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Tax treatment of Exchange Traded Funds

AUTHOR(S): Gerry Thornton
PRACTICE AREA GROUP: Tax, Development of Irish Tax Policy
DATE: 28.05.2015

The Irish Revenue Commissioners recently published a guidance note to clarify their position on the tax treatment of Irish investors investing in exchange traded funds (ETFs) domiciled outside Ireland.  We have summarised the relevant tax treatment that Revenue will apply.  To give the full picture, we have also included the treatment of Irish domiciled ETFs.

 

Domicile of ETF      Tax treatment
1. Ireland No exit tax.  Irish resident individuals are subject to income tax at a special rate of 41% on all returns (dividends and gains) on a self-assessment basis. No social insurance (PRSI) or universal social charge (USC).  Any losses are ring-fenced and are not available for offset.
2. EU – UCITS Taxed in the same way as Irish ETFs (see above).  Therefore, Irish resident individuals are subject to income tax at a special rate of 41% on all returns (dividends and gains) on a self-assessment basis.  No PRSI or USC.  Any losses are ring-fenced and are not available for offset.  This position has always been clear and follows specific legislative provisions.
3. EU – Non-UCITS In most cases, taxed in the same way as Irish ETFs (ie, 41% tax, no charge to PRSI or USC and losses ring-fenced).  However, Revenue acknowledge that it is possible that some EU ETFs which are not UCITS may, due to their legal set-up, fall outside the 41% income tax regime and may instead be subject to normal capital gains tax (33%) and income tax rules (as described below).  Revenue are willing to consider submissions on a case-by-case basis in this regard and acknowledge that taxpayers may decide to take such a position in appropriate cases.
4. Non-EU OECD
(eg, US)
Generally, subject to normal capital gains tax and income tax rules. Therefore, marginal rate income tax (up to 40%), plus USC (up to 11%) and PRSI (4%), as applicable, on dividends received by Irish resident individuals and 33% capital gains on capital gains arising on the disposal of shares.  Capital losses may generally be used to offset gains. Therefore, dividends will generally be taxed at a higher rate than European ETFs (1-3 above) but gains will generally be taxed at a lower rate.
5. Non-OECD 
(eg, Singapo
re)
Subject to a different tax treatment again.  Both income and gains will generally be taxed at marginal income tax rate (up to 40%), plus USC (up to 11%) and PRSI (4%), as applicable.

The Revenue guidance is solely focused on the tax treatment of investors that are Irish tax resident.  The guidance is not relevant to non-Irish investors who hold units in Irish ETFs.  The Irish tax treatment in respect of such non-Irish investors is clear; such investors are wholly exempt from Irish tax their return from Irish ETFs.

Authored by Gerry Thornton and Philip Tully, this article first appeared in the International Tax Review on 28 May 2015. 

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