Investment in Irish ETFs by US returnees to avoid US estate tax – Tax & Other Implications

Today I want to write about Irish Domiciled ETFs which may be a solution to the estate tax problem of returning NRIs from US who wish to retain their exposure to US markets without the US estate tax risk.

Important caution before we proceed – This post is meant for non-US Citizens/GC holders only. If you are a USC/GC, then buying Irish domiciled ETFs can trigger highly punitive & complicated PFIC tax and reporting in the US. 

Why Irish domiciled ETFs

Till a person is living in the US, there is generally a view that he/she holds a domicile of the US for US estate tax purposes and hence a higher threshold of USD 13.99 Mn applies in case he/she dies.

However, one the person returns to India, unless she is a USC, she becomes a non-domiciliary for US estate tax threshold and the for the purpose of estate tax liability in US, the threshold drops dangerously low at $60000 for.  For more details on estate tax, read my article here

IRS website on estate tax – https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

So suppose you are a Indian citizen living on H1B visa in US for say 5 years and at the time of your return to India, have say $500K in various US domiciled investments like a 401k, Traditional IRA, HSA, rental property – now post your return, you may qualify as a non-domiciliary as per US estate law AND if you die, your US situs estate > USD 60000 will be subject to 18-40% estate tax. Also, there is a very long winding estate closure process which can go anywhere up to 2 years and your family members (basically, the named beneficiaries) may have to wait that long before they get money (net of estate tax)

To avoid this, as soon and very soon after return to India, one can decide to liquidate the US stocks and other investments & then invest those funds in Irish domiciled ETFs if one wants to keep the USD exposure.

Basic Structure of Irish ETFs

Most Irish ETFs are established as Undertakings for Collective Investment in Transferable Securities (UCITS) funds, which are regulated by the Central Bank of Ireland.

Irish ETFs can be either physically-backed (holding underlying assets) or synthetically-replicated (using derivatives). Strategies include passive index-tracking, smart beta, thematic, leveraged, and ESG variants

UCITS have a differentiation in terms of certain risk management measures like strict diversification rules (e.g., no more than 10% in any single issuer; the 5/10/40 rule), eligible asset criteria, and strong regulatory oversight – in some ways even better than SEC oversight on US ETFs.

Ireland is a global ETF hub, managing over 70% of European ETF assets.

Taxation of Irish ETFs for Ireland non-residents

[Note – I am not an expert on Irish tax and estate law & related laws and below information is basis my online research. Please confirm with an Irish CPA/Attorney before investing]

There is no Capital Gains Tax or Dividend Withholding for non-Irish residents. Income and gains are exempt from Irish taxes if you provide a non-residency declaration.

No estate tax or inheritance tax for non-residents.  

However, it may be noted that internally when the US company (constituent of the ETF) pays a dividend, there is a 15% withholding by the US co to the Irish AMC – this 15% is a reduced withholding rate under the US Ireland DTAA, as against the 30% flat FDAP tax rate for a non-resident alien. So, effectively there is a 15% tax drag internally as regards the dividend income earned by the ETF which gets reflected in an equivalently lower return. However, if we compare to a US stock directly held by an Indian resident investor, the tax rate on dividend under India US DTAA is 25% which is significantly higher than the 15% in Irish ETFs. 

Taxation in US

When you liquidate the stocks in US after return to India, provided you have updated W8BEN and Indian address, there is no capital gains tax in US as per its internal tax code, does not tax capital gains on personal property for non-resident aliens.

Coupled with the fact that you are an RNOR in India, this gives you the opportunity to a) make built up capital gain tax free in US & India and b) move the stocks money out of the US (and into Irish ETFs) to avoid estate tax.

As mentioned at the start of the post, investing in Irish ETF as a US resident can be a tax disaster as it will trigger the PFIC tax and reporting in US – so best avoided till one return to India and becomes a non-resident alien of US.

Taxation in India

In India, in most cases, there is no tax when you sell US stocks till RNOR. So, RNOR is the golden time window you have to liquidate and move your US stock holdings to Irish ETFs.

Once you enter ROR status in India, you will be liable to tax on the Irish ETFs sold – for India tax purposes, UCITS as any other foreign stocks will be treated as “unlisted securities” – which means that if you sell them within 2 years, you’ll be taxed as per applicable tax slabs. If you sell after 2 years of holding, you’ll be taxed at 12.5%

After you enter ROR status in India, you need to disclose the Irish domiciled ETFs along with any income (e.g. dividend) in Schedule FA/FSI in Indian tax return – read more on this here

India FEMA Law implications

Under Indian FEMA law, there is a Section 6(4) which allows a returning Indian to hold & reinvest funds earned outside India as a non-resident.

So, unless you shift the US stock sale proceeds to an Indian bank account (not RFC), you can move the stock sale proceeds to Ireland and retain it there indefinitely without any requirement to repatriate the sale proceeds of Irish ETFs or any income (e.g. dividend) from those ETFs to India.

How to invest in Irish domiciled ETFs

I haven’t personally yet invested in these instruments so don’t have a personal experience but from what I’ve read on Reddit and elsewhere, Interactive Brokers (IBKR) is one broker which is reputed and allows you to invest in Ireland domiciled ETFs. In my research, I also came across a new venture Paasa, which seems to be backed by Y-Combinator and allows Indian residents to invest in UCITS.

I am not sure whether at this point Indian brokers like Vested Finance and Indmoney have started facilitating this, because if they do, it can be very helpful. On LinkedIn, I’ve tried to put across this idea to their founders/senior team members to start this as it will really help Indians especially US returnees to invest significant amounts in global markets without risk of estate tax.

Coming back to IBKR, you can open an IBKR account in India and fund that account (funding from an Indian resident account will most likely count towards LRS as per FEMA regulations). Once account is funded, you can buy from to a wide universe of UCITS ETFs on European stock exchanges such as the London Stock Exchange, Euronext, and Xetra.

Some points to note/practical issues/grey areas

1. Do not invest in Irish domiciled ETF before your return from US – they qualify as PFIC and till the threshold of USD 25000 (if filing MFS)/USD 50000 (if filing MFJ) may still not trigger a Form 8621 filing requirement to the IRS but anything above that will so you should buy AFTER return to India – also read my article on PFIC https://abhinavgulechha.com/understanding-irs-passive-foreign-investment-company-pfic-rules-implications/
2. Irish ETFs is not the only US estate tax avoidance strategy. I have written a detailed post on Estate Tax Strategies for US returnees here. India’s own Gift city is planning to come up with USD denominated retail schemes – as on date of writing this post, AMCs like DSP & PPFAS have launched/or are planning to launch their retail schemes soon. I am writing a separate post on Gift City Investments by US returnees, please check on the website or will post the link here soon.
3. As regards succession law implications in Ireland, basis my online research here, a probate under Irish law applies only to someone domiciled in Ireland and in case of non-residents, it may not be a problem and the beneficiary nomination on the brokerage would suffice for legal transfer of assets – however it may be a good idea that the Indian will mentions of the global assets or if the Irish ETF assets are significant, a legal opinion should be sought to avoid any hassles for the surviving spouse/beneficiaries at a later date. Also better to contact the customer care of the financial institution say Vanguard Ireland and understand the process and documentation involved.  
4. In my work I’ve come across clients who have returned to India but wish to continue trading on US stocks – now since Irish exposure is mainly in form of ETFs & the stock based trading is sometimes more beneficial than ETF trading and also given the depth of US markets, many traders opt to keep their funds in the US brokerage and use them to trade – an alternative approach there is to have 2 separate portfolios – one for trading and other for investment – the trading portfolio can remain in US (estate tax managed by say pure term insurance) & investment portfolio moved to Irish ETFs – even the Indian tax authorities recognise such a segregation for taxation purpose in India vide CBDT Circular No. 4/2007 dated 15/06/2007 here
5. An issue can be a person holding Irish ETFs via US brokerage say IBKR LLC. Now here the question can be whether since brokerage is US domiciled, will Irish ETFs within the brokerage will be exempt from US estate tax or not. My view on the basis of reading of the law is that the domicile of the stocks within the portfolio is relevant is estate tax does not apply. However, it is advisable to check the position that the broker will take on this issue and preferably get in writing. Again, you’ve to be ready for a change in their position after 10 or 20 years. There was a detailed discussion on this matter in Bogleheads forum here
6. If you’ve for some reason shifted money to an Indian resident bank account, in my view, FEMA Section 6(4) protection may not continue and if you then wish to invest in Irish ETFs, it would constitute investments under RBI’s Liberalised Remittance Scheme which has a per year per person restriction of up to USD 250000 & requirement to repatriate uninvested funds back to India. RBI has not given a clarification on this issue and you may consider checking with your bank for their interpretation in this matter. So, in this case, your money essentially gets tied to India (not a good thing in my view) unless you decide to become a FEMA non-resident at a later point in time wherein you get the opportunity to pull up to USD 1 Mn per financial year from your Indian bank account.
7. There are no bright line rules on domicile from an estate tax perspective. So, a US returnee who has most ties and family back to the US may still be considered a US domiciliary for estate tax purposes and may not have to even think about implementing this strategy in view of the very high estate tax threshold for citizens/domiciliary. Then, for a non-US domiciliary having a USC spouse beneficiary, again there are not many issued as the USC spouse in most cases get the unlimited marital deduction. So, for such cases, a thorough evaluation by a professional should be done.
8. Tax advantaged accounts in US like 401k, IRA, HSA etc. suffer from certain constraints to transfer of jurisdiction and hence funds in those accounts remain exposed to estate tax risk which can then be mitigated in other ways one being pure term insurance. The Irish ETF strategy works mostly for taxable accounts.
9. After moving holdings to an Irish ETF after being a NRA + RNOR, you may consider doing a cost reset (selling and re-purchasing ETFs) near end of RNOR (only if UCITS are at a MTM gain) – this will ensure a new higher cost basis & a reduction of future India capital gains tax on sale of those ETFs in future.
10. A point on currency risk – While the Irish ETFs are denominated in Euro, from a currency risk perspective, it is the currency of the underlying holdings need to be checked as the currency fluctuations in those holdings will ultimately reflect in terms of the returns. So even if you have invested in Irish ETFs in Euros, since the underlying stocks are US domiciled, effectively your funds are in USD and the impact on your portfolio is USD/INR and not EUR/INR.

Further Reading:

Bogleheads article

IRS on Estate Tax for Non-Residents

PWC Tax Summary – Ireland

Taxation and Domicile in Ireland

Tax Residence

Capital Acquisitions Tax

RBI’s Liberalised Remittance Scheme

Hope this post has been helpful. Please feel free to share your thoughts/feedback in comments.

Copyright © Abhinav Gulechha.

This article is my original work. Excerpts may be shared with proper attribution and link to the source. The content is for general informational purposes only and does not constitute legal, tax, or professional advice. Laws and interpretations may change, and outcomes depend on individual facts. Readers should consult their own advisors before acting on any information herein.