Tax Treatment of ETFs and Investment Companies (Trusts)

Thanks again for sharing your experience and thoughts on this. I did not get satisfactory responses when I chased revenue, but I gave up on following it up.

Based on the sign off I would assume the response is a Junior/customer services role and despite the fact that they did the due diligence of asking for the ETF names, it would not make me feel secure on the correctness of the answer.

Would you feel bold and motivated enough to write back, explain the uncertainty that exists on the largest Irish financial discussion site, and ask them if you can get written confirmation from a senior person in revenue? (maybe someone else could advise a title or department to request sign off from http://www.revenue.ie/en/about/role/organisational-structure.html )

I personally hate uncertainty, but given where we are Your plan seems optimal to me.

Hi SPC100,

On the face of it, they do appear to have been thorough in asking all the right questions etc but I too am a little concerned given the weight of opinion to contrary here on AAM.

I am quite happy to respond and refer to the uncertainty that exists here on AAM. When I do so, I will make it absolutely explicit that there are no dividends with these products as they are capitalising ETF's, just in case they did not pick that up from the information I sent them.

I will wait for a day or two in case that there are any further posts on this thread that may inform what I put into my email.

In the meantime, if any other AAMer's know of a tax advisor that can give a definitive opinion on this, I would be grateful of their details.

Many thanks,

3CC

Duke of Marmalade said:

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:



That's good enough for me.

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My own assessment of the tax situation above is not complete and income and gains on an unregulated offshore fund are likely taxed at your marginal income tax rate. I'll try and clarify but may have run out of favours with my contact if you know what I mean.

Duke, I see you went straight to the Revenue, and yet the answer from the Revenue was to short to be definitive. My own summation is that the grey area sourrounding the tax treatment of investment trusts (my preferred fund vehicle) is so large that you can probably pick whatever way you want to treat them. The line of least resistence may be to opt for consistency and assume same treatment as unit-linked funds. But it is not incorrect to assume they are companies and taxed as such as your reply from the Revenue has just said. This line allows for loss relief, and the Revenue would have a devil of a job saying why it should be otherwise.

Duke of Marmalade said:

I stated that I owned shares in the Edinburgh UK Investment Trust, and asked how they were treated.
<snip>
Key extract of Revenue reply

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

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I have never got a concrete complete reply on how to tax an ETF from revenue. I openly admit I'm pedantic and I like precision.

You could read that extract of reply like this;

Revenue have simply re-stated how to tax shares in a normal quoted company. *IF* you bought shares in a quoted company. I fear the lack of a reference to your Trust leaves it somewhat open to interpretation. Did they say your Trust was a quoted company? I thought the whole point about the ETFs/ Trusts etc., is they are not a typical quoted company, they are investment funds.

I fear this answer maybe a bit like the student, who does not know the answer to the question, but knows the general subject area and responds with some information to show that they have done some study. What they are saying is correct, but if they are not answering your question it is pointless.

I had a look at the prospectus of one of the funds listed by 3CC above:
iShares S&P 500 Monthly EUR Hedged (IUSE).

The prospectus (iShares V Plc Prospectus) is available at: [broken link removed]

Details on Irish taxations can be found starting on page 86.

Here's a short extract from Section 1 (you really need to read the full section though):

(i) Shareholders whose Shares are held in a recognised clearing system
Where Shares are held in a "recognised clearing system" such as CREST, the obligation falls on the Shareholder
(rather than the Company) to self-account for any tax arising on a taxable event. In the case of an individual,
tax currently at the rate of 30% should be accounted for by the Shareholder in respect of a distribution where
payments are made annually or at more frequent intervals. Similarly, tax currently at the rate of 33% should be
accounted for on any distribution or gain arising to the individual Shareholder on an encashment, redemption or
transfer of Shares by a Shareholder. Where the investment constitutes a personal portfolio investment
undertaking ("PPIU"), tax at the standard rate of tax (currently 20%) plus 33% should be accounted for.

So, it appears that the iShares prospectus is inconsistent with Revenue's opinion.

The lack of clarity in taxation of ETF's (even Dublin domiciled, UCITS compliant ones) makes me wary of investing in them.

Quote:
Originally Posted by Duke of Marmalade http://www.askaboutmoney.com/showthread.php?p=1316317#post1316317
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:



That's good enough for me.

My own assessment of the tax situation above is not complete and income and gains on an unregulated offshore fund are likely taxed at your marginal income tax rate. I'll try and clarify but may have run out of favours with my contact if you know what I mean.

Duke, I see you went straight to the Revenue, and yet the answer from the Revenue was to short to be definitive. My own summation is that the grey area sourrounding the tax treatment of investment trusts (my preferred fund vehicle) is so large that you can probably pick whatever way you want to treat them. The line of least resistence may be to opt for consistency and assume same treatment as unit-linked funds. But it is not incorrect to assume they are companies and taxed as such as your reply from the Revenue has just said. This line allows for loss relief, and the Revenue would have a devil of a job saying why it should be otherwise.

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I had always assumed that Investment Trusts were taxed in the same way as any other stock market quoted company. I did a little digging once I saw the posts here in AAM suggesting that they may be subject to tax in the same way as UCITS funds. I think it would be nice if they were but I have seen no hard data (in finance acts, revenue documents, etc) that convince me. Without hard data, I think that assuming same treatment as unit-linked funds is not a good strategy. I don't think Revenue would be in any way understanding if you were audited.

With regard to loss relief, remember that IT's are around since the 1800's and loss relief was available in the old days. It's also available under the UK tax regime today. So, if the tax arrangements for IT's changed, when did they change, under what act,instrument, etc?

Hi Maturin, I had also noted that in the prospectus a couple of years ago when discussing etf taxation on AAM.

Here is a revenue tech guide (written for the fund manager), which when i read it appears to have the same details as you posted above from the prospectus.
[broken link removed]


incidentally the same guide also says (bolding is mine)

The ”gross roll-up” regime applies to certain categories of collective investment funds that
fall within the definition of “investment undertaking”. These are: -
* a unit trust scheme that is or is deemed to be a currently authorised unit trust scheme
under the Unit Trusts Act, 1990 but not special investment schemes as defined in
section 737 or “exempt unit trusts” as defined in section 731(5)(a). Exempt unit trusts
do not come within the terms of the new regime because they are not authorised and
are not deemed to be authorised. However, an exempt unit trust can come within the
terms of the regime if it becomes authorised;
* undertakings for collective investment in transferable securities (UCITS) authorised
under the European Communities (Undertakings for Collective Investment in
Transferable Securities) Regulations, 1989;1
* certain authorised investment companies within the meaning of Part XIII of the
Companies Act, 1990;
* investment limited partnerships within the meaning of the Investment Limited
Partnership Act, 1994; and
* certain wholly owned companies of an investment undertaking categorised above.


The “gross roll-up” regime does not apply to offshore funds within the meaning of section
743, as they do not fall within the definition of “investment undertaking”.

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[broken link removed]
appears to say that off-shore funds within section 743 are any of the following...

This section lists the offshore funds to which the Chapter applies as being —
• non-resident companies,
• unit trusts with non-resident trustees, and
• arrangements which, under the laws of a foreign territory, create rights in the nature
of co-ownership

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Kieran Twomey has written an article in The Professional entitled

The Tax Adviser's Annual Puzzle - Investment Gains and Losses

which I have attached.

Thanks for this Brendan.

There is one section that I cannot understand:

More capital gains?
Gains on EU investment funds have a tax rate of
36% in 2013. However, for a client with capital
gains tax lossest carried forward, a gain on the
EU investment fund is taxable at 36% (because
it is an income gain) with no relief for any capital
gains tax losses.
The tax efficient investment for a client
with capital gains tax losses carried forward
is to receive investment returns in the form of
capital gains.

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Is there a misprint here?

Rory Gillen said:

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

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In my view this is incorrect.

Investment trusts should be subject to "normal" CGT rules rather than the offshore funds rules. An investment in such an entity does not constitute a "material interest" for tax purposes (basically because the investor cannot reasonably expect to realise his proportionate share of the underlying assets within seven years).

3CC said:

Thanks for this Brendan.

There is one section that I cannot understand:



Is there a misprint here?

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Other than "lossest" I don't think there is a misprint, though the language is unwieldy. Which bit do you think is a misprint?

I think the language is is just a bit unwieldy.

More capital gains?
Gains on EU investment funds have a tax rate of
36% in 2013. However, for a client with capital
gains tax lossest carried forward, a gain on the
EU investment fund is taxable at 36% (because
it is an income gain) with no relief for any capital
gains tax losses.
The tax efficient investment for a client
with capital gains tax losses carried forward
is to receive investment returns in the form of
capital gains.

Click to expand...

I presume this just means that EU investment funds are taxed at 36% and you cannot offset capital gains losses against profits made in EU investment funds.

3CC said:

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

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3CC said:

Hi SPC100,
<snip>
Sure, The ETF's I inquired about were:
<snip>
Name of ETF
Ticker Code
ISIN
Currency

iShares MSCI Europe (Acc)
(SMEA)
IE00B4K48X80
Euro

Click to expand...

I got a reply from a named revenue employee about this ETF. It was a technical reply referencing tax code etc.,. so I would be inclined to believe it.

The reply confirmed the tax situation is different for different ETFs.

in summary, they said in relation to this fund;

• This ETF is listed on www.ifsra.ie as an authorised UCITS wef 3/7/2009
• therefore, It is taxed under the "gross roll up" regime. i.e. exit tax on payments and 8 year rules apply
• No annual tax is due as there is no annual payment from this ETF.
• No CGT tax due, and therefore no loss offsetting allowed.
• There is no requirement to declare the acquisition of units in an Irish authorised fund.
• You need to submit a Form 11 for any year in which you receive a payment from the fund.
  

It would be worthwhile for some others to enquire about this same ETF fund, and look for a reply from a named individual.

3CC maybe you could follow up on your communications, referencing mine, and look for confirmation/explanation?

> This ETF is listed on [broken link removed] as an authorised UCITS wef 3/7/2009
I had never checked this useful register before. Were I investing in an ETF, I would try to choose one from it. It's available at:
http://registers.centralbank.ie/FundSearchPage.aspx

As an example, a search for "MSCI EMERGING" under "Collective Investment Schemes" generates 11 hits.

Interestingly, there's also a register of authorized investment companies (Authorised Designated Investment Companies, Companies Act 1990 Part XIII ). There's been an argument that UK registered Investment Trusts fall under Part XIII taxation provisions but no IT's are listed in the register at http://registers.centralbank.ie/DownloadsPage.aspx