Another eBrief from Revenue on ETFs

Brendan Burgess

Brendan Burgess

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Revenue eBrief No. 038/22

Exchange Traded Funds
www.revenue.ie www.revenue.ie

21 February 2022​

Exchange Traded Funds​

Tax and Duty Manual (TDM) Part 27-01a-03 on the taxation of investments in Exchange Traded Funds has been updated to confirm the interaction of the 8 year "deemed" disposal rule with updated guidance published on 1 September 2021, where applicable, which takes effect from 1 January 2022.

In addition, the following TDMs have been updated to further clarify the appropriate Case under which income and gains are taxed, where not already confirmed:

  • Part 27-02-01 [Taxation of Income and Gains from certain offshore states]
  • Part 27-04-01 [Taxation of Income and Gains from EU, EEA and certain OECD Member States]
  • Part 27-01a-02 [Investment Undertakings].
 
There was not much new in this, only slight clarification (if that's the word:rolleyes:) as far as I could see
 
The only thing is that even if is a non equivalent fund and taxed under normal CGT taxation, they now want you to separate these out into a separate category
"other offshore products "
In the form 11 return so that obviously means investment trusts will be treated like this.
As far as I was aware there was no separate category for these up to now
 
Thanks for flagging Brendan.
I am searching for a 'non-equivalent' offshore fund in the EU/EEA/ OECD that tracks the Nasdaq 100 (something like the QQQ). Since Revenue has updated its guidance, can anyone share details of tickers that fit this criteria? And ideally bonus points for why they are non-equivalent?
Obviously this is a specific tax question whereby I need tax advice but curious if anyone has received feedback from revenue.
 
joe sod said:
In the form 11 return so that obviously means investment trusts will be treated like this.
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That's not obvious to me.

I don't agree that holding shares in a UK-domiciled investment trust constitutes a material interest in an offshore fund because the share price will not track the net asset value of the investment trust. In other words, it is highly likely that the realisable value of the shares will be at a premium or discount to the value of the assets held by the investment trust.
 
Sarenco said:
That's not obvious to me.

I don't agree that holding shares in a UK-domiciled investment trust constitutes a material interest in an offshore fund because the share price will not track the net asset value of the investment trust. In other words, it is highly likely that the realisable value of the shares will be at a premium or discount to the value of the assets held by the investment trust.
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So in your opinion investment trusts do not need to be categorised as funds at all and there is no need to separate them out just the same treatment as normal shares regarding form 11 reporting?
 
Sarenco said:
Yep.
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I think this is wishful thinking. IT's will/do fall under the offshore fun process, the real test as to if they are subject to CGT or exit tax is "Are they material to Irish Unit Trusts in all material aspects", it is a difference in the material aspects of the equivalence test you are relying on to claim they are subject to CGT, therefor they fall under non-equivalent process and go under the form 11 "Other offshore products" category but subject to general principles i.e. CGT.

The only way you can claim that the IT's are subject to CGT is to say they are non-equivalent and therefore "Other offshore products".
 
deisedub said:
The only way you can claim that the IT's are subject to CGT is to say they are non-equivalent and therefore "Other offshore products".
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No, I’m not arguing that UK-domiciled investment trusts are non-equivalent offshore funds - I’m arguing that holding shares in such an investment trust does not constitute a material interest in an offshore fund in the first place.

Why?

Because there is no expectation that the share price will track the NAV of an investment trust’s underlying assets.

That’s the key test for determining whether or not a holding represents a material interest in an offshore fund.
 
Sarenco said:
No, I’m not arguing that UK-domiciled investment trusts are non-equivalent offshore funds - I’m arguing that holding shares in such an investment trust does not constitute a material interest in an offshore fund in the first place.

Why?

Because there is no expectation that the share price will track the NAV of an investment trust’s underlying assets.

That’s the key test for determining whether or not a holding represents a material interest in an offshore fund.
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No, that's the material test to check if the offshore OECD fund is equivalent or not to an Irish one. It's offshore no matter what, the test is if it's equivalent to Irish one or not to decide if it's exit tax or CGT. I've been over this with specialist Irish tax advisors to get the written position on it. The material result isn't any differnt to you, you are deciding you are in a CGT situation either way but need to watch how the guaidance on non-equivalent, non-EU, OECD with tax treaty evolves over time.
 
deisedub said:
No, that's the material test to check if the offshore OECD fund is equivalent or not to an Irish one.
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I’m not saying it’s not an offshore fund - I’m saying it’s not a material interest in an offshore fund.

If it’s not a material interest in an offshore fund it doesn’t matter whether it’s equivalent or non-equivalent. You don’t get that far in the decision tree.

And if it’s not a material interest in an offshore fund there’s nothing to disclose to Revenue.
 
deisedub said:
The only way you can claim that the IT's are subject to CGT is to say they are non-equivalent and therefore "Other offshore products
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What about "non equivalent " "other offshore products " that were purchased years ago before this new clarification, where do they fall now, there was no separate category for them up to recently?
 
Sarenco said:
I’m not saying it’s not an offshore fund - I’m saying it’s not a material interest in an offshore fund.

If it’s not a material interest in an offshore fund it doesn’t matter whether it’s equivalent or non-equivalent. You don’t get that far in the decision tree.

And if it’s not a material interest in an offshore fund there’s nothing to disclose to Revenue.
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I don't think revenue would agree with you, from: https://www.revenue.ie/en/tax-profe...ains-tax-corporation-tax/part-27/27-02-01.pdf

"Where a person expects to realise more or less than the market value, as will often be the case with quoted shares in a trading company, their holding will not be a material interest. However, if shares in a quoted company generally track the underlying asset values, it may constitute a material interest in an offshore fund. Essentially, if the offshore fund is little more than a “wrapper” for an investment in an underlying asset or assets, an interest in that offshore fund will most likely be a material interest."
 
deisedub said:
"Where a person expects to realise more or less than the market value, as will often be the case with quoted shares in a trading company, their holding will not be a material interest. However, if shares in a quoted company generally track the underlying asset values, it may constitute a material interest in an offshore fund."
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Exactly.

The share price of an investment trust does not track the underlying asset value - the shares will always trade at a premium or (more commonly) a discount to the NAV of the underlying assets.

That’s the key point and is the reason why holding shares in an investment trust does not constitute a material holding in an offshore fund.
 
Sarenco said:
Exactly.

The share price of an investment trust does not track the underlying asset value - the shares will always trade at a premium or (more commonly) a discount to the NAV of the underlying assets.

That’s the key point and is the reason why holding shares in an investment trust does not constitute a material holding in an offshore fund.
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You are ignoring the key 2nd part of that, likely as you need to e.g. "generally track" etc. How can you say an IT is not simply a wrapper on a basket of underlying assets and that the trading price doesn't generally track the value of that basket of assets? If IT's didn’t work this way nobody would invest in them. It's immaterial that there is some relatively constant delta between trading price and NAV with respect to the material interest check. That delta is material however in the equivalence check once you accept that they are offshore funds and you do have a material interest in them.
 
deisedub said:
It's immaterial that there is some relatively constant delta between trading price and NAV with respect to the material interest check.
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There is nothing constant about the delta between the share price and NAV - the delta changes all the time depending on investor expectations.

And ITs do not constitute a “wrapper” for a basket of underlying securities. ITs can make various active decisions beyond the selection of investments, eg whether to increase or decrease gearing, whether to buy back shares, etc.
 
Sarenco said:
There is nothing constant about the delta between the share price and NAV - the delta changes all the time depending on investor expectations.

And ITs do not constitute a “wrapper” for a basket of underlying securities. ITs can make various active decisions beyond the selection of investments, eg whether to increase or decrease gearing, whether to buy back shares, etc.
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Hey, it's not me you have to convince, it's any potential revenue auditor down the line. If being wrong about this would be a significant issue for you then suggest you get professional tax advisors option based on the specific IT's you intend to use.
 
As an unfortunate investor in Woodford Patient Capital Fund, the nav differed from the quoted price by 40pc once the proverbial hit the fan. During March 2020 some trusts hit a discount of 20pc.

I have looked at the Memorandum and Articles of a few ITs (SMT, SSON) and have not found a commitment to try keep the share price at NAV.

I take the point about legal advice and I think there will be an effort by Revenue to shoehorn this into exit tax in the future.

If it did occur does this mean I get a refund on the difference between exit tax and my higher rate income tax prsi and usc already paid on (relatively small) dividends? :).
 
Investment Trusts are “closed-ended” in nature.

An Investment Trust is a company that holds a pool of capital that’s invested in “things” and investors then buy and sell shares in the company.

As a result, it’s not like an open-ended fund which, for example, can need to be “gated” when there’s a run on money because investors can simply ask for their money back.

With an Investment Trust, the share price and the value of the assets inside diverge, so you hear, for example right now, of “investment trusts trading at discounts”.

With an open-ended fund, unit price and NAV are typically aligned and move as one.

With an Investment Trust, there’s no such guarantee because you need a willing buyer and a willing seller. So if I’m a panic seller or if Sarenco is an exuberant buyer, the share price may not be reflective of the net asset value of the underlying bits and bobs.

I’ve love to chat with a Revenue auditor about the above.
 
Would anybody, close to retirement, but still with 50 or so years to live, invest in an Investment Trust with confidence that they will never be subject to deemed disposal?

Would they be confident investing in a conglomerate will never be subject to this?

Or is picking their own portfolio the only way most would be comfortable with?
 
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