WHT in China for dividends is 10%. I believe you'll lose 10% of dividends on the way in.Original Post Deleted
This is a very interesting point. Consider that the dividend yield of the HSI is around 4%, so that means you'll lose (very roughly) 0.4% to dividend withholding (assuming they're all mainland companies, in practice it'll be a little less).Original Post Deleted
The dividend yield for S&P 500 is around 2% so you lose roughly 0.6% to withholding tax. If you look at say VUG with a yield of 1.2% that's only 0.36% withholding
Point is that the US may not be that tax disadvantaged relative to the Hang Seng Index.
This is very interesting. Thanks for sharing.Original Post Deleted
So obviously all companies pay tax on their profits, but it seems it's a good thing to not pay a second round of withholding tax on dividends which are already paid out of post corporate tax profits.
So my original statement stands that buying a Chinese ETF is worse in terms of tax than buying the Hang Seng Index since most of the HSI companies are from the mainland anyway.
I do think that between the S&P 500 and HSI an investor can get a good coverage of both EM Asia and the developed west. If someone was pedantic they may want to throw in other developing nation's and western Europe however I think this is not strictly necessary since
1. US multinationals do a lot of business in these regions anyway and
2. indices in the US and Europe will be fairly correlated, which decreases the diversification achieved by spreading over US and European indices.
I'm interested to hear your thoughts on this.
Last edited by cendrillon; 08-01-2018 at 07:03 PM.
Because the US index has a much lower dividend yield (1.9% for S&P 500 versus 3.9% for the HSI), so although you pay a higher tax rate, you get less dividends and so the effective tax rate (dividend yield times WHT rate) ends up similar.Original Post Deleted
However when JR looked into this more it seems that many HSI companies that are headquartered in HK and do business in China don't have WHT on dividends. In that case HK is still a fair bit better than the US.
So for example if HSI yield is 3.9% and WHT averages to 4% then you are paying 0.156% of your principle in WHT per year. The VUG ETF has a dividend yield of 1.2%, so with WHT at 30% you end up paying 0.36% per year. Looking at 2822/2823 you have a dividend yield of 2% and lose 10% to WHT for a total cost of 0.2% per year, but they have a 1% management fee. If you're willing to use IB you could buy VUSD with a yield of 1.9% and WHT of 15% for a total cost of 0.285%.
Personally I like the combination of 2800 and VUG and maybe VO. This seems to give the best balance between diversification and reasonable tax rates, and doesn't require you to use IB.
Last edited by cendrillon; 09-01-2018 at 10:23 AM.
So lets say a company is headquartered in China. It pays corporate taxes on its profits, then it issues dividends out of those profits post-tax, and then there's an additional 10% withholding tax on top when those dividends get sent to Hong Kong. So if the corporate tax rate is 25% then for every dollar of profit the company earns you will see at most 65 cents in dividends (assuming all profits are paid out as dividends for the sake of discussion).Original Post Deleted
In contrast if a company is headquartered in HK then it pays corporate tax in China, then issues dividends in HK with no further tax. In this case for each dollar of profit you have potentially 75 cents of dividends.
Doesn't it seem that the Hong Kong headquartered company then is better in terms of tax treatment and one is better off going with 2800 over 2822/2823?
Well, there are many ways to finance a dividend....
If I spin your example further the company could operate at around break even, pay little to no income tax, take a credit
( and deduct the interest rate as expense, if that's possible in PRC ) et voila, votre dividende.
btw, treatment of interest expense in Trump's new tax bill is something I really dislike.