Key Post The Tax Treatment of ETFs for Irish residents

Brendan Burgess

Brendan Burgess

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Thread closed as it's replaced by this one
The Tax Treatment of ETFs for Irish residents

This applies to ETFs only. I have excluded discussion of Investment Trusts and EU unit linked funds(SICAVs), as they merit separate threads.

The attached article by Kieran Twomey is well worth reading.

The tax situation is not clear cut and people have got contradictory answers from the Revenue

1. There are two types of ETFs
"Good" ETFs are based in an EU country or a country which has a double taxation treaty with Ireland.
All other ETFs are bad ETFs.

2. A bad ETF is taxed like a share. Dividends will be subject to income tax. Any gains will be subject to the Capital Gains Tax regime. As this is well understood, the rest of this thread is about the Good ETFs which are far more common.

1.Good ETFs are subject to the gross roll up regime

2. Annual payments are subject to 33% ( or is this also 41%?)

3. Exit tax is payable on the gains at deemed disposal and at actual disposal, currently at 41%.

What does this mean?

If you get a dividend from an ETF, you should declare it as a distribution and pay exit tax of 41%.

When you cash in the fund, you must pay 41% exit tax on the gain.

After 8 years, you must deem yourself to have made a disposal and you must pay 41% exit tax on the gain.
 

Attachments

  • Taxation of ETFs.pdf
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Obligations to make returns

On your tax return, you must report that you invested in these funds. If you don't (what happens?)

You must report any annual payments

When you dispose of the ETF, you must pay exit tax.

If you hold it for 8 years, it will be a deemed disposal and you must pay exit tax on any gain.
 
I would like to focus on clarifying the tax treatment first.

When it is clarified, then we can move on to discussing their tax efficiency.
 
I think all, well, most, ETF's domiciled in the EU are structured as UCIT funds and thus are subject to Exit tax and deemed disposals.

But as they are bought and sold like shares, it isn't clear that the broker will be able to apply the tax rules and thus it is up to the individual taxpayer to file and pay on time.

But I may be wrong on this.
 
Boss, I reread the original debate. Hard to improve on that and unfortunately it did not resolve the issue, which concerned what was or was not a "bad" ETF.

Your OP seems to be concentrating on "good" ETFs and that somewhat simplifies the matter.

On a good ETF, and let's stick with accumulator versions, there is an exit tax on all gains at a rate of 41% and no loss relief. There is also gross roll up in 8 year intervals with deemed disposal at the 8 year points. I's as simple as that.

My understanding is that they are like unit linked funds and need not be disclosed in tax returns.
 
My understanding is that they are like unit linked funds and need not be disclosed in tax returns.
Click to expand...

As long as your broker is doing the calculations and payments for you - which would surprise me.
 
jpd said:
As long as your broker is doing the calculations and payments for you - which would surprise me.
Click to expand...
Do Irish ETFs not have to operate like Irish unit linked funds. I accept that for foreign ETFs the responsibility for Exit Tax notification and payment is with the investor.
 
Duke of Marmalade said:
Boss, I reread the original debate. Hard to improve on that and unfortunately it did not resolve the issue, which concerned what was or was not a "bad" ETF.
Click to expand...

I am trying to summarise it and focus on ETFs. I am also trying to update it for the increase in Exit Tax to 41%.

I am trying to do a User's Guide rather than extend the debate.

I will rewrite it to distinguise Good ETFs from Bad ETFs.

Bad ETFs seem to be more favourably taxed?
 
I hold a selection of ETFs (good ETFs) with an foreign broker and I file a tax return with the distributions and gains on disposals - real and deemed.

For 2013, these are taxed at 33% and 36% respectively.

For 2014, this will be 41%, same as DIRT - thus effectively taxing all investment income & gains from interest bearing accounts and funds at the higher rate tax.

It would now seem that directly holding shares is more advantageous from a tax position (dividend income tax taxed at your marginal rate and capital gains at 33% and offsetable). I am in the process of moving out of some ETFs into shares although this is obviously entails extra risk and effort to achieve a balanced portfolio.

It would be interesting to have figures for the tax paid on Deemed Disposals from 2009 onwards
 
Brendan Burgess said:
Bad ETFs seem to be more favourably taxed?
Click to expand...
Very much so, and a short history lesson on why "bad" became "good" might explain.

When gross roll up was forced on the domestic life industry in 2000, it was given a favourable regime. Gross roll up of itself without deemed disposal, but also an exit tax at a mere 23%. This compared to CGT and higher rate tax on divies on direct investment. Under EU rules the government was forced to concede that ETFs and UCITS generally could also enjoy the "good" treatment.

The 23% is now 41% and gross roll up is confined to 8 years. Meanwhile the tax treatment of direct share investment has hardly changed. I agree with Rory G that investing in ETFs and for that matter in unit linked funds is for the birds.
 
jpd said:
It would now seem that directly holding shares is more advantageous from a tax position (dividend income tax taxed at your marginal rate and capital gains at 33% and offsetable). I am in the process of moving out of some ETFs into shares although this is obviously entails extra risk and effort to achieve a balanced portfolio.
Click to expand...
Yes, and this crossed with mine. You should consider "bad" ETFs, if you want to avoid the hassle, risk and expense of building your own portfolio.
 
Sorry, can someone put down a few bullets indicating what makes an ETF "bad" or "good"?
 
Brendan pretty much summed it up in first post

1. There are two types of ETFs
"Good" ETFs are based in an EU country or a country which has a double taxation treaty with Ireland.
All other ETFs are bad ETFs.
Click to expand...

I would hazard a guess that the list of countries supplying "bad" ETFs would look very much like a list of off-shore tax havens with investor protection laws which may leave a lot to be desired
 
Brendan Burgess said:
After 8 years, you must deem yourself to have made a disposal and you must pay 41% exit tax on the gain.
Click to expand...

Ok, imagine I invest in an ETF for 17 years.
Based on the above quote, am I actually obliged to sell the ETF in year 8 and sell it again in year 16? And give 41% of the gain in taxation in both circumstances?
 
He-Man said:
Ok, imagine I invest in an ETF for 17 years.
Based on the above quote, am I actually obliged to sell the ETF in year 8 and sell it again in year 16? And give 41% of the gain in taxation in both circumstances?
Click to expand...
At each 8 year point you pay tax on the gain, if any, based on current market value. No need to actually dispose of the ETF but you are deemed to dispose of it. Any tax payable can be offset against subsequent gains, but can't actually be recouped if the value falls back.
 
Duke of Marmalade said:
Any tax payable can be offset against subsequent gains, but can't actually be recouped if the value falls back.
Click to expand...

This is why we need a good summary and maybe an example

|John|Mary
Buy at |100|100
Valuation after 8 years|200|200
Tax paid|41|41
Revised base value|159|159
So it's as if they sold their shares and bought again with the net proceeds.

Part 2

|John|Mary
Rebuy at |159|159
Sell 4 years later| 200|100
Tax at 41% |17|0
Net proceeds|183|100
Summary
| John|Mary
Invested |100|100
Growth|141|0 (?)
Tax|58|41
Net proceeds|183|100


Rushing now... These figures don't add up.
 
I think should be


|John|Mary
Buy at |100|100
Valuation after 8 years|200|200
Deemed gain|100|100

Tax paid|41|41
We assume that they didn't really dispose of the units, but kept them and paid the tax from other funds.

Part 2 - actual disposal some years later

|John|Mary
Sell 4 years later| 200|100
Original cost| 100|100
Gain| 100|0
Tax at 41% |41|0
Less tax previously paid| 41|41
Tax due/refund now| 0|-41

That is an simple transaction but what imagine when are are multiple purchases and sales over the years - a nightmare of calculations and record keeping
 
The rationale behind the tax is to capture some of tax due on the gains kept in the tax sheltered funds. Prior to the deemed disposal, the gains could be taken much later in life when your income might have fallen and thus the gain might have escaped tax altogether.

When the gross rollup tax regime was set up in 2000, they didn't really think through the implications fully.
 
Here is a link to document on the revenue web site - there is an example on p 37 which covers most of the pitfalls

[broken link removed]
 
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