Portfolio advice (Danish tax laws makes ETF's unattractive)

[thorfromdenmark]

Hi there.

Been reading the blog for quite some time and have decided to start building my 'stash and become FI within hopefully 15 years.

I have started saving about $600 each month to an online brokerage account (Nordnet.dk - it's the cheapest trading platform in Scandinavia by far).But, here's the thing; ETF's are taxed differently than "normal" stocks in Denmark (where I live) - every year you pay 42% tax on the increase in value of the ETF and also on the dividends as opposed to when you own normal stocks and only pay a 25-33% tax on the profit when you sell and on the dividends when they are paid out.

This means that the approach I was hoping to follow - invest in the Vanguard index funds for the SP500 and the global index - isn't as attractive. So instead I am thinking it's better to invest in a broad range of stocks that are almost certainly (I know that nothing certain but you know what I mean) going to be around for the next 30 years and rise in value during that time span, and also pay some fairly reasonable dividends.

So my questions are:
1. What list of stocks would you recommend for my portfolio?
2. Am I wrong regarding the ETF's? Could they still be a good investment even though I have to pay tax every year if their price has risen?

All the best from Denmark,

Thor

[Spruit]

Hi, not Danish. But I am from the Netherlands, does that count?
It seems you Danish folks have something similar to us Dutchies, we have wealth tax of 1.2% on ALL wealth (savings account, capital in the market, you name it). Basically the state presumes you make an average of 4% interest on all your wealth, no matter the actual interest/dividends/growth in value, and taxes that with 30%. At least in Denmark the real dividends / interest is taxed, right?
I completely understand your wish to go for a lower taxed alternative. Kudos to you for trying to pull off FIRE in a Scandinavian country :)

Anyhow, ETFs are not the only possibility to own a broad array of stocks. Are there any possibilities to buy "Index Mutual funds" or "Index Funds" in Denmark? By this, I mean the type where you buy tiny bits of stocks following a certain index (i.e. global or whatever). See link for an explanation of ETFs vs Index funds. Here in the NL we have Meesman, a broker that offers such funds as an alternative to Vanguard ETFs, and it's somewhat more tax efficient from a dividend tax perspective.

Edit: maybe this discussion elsewhere could be of help?

[katthjul]

Stock index funds ought be the best option if you only pay tax when selling. Replicating an index is difficult unless it's a small one like OMXC20 (the twenty biggest companies in Denmark), which gives you little to non diversification.

I search around on Nordnet.dk and there are plenty (expensive) mutual funds. The cheapest global index fund seems to be Danske Invest Global Indeks (TER 0.62%). For the nordic countries, there is Nordnet's no-fee index funds for Denmark, Finland (Suomi), Norway and Sweden (all have TER 0%).

Using those five index fund, you can get a globally diversified portfolio with home (nordic) bias at a more reasonable cost.

[WerKater]

Stock index funds ought be the best option if you only pay tax when selling. Replicating an index is difficult unless it's a small one like OMXC20 (the twenty biggest companies in Denmark), which gives you little to non diversification.

I search around on Nordnet.dk and there are plenty (expensive) mutual funds. The cheapest global index fund seems to be Danske Invest Global Indeks (TER 0.62%). For the nordic countries, there is Nordnet's no-fee index funds for Denmark, Finland (Suomi), Norway and Sweden (all have TER 0%).

Using those five index fund, you can get a globally diversified portfolio with home (nordic) bias at a more reasonable cost.

If I understand Thor from Denmark correctly, the distinction is probably not between ETFs and Mutual Funds but between any funds and individual stock. If Denmark is any similar to Germany where available funds are concerned, almost all index funds are ETFs. I guess that is why he mentioned only ETFs. Could you clarify this?

[katthjul]

I found this respons in the discussion Spruit linked to above.

Mutual funds are not taxed the same way as ETFs in Denmark, link. Stock mutual funds are taxed just like individual shares while ETFs for some reason are treated as a derivative and are taxed as kapitalindkomst and are 'lagerbeskattet' (I don't know the english term for this but it's fucking crazy and you should avoid it at all cost).

I'm not very good at reading Danish, and the legal terms are not helping, but it agrees with what I found in the guide from the Danish Tax Authority. It essentially say that you need to pay tax on dividends and realized gains.

I en investeringsforening skal du betale skat af dit udbytte (de løbende udbetalinger, der kaldes udlodninger), og når du sælger med gevinst.

[MustacheAndaHalf]

That rule doesn't make sense to me, so I looked around and found:

"Share dividends and realized capital gains on shares are charged 27% to individuals of gains up to DKK 48,300 (2013-level, adjusted annually), and at 42% of gains above that"
https://en.wikipedia.org/wiki/Capital_gains_tax#Denmark
(Also mentioned in http://www.taxindenmark.com/article.36.html )

With two sources contradicting your understanding, it sounds like there are two tax brackets that depend on the level of your gains.  You pay 27% in the lower bracket, and 42% in the higher bracket.  Neither source mentions the type of investment.

I'd still encourage you to quote the source which says ETFs are taxed differently in case there's some nuance to the rule that is getting lost.  If this was an actual rule, you'd search for large conglomerates that own other companies in many different industries, and buy those.  You'd look for the most diversification you can buy in one company, and buy several of those companies.  But I suspect that isn't needed, and that you'll be paying 27% or 42% regardless of what investment causes the taxable gains.

[Gonzo]

Definitely research the tax treatment of ETFs/funds to be sure it is as bad as you think.  ETFs or passive funds are the preferred approach.  Active funds are not that bad so long as you can keep costs low includes taxes.  If single stocks are treated much more favorably from a tax point of view, it would still be worth owning stocks in my opinion.  I wouldn't try to emulate indexes, but to have diversification across countries, currencies, and industries. 

In the US, a realized capital gain would be a gain on an asset you've sold, or if a fund distributes a capital gain to you. It is normally not necessary to pay capital gains tax each year on a passive ETF that you buy and hold.   

[mwulff]

As a fellow Dane I have chosen to skip the ETF's and go with low-cost passive index funds instead. The taxation of ETF's are a little more complicated and it makes them a better choice for a 401K like situation.

Personally I own:

LPI USA (not available to everyone)
Nordnet Superfond
SparInvest Global Index

All passive low cost funds that gives me a nice spread over the world, USA and Scandinavia.

I feel pretty good about that portfolio.

[thorfromdenmark]

Thx for all the feedback.

Just to make it clear. I am 100% sure about the taxation of the ETF sadly. I also think that they removed the rule that made the first 50k approx. taxable by only 27%. You now get to pay 42% on any gains during the year and also dividends, which makes the whole ETF approach unfeasible.

What individual stocks would you suggest?

I have been thinking of these (P/E, Dividend pay-out):

Coca-Cola (25.12, 3.21%)
Microsoft (27.46, 2,5%
Ford (5.90, 4,80%)
Tesla (don't know - I just like them)
Walt Disney (17, 1.50%)
Emerson Electric Company (18.8, 3.59%)
AbbVie (18,5, 3,65%)
Dover Corporation (21, 2,4%)
(and a mutual stock fund (danish) that covers the global index with a yearly expense of 0,5%)

Hit me with good ideas!

[Financial.Velociraptor]

Components of the S&P 500 by weight: http://slickcharts.com/sp500.  The top 20 by weight make up almost 29% of the index.  You'd get pretty good diversification with those 20 including international diversification as you are looking at a group that is less than 50% US revenues.

[Financial.Velociraptor]

Can you determine if the tax also applies to "closed end funds"?

[MustacheAndaHalf]

Just to make it clear. I am 100% sure about the taxation of the ETF sadly.

Too bad, but going with that... You want to construct your own index.  If you can find an index fund like an earlier poster mentioned (a poster who avoids ETFs for tax complications), that's best.

If you have to make your own index fund, you will want to lookup sector percentages on morningstar.com.  You might view the "portfolio" tab of Vanguard World (VT) or Vanguard Total Stock Market (VTI).  Sector composition is one criteria, growth vs value (price/book) is another, and size is a third.  You could try varying these criteria to comprise similar characteristics of your holdings as the target fund (US market or world market).

I'd suggest looking for low-cost index funds if you can, and resort to buying the stocks yourself only if it's a last resort.  At the point of buying your own stocks, you'll need to consider the cost of commissions versus the number of stocks you want to hold based on your available investment dollars.

[Spruit]

...
(and a mutual stock fund (danish) that covers the global index with a yearly expense of 0,5%)

Hit me with good ideas!

Well, buying an index seems like the best idea to me. I don't think 0,5% in yearly expenses is unreasonable either, that's the TER I pay on my Meesman account. Buying an index prohibits you to include stocks "because you just like them". No offense, but I think that strategy of individual stock picking is risky. Maybe fun for a small part of your portfolio, but not as a basis for your FI plans in my opinion.

ETA: have you considered that if you want to mirror an actual index, you not only have to rebalance on type of assets (stocks vs bonds etc) but ALL the individual stocks on a regular basis? Otherwise you might get stuck with dwindling companies and miss out on the growth of "new" ones after a while. All in all, that would need way to much head space for me personally. Not much passive about that type of passive investing.

[faramund]

...
(and a mutual stock fund (danish) that covers the global index with a yearly expense of 0,5%)

Hit me with good ideas!

Well, buying an index seems like the best idea to me. I don't think 0,5% in yearly expenses is unreasonable either, that's the TER I pay on my Meesman account. Buying an index prohibits you to include stocks "because you just like them". No offense, but I think that strategy of individual stock picking is risky. Maybe fun for a small part of your portfolio, but not as a basis for your FI plans in my opinion.

ETA: have you considered that if you want to mirror an actual index, you not only have to rebalance on type of assets (stocks vs bonds etc) but ALL the individual stocks on a regular basis? Otherwise you might get stuck with dwindling companies and miss out on the growth of "new" ones after a while. All in all, that would need way to much head space for me personally. Not much passive about that type of passive investing.

I don't think the dwindling stock reason is very strong. If you think of an index fund - it would hold the same shares, and they would dwindle, the same way they'd dwindle if you were holding them yourself.

Further, if you are net saving, you can put new money into any new shares that do enter the index.

(in comparison to annually losing nearly half of any gains - I'd go the direct holding route)

[MustacheAndaHalf]

I have started saving about $600 each month to an online brokerage account (Nordnet.dk - it's the cheapest trading platform in Scandinavia by far).

Does that trading platform charge a percentage per trade?  (like 0.10%)
If you can buy $300 worth of stock for $0.30, that's very different than a website charging $7 to buy $300 worth of stock (2.30%).  Any fixed cost commission will overwhelm a small stock purchase with it's cost.

Best bet is still a low cost index fund, so look for that first.

[Seppia]

What individual stocks would you suggest?

I have been thinking of these (P/E, Dividend pay-out):

Coca-Cola (25.12, 3.21%)

Hard to go wrong with Coke, it's maybe high but the "moat", in Buffett terms, is almost impenetrable.

Tesla (don't know - I just like them)

Because any time you can buy a company that has never made a dime, burns cash like Scarface, has a decision maker who is trying to bail out his other practically bankrupt company (managed by his cousin) by using its stock and writes a letter to his employees asking to pad the numbers to meet a quarterly goal, you have to do it.

(and a mutual stock fund (danish) that covers the global index with a yearly expense of 0,5%)

Hit me with good ideas!

If it covers a global index, why don't you just stick to that?

[supersune]

For more info on FIRE in a danish context check out my newly started website: http://www.frinans.dk/

In regards to the ETF issue. They are currently taxed in a way making them unattractive if you invest freely (frie midler). They can however be used in a pension portfolio. If you are looking for similiar building blocks, Vanguard-ETF-index-type-of-deal, use Sparinvest Index: http://www.sparinvestindex.dk/ This is as of now the best deal you can get in order to build an indexed-based portfolio.
The government is however in the midst of proposing a change in the way ETFs are taxed, so the situation might change in the near future.

[supersune]

It seems there are varying understandings of the laws at work here. Let me try and simplify things a bit.
There are to types of taxes at stake here:
Aktieindkomst(stock income) and kapitalindkomst(capital gains).
Mutual funds, index funds and individual stocks usually fall into the first category. ETFs and bond funds usually fall under the second category.

Then there are different tax brackets for aktieindkomst:

27 % of the first 50.600 kr.
42 % of anything above 50.600 kr.

If you are married you can double the bracket colletively.

The tax on kapitalindkomst is only one bracket:

42% on anything (If I remember correct. The number might be slightly different, but I'm failry certain it's in this area).

Then apart from this kapitalindkomst are taxed according to lagerprincip (lager=storage). This basically means beaing taxed for the rise in value and not on gains from selling. If you buy an ETF for 100 and it increases to 150 you have to pay taxes on the 50 value increase whether you sell it or not.

These rules do not apply for pensions.

The absolutely cheapest way to track an index in Denmark, when not doing so through a pension, is Sparinvest INDEX: http://www.sparinvestindex.dk/

[Happiness Gardener]

From here in Finland I see things as follows, (hoping there is something in for you in Denmark):

Taxation
- ETFs and funds are taxed capital gains 30% when sold and dividend taxation is 25,5%.
- Individual stocks are taxed capital gains 30% when sold and dividend taxation is 25,5%.
- Foreign withheld source tax on dividends can be deducted up to 15% if a tax treatment with Finland exists (e.g. US, Canada, all EU countries, and some others).
- Foreign capital gains tax cannot be deducted, but some dual tax treatments reduce or eliminate those, in many cases only the Finnish 30% apply.
- ETFs and other funds managed in foreign entities or holding foreign securities will leak dividend taxation. An ETF holding US shares will be source-taxed 30% on dividends, but you cannot deduct more than 15% US source tax. Your ETF leaks 15% of your dividend. If the ETF is managed from a unfortunate location, there could be even more source tax from that country. Exception is DAX index funds managed in Germany as their dividend is source-tax exempt in Germany.
- US shares are subject to US estate tax (for those who think that matters). Haven't found a solution for this on yet.

- Direct investment in US, Canadian and UK shares will result in a 15%, or for UK 0% source tax on dividends.
- Direct investment in many European shares will require paper work with respective tax authorities (often in respective language) to claim source tax above 15% on dividends back, typically only after the tax year. For me that means that for example German stocks are off the table, also as ADRs, unless I have critical mass.
- Finnish shares will be dividend-taxed 25,5% right away withheld by your broker. You will never get this below 15%. Therefore, if the grand plan is to move to Florida after FI, Finnish stocks are not good as possible low dividend taxation will never happen for them. If the plan is to stay in Finland, they might be OK.
- For foreign shares you have to pay the additional 10,5% dividend tax  (for UK shares 25,5%) after the tax year, leaving you with some cash in the interim (there is an ECB-rate interest involved if this amount stays small, currently almost 0%).

My conclusion:
==> ETFs and other funds tax-leak in Finland, except all-Finnish products.
==> Dividend stock investment is OK for US, Canada and UK registered companies from Finland, also Finnish dividend stocks are OK.
==> Value/growth investment might be also OK for other countries, it is not my strategy though.

My broker assessment in 2015 concluded as follows (all Finnish perspective):
- for Finnish stocks NordNet is lowest fee (except if you have OP-Pohjola bonus points coming out of your ears and use them to cover trading fees with that bank, not my situation though). NordNet also has a fund and ETF monthly saving programme that has no purchase fee (you are forced to euro-cost average as the purchase day-of-month is fixed).
- For almost everything else, Interactive Brokers UK is cheapest, also very good Forex rates. But they have $10,000 minimum deposit, which is steep for "trying out things". When you think about it, $10k is not much, this shouldn't be a hurdle. You also get the US investor protection for US stocks that is much higher than UK or any other EU country's, in case your broker goes bust. IB has low US transaction fees, I buy also UK stocks as US ADRs for that reason.

I found US/Canada/UK dividend growth stocks most rewarding one year in. Had to add up things for the Finnish tax return. Remember to deduct home office and computer as you utilise those for your investment gains.

Tax-wise US REITs are OK, US MLPs are a no-no in Finland, holding GPs are OK (i.e. OKE is good, OKS not).

I have started a blog where I intend to write up the stuff above in more detail soon: http://www.happinessgardener.com