Like Tree2Likes

Saxo withdraws 30% taxes on municipal bonds. Others don't?

Reply
Page 1 of 2 1 2 LastLast
  1. #1

    Join Date
    Oct 2018
    Posts
    263

    Saxo withdraws 30% taxes on municipal bonds. Others don't?

    @traineeinvestor and @shri kindly pointed out that municipal bond etfs are good options for dividend investors because you don't need to pay the 30% of WHT. I bought some HYD, and Saxo withdrew 30% of my dividend. I asked them why, and they said that "this is US sourced income so it's liable to withholding tax at 30%". I replied that this is a municipal bond fund, so there is no withholding tax. They replied:

    This is a US RIC.

    Distributions from a US RIC are subject to 30% US withholding tax. The US tax rules permit a RIC to pass through certain tax benefits. Most importantly for non-US holders of US RICs is the ability for a RIC to reclassify previously distributed income, specifically when any portion of the previously distributed income qualifies as portfolio interest or a long term capital gain (both exempt from US withholding tax). Practically (and this is largely the global custodian model), after the close of the year an asset manager will report the reclassification information to vendors such as Wall Street Concepts (WSC) in the US (although they are not required to). After year end, a custodian will send all of its income payments to the vendor to scrub against the reclassification data (if any) for its holdings to determine whether any adjustments are required. If there is reclassification data, the vendor will send back the transactions flagged for reclassification and reprocess the event. This all generally occurs at the end of January for the prior year.
    I think that this doesn't make any sense. The information provided by Vaneck (https://www.vane ck.com/etf/income/hyd/overview/) clearly states that HYD is tax-exempt. HYD knows that HYD is tax exempt. Saxo knows that HYD is tax exempt. The IRD (Internal Revenue Department) knows that HYD is tax exempt. So who decided to take away 30% of my dividend, and what have they done with it?

    Why do I need to wait until the end of January to have my money back? And can I trust Saxo to return me the money?

    Do other banks or brokers give 100% of the dividend, or do they all have this practice?

    Thank you.

  2. #2

    Join Date
    Oct 2018
    Posts
    263

    Thank you. Could you share your experience about which bank/broker knows that municipal bonds don't have WHT?

    And how does it work in practice? There is one guy at Saxo who decides how much to withdraw as WHT from every share and bond? And at the end of the year he looks at the books and checks whether what he did over the year was correct? This doesn't make any sense to me.


  3. #3

    Join Date
    Dec 2018
    Posts
    1,248
    Original Post Deleted
    That is a very sad reflection on the absurd and pointless complexity of the US tax system.

  4. #4

    Join Date
    Dec 2002
    Location
    ???
    Posts
    32,075
    Quote Originally Posted by traineeinvestor:
    That is a very sad reflection on the absurd and pointless complexity of the US tax system.
    And a little bit of laziness from the WHT agents too.

    Most ETFs if not all, will release tax rates for their distributions which qualify for WHT exemptions. Technically, HYD as mentioned above and a whole lot others qualify for full or partial exemptions.

    LQD for example ranges in the 70-80% exemption, which would actually make it attractive, but we're left buying through the UK listed LQDE.

    While the US Tax system is mind numbingly complex, there is some serious leakage / lack of transparency here from the ETF managers and who ever handles the tax issues.

    It should not be this opaque.

    OP - I have stuck with MUB as the only income ETF in the US. I think VTEM might have similar treatment, but not that bothered to find out. I do hold a couple of other minimal numbers in SHY etc to see if I do get a refund between the 12-18 month mark next year.

  5. #5

    Join Date
    Dec 2002
    Location
    ???
    Posts
    32,075
    Quote Originally Posted by john_1122:
    @traineeinvestor and @shri kindly pointed out that municipal bond etfs are good options for dividend investors because you don't need to pay the 30% of WHT. I bought some HYD, and Saxo withdrew 30% of my dividend. I asked them why, and they said that "this is US sourced income so it's liable to withholding tax at 30%". I replied that this is a municipal bond fund, so there is no withholding tax. They replied:
    Did you ever see a refund show up in your Saxo account 9-12 months after that first div payment?

    Asking because I want to update some WHT tax info on this HSBC thread, with some additional results of experiments..

    https://geoexpat.com/forum/155/thread354637.html

  6. #6

    Join Date
    Oct 2006
    Location
    Hong Kong
    Posts
    13,961

    I can confirm that Citi provide tax refunds on US ETFs that are not supposed have WHT charged.

    However Citi also charge for dividends for US stocks, so not recommended.


  7. #7

    Join Date
    Dec 2002
    Location
    ???
    Posts
    32,075

    Misread this thread title. Hyg is not a fully exempt etf. It does qualify for 55-65% qii exemptions that I mentioned in the post above.


  8. #8

    Join Date
    Oct 2018
    Posts
    263
    Quote Originally Posted by shri:
    Did you ever see a refund show up in your Saxo account 9-12 months after that first div payment?

    Asking because I want to update some WHT tax info on this HSBC thread, with some additional results of experiments..

    https://geoexpat.com/forum/155/thread354637.html
    No. I didn't see a refund.

  9. #9

    Join Date
    Dec 2002
    Location
    ???
    Posts
    32,075

    If thats the case, then you're not seeing QII refunds at Saxo.

    Thanks.


Reply
Page 1 of 2 1 2 LastLast