Key Post The Tax Treatment of ETFs for Irish residents

Discussion in 'Exchange Traded Funds (ETFs)' started by Brendan Burgess, Aug 26, 2014.

  1. Duke of Marmalade

    Duke of Marmalade Frequent Poster

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    Those examples are confusing:eek:

    Boss, in your example I presume units were encashed to pay the deemed disposal tax. The overall growth for Mary then is 100 in the first 8 years followed by a loss of 59, overall growth of 41 which is 100% taxed:eek:

    jpd

    There would be no refund of the 41, it is lost. Also the point about income in later life being in a low tax band is irrelevant. Exit Tax is the same for all, irrespective of income or assets.
     
  2. jpd

    jpd Frequent Poster

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    My reading of the refund is that it is refundable - it can be paid by the investment company or reclaimed directly by the investor.
     
  3. Duke of Marmalade

    Duke of Marmalade Frequent Poster

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    Yes, I stand ejected:eek:
     
  4. 3CC

    3CC Frequent Poster

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    Hi All,

    I looked into this in some detail in 2013 and came to the following conclusions from my own research and also from some emails with Revenue. I queried the initial response from Revenue and I got a detailed email from a named Revenue employee and so I feel this is reliable.

    Good/Bad ETF's
    Firstly, I did not get into 'bad' ETF's as I could not figure out their tax treatment with any confidence. Some people here have suggested that they fall under the CGT regime and if they did, an accumulating 'bad' ETF would be a very attractive option with unlimited rollup, lower tax rate on disposal, annual CGT allowances, off-settable losses and no tax on dividends/distributions because there are none. However, I did read this article which implied that 'bad' funds are subject to a more punitive exit tax rate. http://www.conlonosullivan.ie/category/tax-returns/

    Revenue confirmed to me by email that ETF's which are listed on www.ifsra.ie as UCITS are taxable under the gross roll up regime. ie 'good' ETF's.

    Taxation under the gross roll up regime
    As far as I understand it, there are 2 different rates of tax under this regime. (1) for distributions which are annual or more frequent, and (2) distributions less frequent than annual, and disposals or deemed disposals.

    I do not see any advantage of distributions and so I have only pursued the simpler option of accumulating ETF's. For these, only the disposal rate of tax applies which is currently 41%.

    Revenue also confirmed that while most funds will deduct the exit tax at disposal, ETF's generally do not and therefore, the holder must declare the disposal in the same way as the disposal of an offshore fund using form 11.

    Declaration of acquisition of ETF's
    Revenue also confirmed that acquisition of 'good' ETF's (as described above, IFRSA UCITS etc) does not need to be declared to Revenue. Against this, RaboBank site says ‘Material interest’ in a fund is to be notified to Revenue on panel 319 g-j so I am unsure on this point. I would like to think that I can depend of the Revenue response and that Rabo are being conservative.

    Tax Returns
    Revenue further confirmed that a form 11 must only be submitted to Revenue for any year in which a payment is received from which tax has not been withheld (tax would only be withheld by a fund and not by an ETF).

    Chargeable Person
    http://www.grantthornton.ie/MediaandEvents/Be-prepared-for-personal-tax-return-filing-season seems to imply that you become a chargeable person as soon as you acquire an interest in any offshore fund so I am not sure if this would include an ETF also.

    Calculations
    Rabo website indicates that the FIFO rule applies to the calculation of gains and I have not found any other guidance on this.

    Personally, I do not see the calculations involved as being overly complex. In fact, if you are not selling shares in order to fund paying tax on the deemed disposal, it is quite simple. A simple excel sheet would do a lot once you understand the principle. I can't explain it here as I can't figure out how to post tables!


    Other notes
    I agree with jpd above that the increase in the rate of exit tax for 'good' eft's from 36% to 41% make holding shares directly a more attractive option, provided you can hold enough shares to be sufficiently diversified.


    I am glad to see previous posts saying that if the deemed disposal tax liability is greater than the final tax liability at actual disposal, a refund would be made. That was my assumption also.

    Summary
    If you buy an ETF which is listed on the IFSRA website as a UCITS, you do not need to declare purchase but need to pay exit tax (currently 41%) on disposal. If you still hold it after 8 years, you have to pay tax (form 11) as though you had disposed it but you can get this credited back on actual disposal and payment of actual disposal tax (form 11). You would also have another deemed disposal at 16 years but by then these rules will likely have changed or you will have moved to a different investment product. 16 years is just too remote for me to hold much sway over present day decisions.


    Hope this is of some help,

    3CC
     
  5. Brendan Burgess

    Brendan Burgess Founder

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    3 CC

    That is an excellent post. I have not had time to digest it yet.

    As this is such a complicated issue, I want to focus on how ETFs are taxed . I have edited the title to restrict it to Irish residents as it will go way off topic otherwise.

    I have deleted your reference to shares, as it has already taken the thread off in another direction.

    Brendan
     
  6. jimmeboy

    jimmeboy Frequent Poster

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    With regards to the 7 year deemed disposal, how does this work if you are regularly investing additional funds into the ETF over these 7 years? Are you expected then to make a deemed disposal every 7 years from the date of each of your "top ups"?

    Sent from my HTC One_M8 using Tapatalk
     
  7. 3CC

    3CC Frequent Poster

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    Hi jimmieboy,

    Yes, there is a deemed disposal 8 years after every investment. If you invest say once per month in 2014, then in 2022 you will have to sit down and work out the value on the same 12 dates, work out the gain and multiply it by the tax rate applicable at that time.
     
  8. 3CC

    3CC Frequent Poster

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    Hi Brendan,

    No problem editing my post. Perhaps we need a Key Post to cover a very limited theme e.g. Investment in Good ETF's for Irish residents.
     
  9. Brendan Burgess

    Brendan Burgess Founder

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    Hi 3CC

    Good idea. We are very nearly there.

    My objective in this thread is nearly achieved. An understanding of the tax treatment.

    Once this is settled, we can extend it to the broader issues
    ETFs vs shares or unit linked funds
    How to find a good ETF
    etc.
     
  10. dub_nerd

    dub_nerd Frequent Poster

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    Can someone tell me if a US-domiciled "bad" ETF is treated absolutely identically to US shares for an Irish investor, i.e.:
    • subject to capital gains tax, not exit tax.
    • no gross roll-up or 8-year deemed disposal
    • dividends subject to income tax
    • subject to the same double-taxation treaties as a share
    • can declare US dividends on Form 11
    • can use W-8BEN with broker to reduce US withholding tax to 15%
    • can claim credit for withholding tax against Irish income tax
    • can offset losses against other gains
    The other big question is how I find out if an ETF is "bad". The one I am interested in is Energy Select Sector SPDR Fund (XLE). I currently pay no income tax, so the difference between a lower rate income-taxed and exit-taxed ETF would be huge ... and getting it wrong would be a disaster! If I'm not confident on all the above questions I'll have to avoid it altogether. (It's a pity ETFs seem to be such a minefield).
     
  11. PMU

    PMU Frequent Poster

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    It's my understanding that the Finance Act 2008 changed this, in that you can decide irrevocably to value the periodic investments at either 30 June or 31 December prior to the chargeable event.
     
  12. dub_nerd

    dub_nerd Frequent Poster

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    Last edited: Jan 11, 2015
    To answer my own question from two posts back, this article from Rory Gillen makes it look most likely that XLE is a "good" ETF, and therefore definitely bad for me. Looks like I am going to have to put together my own share portfolio.
     
    Last edited: Jan 11, 2015
  13. joe sod

    joe sod Frequent Poster

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    This topic is something I have only come across now. It was my presumption that as ETFs are traded like shares their tax treatment was the same as shares. I have been investing in Vanguard ETFs in the last year as a simple way of gaining exposure to countries and sectors. The idea of having ETFs was to make investing in them as simple as shares. Is the irish revenues tax treatment of ETFs at odds with countries like the US and UK. This topic has come as a shock to me.
     
  14. Brendan Burgess

    Brendan Burgess Founder

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    Hi Joe

    There might be some clarity coming soon. Jack Horgan-Jones had a good article in the Sunday Business Post last week

    Fair exchange? (subscription required for full article)

    While the rest of the world is ploughing money into the ETFs and enjoying the benefits, Irish investment managers are currently struggling to get a straight answer from the Revenue Commissioners on just how the proceeds will be taxed.

    Specifically, there is no clarity over whether gains from ETFs outside the European Union – of which there are hundreds – will be eligible for the 41 per cent exit tax usually levelled on funds, or whether the lower 33 per cent capital gains tax will apply, as is the case with normal gains from share disposals.

    Marc Westlake, who relocated from Britain to Ireland several years ago, was gobsmacked when he saw how arcane the tax authorities here are when it comes to dealing with investments.

    “I was staggered at how inconsistent and complicated Ireland is from an investment point of view, once you step outside pensions. In the Irish situation, something as simple as an ETF becomes probably the most complicated thing I’ve ever dealt with in 23 years,” he said.
    ...

    Sources in the investment community said that efforts by some of the larger fund managers based in Ireland to convince the Revenue Commissioners to provide clarity on the issue had proved fruitless so far.

    ...

    “We looked for clarity on this from the Revenue. The most concrete thing we got back from them was: ‘You could look at it that way if you wanted to’. You couldn’t get less committal if you tried.”

    A Revenue spokesperson said ETFs were a “complex and specialist area”.

    “The Revenue has no wish to be opaque in any respect in setting out the specifics of the law in this matter and we regret that any potential investor in ETFs may have had an unsatisfactory experience in seeking to clarify the relevant tax treatment,” she said.

    Summary guidance on the treatment of ETFs is being prepared and will be shortly published, she added.
     
  15. jpd

    jpd Frequent Poster

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    I presume she meant "published shortly" :)
     
  16. joe sod

    joe sod Frequent Poster

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    another point is that the revenue is trying to get as many people as possible to declare all of their income and capital gains. They know that many people do not declare shares they may have got from their employment etc. Surely it is in the revenues own interests to simplify this as much as possible. Many people hold US electronic trading accounts to hold shares they may have received mostly in the high tech, and pharma industries. On these accounts ETFs look and are treated the same as shares with dividends and witholding taxes treated the same. Even if revenue came looking to these US trading accounts for specific information on ETFs with regard to their own arcane rules, they would have great difficulty getting it as this type of detailed logging would not be done simply to satisfy irish revenue.
     
  17. Marc

    Marc Frequent Poster

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    Of course what most people don't appreciate is that if you are not a US citizen or US resident and you hold more than $60,000 in US equities then US estate taxes apply to transfers between spouses on death.

    That's right if you die your spouse or civil partner would have to pay US Estate taxes!

    Since there is no CAT on first death in Ireland you do not get any credit for US taxes paid.

    Investment problems are rarely one dimensional!
     
  18. Fella

    Fella Frequent Poster

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    Hopefully revenue clarify the position on ETF's , I wonder if its possible they decide to treat them like an ordinary share. It's not really fair on the average person with a few quid that wants to invest who just hasn't got a clue on what way they are taxed, tbh I had to find out nearly everything about investing from sites like this , this site has been an amazing resource and thanks very much to the knowledgeable posters who have helped get the thread this far. I started off in August with 30k in ETF's I got a bit carried away and thats up to 160k now, I'm adding to this at about 10k a month, anyway I emailed Saxobank and asked them whats the story with tax on any gains I make on the ETF's I hold when I sell them do they withhold the tax or do I have to do with myself with Revenue. There reply was " We cannot give you tax advice , but Saxo deduct the withholding tax at source" So i'm even more confused do i just do nothing now and in 8 years saxo will deduct the withholding tax? Should i tell revenue at any stage before 8 years that I have 160k worth of ETF's , i'm kinda panicing a bit that I should be declaring these yearly , or do I ever need to contact revenue if Saxo deduct the tax , if Saxo deduct it it saves me a lot of hassle as i'm buying monthly I won't have to calculate each 8 year period from time of inital buy , man this is so confusing.
     
  19. Marc

    Marc Frequent Poster

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    Last edited: Jan 18, 2015
    Hi Fella

    Yes, do-it-yourself investing can be frustrating at times.

    The UK regulator, the Financial Conduct Authority has just released some very good independent consumer research that says that once an investment is over 100k over 60% of people seek out an adviser to assist them with their investment decisions.

    I make this point as you seem to be investing a large amount, you don't seem to understand what you are doing by your own admission and so perhaps you might consider taking some professional advice?

    Just based on what you say it looks like you don't have a clear plan ("I got a bit carried away") or good execution ("I e mailed Saxo bank") and you are also offside with your tax reporting.

    Buying ETFs monthly outside of a pension is bringing you into a whole world of pain that you can easily avoid.

    Before you go any further you need to be really clear about what it is you are trying to achieve. It's often said; if you don't know where you are going, then any map will do.

    It might be that you are attempting to create a phased or euro cost average strategy for example.

    When buying ETFs monthly you are creating a series of separate chargeable events each with their own 8 year reporting period. This means that in the future you will need to deal with each tax calculation separately each month as it applies to each discrete purchase.

    An alternative would be to purchase a conservative low cost index fund (mutual fund rather than ETF) to protect your initial purchase and create a single reporting event.

    So for example I might invest your €160,000 in the Vanguard Global Bond index fund Euro hedged. Note that the minimum investment in this fund is €5M so this isn't a DIY solution for most people.

    So I have created a single tax reporting event with one 8 year reporting point.

    Now, next month I could switch some of this into the Vanguard Global Stock index fund and I would have not created a taxable event as these are sub-funds of the same fund "umbrella"

    I therefore still only have one reporting event, the initial purchase, but I am phasing and diversifying my portfolio across low cost index funds - which seems to be ultimately what you seem to be wanting to achieve??

    Note that you cannot do this with ETFs.

    Now, this approach still requires you to complete a self-assessment tax return which is still too much hassle for some investors as you are still required to report to revenue all purchases, income, gains and notional gains every 8 years.

    The problem here is that where funds are held in most nominee arrangements the fund manager doesn't have line of sight to the end investor and so cannot withhold tax at source. Some investors mistakenly think that when a broker tells them that they have withheld dividend withholding tax, that they have no further tax liability. This is incorrect.

    So to get around this, it is possible to structure your portfolio so that certain fund managers including,Blackrock Index Series funds, will automatically calculate and withhold your taxes at source.

    The way almost all stock broker accounts are structured these days prevents this and from the broker's perspective it is counter intuitive to to it differently.

    But it is perfectly possible to construct a portfolio of index funds for an Irish resident and for the underlying fund managers to calculate and collect the tax.

    And that's one of the benefits of working with an adviser. This is such a complex area, and as I said in the Sunday Business Post piece, I have never in my career come across something more complex for the average investor to have to resolve.

    One further point to note which I also raised I the SBP article. Don't expect most financial brokers or stockbrokers to understand this in any detail either.

    This is an extremely technically complex area and most brokers have no interest in tax matters.
     
    Last edited: Jan 18, 2015
  20. Fella

    Fella Frequent Poster

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    Thanks for your detailed reply Marc

    I am basically building my own portfolio using various portfolio builders, I am buying MSCI world , MSCI europe , S&P500 , Emerging markets and Government bonds. This should cover me for the total stock market and give me some diversification. When I say I got a bit carried away I mean my initial plan was to top up my 10k a quarter but from reading up online advice seems to be to keep no more than 20% of your whole portfolio in cash and I had some 400k in cash doing not a lot in the banks so have been moving it monthly with "dollar cost averaging" in mind. From all I read and understand buying these funds and forgetting about them seems to be the way to go you get total stock market coverage and you you should get diversification.

    I think it should be possible for people to invest for the future on there own and I'm open to learning to do this without seen an advisor, the admin of buying monthly doesn't really bother me in so far as I have a simple spreadsheet set up with what I bought each month and the date I Will be deemed to dispose of these on , in reality what I will probably do is sell my total portfolio after 7 years and give myself the time to sort out the tax implications and probably see a tax advisor if I am still unsure of what to do.

    If I understand you correctly the broker withholds dividend withholding tax but not the tax on the gains , I think all of my ETF's are accumulating so there will be no withholding tax and the exit tax I will need to pay myself to revenue.

    Looking forward to revenues publication on all of this hope it really clears matters up.