Tax Treatment of ETFs and Investment Companies (Trusts)

Having enquired from an expert, the tax treatment of investment companies (trusts) and ETFs remains a tricky area for Irish investors. To summarise;

An offshore fund that is a good offshore fund (in the EU or part of a tax treaty with Ireland - say established under UK law and resident in the UK) will be taxed under our income tax regime (gross roll up) if subject to a regulatory regime. If a non-regulated fund, then taxed as a normal security. To determine whether a fund is subject to a regulatory regime would have to be done on a case by case basis and by drilling down into the original fund prospectus.

An offshore fund is a bad offshore fund if non-EU and not part of a tax treaty with Ireland. Such funds are taxed as securities, not funds and income and CGT applies, and loss relief available.

Most ETFs, but not all, fall under the good offshore fund rules and should be taxed under gross roll-up rules, with no tax relief. ETCs (exchange-traded commodities) are securities and taxed as such. US ETFs not constituted under the US Mutual Funds Act are more likely to be bad offshore funds and taxed as securities. Difficult to determine though.

UK listed investment trusts that are constituted under UK law and subject to a regulatory regime most likely fall under Part 13, Irish Companies Act, and subject to gross roll-up rules for Irish residents. But non-UK registered investment companies (Guernsey registered for example, of which there are many) probably should be categorised as bad offshore funds and taxed as normal securities (income tax on dividend and CGT on gains) with loss relief.

Tax returns: It is a minefield for the private investor, as none of us are experts and in a position to determine the above. My own read of it is that gross roll-up rules should be your default stance unless you can prove your fund is a bad offshore fund or a good offshore fund not regulated in which case normal security tax rules apply (with loss relief).

Best I can do.

Rory Gillen

Hi Rory

That is a great bit of work.I had not realised that there were so many varieties and two different tax treatments.

I have losses on my ISEQ ETF. I presume that this is a gross roll up fund and I can't use the losses against capital gains elsewhere?

This sort of complexity and inflexibility is one of the reasons I don't like these funds.

I am stuck with my ISEQ ETF. Any gain it makes from the current level to the level at which I bought it, will be effectively tax free. If I cashed it in and invested in something else, any gain it would make from this level would be taxable.

Brendan

Brendan,

The tax laws are simply unfair. ETFs, in my view, are not gross roll-up vehicles in that there are no gains crystallised to roll up and most pay out the dividends.

On funds in general, it is simply unfair to disallow loss relief when the flip side is taxed.

Not much we can do about it though. Makes it even more important that when you a fund you buy at good value levels so that by holding it you should eventually surpass the purchase price.

Funds, after all, are there to reduce risk for private investors, so why disadvantage them on the tax side.

Rory

ETFs Taxation

Thanks Rory - this is very helpful. I had come to the same conclusion that it was best to assume an ETF (mine are mainly US-origin) would be taxed under gross roll-up.

Another element of unfairness is the 8-year deemed disposal rule. If, as I do, you accumulate these holdings piecemeal as funds allow (I have a few cheap US trading accounts) then you end up with dozens of "slices" of ETFs to record and account for.

One question, please. One of my US trading accounts withholds US tax at source from income. I have submitted a WBEN to get paid gross, but they haven't accepted it yet (and may not - they seem unconvinced about something). In that case what is liable to tax in Ireland - (a) the net amount received, (b) the gross amount with a tax credit, or (c) the gross amount? In a normal world it would be one of the first two, but I have come to realise that little is normal in the poorly-thought out gross roll-up regime.

And a follow-on question, if I can't get the US firm to accept my WBEN request, I could always opt to have dividends reinvested on both shares and ETFs. Would that reinvestment get around the withholding tax, or would I just get fewer new shares than I would otherwise?

Thanks again for the helpful contribution.

Rory Gillen said:

Brendan,

ETFs, in my view, are not gross roll-up vehicles in that there are no gains crystallised to roll up and most pay out the dividends.

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This is technically correct but the Boss was I presume referring to the Exit Tax aspect rather than GRU.

This regime has its origins when Charlie McCreavey was forced to put domestic life policies on a level footing with their IFSC counterparts. It was perceived to be a very generous regime compared to direct investment with an exit tax of only 23% and gross roll up along the way. An obvious negative was the lack of loss relief but the life industry didn't lobby too hard against it as they saw themselves as generally on a winner.

So far as I am aware the ETF people and others lobbied to be put on a level playing field with the life companies and got what they wished for.

Since then the sheen has gone something off with the exit tax now at 36% and with 8 year deemed disposal.

It seems to me that since ETFs don't even have the benefit of gross roll up they are a bit of a bummer from a tax perspective.

Hi Duke,

If I understand it correctly, the situation is as follows:

1. ETF's are generally subject to the gross roll up regime (provided they meet certain conditions around UCITS, domicile etc)
2. Most ETF's pay distributions and therefore are subject to exit tax on these, currently at 33%.
3. Some ETF's are accumulating and therefore there would be no regular exit tax to be paid. The exit tax would only be payable at deemed disposal and at actual disposal, currently at 36%.

If the above assumptions are correct, I think that there is some case to be made for using an accumulating ETF as opposed to shares in terms of the gross roll up of regular distributions, especially for a higher rate tax payer.

Would you agree?

Regards,

3CC.

3CC said:

Hi Duke,

If I understand it correctly, the situation is as follows:

1. ETF's are generally subject to the gross roll up regime (provided they meet certain conditions around UCITS, domicile etc)
2. Most ETF's pay distributions and therefore are subject to exit tax on these, currently at 33%.
3. Some ETF's are accumulating and therefore there would be no regular exit tax to be paid. The exit tax would only be payable at deemed disposal and at actual disposal, currently at 36%.

If the above assumptions are correct, I think that there is some case to be made for using an accumulating ETF as opposed to shares in terms of the gross roll up of regular distributions, especially for a higher rate tax payer.

Would you agree?

Regards,

3CC.

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Yes, I missed the point that distributing ETFs would be taxed at 33% not 36%.

Hi Duke,

The 33% vs 36% is s small difference. That was not really my point (I would be pedantic if is was).

My main point was that the accumulating ETF's are not subject to tax in respect of the fact that distributions are reinvested in the fund.

This is what I understand to be the case but I would be grateful if you or anyone could validate that view.

3CC

3CC said:

Hi Duke,

The 33% vs 36% is s small difference. That was not really my point (I would pedantic if is was).

My main point was that the accumulating ETF's are not subject to tax in respect of the fact that distributions are reinvested in the fund.

This is what I understand to be the case but I would be grateful if you or anyone could validate that view.

3CC

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Apologies for the confusion. My "Yes" was a yes to all you had said in your earlier post.

Hi all,

I suggested above that ETF's may be relatively tax efficient in some circumstances so I decided to check if this is correct. I have had a go at an Excel sheet to compare the outcome of investing in shares vs an ETF vs an Accumulating ETF.

https://docs.google.com/spreadsheet/ccc?key=0AlgkIxl5TNVUdGtQdTFtVExIX18xOHF4MDgtSG5UWHc

I have made a few assumptions as follows:

For the shares, the capital gain is 5% and the income from dividends is 4%. The dividends are taxed and reinvested each year.

For the 'distributing' ETF's, I have used a lower capital gain of 4.5% (to allow for annual management charges of say 0.5%) and a distribution income of 4% . Again, the distributions are taxed and reinvested each year.

For the accumulating ETF's, as the distributions are used to increase the fund price, I have put the 4.5% capital gain and the 4% distribution income all into the capital gain and thus this is assumed to be 8.5% with 0% distributions.

I have also assumed that the investor is a top rate taxpayer (when calculating the tax on share dividends).

I have assumed that the fund is disposed of in full at the end of the term. I have calculated the result for an 8 year term and a 16 year term and compared the results.

For the ETF's, I have assumed that the fund is sold in full at 8 years and the tax paid and the remainder reinvested although in practice you would only sell part of the fund to pay the tax due.

I have ignored broker charges and stamp duty throughout.

The results (see the summary tab) show that the accumulating ETF gives the best return and the shares the worst BUT the difference is small. The difference is small enough that the potential for future changes in tax treatment or personal circumstances, and the validity of the assumptions made etc mean that there is little to separate the approaches for me.

The simpler tax returns for the accumulating ETF and the potential for marginally higher returns gives this option a slight edge in my view.

I hope is of help to anyone else pondering this question.

Regards,

3CC.

Good stuff, 3CC

There is however a new category of unfortunate investors including yours truly, those who are nursing substantial bank losses or indeed other capital losses. These can be used to shelter capital gains on direct share investment and just possibly on foreign based Investment Companies and that to me tilts it against exit tax vehicles.

For someone with a clean tax sheet, I agree with your comments.

ETFs - Withholding Tax

Hi folks,

Can anyone help with my specific question from above, please?

One of my US trading accounts withholds US tax at source from income on both ETFs and stocks. I have submitted a WBEN to get paid gross, but they haven't accepted it yet (and may not - they seem unconvinced about something).

On the stocks the position is clear. I declare the gross amount but get credit for the tax withheld. But I have no idea how to account for the ETFs. In that case what is liable to tax in Ireland - (a) the net amount received, (b) the gross amount with a tax credit, or (c) the gross amount? In a normal world it would be one of the first two, but I am worried that won't apply under gross roll-up. I don't know of any provision to allow for tax withheld.

And a follow-on question, for anyone who knows about the US withholding tax regime. If I can't get the US firm to accept my WBEN request, I could always opt to have dividends reinvested on the ETFs (and the shares). Would that reinvestment get around the withholding tax, or would I just get fewer new shares than I would otherwise?

As I am writing another question has occurred to me. Does the income levy allow for tax credits, or is that just the gross amount received? This is the problem, it seems to me, with the "make it up as you go along" tax system that has emerged over the past few years - lots of (potentially) unintended consequences.

Thanks for the help.

I decided the only way to resolve this was to write to my Tax Inspector. I stated that I owned shares in the Edinburgh UK Investment Trust, and asked how they were treated. I even referred her to the debate on Askaboutmoney which suggested that the issue was unclear.

I received a written reply (by snail mail) today. This is the key extract:

Revenue said:

If you have purchased shares in a quoted company then any income or gains are taxed in the usual manner.

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That's good enough for me.

Hi Duke,

Good idea to go straight to the horse's mouth.

I understand that my ETF investments are also 'shares in a quoted company' so you have just shattered everything I thought I knew about the taxation of ETF's (I think).

I had better just do as you and write to the Tax Inspector for a definitive answer. It would be good to have a response on file in any case. I think that would be better that trying to point to this thread in 10 or 20 years time!

Thanks for posting the result.

3CC

3CC

I think Rory Gillen has summed it up correctly. Your ETF is probably a "good offshore" vehicle and therefore subject to the exit tax regime. I don't know whether the Edinburgh UK IT is regulated or not. I didn't get into that detail but I don't think I could be accused of hiding any facts. I will keep this correspondence as in my case I am hoping to use up a bit of my bank losses.

If you ask the wrong question you might not get the answer you want, I think you would need to go into all that "good offshore" stuff if you want to be sure of getting an exit tax reply.

Thanks Duke,

I think you are right that the answer will depend on the question so I'll make sure to phrase it as correctly as I can.

I am hoping that Revenue will reply saying that the ETF's are subject to the exit tax regime which will reinforce my current understanding which based in part on what others have very kindly posted here on AAM.

If Revenue say that ETF's are subject to the same treatment as any other share (ie CGT), then I will be in a quandry - wondering if I have explained the issue sufficiently.

It's a real pity that Revenue would not publish a guide on their website to address this issue that many retail investors (and possibly tax advisors) are unsure about.

I'll post the response when it arrives in any case.

Many Thanks,

3CC.

Hi All,

Just to confirm that I queried the taxation of ETF's with Revenue asking if these are subject to the same taxation regime as all other shares (ie dividends taxed as income and gains subject to CGT using the first in first out rule) OR if these are subject to the gross roll up and exit tax regime.

Revenue came back asking for more information about the specific ETF's and I supplied the Name, Ticker Code, ISIN, Currency for each of the ETF's that I propose to purchase. I also confirmed that all of the Exchange Traded Funds listed above are traded on the London Stock Exchange, are UCITS compliant and are domiciled in Ireland. I attached the fact sheet for each fund.

Revenue responded stating that the ETF's are subject to tax on dividends and CGT on disposal.

Given that there has been some very reliable information to the contrary and that tax advisors seem to differ on this, I wonder if this is a grey area. Maybe Revenue would prefer that ETF's were taxed under the gross roll up regime given that they behave like unitised investments but they must be taxed as shares given that they are shares.


3CC

It's no wonder people are confused about this when Revenue regularly respond to specific enquiries incorrectly.

3CC thank you for sharing.

The constant confusion over the tax on this very useful investment vehicle is a disgrace. It seems that people who study the taxation rules are taking a different view from revenue. I have avoided using ETFs as there is so much conflicting advice.

I would love if there were treated as you described, as an accumulating fund would be a no-brainer to minimise tax for a long term buy and hold investor.

3CC, do you have any indication if your reply was from a senior revenue source? or from a less knowledgeable helpdesk/first line support type person?

3CC, where any of your ETFs accumulating?

3CC, would you be willing to share your list of ETFs?

I think if someone else repeats this exercise it would be would putting in a "Bad" fund, and a commodity fund, to see if they are actually distinguishing on the tax due between different funds or not.

Maybe we need to send the requests higher up the chain, or via a TD, in order to feel secure about the tax situation.

Hi SPC100,

SPC100 said:

3CC, do you have any indication if your reply was from a senior revenue source? or from a less knowledgeable helpdesk/first line support type person?

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I have no way to know. They were simply signed the persons name and 'Fingal PAYE Customer Services'

SPC100 said:

3CC, where any of your ETFs accumulating?

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Yes, they all were. In some cases this was very obvious as it was in the name of the fund and in some cases it was stated in the fact sheets that I sent in.

SPC100 said:

3CC, would you be willing to share your list of ETFs?

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Sure, The ETF's I inquired about were:

Name of ETF
Ticker Code
ISIN
Currency

iShares S&P 500 Minimum Volatility
(SPMV)
IE00B6SPMN59
USD

iShares S&P 500 Monthly EUR Hedged
(IUSE)
IE00B3ZW0K18
Euro

iShares MSCI Europe Minimum Volatility
(MVEU)
IE00B86MWN23
Euro

iShares MSCI Europe (Acc)
(SMEA)
IE00B4K48X80
Euro

iShares MSCI World Minimum Volatility
(MVOL)
IE00B8FHGS14
USD

iShares MSCI Emerging Markets Minimum Volatility
(EMMV)
IE00B8KGV557
USD

SPC100 said:

3CC thank you for sharing.
Maybe we need to send the requests higher up the chain, or via a TD, in order to feel secure about the tax situation.

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In spite of having an unequivocal response from Revenue, I am still not sure about this. Personally, I would be happy to pay a tax consultant for a written opinion but it seems that even the tax experts differ on this. And in my view an incorrect opinion from a tax expert is not much comfort if I end up in a wrangle with the Revenue down the line.

I think Rory Gillen suggested that the default position should be the gross roll up regime. I presume this is because it is the most favourable for Revenue and therefore cannot result in a tax underpayment.

In my opinion, even you assume this worst case scenario assumption, ETF's are still an attractive vehicle for the buy and hold investor.

So I think my plan will be
1) Buy and hold some accumulating ETF's.
2) Declare their purchase on form 11.
3) Spend the next 8 years trying to figure out the tax position on them.
4) If there is any uncertainty, assume a deemed disposal in 8 years and pay the relevant tax accordingly.

3CC