Why I’ve stopped buying VWRLs

Schloss

After comment-chatting with Richard from Banks Germany, I’ve decided to stop buying Vanguard’s All-World fund (aka VWRLs) for our index ETF strategy.

The big reason being that VWRLs are domiciled in Ireland, and I live in Germany. As a non-Irish resident, it would cost me too much on taxes compared to other funds domiciled in Germany.

In case you live in Germany and are thinking of buying European Vanguard products (domiciled in Ireland), consider these points first.

Capital gains taxes in Germany and Ireland:

  • In Germany, you can earn up to €801 (or €1602 for a married couple) a year in capital gains tax-free. After that your gains will be taxed at 25%+ .
  • In Ireland, there is a 10% withholding tax for non-Irish residents from first EUR.

Compare different capital gains scenarios in Germany (DE) and Ireland (IE):

If you earn €1000
DE: No tax
IE: €100

If you earn €1602
DE: No tax
IE: €160

If you earn €2000
DE: ~ €100 (i.e 25% of €398 (amount above €1602)
IE : €200

If you earn €2500
DE: ~ €230 (i.e 25% of ~€900)
IE : €250

If you earned €2650
DE : ~€262
IE: €265

Credit: Richard @ Banks Germany. 🙂

Earning more than €2650 as capital gains from VWRLs is when taxes paid to Germany will be higher than taxes paid to Ireland.  In all other cases, you actually pay higher taxes in Ireland as withholding taxes – plus you’re not using your free-tax room of €1602 per married couple.

Lessons learned:

If you and your fund do not share the same domicile, there will be tax issues! Learn what they are beforehand so you can make tax efficient decisions. I was rushing to buy VWRLs because I’ve been putting off investing for several years. Turns out, Irish VWRLs are not the best choice for German residents like me. While my intent is not to search for ‘the best fund’ (index trackers are very similar to each other), I don’t want our taxes to be so complicated either. Especially when there’s plenty of good options in Germany, the richest country in the EU.

Thanks again to Richard for saving us so much time, money, and frustration! :mrgreen:

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5 thoughts on “Why I’ve stopped buying VWRLs

  1. Ah, the dreaded issue of domicile for managed funds… We used to have funds domiciled everywhere when I was working at the bank in London. It made sense in some respects but no sense in others.

    My experience in the industry turned me off managed funds/mutual funds entirely unfortunately, but if you are into managed funds then you need to question whether it is worth investing in some that are domiciled in all sorts of obscure places. Pretty soon they’ll be setting them up in the North Pole because Santa doesn’t charge them tax. Too bad they need to hold the fund’s board meetings there to make it stack up!

    I like the way you spiced up a financial post with a sensational picture of Schloss Neuschwanstein – we loved that place when we went there. It really is an amazing setting that is unlike anything else that we have ever seen.

    Liked by 1 person

    • Yep, I needed some eye candy to break up all this fund-speak which tires me out.

      Neuschwanstein IS magnificent, but next time you visit Germany, try Burg Eltz. Much less touristy and somewhat off the beaten track. It’s my favourite Germsn castle. Bonus that it’s nestled in Germany’s wine region with other beauty (including other castles) nearby. 🙂

      Liked by 1 person

      • Wow, just googled Burg Eltz and am very impressed – I never knew it even existed! We never managed to travel in that area but it’s certainly some thing I’d like to do when we go back to Europe. It will be a while away yet though unfortunately as we need to wait until our kids are old enough to travel.

        And yes, castles are MUCH more interesting than managed funds!

        Liked by 1 person

  2. Pingback: Back to investing | Ms. Canadian Expat

  3. Are you sure about Ireland withholding tax on capital gains in ETF? I mean, did you actually see some amounts withdrawn from your gains? I’ve only ever heard of withholding tax related to ETF dividends, but have also been considering VWRL so this is of utmost interesting (I’m not based in Germany though, but another EU country).

    As far as dividend withholding tax goes, I was hoping that the exemption in 5.a. in http://www.revenue.ie/en/tax/dwt/leaflets/dividend-withholding-tax-guidelines.html would apply. Waiting for reply from revenue.ie representative.

    Like

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