Key Post The Tax Treatment of ETFs for Irish residents

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Marc

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We have completed a detailed analysis of the tax treatment for an Irish investor which can be found here

Global Wealth Tax Guide 2020 v1.0​

This guide sets out the issues Irish Resident and Domiciled investors should consider in order to ensure that their investment portfolio is the most suitable for their particular requirements. We summarise Personal and Capital Taxes in Ireland along with the taxation of different fund...
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We have considered many marginal tax issues that most commentators ignore such as DWT

Case study - Why do dividend withholding taxes matter?​

The following is from a presentation I gave at Alan Moore's Tax and Wealth seminar in 2019 Joe and Mary are aged 71 and each have State Pension income of €12,000pa and rental income of €10,000pa They have €500,000 to invest for income Assuming a yield of 2% this will generate additional...
www.askaboutmoney.com

we also have ex-post results for portfolios of US and Canadian ETFs as well as our U.K. Investment Trust portfolios.

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Or for those looking for a socially responsible investment strategy and tax efficiency

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Yep.

Their view is that US ETFs, EEA ETFs and OECD DTA ETFs are treated like shares (income tax etc on distributions and CGT on gains).

Their view is that ETFs domiciled elsewhere are subject to fund tax.
 
mrbrian said:
Based on my wish to pursue a regular investment plan, investing in broad ETF's that replicate major stock indices over a long term, it's clearly more advantages to use US domicile ETF's. My only concern now is the major currency exposure
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Couple of options I believe:

1. Buying an ETF for US stocks? Just buy the US domiciled ETF, rather than the Irish domiciled one. Currency exposure is the same.
2. Buying an ETF for European stocks? Buy a US-domiciled but euro-hedged European stocks ETF

Some complexities regarding US witholding tax and slightly higher TER for hedged ETFs, but overall still better than the alternative.

Am I right?

Possible problem is the lack of capitalising/accumulating US ETFs.
 
I have read revenue info (search revenue.ie for ETF). I understand income (dividends) from US domicile ETF's are subject to USC and PRSI. This will chip away at investment gains.

Are there any US based ETF's that automatically invest back in dividends? Can you choose such an option e.g like shares?
 
Try looking at ETFs that are accumulating ETFs which are easily identifiable on FT.com or etfinfo.com which shows those that are income over those that are acc as per the link below.

http://www.etfinfo.com/en/search/?q=company:ishares&p=11

How does reinvesting dividends save you from income tax at 40%? All dividends are subject to income tax at your marginal rate. Add USC and PRSI then investing in these is not worth it over shares. Share CGT is 33%, no PRSI or USC.

Why oh why does this country penalise investors and treat ETF different to other countries.
 
It's good that revenue have made this clear.
Now I know what I'm dealing with I will have to change my portfolio of ETF's.

All my ETF's are Irish domiciled so will be subject to 41% exit tax at 8 years thats simple to work out. The problem is you can't deduct the losers from the winners so I don't see a point in holding bonds that I do currently and emerging markets , Europe and world ETF's , I'm just going to hold one ETF an all world ETF and the other cash I would have used to diversify into bonds etc. I will keep on deposit. I am still getting amazing diversification that I would struggle to get by investing directly in shares , there is over 1500 holding in MSCI world , so thats what i'll be doing sell everything else I have pay exit tax now and buy one world ETF and forget it for 8 years.
 
I currently have some Irish domiciled capitalising ETF's and in light of the recent release from the Revenue, I wondered if I am better looking at ETF's based in the US? Unfortunately, there do not seem to be many capitalising ETF's available over there (see [broken link removed]). So I did a comparison between

an Irish/EU capitalising ETF taxed at 41% and the 8 year deemed disposal rule

OR

a US distributing ETF taxed like a share with CGT=33% and income taxed at 41% etc.

Note that although the exit tax rate is higher for the former, this is to some degree offset by the the ability to roll up income for 8 years. I did some calculations for typical returns rates over an 8 and 16 year period and as far as I can see, the tax liability is the very similar for either the two cases above, for a higher rate taxpayer. For a low rate taxpayer, I presume the dividend payments would attract the lower rate of tax making the latter option more preferable.

I realise that there are other considerations such that the ability to carry forward previous CGT losses, but from a tax point of view capitalising ETF's seem to be just as efficient and maybe less administration that shares or share-like US distributing ETF's.
 
I got the following reply from Revenue regarding the eight year rule, it might clear up a few things for people:

I refer to your queries below.


1. If you acquire an interest in an Irish domiciled ETF you do not need to notify Revenue. However, for any year in which you acquire an interest in an EU domiciled ETF then you must notify Revenue of same (via (h) – (j) of line 319 (Offshore Funds) of Form 11).

If you acquire new units each month, you will have a deemed disposal in respect of each acquisition in 8 years time, unless, of course, you sell the units before you’ve held them for 8 years. If you receive a payment (e.g. an annual distribution) from either an Irish or EU domiciled ETF, you must return the details of same on Form 11.

You do not need to complete a Form 11 on each occasion that you receive a payment or have a deemed disposal, rather you will total all payments and/or all gains for the year of assessment and enter the relevant details at (a) – (f) of line 319 of Form 11 and submit the return and payment in the October following the year of assessment. See page 1 of Form 11 for further details in relation to filing/payment dates.

If, say, you commence purchasing ETFs on a monthly basis in June 2015, by the end of 2015 you will have 7 different ETFs. If you hold these investments for 8 years, you will return the total of the deemed disposals of the 7 ETFs on the various dates in 2023 in you tax return in 2024. And so on for subsequent purchases.


2. Because US ETFs are not regarded as having structures and regulation that are similar in all material respects to Irish ETFs, they are taxed as share investments generally. Income payments i.e. annual distributions/dividends will be subject to income tax at the standard or higher rate as appropriate, and gains on disposals will be subject to capital gains tax. The deemed disposal provisions apply to gross roll-up funds only. However, PRSI and USC will apply.

I hope the above helps clarify the issue.
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joe sod said:
As regards currency exposure with US domiciled ETFs, this is not an issue, for example I own a Vanguard european ETF in a Us account quoted in dollars, even though the european market has gained in the last year the ETF is basically hovering at the value it was a year ago in US dollars, but the euro has depreciated 23% therefore effectively I have ETF worth 23% more in euros than it was a year ago. Of course if I had of chosen a dollar hedged ETF it would have performed much better but I am not american so dollar hedging is not so important to me. At the end of the day you own an ETF which has a basket of shares it is irrelavant what currency those shares are quoted.
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Hi Joe...I am new to stock market investing, so I have a question regarding your comment that it is irrelevant what currency your ETFs basket of shares are quoted in.... Perhaps I'm not understanding this but I thought it would matter about the currency ?

For example You invest in a U.S. domiciled WORLD FUND denominated in US dollars .....I see this as having a double currency risk...
1. Euros are converted to dollars to purchase the fund. You invest for 10 years and during that period the value of the Euro against the dollar strengthens. When you sell your portfolio after 10 years your profits would've been dampened by the increased value of the Euro.

2. If you buy this ETF, you will be exposed to currency risk within the ETF. For example, the base currency of this world ETF fund is USD, but this world ETF will invest in many different countries stocks and therefore in many different currencies. If the fund invests entirely in non U.S. stocks for example and during the investment period the dollar strengthens against those other currencies, then the value of the fund in dollars would be less.

Would this be reflected in a lower share price?

Does this make sense ?
 
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I want to ask a question thats probably stupid so apologies!
With ETF's there is no loss relief , i'm buying regularly but just using one ETF , I look on Saxo and under MSCI world I have loads of purchases of 10k worth of MSCI world , some of them are showing as a loss and some of them at a profit , I seriously hope i'm right that when it comes to paying exit tax I can deduct the losses from the gains before paying tax , i'll probably have to sell them all 8 years after buying the initial one to make the tax accounting easier.
 
Unfortunately each time you make a purchase of a UCITs ETF its treated as a distinct investment even if it is in the same "fund"

So you will have to pay tax on your gains even if some of your investments are showing a loss

The Sunday Business Post has a supplement on fund investing this weekend which I was asked to contribute to.

Just a thought but who would be willing to sign a petition to lobby to get this crazy situation changed?
 
That's absolutely crazy so buying the same fund over and over doesn't help with the tax treatment of ETF's , I've gone from buying all world ETF's government bond's emerging markets etc to selling everything and just keeping one world ETF thinking I can buy into that regularly , man I feel pretty stupid now assuming that loss relief would apply in this case.

I'm feeling pretty despondent about the whole thing now and may just take all money out and stick it in the bank , I'm earning money quicker than inflation , this country is a bloody joke , what hope have people got of investing for the future when it's so difficult .

Thanks Marc for your reply , I obviously would sign a petition.
 
Could anyone point me toward more info on etfs domiciled in the U.S? i.e. when to fill out a W8-BEN form, declaring income from dividends to revenue, etc.

It just seems to me that for regular monthly investing, buying a UCITS etf would just be a huge headache in eight years so I'd like to read up on the other options as its my understanding that they're treated like shares for tax purposes?
 
It looks like US etfs are the way forward.
When purchasing US etfs do you need to notify Revenue?

Has anybody also looked at trading through degiro? they seem very cheap for investing in etfs compared to other brokers.
 
Fella said:
That's absolutely crazy so buying the same fund over and over doesn't help with the tax treatment of ETF's , I've gone from buying all world ETF's government bond's emerging markets etc to selling everything and just keeping one world ETF thinking I can buy into that regularly , man I feel pretty stupid now assuming that loss relief would apply in this case.

I'm feeling pretty despondent about the whole thing now and may just take all money out and stick it in the bank , I'm earning money quicker than inflation , this country is a bloody joke , what hope have people got of investing for the future when it's so difficult .

Thanks Marc for your reply , I obviously would sign a petition.
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I have to disagree slightly with above. I emailed Revenue and they confirmed you do not ignore losses on same ETF sold in same tax year. Hence buying monthly batches of one ETF doesnt sound like the worst idea, as long as you sell entire fund in one tax year eventually. Similarly for deemed disposal, you'd include 12 buys in calculation for tax due, whether they are up or down, as they are deemed to be sold in same year. In examples below you include the E50 loss in tax calculations, as long as ETFs are same fund AND sold in same tax year.

I laid out below to Revenue, and they agreed all four are correct, via email.

1) Selling 2 shares of same ETF in same year (bought at E100 and E200 respectively, both sold at E150)
Here, since its the same fund AND the sale is in the same tax year, there would be a null gain, and no tax due.

2) Selling 2 shares of same ETF in different tax year (bought at E100 and E200 respectively, both sold at E150)
Here, even though its same fund, the sales are in different tax years, so there is E50 gain in first year and loss in second. Hence, there is E50 gain taxed at 41%.

3) Selling 2 shares of different ETF in same year (bought at E100 and E200 respectively, both sold at E150)
Here, since they are not the same fund it doesn't matter that they are sold in same year. Each fund is calculated independently. So there is gain on first ETF, and loss in second, which results in E50 gain being taxed at 41%.

4) Selling 2 shares of different ETF in different year (bought at E100 and E200 respectively, both sold at E150)
As point 3 since they are different fund.

Dunno if anyone still cares about this but that's what I was emailed from named Revenue source.
 
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trickortrade said:
In light of all the above, is any of you guys trading in US domiciled ETFs as an Irish resident? If so, could you give some tips on which (preferably) execution-only services lets you buy these? From what I could find both TD Direct Investing and Davy Select offers only UCITS ETFs.
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I moved from TD waterhouse to Degiro because they had a much better choice of ETF's
 
Just say you hold a US domiciled ETF of european shares for example iShares France ETF. This ETF will have individual french shares. It will also pay out a headline dividend of around 2.5%. However if you were to hold french shares in their own right for example BNP paribas you would be charged french withholding tax of 30%. What happens to witholding tax for shares held within an ETF, is witholding tax withheld by the french revenue before it is received by iShares ETF and if it is what percentage witholding tax would be charged for each individual share. I am still charged withholding tax on the 2.5% headline dividend rate of the ETF. So is it the case that withholding tax is deducted twice first before it is received by the ETF and again when it is paid out to the ETF owner
 
I don' know how the US ETF receives the dividend and in fact this is irrelevant to you as an investor in the fund - well apart from the fact that the fund is paying taxes etc.

Any dividend paid by the fund may have American tax withheld but you will get credit for this from the revenue because of Double Taxation treaty with USA
 
I understand that that the US withholds 15% dividend tax. However if I held BNP paribas 30% tax would be deducted by French dividend tax if held in a US account however the US would not then deduct any tax after that. However the US deducts 15% from iShares France ETF even though BNP Paribas is held in that ETF. My question is am I being taxed twice for foreign shares held within an ETF rather than holding them outright. Also if it is the case that the ETF has tax withheld before it receives them from french companies I do not get any tax credit for that only for the tax witheld when the ETF pays out.
 
Praetor said:
You can buy any ETF listed on the NYSE via TD Direct, at least as far as I can see in my account
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Unfortunately you are unable to buy the EU UCITS ETFs with TD that's why I changed to Degiro.
 
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