@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:
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?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.
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?