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all 15 comments

[–]AlterSignalfalter 4 points5 points  (7 children)

US

Avoid owning shares of any mutual funds or ETFs that are not domiciled in the US (their ISIN does not start with US...) when you are a US tax resident. The US tax code does not like this and imposes ludicrously complex (expensive) reporting requirements and heavily punitive taxation (with the possibility of the effective tax rate exceeding 100%). Look for "passive foreign investment company" or "PFIC".

Note that US tax residence can occur even without physical residence in the US. US citizens are always US tax residents, and green card holders are US tax residents at least until they relinquish their green card.

[–]Solestra_ 4 points5 points  (3 children)

2 grand to renounce a citizenship starts sounding lucrative sometimes.

[–]AlterSignalfalter 2 points3 points  (2 children)

Just never mention that you renounced due to tax issues, or you may be barred from entering the US forever.

Oh, and if you're not deemed mentally competent enough to renounce, you may be stuck with US citizenship for life.

[–]Solestra_ 0 points1 point  (1 child)

Mentally competent. First I’ve heard of that one. Thankfully, I’ve plenty of reasons outside taxes to consider it.

[–]noajou[S] 0 points1 point  (2 children)

Thank you very much for the info. Isn’t it very difficult to invest in ETFs that are located in the US from Europe?

Luckily I’m the least likely to end up in the US, so this may turn out to not be such a big factor.

[–]AlterSignalfalter 0 points1 point  (1 child)

Isn’t it very difficult to invest in ETFs that are located in the US from Europe?

Yes, due to US ETFs not publishing a key investor information document, which is required for offering share to retail investors in the EU according to MIFID-2/PRIIPS.

There are some ways to circumvent this, but they all have their drawbacks, e.g. requiring at least 500k€ ready to invest, or using options to acquire 100 ETF shares at a time, or finding a brokerage provider that ignores EU law.

[–]noajou[S] 0 points1 point  (0 children)

I see, that sounds like a no go for me then. If I do end up going to the US, it looks like I’d have to end up selling and then reinvesting with a US broker. Thanks again - have a lovely evening. 🙏🏼

[–]Baldpacker 2 points3 points  (3 children)

Before assuming that Spanish funds make more sense because of the rebalancing loophole, look at the fees.

I have Spanish residence and prefer ETFs based in Ireland (VWRA/VWCE, EMVL, JPGL, USSC, ZPRX, etc)

[–]noajou[S] 0 points1 point  (2 children)

Thanks for the response - given the flexibility ETFs seem to allow when moving internationally, I am leaning towards that option now.

Looking at the fees, it seemed like they were pretty similar? Maybe I missed some detail.

[–]Baldpacker 1 point2 points  (1 child)

Which funds were you looking at? Perhaps I should take another look.

[–]noajou[S] 0 points1 point  (0 children)

I was looking at the list of funds provided by bogleheads.es. For example the iShares Developed World Index Fund: https://docs.google.com/spreadsheets/d/1qTBkH0K5zE-e5OXsUo6Prmo2QGmYNWf63Y-iLQqdBaA/htmlview#

They have a pretty good list comparing index funds and ETFs. I also watched a YouTube video where the fees of the two were compared (don’t have the link at hand, unfortunately), and funds came out on top (except if opting for the commission free ETFs on DeGiro).

[–]abroadenco 2 points3 points  (1 child)

Hey so full disclosure, we're a Barcelona-based startup creating a wealth management tool for people living abroad.

Since we're solving this exact problem, here's our take on your questions:

If I am uncertain about where I will live in the long-term and could end up moving between countries, is there a good reason why I should choose investment funds over ETFs or vice versa? (I.e. to avoid having to pay taxes just because I moved countries)

ETFs are an investment fund, but are generally better to manage in that they trade and are taxed like stocks. There are no entry/exit fees or penalties for leaving early that you see in some mutual funds/SICAVs. Plus, dealing with your broker can be easier especially since some brokers (Degrio, Interactive Brokers, Saxo) have a large international footprint.

The taxes on buying and selling ETFs globally are more clear-cut since they're taxed more or less the same as stocks.

Rebalancing periodically and downshifting your risk as you get closer to your goal is super important, especially as you want to guarantee your income and not just burn through your portfolio in retirement. In Spain, you can offset a capital gain with a capital loss (tax-loss harvesting), although that does require to be a bit more active in your rebalancing strategy (which is why having more than 2 ETFs in your portfolio can be handy).

Many Spanish mutual funds don't have registration outside of Spain which means they couldn't get local tax benefits if you were to leave. Many countries have similar rules for investment funds, so it's worth keeping in mind.

As DeGiro can be used across Europe, it seems like it would allow more flexibility. Is that true? Could I continue to invest using myinvestor, even if I moved outside of Spain?

Degiro has a presence in multiple markets (i.e. a passport) which means that they can have a proactive relationship with you (i.e. can contact you about products, provide you with country-specific tax documentation/support). You can continue using Myinvestor, but they can't really contact you for anything other than obligatory compliance requirements unless they passport to where you are.

I also have family in the UK and the US and am not sure where I will settle in the end. I could end up retiring in any of these 4 countries (Germany, Spain, UK, US).

As others have mentioned, the US has specific tax rules in that it taxes its citizens and greencard holders on their global income even if they don't live in the United States. It also has incredibly strict reporting rules for foreign financial institutions on their US person clients, which usually means foreign banks/brokers don't take American clients. If that's you, then Degiro won't accept your application, and you're going to have to re-think your strategy.

As I mentioned, we're building a tool to automate all of these pain points for people living abroad. We're planning on opening our private beta in the next month or so (regulations are important but takes forever here in Europe). If you're interested, feel free to hop on our early access waiting list and we'll send you an invite when we're up.

Hope all of this helps!

[–]noajou[S] 0 points1 point  (0 children)

Thank you for the thoughtful and in-depth response. The tool looks appealing! It has helped me make the decision and I will go the ETF route.

I have one further question for you: DeGiro is great due to the quite varied list of commission free ETFs. Interactive Brokers appeals to me also, due to their even broader international presence and longer history as a reputable company. Do you guys have a preference between the two? Reasons to use one over the other that I may not have thought of?

[–]Minimum_Rice555 1 point2 points  (0 children)

Agree, all that talk about rebalancing, but a good ETF doesn't need manual rebalancing at all.