Purchasing ETF cross-listing as US taxpayer

[davidsouth]

Hello All,

I'm a US taxpayer, looking to see if anyone has any experience/information about purchasing US domiciled ETFs through a Japanese brokerage.

First, some background. I plan on living in Japan for the long haul, and am currently in the process of naturalizing. Hoping that goes well, it means that I'll be relinquishing US citizenship within a couple of years.

Meanwhile, I'm trying to get a long-term investment plan in place, within my current constraints, knowing that those constraints will (perhaps, maybe) disappear in not too long. That means that I'm in a weird position where

1. Right now I can't buy into funds which are not US domiciled (JP funds no good)
2. In the long run, I want to reduce/eliminate anything held in the US and I'd like to keep everything in a Japanese brokerage in the future. (so I'd rather not open an Interactive Brokers account for example).

Right now I've been buying individual JP stocks in the 5-year NISA (while hopefully avoiding PFIC traps). I would prefer a global index fund approach, though, so my long term plan is to fill the "new NISA" with index funds after I'm not limited by the US concerns anymore. I'll keep the individual stocks as the hobby portion (10%) of my portfolio.

So the question is what to do in the intermediate year or two, beyond the limited NISA allowance. I was hoping to diversify out of the Japan market a bit, and the most important thing with long-term investing is to show up to the party as early as possible.... but many Japanese brokerages will not let US persons purchase US ETFs or stocks.

There does seem to be one S&P500 ETF which is directly cross-listed (on Rakuten) however:

• SPY / SPDR S&P 500 ETF --> Direct US ETF purchase
• ＳＰＤＲＳ＆Ｐ５００ＥＴＦ (1557) --> Japan market cross-listing?

I don't think that I can directly purchase the SPY ticker (US market) listing, but can probably purchase the 1557 ticker. Does anyone know the implications for a US person purchasing such a direct cross-listing on the Tokyo market. I'm honestly a bit fuzzy on the topic of Japan Depository Receipts JDRs vs cross-listings....

Also, if I don't have a W-9 on file (which I don't think Rakuten would do for me anyway), I know that I'd be subjected to 10% tax withholding under the US-JP treaty. I'm more than happy to accept that (as it would the long-term case anyway if I become a Japanese citizen), but does anyone know if doing that would case any issues for a US person (as far as the IRS is concerned?).

 

[dee436]

@davidsouth The reason Japanese brokers restrict US taxpayers from purchasing US domiciled securities is because of the arrangement they have with the IRS (Qualified Intermediary agreement) which stipulates they handle all withholding for the US as if customers are not US taxpayers. Hence, they don't allow US taxpayers to purchase securities that would be subject to US withholding. 1557 is still subject to US withholding, and thus if the broker is acting as a QI and doing things correctly, 1557 will also be restricted the same as e.g. SPY. Monex, for example, explicitly calls out 1557 (and others) as restricted.

So, until you have removed your US taxpayer status, I don't think you're going to be able to do what you want at a typical Japanese broker. The Japan branch of Interactive Brokers I believe will let you buy SPY, but they only offer general accounts (一般口座) last time I checked, which is probably not what you want for the future when you are a Japanese national.

 

[davidsouth]

@dee436 Thanks for the very interesting information.

That the Qualified Intermediary agreement helps to clarify a lot forces them to treat all customers as non US taxpayers clarifies a lot. Otherwise, it that SPY and 1557 would be treated differently was somehow too good to be true.

I confirm that as of now (based on their website) Interactive Brokers Japan only handles 一般口座, but I guess that doing a year end tax return in Japan isn't too much of a price to pay. It's certainly much less painful than the US 1040...

 

[dee436]

@davidsouth

Interactive Brokers Japan only handles 一般口座, but I guess that doing a year end tax return in Japan isn't too much of a price to pay.

Having to file a tax return isn't on its own a problem. The question for me would be exactly what information do they provide to help you file your taxes. The pain is in keeping track of transactions and cost basis yourself.

 

[resjudicata]

@davidsouth This topic comes up every few months. If you browse through the archives, you can probably find some detailed answers.

 

[tobehisalone]

@davidsouth I've been trying to look into this as well (no intent to renounce US citizenship, yet). Hard to find anything good. I don't think what you're mentioning is really possible. If you were going to keep your US citizenship, I'd say you should try to open a US brokerage account using a family or friend's US address. Of course this would require you to keep a US bank account funded.

Another option might be a Schwab International account which they allow US citizens and foreign citizens to open and invest in US securities. When you become a Japanese citizen they'd probably help you do all the necessary paperwork since Japanese (or other citizens) can have such accounts with them. You need $25,000 USD to open such an accoun though. Unfortunately, it also doesn't look like they are opening accounts to Japan residence at this time though.

 

[davidsouth]

@tobehisalone 100% that those who plan to remain US person should just open a US brokerage account one way or another and invest there.

Probably Interactive Brokers Japan is the best option (once they sort themselves out) if you don't want to play games with the US address.

 

[tobehisalone]

@davidsouth Yeah, I actually kind of hope IB Japan will be really good for US citizens in Japan. Hopefully those who are being transferred over will be able to update us on US domiciled ETFs they offer and how it is. Still have to deal with FATCA reporting and all the US bureaucracy having foreign accounts while dodging the minefield of PFICs.

Citizen-based taxation is such a disaster. I'm still holding out a bit in hopes this may change in the next decade or so. The longer I am in Japan and the more permanent I feel here, the more I am thinking about renouncing US citizenship as well.

 

[resjudicata]

@davidsouth Nomura is the only broker that offers us stocks and etfs to Americans.

I do not think they are a cheap option though. Worth a call....

 

[davidsouth]

@resjudicata Thanks, might be worth looking into.

 

[pristinegraceca]

@davidsouth If I understand correctly, the Japan branch of Interactive Brokers (IBSJ) meets most of your requirements. It is an account in Japan, not in the US. In fact, I believe the US-based account (IBLLC) is no longer offered to residents of Japan, so IBSJ is your only option for IB.

The only problem is it won't be a tax-advantaged account in that NISA is not offered, but I'm not sure that matters as long as you are a US citizen since the NISA tax benefits might not extend to your US taxes.

Regarding the question of the 1557 ticket, a search online for "1557 pfic" has some informative results, but the conclusion is not entirely clear to me.

If I were in your situation, I'd probably just open an IBSJ account and buy index fund ETFs until naturalization.

 

[davidsouth]

@pristinegraceca I am beginning to think that IBSJ might be worthwhile, but I've been hesitant since I like to keep these things *simple*. So the tax reporting 特定口座 has great appeal.

I'm also thinking about the trade-off between how much 1 year out of the full index market might hurt me vs the extra complexity.

On a side not, I think that it's worthwhile to clarify a few things about the NISA when it comes to US taxpayers.

1) Yes, the tax-advantaged status of the NISA is not recognized by the IRS. So a US taxpayer will have to declare all gains in the NISA to the US.

2) But, if you are using the Foreign Earned Income Exclusion (FEIE) to "erase" your Japan income on the US taxes you still get the ~12,000 USD standard deduction. So, if your total investment income is less than that, you won't owe anything in the US.

Part 2) means that is is still worthwhile to use the NISA account to also eliminate your Japanese tax liability, if you can stomach investing in individual Japanese stocks. Obviously some care has to be taken to dance around PFIC landmines like Softbank group. This play also made more sense with a few slices of the old 5-year NISA and its 1M yen per year cap, perhaps it isn't as worthwhile as a long game.