Key Post The Tax Treatment of ETFs for Irish residents

Hi Marc

Does the feedback username123 got from from the revenue contradict this? They said:
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.

 

Revenue advice is related to buying same ETF monthly. If buying different funds, you total the gains of each ETF individually. At the end of the eight years, sum of ETF A purchases could be down and sum of purchases of ETF B up, but you must pay tax in full on profit from ETF A - you can't offset the loss on B to reduce your tax bill.

 

Hi username123, yup I understood that but Marc seems to imply even if you are buying the same fund monthly you can't offset:

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

 

I posed this question to revenue by email

Question

In August 2015 I buy 100 units of MSCI world ETF at 30euro a unit total cost 3000 euro
In September 2015 I buy 100 units of MSCI world ETF at 50euro a unit total cost 5000 euro

Fast forward some time and I wish to dispose of them

The price on the stock market is 40euro for 1 unit of MSCI world ETF

So...
I now own 200 units at an average price of 40 euro a unit therefore my total holding is 8000 euro and my
total investment is 8000 so I have made no gain , your website says I can use First in First out for calculations or average cost.

Can you clarify if the tax due would be 0 as

I would be -1000 for the August 2015 ETF
And +1000 for the September 2015 purchase or is tax due 41% of 1000 = 410 even though I have not made a gain .

Reply
The reply was the tax due is 410euro

As you are aware, you can use either the average cost basis or FIFO basis for calculating the gain of the disposal of units. Whichever basis you choose, you will have to continue to use that basis for subsequent disposals. My view is that the FIFO basis is the simplest approach as it makes it easier to identify which units are subject to a deemed disposal. You are correct when you state that each purchase is a distinct purchase and no loss relief is available as a loss in treated as a nil gain.


So you add up all your profitable ETF's and use an average but you treat losing ETF's as 0 for calculations purposes , this is the main reason I have moved from ETF's to other ways of investing , that for me is grossly unfair and no use for people who want to top up regularly.

 

Ya it's def complicated either way!

I can see how it is half manageable if you only making a purchase a couple of times a year, but as a monthly investment vehicle I can only see it being a book keeping nightmare come 8yrs and on-wards.

2016 12 buys hit 8yrs in 2024
2017 12 buys hit 8yrs in 2025
2024 12 buys hit 8yrs the same year as your 2016 12 buys hit 16yrs

And that just the 'happy path'! Add in part encashments out of some of these 'tranches' and also perhaps funds getting renamed and underlying charges restructured, which can result in you having to sell and rebuy.

Ahhh, at this moment in time it just looks a feckin head wreck!

For now I might just go with the route overpaying my mortgage vs investing. I've read quite a bit recently about studies done on 'real' returns vs nominal on the investing. Post all the charges, fees, taxes you doing well to hit a greater % number than that of my mortgage interest rate. And over paying a mortgage is much more straightforward then all the tax hassels above.

Anyway, t'is Christmas now so time to park the brain on all this stuff

Have a good one.

 

Well my email from revenue contradicts yours then Fella! They said to me that the -1000 is counted and offsets the +1000 resulting in no tax due (see my post on previous page).

 

What chance have we got if revenue themselves give out contradicting information it is an absolute farce, I emailed Susan and had the reply.

 

Replying to myself at this stage!..........I am now seriously thinking about selling both my bond and EuroStoxx ETFs and retaining just the IWDA world equity ETF (and using regular deposit accounts as the fixed income part of portfolio). I may also investigate US/Canada domiciled ETFs, but the whole dividend & withholding tax sounds like awful pain.

After re-reading this again and thinking about it more, its clear now that the tax situation with UCIT ETFs is just not acceptable. Specifically, if my IWDA ETF is up 10K and STOXX50 is down 10K (on deemed or actual disposal) I have to pay 41% tax on IWDA profit, leaving me at a E4100 quid loss.

If in future they do change the tax laws it I'd buy back in, but for now I think having a portfolio with multiple UCIT ETFs is just silly.

Any thoughts on retaining just the one IWDA ETF?

 

Can you buy US domiciled ETFs from Ireland that accumulate dividends instead of distribute them?

In the great bogleheads site they advice against using US domiciled funds if living in Europe. (bogleheads /wiki/EU_investing )

I quote the following from their site:
"The biggest difference between US domiciled ETFs and EU domiciled ETFs is that EU domiciled ETFs can reinvest the received dividends/interests, without distributing them...

... The problem with distributing ETFs is that you may have to pay dividend tax in your home country, then when you reinvest the dividends you must pay brokerage commissions, and also the bid/ask spread. These problems often do not exist in capitalizing/accumulating ETFs.[note 1]"

Does this make sense?

 

0.1% for an automatic currency conversion transaction......very cheap !!!

 

Yes but that advice is for Europe in general, Ireland has this huge distinction between ucits (etfs and funds ) and normal shares in terms of taxation which is not the case in the rest of Europe. There may be the disadvantage with us domiciled etfs in relation to dividends however in my opinion this heavily out weighed by the advantage that they are taxed like shares so no disposal tax just cgt if you have made a capital gain.

 

No that is exactly what I was looking for 6 months ago. US domiciled ETFs legally must distribute I.e. Pay dividends.

 

So us domiciled etfs are better in terms of cgt vs exit tax... But would it not be a huge problem if you have to pay Tax each time you get dividends? currency exchange rate fees , dividend tax (income tax+USC+PRSI) and then pay brokerage commissions to reinvest the dividends?

Cheers

 

If you are regularly investing, then not really. And in any event so what if it is? Get an EU accumulator and be subject to ExitTax/deemed disposal or get US and pay CGT/Income. Them's the rules. No point complaining about it.

 

Yes, I agree with that

Ok , so if in a given year I have one US ETF fund with a 1000E profit and another one with a 1000E loss, and I sell both -> CGT=0,
But 2 EU ETFS invested in the same year, and a similar profit loss case as in the above example -> exit tax/disposal after 8 years = 410E

Is this it? Can you also confirm the 8 years rule does not apply to US domiciled ETFs?

Thanks for all your replies and help!

 

Yes. All of the above is correct.

 

Revenue released a note recently with above about US v UCIT being CGT v exit tax (just Google for it, it's readily available)

 

thanks, it is now clear to me that US domiciled ETFs are a better vehicle than Irish ones. At least in 2016

There is just another thing I still cannot fully understand, is the way the US withholding tax works for dividends. I have read mentions of it, but no practical examples. Would that be taken off before the Income tax is applied to it? How much is it and how do you pay it?

Thanks again. I will read revenue's guide too.

 

Re: USA withholding tax

I have found the answer online, which I ill summarise it in here in case it can help someone
- There is a 30% withholding tax on US shares for non-residents, but if you complete the W8-Ben form, you pay 15% withholding tax instead.
- the remaining 85% of the dividend is then assessed by revenue.
- The 15% withheld by the US Revenue is deemed as tax already paid

Cheers

 

Almost. However AFAIK you declare the gross dividend on your Irish tax return and claim a credit for the US tax paid.