Two funds can track the same index and hold the same stocks, yet leave an investor in Singapore or Hong Kong with different returns. The difference often comes down to where the fund is legally based.

For buyers of US stock funds, the usual choice is between ETFs domiciled in the US and listed on exchanges such as the New York Stock Exchange or Nasdaq, and Irish-domiciled funds that follow the European Union's UCITS rules and trade in London and on other European exchanges.

The dividend tax gap

By default, the US withholds 30% of dividends paid to non-US investors unless a tax treaty sets a lower rate, according to investment platform StashAway, which cites Section 871 of the Internal Revenue Code. Singapore has no comprehensive income tax treaty with the US, and neither does Hong Kong, so investors in both places generally face the full 30% on dividends from US-domiciled ETFs, StashAway and robo-adviser Syfe say.

Ireland does have a treaty with the US. An Irish fund holding US shares pays 15% withholding on the dividends it receives, and Ireland does not withhold tax on distributions to investors who are not Irish residents, according to Syfe. The net drag for a Singapore investor is therefore about 15%, half the US-domiciled rate.

The gap is real but modest for low-yielding funds. Phillip Securities' POEMS platform worked through a US$50,000 S&P 500 holding yielding 1.3%, or about US$650 a year in dividends. A US-domiciled fund would lose about US$195 a year to withholding and an Irish one about US$97.50. Compounded over 30 years, with price returns excluded, the gap grew to about US$3,910 in its example.

The effect grows with the yield. Endowus calculated that withholding on the US-listed VWO emerging markets ETF, which it said carried a 0.08% expense ratio and a 2.55% dividend yield, lifted the effective annual cost to about 0.845%. That compared with 0.22% for the Irish-domiciled VFEM and VFEG.

Choosing a share class that reinvests dividends does not avoid the tax. Accumulating classes still bear the 15% withholding inside the fund, Syfe, POEMS and StashAway all note.

What Irish funds cost in other ways

Lower tax drag comes with trade-offs.

Fees can be a little higher. POEMS lists expense ratios of 0.03% for the US-domiciled IVV and VOO S&P 500 funds and about 0.07% for the Irish-domiciled CSPX, a gap of roughly four basis points a year.

Trading is less convenient for some. London Stock Exchange hours run from 3 p.m. to 10 p.m. Singapore time, StashAway notes. Smaller UCITS funds can have wider gaps between buying and selling prices than the largest US ETFs, and currency conversion fees may offset part of the tax saving for frequent traders, according to POEMS.

Choice is narrower. The US offers the widest range of sector, factor and leveraged funds, and some niche themes have no UCITS equivalent, POEMS and StashAway say.

Funds listed closer to home are not an automatic fix. Some ETFs listed on the Singapore Exchange are domiciled in Singapore or Luxembourg and may not receive the same treaty treatment, StashAway cautions.

Other points, and how to weigh the choice

Singapore does not tax foreign dividends received by resident individuals, except income received through a Singapore partnership, and it has no capital gains tax, according to Syfe. US tax withheld at source cannot be reclaimed from Singapore's tax authority, the firm adds.

Investors holding US-domiciled securities need a valid W-8BEN form on file with their broker, which certifies that they are not US persons. Without one, US brokers apply 24% backup withholding to dividends and gross sale proceeds, Syfe says. The form lapses at the end of the third calendar year after the year it is signed, so a form signed in 2024 expires on Dec. 31, 2027.

Domicile matters for a second US tax as well. US-domiciled holdings can be subject to US estate tax when an investor dies, while Irish-domiciled UCITS funds are not classed as US-situs assets, according to StashAway.

For a long-term investor buying broad index funds and holding them for years, an Irish-domiciled fund will often keep more of the dividend stream. For someone who trades often, wants niche exposure or holds small amounts, the lower fees and convenience of US-listed funds may outweigh the tax saving.

Either way, the comparison should include the full cost: expense ratio, withholding tax, trading spreads, currency conversion and platform fees, not the headline fee alone.

This article is general information, not financial advice.