More and more popular
Exchange-Traded Funds (ETFs) have become very popular in recent years as they allow you to invest at low cost in a diversified way. Their annual fees are significantly lower than for traditional unlisted funds you typically buy at your bank. Moreover, by opting for a low-cost online broker, you can also reduce transaction costs. However, comparing brokers based on brokerage fees alone is never a good idea. There are other costs that may come into play, such as custody fees or subscription fees to access certain exchanges.
The more you can limit your costs, the more it will increase your return on investment, but while doing so, many people forget about the Tax on Stock Exchange Transactions (TST). In respect to the TST, trackers (listed index funds) can be subject to 3 different exchange tax rates. The applicable tax rate depends on the type of ETF and where the tracker is registered.
The rates are 0.12 percent, 0.35 percent and 1.32 percent. On each of the transactions on which the TST is levied, the total tax due may never exceed €1,300 (at 0.12 percent), € 1,600 (at 0.35 percent) or €4,000 (at 1.32 percent). This is for any transaction relating to the same security and made on behalf of the same taxpayer and on the same market. Consequently, the tax due and limitation are determined separately for each individual security.
Accumulating type
The highest rate of 1.32 percent is charged for trackers registered in Belgium that do not distribute a dividend. For this reason, those who prefer a tracker that does not pay dividends (accumulating type) are better off choosing a tracker that is not registered in our country for tax purposes. Otherwise, a TST of 1.32 percent will be due when you buy and, once again, when you sell your tracker. This will immediately impact your return-on-investment.
Whether a tracker is registered in Belgium can always be checked via the FSMA, that keeps a list of all investment funds registered in Belgium. As soon as the name of your preferred tracker (or any variant) shows up on that list, you will have to pay the 1.32 percent TST when you buy or sell the accumulating (non-dividend distribution) variant.
Dividend distribution type
Typically, a distribution variant of the tracker will also be made available. This one will track the same index, but will pay-out a dividend annually it has collected from the underlying companies. For this type, you only pay 0.12 percent TST when buying and selling the product. The downside is that you will also be subject to a 30 percent Belgian withholding tax (WHT) on the dividend distribution.
Those who prefer a variant that reinvests the dividends immediately should look for accumulating (capitalization) trackers that are not registered in Belgium. Those trackers are normally also subject to a 0.12 percent TST on buying and selling, if the tracker is registered in another country of the European Economic Area (EU, Iceland, Norway and Liechtenstein).
Complicated situation
In other words, registered trackers are more expensive than unregistered ones. This situation resulted in several issuers cancelling their registration before in Belgium. Some issuers registered only the distribution variant but not the capitalization variant, on the assumption that the latter would thereby escape the 1.32 percent TST. However, this loophole has since been closed.
These complex rules resulted in differing interpretations among banks and brokers. For the same tracker, you could pay 1.32 percent TST with one broker and 0.12 percent with another.
Conclusion
The tax authorities then clarified, stating that all trackers are considered registered for tax purposes as soon as one tracker variant is registered in Belgium. If the tracker appears on the FSMA list, then it is registered for tax purposes and the accumulating type is to be avoided.
To complicate matters even further, there is also a 3rd TST rate. Anyone buying a tracker that is not registered in one of the European Economic Area countries pays a 0.35 percent tax. ETFs that track commodity prices are also charged a 0.35 percent TST when bought or sold.
Do pay attention to the TST if you are a Belgian taxpayer investing in domestic or foreign registered trackers. It is an important cost factor to consider when buying or selling index funds.