U.S. ETF taxation

Hello,

I wonder if anyone knows what's the Revenue stand on these two major ETFs: SPY and QQQ these are the most widely traded US ETFs in the planet. Are they considered "equivalent" hence taxed at 41% following the deemed disposal rule or "not equivalent" hence they follow the mainstream income taxation ? I'm sure being these the largest traded ETFs in the world someone most have clarified that with Revenue in the last 4 years or so ? What sort of feedback would I get from Revenue if I put the question direclty to them on MyEnquires ? Before buying them I would like to be sure about the taxation rules of these ETFs but it looks like it's extremely difficult to get which is unbelievable.

Thanks
Franc

For a start, these are not usually available to retail investors in Europe as they do not provide documentation which is required under EU rules

Even if they were, they would certainly fall under the Irish ETF system - they are completely equivalent to European ETFs

jpd said:

For a start, these are not usually available to retail investors in Europe as they do not provide documentation which is required under EU rules

Click to expand...

Yeah, even if, as an EU user, you try to buy them on the likes of E*Trade it won't let you because the relevant documentation (e.g. KIID) required under EU regulations is not available.

Franc1 said:

Are they considered "equivalent" hence taxed at 41% following the deemed disposal rule or "not equivalent" hence they follow the mainstream income taxation ?

Click to expand...

Under the legislation, an equivalent fund refers to a fund that:

1. Is similar in all material respects to:

(a) an investment limited partnership,
(b) an authorised investment company, or
(c) a unit trust scheme; or

2. Is a UCITS.

Neither QQQ nor SPY are a UCITS so you can strike out number 2 above.

The question then is - are these funds similar in all material respects to an Irish ILP, an Irish Part XIII AIC or Irish UT?

A key feature of an Irish regulated unit trust is that it must provide facilities for investors to redeem units directly with the trustees. Whilst redemption (against receipt of securities) is possible for certain institutional investors (market makers or other broker dealers) in multiples of 50,000 QQQ & SPY shares, it is not possible for individual investors to purchase or redeem units directly with the Trust (INVESCO QQQ Trust or SPDR S&P500 ETF Trust). Individual investors can only trade shares on a secondary market on a stock exchange.

Similarly, an Irish Part XIII authorised investment company must either redeem units for investors or take steps to ensure that its shares trade within a specified percentage of NAV. That is not a feature either of QQQ & SPY.

I would say it is reasonable to conclude that QQQ & SPY are not "similar in all material respects" to its Irish equivalent and are taxed under general principles.

AAAContributor said:

… an Irish Part XIII authorised investment company must either redeem units for investors or take steps to ensure that its shares trade within a specified percentage of NAV. That is not a feature either of QQQ & SPY.

Click to expand...

It is very much a feature of any ETF (including QQQ and SPY) that steps are put in place to ensure that shares trade within a specified % of NAV.

The reality is that it is impossible to state definitively whether or not these ETFs would be considered “similar in all material respect” to comparable Irish ETFs.

However, as others have pointed out, the issue is probably moot for the OP.

It's not moot when you can still buy them quite easily if you're motivated to.

Sarenco said:

It is very much a feature of any ETF (including QQQ and SPY) that steps are put in place to ensure that shares trade within a specified % of NAV.

Click to expand...

The "creation-redemption" mechanism help keep an ETF's market price in line with fair value and limits large premiums and discounts.

The "specified percentage" relating to a Part XIII investment company is to be "no more than 5% and is to be specified in the company's memorandum and articles of association." I'm not sure that is a feature of the above ETFs (at least I can't see a specified % in the prospectus) but am open to correction.

Revenue did issue guidance in 2014 & 2015 that they were prepared to accept that US ETFs were not "similar in all material respects". That has since been rescinded. Issuing such guidance was helpful but Revenue probably over-stepped the mark issuing such blanket guidance. It is instructive however that they were prepared to accept that. An investor has to look at each individual security now to determine the tax treatment.

As with all these things, professional advice should be sought from an adviser that opines on these matters regularly.

ClubMan said:

Yeah, even if, as an EU user, you try to buy them on the likes of E*Trade it won't let you because the relevant documentation (e.g. KIID) required under EU regulations is not available

Click to expand...

So what about the QQQ I bought via eToro? Or the TQQQ I've started DCA with?

From my perspective they seem functionally equivalent to buying the ETF regardless of the legal structure.

And if i make significant gains the how does tax apply? Income tax, USC, PRSI, CGT, or 41% as with an ETF?

It's very hypothetical at the moment and I'll take the advice of an accountant if I do come to have that best of problems to deal with, but I'd like to have an idea even at this early stage.

Thanks for the feedback folks, especially to AAA with all the details provided. It is really depressing having to seek professional advise on something that everywhere else in Europe is just mainstream. It would be the same thing as if I would have difficulties buying an investment house because then when I sell it, nobody knows how the profit is taxed and Revenue could challenge it since there aren't clear rules. The other issue is that I don't think it's realistic to seek professional advice on the U.S. ETF taxation, unless you have millions to invest

1) The vast majority of tax advisors would have little or no experience on this , since very few people in Ireland buy U.S. ETFs
2) SPY and QQQ are composed of over 500 individual stock holdings that make up the ETF, so would a tax advisor need to check over 1000
holdings to see if any of them breaks the "non equivalence" rule ? What would the cost of that be ? Then the ETF composition changes every
now and then anyway
3) Once point 2 is cleared the advisor will form an opinion, Revenue could have a different opinion. So the taxation of US ETFs in Ireland is not
based on clear rules but on opinions.

I will stick with my diversified basket of U.S. stocks portfolio since buying U.S. ETFs is a no go in Ireland.
Also my U.S. broker allows EU residents to buy ETFs, I can buy SPY and QQQ and every other ETF in the same way that I would buy AAPL

Franc1 said:

The other issue is that I don't think it's realistic to seek professional advice on the U.S. ETF taxation, unless you have millions to invest

1) The vast majority of tax advisors would have little or no experience on this , since very few people in Ireland buy U.S. ETFs

Click to expand...

exactly most accountants wouldn't have a clue themselves even revenue don't know and are highly likely just to run with the previous clarification that US domiciled ETFs are taxed the same as shares.

SquirrelChaser said:

So what about the QQQ I bought via eToro? Or the TQQQ I've started DCA with?

Click to expand...

Did you buy the ETF or did you buy a CFD on the ETF?

SquirrelChaser said:

From my perspective they seem functionally equivalent to buying the ETF regardless of the legal structure.

Click to expand...

The return may be functionally equivalent but it's the legal structure that determines the tax regime.

SquirrelChaser said:

And if i make significant gains the how does tax apply? Income tax, USC, PRSI, CGT, or 41% as with an ETF?

Click to expand...

CFDs are not funds so are subject to CGT but they come with their own risks.