Double taxation of capital gains

It’s the time of the year to hand in tax reports for the previous year. That got me thinking about trading shares on foreign markets.

In many countries, including where I live, there is a capital gains tax. The capital gains tax is calculated as a portion of the return (purchase price minus sales price). Gains tax varies between countries, from 0 % to upwards of 40 %. Local laws can also make a difference between long term and short term ownership. Typically, there is some type of incentive for long term ownership.

It occurred to me that trading shares on some markets could perhaps make you liable for tax in a foreign state. That made me a bit uneasy. I have good knowledge of my local rules, but I am certainly no expert for every state in the world. The idea seemed not too far fetched, we pay plenty of foreign taxes when trading shares – withholding tax on dividends, stamp duty, transaction taxes and what not.  Incurring an unknown tax debt in a foreign land would obviously be bad. The trading returns could be vastly overstated. Also, correct tax deductions would not be applied for, making the total tax higher than needed (ie double taxation – you have to pay tax twice on one income).

It turned out this issue is dealt with in double taxation agreement between states. The lawmakers agree that double taxation is bad and prevents investment and free movement of people, goods and service. Just one thing, there are many agreements – a typical state can have 100 to 200 agreements with other states. And the agreements are written in complicated legal-speak. And it is one of these particular agreements that govern how stock trading is taxed in your particular situation.

Thankfully, most of the double taxation agreements are based on the OECD Model Tax Convention. Article 13 in the model agreement deals with capital gains taxation and paragraph 5 states:

Gains from the alienation of any property, other than that referred to in paragraphs 1, 2, 3 and 4, shall be taxable only in the Contracting State of which the alienator is a resident.

In other words, capital gains tax on shares is paid in the state you are a resident in. There are exceptions, for example for some real estate companies. Feel free to read more if interested. Article 10 deals with the taxation of dividends.

Note: Don’t take my ramblings as tax advice. Just had to get my findings on paper… what’s written above may not be applicable to your situation.


… And so it begins

On this blog I will document thoughts and trading for my new portfolio. I have a general idea of the strategy I want to explore, nothing is set in stone and things will likely change over time.

In recent years I have spent a great deal of time analyzing and reading up on securities and companies. I have gained a fair deal of experience from this and also had some good performance. However, I feel my stock-picking has been too random I have frequently doubted choices and made unnecessary or poor trades.

In an attempt to give myself more peace of mind as well as a structured approach to investing I have decided to start this portfolio.

My strategy

  • Purchase price is important for long-term performance. Focus on objectively cheap companies, e.g. net-nets and low p/b.
  • Evaluate investments on a annual basis. Day to day price changes is usually noise, the intrinsic value of company don’t change much from one day to another.
  • Don’t over-analyze. Stuff will happen and I will not be able to foresee half of it. Mitigate the risk by diversification and looking for high margin of safety.

The goal is to gradually build a portfolio of at least 20 holdings. The basis for the stock-picking will be quantitative screening followed by qualitative analyzes of short-listed companies. Will look for bargains on as many stock markets as possible.