ETF TAX REVERASL Guide: Know Your Investment Returns

Is tax required when investing in ETFs?

When US Stocks and ETFs distribute cash dividends, a certain amount of tax is withheld, known as withholding tax.

Whether placing orders through overseas US stock brokerages or through domestic brokerages on a lump-sum basis,

As long as cash dividends are issued when buying US stocks, stock ETFs, bond ETFs, etc., taxes will be levied.

Do Hong Kong people need to pay tax when buying US stocks?

Non-US tax resident investors do not need to pay capital gains tax imposed by the USA. If non-US tax resident investors directly hold US Bonds, whether US Treasury Bonds, municipal bonds, or general corporate bonds, they also do not need to pay interest tax. However, if US Bonds are held through bond funds or bond ETFs, the interest distributed by such funds or ETFs is regarded as dividends and should be taxed according to the dividend tax rate.

Definition of US tax residents

As a foreign investor (individual or institution), if none of the following conditions are met, they generally will not be considered a US tax resident by the Internal Revenue Service.

The IRS generally considers individuals and entities that meet the following criteria as US tax residents:

1. All US citizens and green card holders.

2. Organizations established or operated in the USA.

3. Foreign individuals who legally reside in the USA:

1. Legal permanent residents holding a green card;

2. Individuals holding a valid non-immigrant visa who have met the substantial presence test in the USA (refer to IRS Publication 519 US Tax Guide for Aliens).

For the latest version of Publication 519, please refer to IRS guidelines:Current Revision.

US stock dividend tax.

In terms of dividend tax, generally, the USA imposes a tax of about 30% on cash dividends from US companies. However, if the investor's tax jurisdiction has a tax agreement with the USA, the investor can apply for a dividend tax rate lower than 30%. For example: China 10%, Canada 15%, Japan 10%, Australia 15%, New Zealand 15%, etc. When investors receive cash dividends from ETF, this tax is usually collected in advance by the Brokerage, known as withholding tax.

However, the taxation method for ETFs depends on the Assets they hold, and some ETFs’ dividend payments may be tax-exempt. For such ETFs, the portion that the Brokerage withholds during the distribution will be fully or partially refunded at a later point (generally at the beginning of the second year) after confirmation, but there are exceptions, such as TLT. At the end of the article, more information on how to check tax refund details on Futubull can be found.

Tax refund timing and limits.

Tax refund schedule: key dates.

Generally, tax refunds occur in the first quarter of the following year. The Brokerage recalculates the corresponding tax amount based on documents from the upstream tax authority. Taking Futu Securities as an example, in February 2021, Futu Securities completed the tax refund, while the tax refund time for 2022 was between February and April. Investors should pay close attention and conduct relevant financial and tax planning according to the latest schedule provided by upstream Institutions. Please note, the tax refund date may change based on the actual processing progress of upstream Institutions.

Tax refund limits.

Taking full refund as an example: Suppose David is a permanent resident of Hong Kong and holds an ETF eligible for full tax refund, with the ex-dividend date on August 1, 2022. On August 5, 2022, he received dividends of $29.83 from the product; according to the 10% tax rate, Futu Securities withheld $2.98 in tax for him. On April 4, 2023, David received an automatic full refund of the $2.98 tax from Futu Securities.

Special circumstances regarding tax refunds.

For certain ETF products, such as the iShares 20+ Year Treasury Bond ETF (TLT), there are specific tax refund rules. TLT invests in U.S. Treasury bonds with a maturity of more than 20 years, and the tax treatment related to TLT should be as follows, based on the type of investment income:

• Dividends

  The dividends distributed by TLT are actually qualified U.S. Treasury interest, which is generally tax-exempt for non-U.S. tax resident investors and should not be considered ordinary income or qualified dividends, thus not subject to dividend tax.

• Capital gains

  When selling TLT holdings, if the selling price is higher than the purchase price, capital gains will be generated. The capital gains tax rate depends on the holding period, and for non-U.S. tax resident investors, capital gains in the U.S. securities market do not need to be taxed in the USA.

Furthermore, if non-U.S. tax resident investors hold TLT through a brokerage, the brokerage might handle withholding tax deductions based on its own policies.

However, starting from April 2024, Futu will exempt the withholding of U.S. stock TLT dividend tax, and no dividend tax will be withheld at the time of distribution. This means customers no longer need to wait until the beginning of the next year to receive concentrated tax refunds. However, there may be instances where dividend tax is automatically withheld at the time of TLT dividend distribution and is returned within 1-2 business days. For questions related to ETF tax matters, please contact customer service.

Comparison of TLT tax refund services among major Brokerages and Banks.

Which Brokerages and Banks provide TLT tax refunds?

There are slight differences in tax refund services and refund amounts among major mainstream Brokerages. The following compares the situation of major Brokerages and Banks in terms of tax refund services, taking TLT as an example, from the perspectives of whether they support automatic refunds and whether full refunds are available.

As of August 26, 2024, comparison of tax refund services and limits between Brokerages and Banks.

Data Source: The above data is obtained by organizing public information, and the specific data is based on disclosures by various brokerages and banks. The data in the above table is for display and explanatory purposes only, and is not intended or directed at any third party. Futu does not guarantee or commit to the timeliness and completeness of the related content.

How to view tax refund details in Futubull

1. If you have received the refunded TLT dividend tax amount, you can view the details of the TLT tax refund amount in the Futu APP under "Capital Details" in "Other" — "Other Details".

2. Operation path: Click on the "Account" tab > Click on "More" > Click on "Capital Details" > Click on "Filter" > Click on "Other" — "Other Details", as shown in the picture below.

The above statements related to tax are provided solely for informational purposes and are not intended to constitute any tax advice.

Note:

The information displayed on the Futu application, website, and event pages sourced from third parties is for reference only and does not constitute any recommendation.

The above content does not represent any position of Futu and does not constitute any investment advice related to Futu. Before making any investment decision, investors should consider the risk factors associated with investment products based on their own circumstances and consult professional investment advisors when necessary. Futu makes every effort but cannot verify the authenticity, accuracy, and originality of the above content, and Futu makes no guarantees or commitments in this regard.

Futubull is a one-stop financial investment trading platform, and brokerage services are provided by Futu Securities International (Hong Kong) Limited.