Interactive Brokers Merger – What Does It Mean For Your Portfolio?
Interactive Brokers is shaking things up, merging its EU operations and moving everyone to its Irish entity, IBIE.
What does it mean for your portfolio protection?
Here is what we know so far, and our interpretation of the changes.
KEY TAKEAWAYS
- Interactive Brokers (IBKR) is one of the largest brokers in the world, with a $37 bn market cap and ‘A-‘ Credit Rating from S&P.
- In September 2023, it announced merging its EU operations, and moving all customers to its Irish entity (IBIE). UK customers are not affected.
- We don’t know the exact reasons for this move, except the stated efficiencies, but in January 2024, the U.S. ends its double taxation treaty with Hungary, where its second entity was based.
- Most of its Central and Eastern European customers were historically assigned to the Hungarian entity (IBCE).
- For IBCE customers, the major difference will be the change of the regulator. IBIE falls under the supervision of the Central Bank of Ireland, whereas IBCE fell under the supervision of Hungarian Central Bank. Both countries have different Investment Compensation Schemes.
Here is the full analysis
IBKR is moving its E.U. clients to ireland
IBKR had two entities in the EU
Interactive Brokers Group (IBKR) recently announced pulling its European operations into a single hub in Dublin, Ireland.
When you signed up with IBKR as an EU customer, you were essentially assigned to one of two entities:
- Interactive Brokers Central Europe (“IBCE”) – based in Budapest Hungary
- Interactive Brokers Ireland (“IBIE”) – based in Ireland
Were you assigned to IBCE or IBIE?
Interactive Brokers assigns EU customers to different entities based on their country of residence, regulatory environments, and specific business considerations. The exact criteria or methodology they use is not public information. However, historically, the assignment of clients was mainly influenced by their country of residence:
- Customers residing in Central and Eastern European countries were likely assigned to Interactive Brokers Central Europe (IBCE) in Hungary.
- Those residing in other parts of Europe were likely assigned to Interactive Brokers Ireland (IBIE).
👉 Action Item: Check your client agreement to verify whether you’re impacted.
Why is IBCE being closed?
We don’t know the exact reasons behind the move, but many observers think that the end of the double taxation treaty with the U.S. played a role, although the official announcement also mentions efficiencies.
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Hungary will no longer have a tax treaty with the U.S.
The double Taxation treaty was in place for 30 years
The treaty in question was applicable for 30 years. In July 2022, Hungary received a notification of termination from the United States. As of 1 January, 2024, according to the recent publication of the Hungarian Tax Authority this treaty will no longer be applicable. The introduction of a new treaty for the avoidance of double taxation cannot be ruled out, however, this would be a complex and time- consuming process.
What it means for Hungarian Investors
Dividends
As regards dividend income, the treaty sets forth a limit on tax liability arising in the country of source. Accordingly, the tax liability arising in the US in connection with dividends paid by a US company to a Hungarian one may not be higher than 5%, or 15% (depending on the proportion of ownership held by the beneficial owner entitled to the dividend in the entity paying the dividend).
As of January 2024, this cap will be removed and US domestic regulations will be applicable to withholding tax, when applying the prevailing 30% withholding tax rate will be likely to result in a higher tax charge.
However, Hungarian investors can still use tax efficient Irish UCITS ETF to tackle this problem.
Interest
The termination of the treaty will have even more serious consequences for interest income and royalty payments than the removal of the withholding tax cap applicable to dividends. The interest and royalty paid by a US company to a Hungarian tax resident entity have not incurred any tax liability in the US, however, those affected by this change will in the future be subject to a 30% withholding tax liability under US domestic rules.
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Today's prices are not coming back!
In 2024, we Will be increasing coaching service prices.
Sometimes individual sessions are very helpful to get past your investing concerns. Our readers asked us to create a coaching service. And we’re proud to say, that some of them even ditched their Financial Advisors, after experiencing the value we provide. Some of the topics we recently discussed include:
- How much money do I need to retire with higher inflation?
- Medium Term or Long Term Bonds with today’s yields?
- Risks and Returns of Money Market Funds
- Asset Allocation for 10-15 year goals with narrowing returns between Equities & Bonds
- Merits of UK Trusts that invest in unlisted companies
- Traps with choosing brokers – PFOF & Risks of moving to another country
- International Situations – Choosing ETFs when leaving Europe
What the merger means for IBCE Clients
If you were assigned to ibce
You will be moved to IBIE with a €20k Investment Compensation Scheme
Securities and Cash have a combined Investor Guarantee Scheme Across Most European Countries – ranging from €20k in Ireland to €100k in Hungary. An additional safeguard exists if cash is held in your name with a bank, potentially benefitting from an extra €100k guarantee.
Hungary also covered 100% of the loss, while Ireland wants you to cover 10%.
Below is a table from our Broker Safety Guide, showing the different coverage levels in Europe.
So, on paper, this means that you’re losing out on being moved to the Irish entity.
Select Compensation Schemes
| Country | Investment Guarantee | Coverage Level | Cash Guarantee | Guarantor | Category |
|---|---|---|---|---|---|
| US | $500k | 100% | Combined up to 250k | SIPC | Outside EU |
| UK | £85k | 100% | Additional £85k | FSCS | Outside EU |
| Spain | €100k | 100% | Combined | FOGAIN | EU |
| Hungary | €100k | 100% | Combined | BVA | EU |
| France | €70k | 100% | Combined | FGD | EU |
| Portugal | €25k | 100% | Combined | SII | EU |
| Poland | €22k | up to €3k - 100%, €3-22k - 90% | Combined | KDPW | EU |
| Netherlands | €20k | 100% | Combined | ICS | EU |
| Belgium | €20k | 100% | Combined | GF | EU |
| Italy | €20k | 100% | Combined | FNG | EU |
| Denmark | DKK 150,000 | 100% | Combined | FS | EU |
| Germany | €20k | 90% | Combined | EDW | EU |
| Ireland | €20k | 90% | Combined | ICC | EU |
Why IBIE May be good news
However, this move may not be detrimental if you take a step back and consider a number of other factors:
- Ireland is a ‘AA’ Rated Developed Country, with strong regulator and deep capital markets expertise. It is part of the Eurozone. Ireland is recognised as a significant financial hub, particularly for asset management and investment funds, attracting various international financial institutions.
- Hungary is a ‘BBB’ Rated Emerging Country. While Hungary is a EU member, it isn’t fully integrated into the Eurozone as it has not adopted the Euro as its currency. This might create a different set of financial regulations and considerations for investors. There are concerns and criticisms over political influence on Hungary’s institutions, including its central bank, which might affect its independence and decision-making processes. Under the current regime, it is also not guaranteed that the Government would step up to cover for shortfalls of foreign investors.
These considerations made a number of our readers consider changing their residency with IBKR in the past and moving to IBIE.
If you were assigned to IBIE
The news is neutral
Unless IBIE inherits some restrictions from IBCE, it is unlikely that customers will be affected.
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Stay on top of broker safety
Many investors don't know the risks they are facing
How to be smart about counterparty risk
Unfortunately, the EU has Investment Compensation Scheme requirements that are very low, compared to the UK or the US.
The directive in place has been challenged, but a higher threshold has not been implemented. This means European Investors need to be more cautious about selecting the right brokers.
Understand common misconceptions
Some common misconceptions include:
- I Don’t Need Protection. Shares Are Mine And My Broker Holds Them In My Name
- The Investment Compensation Scheme Only Protects Cash
- Asset Segregation Protects My Assets
- My Cash Is Protected Up To €100k
- I Have No Possibility Of Assessing The Likelihood Of Bankruptcy
- Broker Capital Will Cover All Workout Costs So I Won’t Lose Money/Securities
We have created a step by step guide on how to mitigate Broker counterparty risks.
Good Luck and Keep’em* Rolling!
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