Deemed Disposal at 38% vs CGT at 33% - a stochastic analysis

Corola said:
Distributing ETFs are the worst of both worlds: deemed disposal and annual tax on dividends.
Click to expand...
why were distributing ETFs included in deemed disposal at all, surely the fact that they were distributing their dividends and tax was then paid on those dividends means they should be taxed under CGT. Surely this aspect alone should be vigorously challenged.
 
jpd said:
Dividends from ETFs are taxed at 41% in the year they are received
Click to expand...

For Irish-based distributing ETFs, they are taxed when received... You are correct, but I think they are taxed immediately upon the chargeable event (i.e., being received) rather than on some annual basis.

Corola said:
Distributing ETFs are the worst of both worlds: deemed disposal and annual tax on dividends.
Click to expand...

Yes,you're right.

What I said previously is what I think is correct, but I'd love for someone else to tease it apart if wrong.

Whereas for Irish ETFs, the dividend is considered part of the fund’s growth and taxed at the next chargeable event under Exit Tax. Irish ETFs (both accumulating and distributing) enjoy gross roll-up: no annual tax on dividends.
Click to expand...
In the case of the dividend the next chargeable event is when the dividend is distributed - and it is taxed under Exit Tax (41% currently, moving to 38%). See 27-01a-02.pdf section 4.1. I find the wording there confusing...

Tax and Duty Manual, Investment Undertakings, Part 27-01A-02 §4.1:

"In general, exit tax must be deducted on the occurrence of a chargeable event as defined insection 739B.

Such chargeable events happen – on the making of a regular payment by a fund to a unit holder other than on thecancellation, redemption of units or repurchase of a unit (e.g. an annual dividend);"
Click to expand...

What I *think* that means is if an Irish UCITS ETF pays out a cash dividend, that payment is itself a chargeable event. The fund must deduct Exit Tax (currently 41%, reducing to 38% from 1 Jan 2026) on that dividend before paying it to you:
  • For Irish distributing ETFs, dividends are not taxed as income at your marginal rate. Instead, the fund applies Exit Tax at source when paying the dividend.
  • For Irish accumulating ETFs, there’s no dividend payment, so no interim chargeable event. Tax only arises at deemed disposal or sale.
  • For foreign ETFs, dividends (whether accumulating or distributing) are taxed at your marginal rate.
 
No, Irish-domiciled ETFs don't deduct exit tax. You must self-assess and pay the tax on dividends annually.

Remember that they are traded on international stock exchanges. So their taxation depends on the country of the investor who purchased them.

4.2.3 Units held in a recognised clearing system (such as Exchange Traded Funds)
Paragraph (III) of the definition of chargeable event in section 739B(1) provides that any transaction in relation to, or in respect of, units which are held in a recognised clearing system does not require the deduction of exit tax. This would be the case for an ETF where the units/shares in the underlying fund are bought and sold between investors on the stock market and are cleared through a recognised clearing system.
While the fund does not have to deduct exit tax, an Irish resident unit holder will be subject to tax on income and gains arising and must self-assess and include details of income and gains in a timely filing on their income tax return to Revenue.
Click to expand...
 
Last edited:
joe sod said:
why were distributing ETFs included in deemed disposal at all
Click to expand...
Because Irish-domiciled ETFs were added to the offshore funds regime as a footnote. There isn't a logical answer. They aren't even offshore.
 
Last edited:
joe sod said:
why were distributing ETFs included in deemed disposal at all, surely the fact that they were distributing their dividends and tax was then paid on those dividends means they should be taxed under CGT. Surely this aspect alone should be vigorously challenged.
Click to expand...
I think because, as Duke of Marmalade spotted earlier, Irish fiscal Calvanism was looking towards equivalent with DIRT (i.e., 33% annualised) rather than CGT (once on final gain) due to anxiety/fear of famine/tax it while you can... (for sake of transparency, effect spotted by Duke of Marmalade, interpretation my own).

Corola said:
No, Irish-domiciled ETFs don't deduct exit tax. You must self-assess and pay the tax on dividends annually.

Remember that they are traded on international stock exchanges. So their taxation depends on the country of the investor who purchased them.
Click to expand...
I got to admit I struggle with this... for me, this is one of the most confusing areas of Irish tax treatment for ETFs.

My understanding is that if you invest in an Irish-domiciled ETF (like iShares Ireland UCITS ETFs) through an Irish intermediary (e.g., a domestic broker or fund platform) then the fund itself is a “regulated investment fund” under Section 739B TCA 1997, and Exit tax (41%) is automatically deducted by the fund manager, and you don't need to declare on Form 11.

However, Section 4.2.3 in the link you provided suggests if you are buying ETFs directly on "a recognised clearing system" then "Section 739G(2)(b) provides that where exit tax is not applied and the unit holder isan individual, the payment is treated as if it is a payment from an offshore fund"... In other words, when you buy Irish-domiciled ETFs through a recognised clearing system (e.g. via DEGIRO, Trading 212, Interactive Brokers, etc.), Section 739G(2)(b) kicks in.

There was a "loophole" where at one stage US ETFs were potentially more tax-efficient for some Irish investors (subject to CGT on gains / income tax on dividends - versus DD8 exit tax). This was closed in 2022 IIRC, and the fix reinforces the need to watch how you hold ETFs (via recognised clearing systems, fund platforms, etc.), because that also affects whether exit tax is collected automatically or you must self-assess.

Personally, I think this complexity is all a hot mess, and it urgently needs to be cleaned up and simplified. A complex convoluted tax code is an inefficient tax code. The ETF regime in Ireland is a prime example of complexity breeding inefficiency, confusion, and unequal outcomes.
 
@Duke of Marmalade
If I input dividends of 0% into your spreadsheet is that like comparing an accumulating ETF with investing in shares subject to CGT that do not issue dividends?

If yes, then am I right that your spreadsheet cannot compare an accumulating ETF with shares subject to CGT that do issue dividends?
 
joe sod said:
why were distributing ETFs included in deemed disposal at all, surely the fact that they were distributing their dividends and tax was then paid on those dividends means they should be taxed under CGT.
Click to expand...
I think that problem pre-dates Revenue guidelines on ETF taxation.

As far as I know there's nothing to stop a non-ETF fund giving a dividend/distribution. In the UK these seem to be known as "Income" funds.

It looks like a distributing regular fund that isn't an ETF would also require tax on dividends and DD?
 
CharlieMac said:
If I input dividends of 0% into your spreadsheet is that like comparing an accumulating ETF with investing in shares subject to CGT that do not issue dividends?
Click to expand...
If you input 0% dividends. The "CGT" figures now apply to any arrangement which grows on average at 7% p.a. and is only subject to CGT. The DD8 figures are not affected. The comparison is always with DD8. If you want to compare two different CGT situations you have to run tow separate analyses.
CharlieMac said:
If yes, then am I right that your spreadsheet cannot compare an accumulating ETF with shares subject to CGT that do issue dividends?
Click to expand...
I think you are right here. As I say the spreadsheet is always comparing some version of CGT with DD8. If you want to compare two different versions of CGT with each other you need two separate runs and eliminate the DD8 "middleman".
 
Isn't that the scenario in post #1?

DD8 = accumulating fund, dividends rolled-up, deemed disposal every 8 years, with combined growth and rolled-up dividends taxed at 38%
CGT = distributing fund, dividends paid out and taxed annually at 52%, no deemed disposal, growth taxed at 33%

What isn't being modelling is: an accumulating fund under CGT, with dividends rolled-up indefinitely and no deemed disposal, because that would clearly be better than DD8.
 
Last edited:
Duke of Marmalade said:
If you input 0% dividends. The "CGT" figures now apply to any arrangement which grows on average at 7% p.a. and is only subject to CGT. The DD8 figures are not affected.
Click to expand...
So your model can specify dividends or no dividends on a CGT investment but I don't think it can specify dividends or no dividends on an ETF investment?

I'm interested in the comparison of:

1. An accumulating ETF with an investment subject to CGT.
2. A distributing ETF with an investment subject to CGT.

Maybe the numbers will be very different depending on the type of ETF.

Apologies if this question has already been answered.
 
@CharlieMac I am not entirely sure what you are asking.
The comments made by others make me aware that I haven’t a clue how ETFs are currently taxed.
I have been considering a plausible long term solution that taxes the income of ETFs, possibly on a look through basis, as income and profits on sales as capital.
If you set out more clearly the tax bases you want compared I will see if that is readily available to me. Specifying actual instruments only exposes my ignorance of how ETFs are currently taxed.
 
Well as mentioned a few posts above in this thread we could assume that dividends on Irish based accumulating ETFs are taxed at 0%, dividends on Irish based distributing ETFs are taxed at the exit tax rate but dividends on foreign ETFs are taxed at your marginal rate.

Duke of Marmalade said:
If you input 0% dividends. The "CGT" figures now apply to any arrangement which grows on average at 7% p.a. and is only subject to CGT.
Click to expand...
You designed your spreadsheet so the dividend yield and rate of dividend tax can be changed... but only as that applies to investments subject to CGT.

So all I'm saying is your model assumes a comparison involving an accumulating ETF (subject to exit tax and DD and does not issue dividends) with an investment subject to CGT which may or may not issue dividends. There is no way to specify a dividend yield or rate of dividend tax on the ETF (instrument subject to exit tax). If there was then a comparison could be made not only with accumulating ETFs but also with distributing ETFs?
 
RainyDayFund said:
There was a "loophole" where at one stage US ETFs were potentially more tax-efficient for some Irish investors (subject to CGT on gains / income tax on dividends - versus DD8 exit tax). This was closed in 2022 IIRC,
Click to expand...
It wasn't a loophole, there was clear revenue guidance before 2022 that they were taxed under normal taxation CGT etc and not deemed disposal. They then removed this clarification, that's all they did, it was then up to an investor to decide if they were materially the same as a ucits fund or not.
 
@CharlieMac

The dividends of an accumulating fund aren't taxed at 0%. They are paid into the fund and taxed every 8 years when there is a deemed disposal (forming part of the overall gain).

Post #1: In Duke's proposed CGT system, the dividends would still be paid into the fund, but the investor would self-assess and pay 52% tax on those dividends in their annual tax return. This is functionally the same as a distributing fund taxed under CGT, where you personally reinvest the net dividend you receive (after tax) back into the fund.

It is assessing what level the exit tax rate would have to drop to for the investor in an accumulating fund to be indifferent between the two tax regimes.

Post #9: I asked about Berkshire Hathaway because it is very frequently recommended as an alternative to ETFs on AAM. It doesn't pay out dividends to the investor, it keeps its profits in the company. These notional dividends are eventually taxed - when the stock is sold it's all part of the gain. It's a stock that functions similarly to a gross-roll up accumulating fund, but without deemed disposal. So setting the dividend yield in the model to 0% simulates BRK.B.

It is assessing what level the exit tax rate would have to drop to for the investor to be indifferent between an accumulating fund and BRK.B.
 
Last edited:
@Corola Thanks for that explanation. I think I now understand what I was trying to do.:)
I think @CharlieMac is asking me to consider a situation where dividend income is taxed annually at the Exit Tax rate and Deemed Disposal operates. It would require some surgery to my existing spreadsheet but clearly it would be worse but not a lot worse than the straightforward accumulating DD8 situation.
 
Last edited:
You must log in or register to reply here.
Back
Top