US Citizen residing in Germany. Where to invest?

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I am a US Citizen residing, employed and paying taxes in Germany (married and two kids).

 

Most of my savings are still in US banks and I am way more familiar with US investment products.

 

I want to invest a five figure amount in a well diversified basket of ETFs during the next few months, with the intention of holding them for 10-15 years. My question is: should I buy US-based ETFs or German-based ETFs? My understanding is that either option is going to complicate greatly the taxes in the other country. Is this true? What would you do?

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Germany charges a penalty tax for holding investment funds which don't do their accounting in accordance with German accounting priciples (intransparent funds). For ease of doing your German tax declaration you might want to have your investment portfolio with a German bank or broker. In that case your investment income will be taxed automatically with a 25% flat rate (plus solidarity surcharge plus church tax, if applicable) without you having to file. Should your personal tax bracket be lower than 25% you have the option of filing your investment income and get a refund.

 

To avoid the penalty tax you might want to invest either in funds which do adhere to German accounting priciples and are registered as doing so (simply ask your bank or broker whether a specific trust you are interested in does) or you restrict yourself to e. g. buying funds or trusts which are either based in Germany or which are organized as stock corporations or "Zertifikate" (which technically are sort of bonds). Be aware though that Zertifikate are just claims towards the issuing bank, so if the issuing bank goes bankrupt you might not get your money back.

 

If your bank/broker is not registered in Germany, you will be required to file your investment income. On the other hand in practice you might not be charged the German penalty tax because then your broker won't withhold it (as they aren't subject to German law) and it usually isnt't obvious from foreingn account statements that a specific fund would in theory have to be taxed as intransparent. And for a 5 digit investment chances are pretty much zero that the case handler dealing with your tax declaration will make the effort to check this (and you will not routinely be asked for it, so you won't have to lie).

 

So from the point of ease of dealing with paperwork I guess it might be most convenient to buy US-based investment vehicles (which will give you the information you need to submit to the IRS) and keep them in a portfolio with a German bank (because then taxes will automatically be withheld and you won't have to file a tax declaration for it).

 

For a long term investment I'd simply buy shares of Berkshire Hathaway and have Warren Buffet's team make the decisions on how to invest. Berkshire doesn't pay dividends so there will be nothing to declare or to be withheld unless your sell.

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I'm in the same boat, you'll run into a few problems:

 

-Most brokers in Germany are unwilling to deal with FATCA, and will refuse to open an investment account for US-Persons

 

-To avoid running afoul of the IRS PFIC rules, you'll want to specifically avoid investing in ETFs or mutual funds which are not registered with the SEC

 

-Like jeba said, you'll want to only ETFs which are compliant with German reporting requirements. Unfortunately the intersection of dual-registered ETFs is small (I haven't see a list, if any even exist)

 

-Most non-US based ETFs/mutual funds/bonds restrict ownership to non-US Person, for example, the second largest ETF in the US, iShares Core S&P 500 ETF (IVV), offers a comparable product here in Europe (iShares S&P 500 UCITS ETF (DE0002643889), yet the prospectus for the European product specifically excludes US Persons:

 

 

The Shares have not been, and will not be registered under the 1933 Act or the securities laws of any

of the states of the United States. The Shares may not be offered or sold directly or indirectly in the

United States or for the account or benefit of any US Person. Any re-offer or resale of any of the

Shares in the United States or to US Persons may constitute a violation of US law.

 

http://uk.ishares.com/en/rc/stream/pdf/-/publish/repository/documents_legal/dub_pdf/uk_retail_en/ishares_plc_prospectus_en_v2.pdf

 

As such, everything I've read thus far has recommended US expats restrict investments to individual stocks (Adidas, Daimler, Linde, etc) to considerably ease reporting requirements.

 

Perhaps Straightpoop can offer more optimistic advice. :(

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there are some/few banks left in Germany as well as fund-plattforms which still accept US-citizens living in Germany as clients. With regards to the funds, on the German side the selection is easy enough and our clients with one of these banks have never so far been banished or rejected from investing in publicly traded funds (traded in Germany, that is) yet, be that ETFs or mutual/managed investment funds. But obviously I am only talking from the German side of things.

 

And looking at what I percive to be a high probablilty for serious volatility during the next couple of months in the main stock-markets, I would actually rather stay away from ETFs and concentrate on really well managed funds which can take advantage of this...

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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Most of my savings are still in US banks and I am way more familiar with US investment products.

 

Why would you consider investing someplace you are NOT familiar with? Transfer costs, unknown tax implications on top of market uncertainties seems like a an investment in unnecessary frustrations.

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Thank you all for your thoughts. They more or less confirm what I had been reading so far.

 

I am simply trying to find out what investments will not make either my US Taxes or my German Taxes unnecessarily complicated (or expensive, for that matter).

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I'm in the same boat, where is the best place to hold investments, obvously being American makes things more complicated, but for me I did a lot of looking around and at this point am leaving my investments in Canada makes sense. Just currious but does it make a difference if funds which don't ahere to German accounting if they are held in the states, I mean other than having to file a tax return? I'm assuming that he'll be investing in US and not German stocks.

 

One other advantage, which I know more when I file taxes next year, is superficial loss selling, unlike Canada/US, the German rules are very very generous. Basicly you can sell and immediately repurchase it (as long as the price is different) for me this year I should be able to offset about 1500€ in taxes which minimal impact on my portfolio.

 

Second advantage is if I do owe money I have till the end of the year to file and pay, but if you are earning a lot they make you prepay.

 

As mentioned once I file taxes I'll know more

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Just currious but does it make a difference if funds which don't ahere to German accounting if they are held in the states, I mean other than having to file a tax return?

 

As I said above I think in theory it should make a difference. In practice however, no US-broker will withhold German tax or show on the yearly account statement / tax statement that a specific fund should be subject to German tax penalty. And your case handler won't bother to check. You will not be explicitly asked (at least so far they haven't).

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Be very careful about US vs. German investment accounts - there are issues with withholding. You indicated that you may want to invest in US ETFs or German ETFs. I am guessing that you would buy the US ETFs in a US-based account and the German ETFs in a Germany-based account, and that the biggest question is in which jurisdiction you should hold the money.

 

Unfortunately, when it comes to the withholding tax, both jurisdictions will consider themselves to be the primary taxing authority, even though you do not live in the US and, under the tax treaty, Germany is cleary your primary taxing jurisdiction. If the account is in the US, then capital gains will be automatically taxed fully (and withheld) in the US. Simultaneously, you will have an obligation to declare and pay the taxes in Germany. Germany will not credit you for the taxes you have paid in the US. You will have to argue with the IRS that the money is "foreign earned" even though the account is held in the US, and therefore a) Germany is the primary taxing authority and that B) the German taxes should be credited against US taxes due.

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If the account is in the US, then capital gains will be automatically taxed fully (and withheld) in the US.

False. Only if the US citizen account holder has failed to provide his bank with a W-9 would the account be subject to "back-up" withholding. For US tax and withholding purposes the residence of the US citizen account holder is not relevant and the requirement to submit a W-9 upon opening an account is nearly universal in the US. There is no US withholding on capital gains, interest and dividends for US citizens who have a valid W-9 on file.

 

 

Simultaneously, you will have an obligation to declare and pay the taxes in Germany.

True.

 

 

Germany will not credit you for the taxes you have paid in the US.

False. Germany is obligated under its own tax law and under Article 23 of the DBA-USA to credit US citizens resident in Germany with US taxes actually paid up to the amount that the US government would by treaty be entitled to impose on a German citizen resident in Germany. E.g. 0% on interest, 15% on dividends, 0% capital gains on sale of intangibles.

 

 

You will have to argue with the IRS that the money is "foreign earned" even though the account is held in the US

False.

 

First: There will be no argument with the IRS.

 

The IRS is silicon-based and is essentially operated by computers; these are not programmed for engaging in debate. It has relatively few "carbon-based" units who will not be aware of much less argue any position you take that is satisfactory to the computer unless and until the computer selects the return for audit.

 

Second: Passive investment income is never "foreign earned". It may be foreign sourced but it is, by definition, not "earned". The US sourcing rules for purposes of claiming the foreign tax credit will not allow a foreign tax credit on income that is "US sourced".

 

Treaty Article 23, however, has a "treaty resourcing" provision that overrides the US domestic source rules (IRC §861 et seq.) to prevent double taxation. In effect, this allows the US citizen taxpayer resident in Germany to claim a US foreign tax credit for German taxes payable on US source income up to the treaty limits and/or the actual US tax on such items. Under the treaty, Germany has the exclusive right to tax its tax residents (including US citizens tax resident in Germany) on their interest income. Because of the treaty's "savings clause" the US will tax the US citizen as if the treaty did not exist; thereby exposing the US citizen to potential double taxation.

 

That's where the "treaty resourcing" provision of Article 23 kicks in. It allows the US citizen to claim a credit on his US tax return for the German taxes imposed on that interest up to the lower of the 26.375% paid to the Germans or his own US tax rate even though under US domestic tax law the interest is "US-sourced" and thus ineligible for a foreign tax credit.

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Bottom Line: the OP has ~$5k to invest and hold for 10-15 years. Even annual dividend income is negligible much less the taxes on it and no one can predict what or if there will be capital gains. If it were $500k and one year, this discussion would be pertinent.

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Where do you get $5k?

 

fraufruit, 5k is only a lot of money if you don't have it. It can also be a lot of money if you had save it over a few years.Otherwise it's pocket money to play with.It is a lot easier and faster to spend it than to accumulate it. For the OP and anyone else I recommend to listen to this fellow and draw your conclusions.

 

http://sufiy.blogspot.co.uk/2013/12/very-interesting-interview-and-rob.html#

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Sorry, make it 10k or 50k, the probable returns are still so slight that taxes should not be the concern.

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If you can leave your money dormant, that is you do not care for an immediate return,I'd put the money into a commodity, like certain metals and keep physical possession of it. No trouble with taxes until you sell and then maybe not if you can arrange a private sale.Gold, silver platinum metals and rare earth metals too,( rare earth metals are difficult to sell privately). But gold and silver and platinum metals(in coin )there is always a buyer to be found.Just to tell you an example, I'm in silver and even though the silver price is very depressed now, I still would have a neat return if I would sell out now.As it is, I have no worry and I don't sell out.It is either land,commodities, education and a titled home, so no one can raise the rent on you. The stock market is much to corrupt at the present to get involved in it, unless you are professional. That's why it is so difficult for a commoner to get ahead in this world. Very few people make it in the first generation to establish them self,It has to be a family which has to supply a base for to get ahead.

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I have to admit I am very confused about the whole thing. I honestly didn't expect that moving to Germany would have such an impact in what I can do with my savings. I suppose it could all be simplified by renouncing my green card (which I've only had for a few months), but I don't want to do that just yet. By the way, the amount I want to "invest and forget" is around $200-300K. Thanks all for your interesting points.

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@salustius

 

In your original post you describe yourself as a "US Citizen".

 

In your most recent post you state that you have just received a "green card". By "green card" are you referring to Form I-551 Permanent Resident or Alien Registration Receipt Card issued to persons granted lawful permanent residence in the United States or did you have something else in mind?

 

If, in fact, you have $200,000 - $300,000 to invest rather than the "5 figure" amount you referenced in your original post, why are you horsing around looking for free tax guidance on a public forum rather than springing for a few bucks to get that advice from a qualified professional?

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Salustius is from Spain according to his personals. He just did not know the difference between resident of and citizen of.A great difference except when it comes to paying taxes.

Even $200 000 - $ 300 000 is not a big deal. Everyone around here who owns a house and bought it 30 years ago is worth that much. Just tells you what inflation has done to the working class.

 

If you want to join a hedge fund you have to have proof that you have control over at least $50 million and that is just the lower level and then you have to sign a paper that you can afford to lose it.That's how financial segregation works.

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