Author Topic: How to deal with a "wealth tax"? Need some advice on investing  (Read 1568 times)

Hula Hoop

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How to deal with a "wealth tax"? Need some advice on investing
« on: September 02, 2018, 05:09:50 AM »
I posted this in "ask a mustachian" but it may be more appropriate here as it's an investment question (mods please delete original post):


I need some advice from my fellow mustachians.  I recently found out that Italy imposes a 0.15% "wealth tax" on all assets held by its tax residents outside Italy.  I'm an American long term expat in Italy and have always sent my savings from my job here in Italy back to the US where I invested them in my US Vanguard account. Obviously, I had already paid income tax on this money. I did this because investing in a foreign country is very complicated for US citizens due to FBAR and FATCA. I have an IRA and a taxable account at Vanguard. 

I just found out about this wealth tax here in Italy and the fact that I should be paying this on my money at Vanguard (both IRA and taxable account) and have taken steps to comply with it.  Apparently, the tax only applies to assets held outside Italy so now I'm thinking about bringing my non-IRA money to Italy and investing it here to avoid the tax.  I will still have to pay it on the IRA but it seems silly to keep paying it on my taxable account.  I have a US tax accountant and I'm waiting for a response from her on the wise-ness of this move from an FBAR perspective.

If we decide bring this money back to Italy, my husband and I are now thinking about buying a second, small investment apartment here in our city in Italy.   My husband works in the tourist trade and we would rent out the apartment AirBNB style to tourists in our town.  My husband has 20+ years of experience in tourism so he knows how to do this and make it work and also how to comply with licensing and tax requirements here.  The only issue is that he is a bit nervous that they will change the rules to limit the number of AirBNB apartments here as they have already done in Amsterdam, Barcelona and various other European tourism hotspots.  If this happens, I figure we can always just rent out the apartment the normal way - to students or others.


The real estate market here has been falling steadily in Italy for years but IMO it may have finally hit rock bottom and may improve soon.  But meanwhile, my husband says, we can earn money with the apartment so the apartment as an investment doesn't really matter.


Any advice or thoughts on this?  Does his argument that we can 'earn money' with the apartment despite falling real estate values hold water?  Would it be better for me to just put the money into a European low-fee index fund like Degiro?

SansSkill

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #1 on: September 02, 2018, 05:36:51 AM »
I'm in the Netherlands where we have a wealth tax as well.
I invest in VWRL, which is a vanguard low cost index fund available with DeGiro and just pay tax.
I just change my SWR down with the wealth tax, for you that won't even be needed as once in Italy the money is no longer taxed.

Just to clarify, you don't have an appartment yet for investment purposes, just for living?
Because if you are thinking of entering real estate just to evade a wealth tax I would seriously reconsider it, it's an entirely different asset class and not passive at all.

Hula Hoop

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #2 on: September 02, 2018, 05:40:41 AM »
Thanks, Sans.  What is SWR? 

From what I read on the internet, the Netherlands has a wealth tax on all assets whereas Italy only has the wealth tax on assets outside Italy.

Yes, we already own an apartment that we live in.  My husband thinks we should buy a second investment apartment to use for short term rentals to tourists.  We live in an Italian city with tons of tourism and husband already works in that sector so he knows how it all works.  So I guess there are two questions - should I transfer the money to Italy to avoid the wealth tax despite the FBAR implications (this is more a question for my US accountant and I'm waiting for her answer) and should we use the money to buy a small apartment rather than investing it in the Italian branch of Degiro?  Is my husband's argument that we can 'earn money' with the apartment sound?

expatartist

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #3 on: September 02, 2018, 06:30:08 AM »
I've not checked updated tax info, but for some time now the stamp tax when buying a second home in Italy is quite a bit higher than for your first. As long as you've factored in the local as well as the tourist market, it's worth considering. But if your town decides to go the way of Barcelona etc the rental market may drop significantly.

Hula Hoop

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #4 on: September 02, 2018, 07:22:57 AM »
I've not checked updated tax info, but for some time now the stamp tax when buying a second home in Italy is quite a bit higher than for your first. As long as you've factored in the local as well as the tourist market, it's worth considering. But if your town decides to go the way of Barcelona etc the rental market may drop significantly.

Yes, that's right.  The stamp duty (as well as property taxes) are much higher for a second property here in Italy.  I guess we need to talk to our Italian accountant about all this and weigh all the factors.  For some reason, my American accountant told me under no circumstances to invest in stocks etc here in Italy due to FATCA.  But maybe it's worth it to go through whatever hoops we'll have to jump through due to the 'wealth tax'.

ixtap

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #5 on: September 02, 2018, 07:36:25 AM »
At .15%, I would not be making any investment decisions just to avoid the tax. Investing in an unstable economy or paying property tax could easily be a bigger drag on your wealth.

Hula Hoop

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #6 on: September 02, 2018, 07:42:26 AM »
At .15%, I would not be making any investment decisions just to avoid the tax. Investing in an unstable economy or paying property tax could easily be a bigger drag on your wealth.

I have that feeling too re investing in property here.  We already own one apartment (that we live in) so a significant chunk of our money is already tied up in Italian property.  On the other hand, I understand that through Degiro I could invest locally in a lot of Vanguard type funds all over the world.  I don't think I'd be limited to Italian stocks (maybe we need to ask our Italian accountant this question).

lhamo

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #7 on: September 02, 2018, 08:21:53 AM »
What is your concern about FBAR?  It is a pretty simple form -- you just have to figure out the highest balance of each account in a given calendar year.

Though I must admit I am happy I no longer have 10k plus in foreign accounts and don't have to file it for myself.  Still waiting for DH to spend down his balances, unfortunately....

Financial.Velociraptor

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #8 on: September 02, 2018, 08:22:24 AM »
Talk with an Italian Chartered Accountant about this, especially the tax on the IRA money.   The US and Italy have a TAX TREATY and most likely you can avoid the tax on the IRA entirely by filing a form.  G-11 nations traditionally respect each other's tax deferred/exempt treatment on retirement accounts.

Otherwise, don't let a tax tail wag the investment dog.  A lot of people pay more than 0.15% in fees for an index type fund.  It shouldn't be enough to make you take on extra risk, especially if you are not going to be in Italy permanently.

Hula Hoop

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #9 on: September 02, 2018, 02:15:21 PM »
Talk with an Italian Chartered Accountant about this, especially the tax on the IRA money.   The US and Italy have a TAX TREATY and most likely you can avoid the tax on the IRA entirely by filing a form.  G-11 nations traditionally respect each other's tax deferred/exempt treatment on retirement accounts.


Our Italian accountant is the one who told us about this tax.  The Tax Treaty does not touch on the "wealth tax" - it's mainly about avoiding double taxation and since there is no similar tax in the US this is not double taxation.

MrThatsDifferent

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #10 on: September 02, 2018, 02:42:35 PM »
What is your concern about FBAR?  It is a pretty simple form -- you just have to figure out the highest balance of each account in a given calendar year.

Though I must admit I am happy I no longer have 10k plus in foreign accounts and don't have to file it for myself.  Still waiting for DH to spend down his balances, unfortunately....

I agree, youíre not getting the right advice about FACTA and FBAR. All it is reporting what money you have in foreign accounts. Do you have an Italian bank account? If so, then you have to declare. It doesnít prevent you from anything. You should look at talking to an accountant with expat experience. Youíve been scared for no reason. Form wise itís slightly annoying but once you set it up and know what to track, itís easy.

Hula Hoop

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #11 on: September 02, 2018, 02:54:08 PM »
I've been doing the FBAR for years and my bank has no problem with FATCA as they are a big bank with lots of American clients.  But my US accountant said that "investing outside the US is hardly every worth it for US citizen expats"  I think it had something to do with additional reporting requirements besides FBAR.  Anyway hopefully I'll hear back from her next week.  The US accountant is based here and advises American expats so she should have some knowledge of this.  She is a US expat herself actually.

Hula Hoop

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #12 on: September 02, 2018, 03:12:50 PM »
I just tried opening a Degiro account (similar to Vanguard but here in Europe) and a message came up saying that they don't accept US citizens as clients, presumably due to FATCA requirements.  I know that a lot of non-US banks are similar although my bank is OK.  Bummer.

ETA - I did some googling and #1 explains why buying mutual funds outside the US is a bad idea for US citizen like me:

https://thunfinancial.com/home/american-expat-financial-advice-research-articles/top-ten-investment-mistakes-made-americans-abroad/
« Last Edit: September 02, 2018, 03:23:30 PM by Hula Hoop »

bwall

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #13 on: September 03, 2018, 06:58:44 AM »
At .15%, I would not be making any investment decisions just to avoid the tax. Investing in an unstable economy or paying property tax could easily be a bigger drag on your wealth.

+1

0.15% on $1m USD is $1500 per year. Would I divest from a passive investment and re-invest in an active investment for $1500 a year? Probably not. YMMV.

expatartist

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #14 on: September 04, 2018, 01:36:14 AM »
Excellent article HH with some great links, thanks for posting. I'm having some of these dilemmas now and struggling.

lollipop_hurricane

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #15 on: September 13, 2018, 12:34:28 PM »
Hey I'm reading this and maybe need to start a new thread, but I am also an American expat, currently in Canada.  I have been buying index funds here, that are tracking the S&P.  I used to have Vanguard, but they refused to do business with me anymore, when I moved to Canada, as they said the law stated I had to live in the United States to own stock in US companies.

Later, someone else told that I only need a US address to invest with Vanguard.  What do you know about this?  Have you had any problems buying Vanguard in the US living in Italy? 

What is the problem with the FATCA?  This FATCA thing started after I got here and was already buying the index funds, but now they have started asking for my SSN at the banks once they get wind that you are a US citizen. 

Hula Hoop

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #16 on: September 13, 2018, 12:54:06 PM »
You just need a US address to have a US Vanguard account.  I use a family member's address.

The problem with owning non-US investments as a US citizen is not FATCA but a punitive tax that you have to pay in the US on foreign investments.  Read the article I linked to above from Thun Financial for more detail.  It sounds like you aren't paying this tax which could cause big problems down the road if the IRS ever finds out.

lollipop_hurricane

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #17 on: September 13, 2018, 01:11:03 PM »
Thanks Hula Hoop.  I've filed my US taxes every year and my FBAR, but I've never heard anything about this strange reporting of mutual funds as PFIC.  I'm going to look into this.   

I guess it's back to US Vanguard for me. 

flipboard

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #18 on: September 13, 2018, 11:22:16 PM »
Honestly, I'd recommend against using false addresses. There are brokers who are more international friendly, I have actually used Interactive Brokers and Schwab. Schwab offer commission-free ETF's that cover most of my needs, Interactive Brokers offer any ETF or stock at 1-2 USD per trade (there's a 10 USD monthly minimum if your assets are less than 100k though).

The main issue with Schwab is they charge around 1% for currency conversion, whereas Interactive Brokers offer almost-free currency conversion. Hence Interactive Brokers are often the best choice for international users.

However, there's one more pitfall: EU requirements mean that EU residents can no longer buy US-domiciled funds or ETFs. (FATCA meanwhile prevents most US citizens from trading in Europe, not that you'd want to because of PFIC.) I don't live in the EU so I'm not affected, but you'll want to research this carefully. I'm guessing you wouldn't run into this issue if you open a Vanguard account with a US address, but Vanguard are likely to block your account from trading as soon as they realise you aren't in the US (I don't know if they're one of the institutions that looks at your IP addresses to figure out where you are).

I suppose what I'm trying to say is: you're in a bind, and your solutions are either to get rid of the cumbersome citizenship, move to a country outside the EU (there are a few of those in Europe), or lie to your broker and hope they don't notice you're lying to them (at which point they stop you from trading).
« Last Edit: September 13, 2018, 11:26:29 PM by flipboard »

Hula Hoop

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #19 on: September 14, 2018, 01:38:04 AM »
Neither my US or Italian accountant have ever mentioned an EU requirement that US Citizens resident in the EU can't buy US domiciled funds.  My US accountant is also a long term expat/immigrant here so you'd think she would know about such a requirement since all her clients are US expats in Italy.  Anyway, I'll ask them both.

None of your three options are available to me so I guess I'll just need to keep going.  I've spoken to Vanguard on the phone a few times and have been open about living outside the US  and they were fine with it.  They even helped me to access the site without a US phone number.

reeshau

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #20 on: September 14, 2018, 03:33:39 AM »
@Hula Hoop I am very interested in what you find.  I just moved to Ireland, and I see no barrier to continued ownership of my us accounts.

lollipop_hurricane

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #21 on: September 14, 2018, 07:55:01 AM »
I'm glad to hear Vanguard was helpful for you.  I am very disheartened that they closed out my accounts 11 years ago when I told them my new address, without giving me the opportunity to just keep it in the US.  I remember speaking to them on the phone about it too and they recited some law about people in other countries not being allowed to take over US companies or something like that.  I had no idea it was just about the address and not about where I was actually living.  I wonder if originally that was how the law was intended, and then the companies are just saying it's the address now.  Cause I only heard about the address thing years later.

In case anyone is interested, I have bought Canadian mutual funds, and sold them this year, so I'll be seeing just how bad this PFIC tax is.  "Lucky" for me, I hadn't accumulated too much wealth yet.  I must say, this is making me rethink staying in Canada for a long period of time, since I will have to be dealing with the conversion rate putting money in my funds. 

Hula Hoop

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #22 on: September 14, 2018, 08:07:34 AM »
Good luck, lollipop.  Please come back here and report on the whole PFIC thing.  My US accountant made it sound pretty bad but maybe she is exaggerating. I hope for your sake that she was.

Maybe try opening an account again at Vanguard using a family member's address?  I use transferwise to transfer my euros into dollars at my US bank account and then transfer them over to Vanguard.  Not the perfect solution but better than all the alternatives. 

This whole mess sometimes makes me regret conferring my US citizenship on my kids.  They probably won't ever live in the US but they'll have to deal with this whole tax mess their whole lives.  Even when they get their first jobs hopefully in their teens they're going to have to file tax returns on two countries.

flipboard

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #23 on: September 14, 2018, 10:38:18 AM »
Apologies, it looks like I may have misconstrued the EU resident thing *slightly*. The issue is that EU regulations don't allow EU brokers to sell non-PRIIP compliant funds to EU residents - and most US funds aren't PRIIP compliant. This affects e.g. Interactive Brokers, who only recently stopped EU residents from buying such funds (or ETF's). There's a news article explaining this issue here: [1] . This issue presumably doesn't affect any purely-US brokers because they couldn't care less about EU requirements (e.g. Vanguard, assuming you're a Vanguard US client). IB however have an EU based entity (IB UK), and most EU residents are customers of IB UK, hence IB can't sell such ETF's to such customers - but they also only recently started doing this: for a while they continued to sell non-PRIIP compliant funds despite the regulation being in force (It's unclear if Schwab follow the same rules - most EU resident Schwab customers are clients of Schwab UK, hence are presumably affected - but I haven't seen any definitive reports.)

It's surprising that Vanguard let you keep your account, but it definitely sounds like the best option for you specifically. Just don't make too much noise about it in case they change their mind : ). I've seen too many stories about Vanguard customers having their accounts blocked from trading (I think Vanguard still allowed sales, but blocked purchases).

[1] https://www.justetf.com/uk/news/etf/us-domiciled-etfs.html

Regarding citizenships and children: they can "easily" (fees aside) free themselves by renouncing citizenship at age 18, so it's not that horrendous. (I don't think they have a choice in the matter before age 18 however, and I don't think it's even possible for you as a parent to stop them from automatically gaining citizenship at birth - so you haven't done anything wrong in that regard.)  They'd just need to have some other citizenship, and if they're growing up in Italy then it shouldn't be that difficult to get Italian citizenship.

reeshau

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Re: How to deal with a "wealth tax"? Need some advice on investing
« Reply #24 on: September 14, 2018, 11:31:11 AM »
Thanks for the article @flipboard.  It will definitely spur some more research.

One potential out for Mustachians / FI:
"A potential exception exists if your platform allows so-called sophisticated investors to buy US-domiciled ETFs. You may qualify if you can demonstrate that you are a professional investor, or are otherwise highly qualified, with the knowledge and experience to understand the risks of the product. 

Qualification under this exception depends on your broker deciding that you meet the UK definition of a sophisticated investor. You may also need a very large portfolio (over £500,000). Many popular brokers donít even allow for this workaround so itís no magic bullet."


I will also add:  does not appear to affect purchases of individual stocks at all.
« Last Edit: September 14, 2018, 03:24:24 PM by reeshau »