiciled in the USA. They are not bound by the FINMA list. In accordance with Art. 5 para. 2 of the Financial Services Act (FinSA), a private client may declare that he (or she) wishes to be considered a professional client if he (or she):
- has the knowledge required to understand the risks of the investments based on personal training and professional experience or comparable experience in the financial sector and has assets of at least CHF 500,000; or
- has assets of at least CHF 2 million.
Access via asset management mandate
Private clients for whom investments are made by an authorized asset manager as part of an asset management mandate are also considered professional or qualified clients. This is regulated in Article 10 para. 3ter CISA.
If these requirements are met, additional documents must be submitted to the financial institution through which US ETFs are to be traded (form W-8BEN for natural persons) so that the qualified intermediary can correctly carry out and settle the reporting obligations and withholding tax settlements with the US tax authorities (IRS).
The best alternative fund domicile for US equities
What is the best alternative if you want to avoid the US inheritance tax problem?
In this case, one country stands out. It is Ireland. Ireland has an old double taxation treaty with the US, which has an advantage over other countries. Dividends from US companies to funds domiciled in Ireland are only subject to a 15 percent withholding tax and not the usual 30 percent.
| Domicil | Non-recoverable taxes | Description | |
| Domicile of the company | USA | 15 % | The USA has a withholding tax on dividends of 30%. Thanks to an old double taxation agreement, funds domiciled in Ireland can reclaim 15% of this tax. |
| Domicile of the fund | Irland | 0 % | No withholding tax is deducted when the fund distributes dividends to foreign investors. |
| Domicile of the investor | Switzerland | Income tax | The income must be taxed as income. |
It is true that the ETF domiciled in Ireland performs worse than the US ETF. However, the difference is limited. It can be explained as follows:
- The withholding tax of 15 % on dividends (of 2 % on average), which is withheld at domicile in Ireland. On average, this effect amounted to approx. 0.30 % per year for the years shown.
- The ongoing charges (TER), are 0.04 % lower per year for the fund domiciled in the USA in the above example.
| Domicile | 2017 | 2018 | 2019 | 2020 | 2021 | |
| iShares Core S&P 500 IVV | US (no ISIN) | 21.79% | -4.42% | 31.44% | 18.37% | 28.66% |
| iShares Core S&P 500 UCITS ETF | IE00B5BMR087 | 21.40% | -4.72% | 31.02% | 18.02% | 28.36% |
| Difference | 0.39% | 0.30% | 0.42% | 0.35% | 0.30% |
Ireland is therefore the best alternative for investments in US equities.
The best fund domicile for European equities
Funds from Ireland or Luxembourg are preferable for investments in European equities. If the funds have the designation UCITS, they are subject to uniform European regulation.
The best fund domicile for emerging markets
The fund domiciles in Ireland and Luxembourg are similarly well-suited for investments in emerging markets. For very targeted investments, the situation would have to be assessed individually.
Lump-sum tax credit
Non-recoverable withholding taxes on foreign dividends can be credited against taxes in Switzerland (Art. 2 para. 1 of the Ordinance on the Crediting of Foreign Withholding Taxes). This is referred to as a lump-sum tax credit. The term “flat-rate” means that the tax is credited for all levels of the Swiss tax system (communal, cantonal and federal) at once and not separately for each level.
In order to claim the lump-sum tax credit, you must submit the relevant receipts to the tax authorities showing the amount of non-recoverable withholding tax on the securities positions. What is still possible for individual securities has become a problem for funds that invest in many different shares. However, finpension has now developed a new type of reporting that should also enable a flat-rate tax credit for ETFs.
Final note
In this article, we took the view that applies if you want to invest in physically replicated ETFs. Physical means that the ETF actually buys and holds the shares and does not just track the performance of the index. We have also not looked at SWAP ETFs. We may make up for this in another article.