ETF Tax In Ireland
Understanding ETF tax in Ireland is important for every Irish investor. As exchange traded funds (ETFs) continue to grow in popularity, there is still much confusion about how they are taxed. This guide explores everything you need to know, including the tax implications of investing in an ETF.
Reading time: 20 min
Written by:
Dan Malone
How ETFs Are Taxed In Ireland
Irish tax residents are liable to tax at a rate of 38% on gains made from the sale of ETF investments. Income earned from holding ETF investments is also taxed at 38%.
Irish Domiciled ETFs
One concept that's important to understand is domicile. This is used to indicate the country of origin of a collective investment fund (CIF), such as an ETF. When you hear the term ‘Irish domiciled ETFs’, this refers to ETFs that are established in Ireland and regulated by the Central Bank of Ireland. An ETF’s domicile can affect the taxes that you pay.
Key Insight: If a fund is Irish-regulated or is deemed to be ‘equivalent’ to an Irish-regulated fund by Revenue, then the gross roll-up regime will apply. That means 38% tax and the eight year deemed disposal rule will apply, where unrealised gains on ETF shares are taxed every eight years. We explore deemed disposal in more detail below.
If the fund is ‘non-equivalent’ to an Irish-regulated fund, it will be taxed like a regular company share: income tax, USC and PRSI on dividends and capital gains tax on realised gains, with no deemed disposal. There are exceptions for funds based in non-OECD countries.
ETF Tax vs. Taxes On Other Investments
ETFs are taxed differently to gains realised on the sale of company stocks or dividends received from share ownership.
Capital Gains
ETF taxation is unfavourable for Irish investors from a capital gains perspective, given that the rate of capital gains tax (CGT) on most investments, including company stocks, is 33%. This means that for every €100 gain in an ETF, €38 goes to tax. For every €100 gain in a company stock, €33 goes to tax. In other words, you’re paying 15% more tax on ETF gains as compared to gains made on company stocks.
| Gains Tax - ETFs | Gains Tax - Stocks |
|---|---|
| 38% | 33% |
To learn more about capital gains tax on stocks, check out our Investment Gains Tax guide.
Dividend Income
When it comes to income, ETF taxation is actually favorable for Irish investors, specifically those investors who are also higher rate taxpayers. This is because dividends received from owning a company stock would be liable to marginal rate income tax, USC and PRSI. Given how early taxpayers enter the higher tax brackets in Ireland, for most investors, tax will be paid on any dividends received at rates as high as 52.2%.
Comparatively, dividends received from ETFs are liable to tax at a flat rate of 38%. USC and PRSI do not apply. As a higher rate taxpayer, you could be paying 27% less tax on dividends by investing in ETFs. However, as a standard rate taxpayer, you could be paying 40% more tax on dividends by investing in ETFs. This creates a large disparity between the tax paid by higher rate and standard rate taxpayers.
| Income Tax - ETFs | Income Tax - Stocks (Higher Rate) | Income Tax - Stocks (Standard Rate) |
|---|---|---|
| 38% | 52.2% | 27.2% |
Key Insight: Ireland has a unique tax treaty with the United States. Irish domiciled ETFs are only subject to U.S. dividend withholding tax at a special rate of 15%. In comparison, an equivalent Luxembourg domiciled ETF would be liable to U.S. dividend withholding tax at a rate of 30%.
That means Irish domiciled S&P 500 ETFs will retain a greater percentage of the dividends that they’re paid, which means greater returns for investors. That’s one reason why over 70% of the total European markets’ ETF assets under management (AUM) are attributable to Irish domiciled ETFs.
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Deemed Disposal
The most well-known aspect of ETF taxation in Ireland is the existence of the deemed disposal rule. The investor will be deemed to have sold and immediately repurchased their ETF shares 8 years after purchase, if:
- 1
The shares have not been sold; and
- 2The value of the shares exceeds the price originally paid
This results in a charge of 38% tax, and this happens every 8 years.
Unlike ETFs, unrealised gains on company stocks are only liable to capital gains tax when they become realised by virtue of the investor selling their shares.
Key Insight: When you do sell your ETF shares, a tax credit will be given for any tax you've already paid as part of the deemed disposal rule. This ensures that you’re not paying tax on the same gains twice.
If you sell for a lower gain than what was calculated for deemed disposal, or if you sell at a loss, you’ll have overpaid tax. In that case, you’ll be entitled to a refund.
Gross Roll-Up Regime
It’s important to understand why the Irish tax rules for ETFs are different to company stocks. The answer lies in what ETFs actually are. An ETF is a type of collective investment scheme (CIS).
Collective investment schemes in Ireland are taxed under the gross roll-up regime.
Gross Roll-Up Explained: Irish tax law allows collective investment schemes, like Irish domiciled ETFs, to earn tax-free investment returns. When the ETF realises capital gains and receives investment income from its underlying investments, the fund pays zero tax.
Why Gross Roll-Up Exists
The logic is that if the Government were to tax ETFs on their capital gains and investment income there would be a double charge to taxation. This is best visualised by thinking of a dividend payment.
Let’s say an Irish domiciled S&P 500 ETF receives €1,000,000 worth of gross dividends from the underlying S&P 500 companies which the ETF owns. Provided the ETF is a physical ETF and not a synthetic ETF, the U.S. companies will withhold €150,000 of this payment as U.S. dividend withholding tax. This is a real, non-recoverable cost to the ETF. The net dividend received by the fund will be €850,000.
Now, let’s say the Government were to take €200,000 of this dividend as tax. The ETF would be left with €650,000. What would happen if the ETF then paid this €650,000 out to the ETF investors as a dividend? The investors would also be taxed. So, a dividend that has already been taxed at the ETF level would be taxed again at the investor level. The same income would be taxed twice.
Key Insight: To prevent this double taxation from happening, and to make collective investment schemes more attractive, tax is only collected by Revenue at the investor level. That is the most important point about gross roll-up to understand.
The Value of Gross Roll-Up
Many Irish investors fail to recognise how valuable the gross roll-up regime actually is. If you invest in a distributing ETF, which pays out dividends, you’re only paying tax at 38%. That’s significantly lower than what most investors would be paying if they received dividends directly from the underlying stocks.
Because Irish domiciled ETFs aren’t required to charge dividend withholding tax, you also receive the full value of your dividend upfront. This wouldn’t be the case with dividend-paying stocks. This gives the ETF investor an upfront cash flow advantage.
If you invest in an accumulating ETF, which reinvests dividends, you skip having to pay tax on the dividend altogether. This means that the full value of your dividend is reinvested by the ETF and is permitted to grow tax free for 8 years until the deemed disposal charge arises.
Did You Know?: UK tax law states that ETF investors have to pay tax on ETF dividends regardless of whether they’re distributed or accumulated. This makes Ireland’s current tax treatment more favourable by comparison.
Why Deemed Disposal Was Introduced
When the gross roll-up regime was first introduced in 2001, the rules stated that tax would only be owed by an investor when they sold their investment. By utilising accumulating funds, long-term investors would never have to pay tax on dividends that accrued in their name. The fund would simply reinvest the dividends and no tax would be paid.
The long-term investor would also avoid having to pay capital gains tax, because the fund holds the investments and is the beneficiary of any gains, but the fund doesn’t pay tax. Gains realised by the ETF could be reinvested tax free for the investor's benefit indefinitely.
The only time the investor would ever have to pay tax would be when they eventually sold their investment. But for long-term investors, they could hold off selling for 20, 30 or even 40 years. Revenue would have to go that entire time without ever receiving a cent of tax from either the investor or the fund. To prevent this from happening, the Government introduced the deemed disposal rule.
Accumulating vs Distributing ETFs
There are two types of ETFs for Irish tax purposes: accumulating ETFs and distributing ETFs.
Accumulating ETFs will not pay you a dividend directly into your online brokerage account. Instead, it will reinvest the dividend into the fund tax free for your benefit. This is the gross roll-up regime in its truest form.
Distributing ETFs will pay you out a dividend directly into your brokerage account. The downside here is that you'll have to pay tax at 38% on the dividends that you receive from these ETFs, so you're losing some of the benefit of gross roll-up when you invest in a distributing ETF.
The fact sheet of the fund you're looking at will tell you whether or not the ETF is an accumulating ETF or a distributing ETF.
ETF Losses
It’s worth noting that losses on ETFs are ringfenced. What this means is that if you lose money on an ETF investment, that loss can’t be used to reduce your taxable gains on any other investments. This differs from company stocks, where losses can be used to offset realised gains on other investments, but not ETFs.
Did You Know?: Irish tax resident investors are required to disclose their purchases of ETF shares in their tax return.
Why ETF Tax In Ireland Needs To Change
The Commission on Taxation and Welfare published a report entitled ‘Foundations for the Future’. In the report it was noted that differences in the tax treatment of investments can lead to distortionary behaviour among investors. This is where investing decisions are made on the basis of tax rather than investment outcomes. There is no better example of this than with ETFs.
Many Irish investors will discard all of the benefits of ETF investing in favour of individual stocks, just because the tax rate is higher. However, they’re assuming that their investment results with individual stocks will be, at a minimum, on par with the return associated with ETFs over the same investment period. This is highly unlikely – especially over longer time periods.
Key Insight: There may be a need for the Government to deal with the taxation of ETFs separately to the taxation of other collective investment schemes. ETFs are very different in terms of how they operate compared to mutual funds and life assurance products. The latter would have been the dominant collective investment structure at the time the gross roll-up regime and deemed disposal rules were introduced.
ETFs inherently generate less taxable capital gains than other funds due to the way that ETF shares are created and redeemed. This is done through in-specie transfers of ETF shares and shares in the underlying companies with the authorised participant (AP). Index funds as a whole also generate less taxable capital gains than actively managed funds.
When it comes to index fund ETFs, the Exchequer isn’t necessarily missing out on as much tax revenue, by foregoing a tax on capital gains at the fund level, as they are for other collective investment products. Therefore, it may not be appropriate to consider all collective investment schemes as being equal in terms of tax potential.
Funds Sector 2030 Report
The initial report of the Commission on Taxation and Welfare led to a Funds Sector 2030 report being published by the Government. The three major recommendations in the report regarding the taxation of Irish domiciled funds and equivalent products were:
- Remove the eight-year deemed disposal requirement
- Align the rate of tax applicable to investment funds with that of capital gains tax, currently 33%
- Allow for a limited form of loss relief on ETFs
This led to a small reduction in the tax rate applicable to gains and income from collective investment schemes to 38% from 41%.
What Any ETF Tax Policy Changes Need To Achieve
The Government will want any ETF tax policy changes to result in either more tax revenue for the Exchequer or, at a minimum, the same amount of tax revenue that was generated under the old policies. Any policy changes should also seek to:
Simplify the taxation of investments to provide certainty to taxpayers, reduce administrative burdens, reduce the risk of errors and support tax compliance.
Increase tax neutrality so that investment outcomes, not taxation, are the guiding factor when making investment decisions.
Our Proposed ETF Tax Changes
With that in mind, here are the ETF tax policy changes that we propose to Government:
Investing in Irish domiciled ETFs is much more attractive to foreign investors than it is to Irish tax resident investors. This is inequitable. Foreign investors aren’t liable to deemed disposal taxation. They can invest in Irish domiciled accumulating ETFs and enjoy decades of tax-free growth. Irish investors on the other hand have to account for tax on unrealised gains every 8 years.
The Government might argue the point that because the investor receives a tax credit for deemed disposal tax paid, when they do eventually sell their shares in the future, the net tax paid will be the same as if they had only paid tax at the point of sale. We would disagree, because a euro paid today is worth more than a euro paid in the future.
There are five reasons why deemed disposal needs to be reconsidered by Government:
ETF Popularity
ETFs have become a staple of every investor's portfolio. The data has proven that investing consistently in low-cost, passively managed index fund ETFs is the best way to invest for the long-term. Online brokers like Trade Republic, Trading 212 and Lightyear, among others, are allowing Irish investors to invest in these ETFs with little to no brokerage costs. And with the advent of fractional share investing, it’s now possible to invest in ETFs for as little as €1. There has never been a better time in modern history to be an investor than right now, but deemed disposal is holding Irish investors back.
Opportunity Cost
Deemed disposal requires Irish investors to choose between two options. Neither of these options are favourable.
Option 1: have cash set aside to cover the cost of deemed disposal tax liabilities. There’s an opportunity cost associated with this. The cash could have been used to make further investments.
Option 2: sell some of the ETF holdings in order to cover the cost of deemed disposal tax liabilities. Again, there’s an opportunity cost. By selling a portion of the ETF investment, the investor is foregoing the additional gains or losses that would have accrued to the investor had the holdings been kept.
Distortionary Behaviour
Deemed disposal causes distortionary behavior among investors. It’s hard enough for a beginner to get to grips with investing as it is. But when that beginner sees the minefield of tax rules around ETF investing in Ireland, it can be off-putting – considering ETFs are globally marketed as being beginner-friendly products.
As a result, prospective investors will either:
- Give up entirely and decide to keep all of their money in the bank, which is a disastrous outcome; or
- Attempt to invest in individual company stocks, which could result in an even more disastrous outcome.
For a country faced with such a stark retirement crisis, we fail to understand why we’re punishing investors for utilising the most proven products for wealth accumulation.
Estate Planning
Even death can’t save you from deemed disposal. Say an individual invests €100,000 into an ETF. Six years later, that investment is worth €300,000 and the individual dies. The individual specified in their will that their investments were to be left to their only child. As such, at the date of death, the gain of €200,000 will be taxed at 38% resulting in a tax liability of €76,000.
That tax liability of €76,000 will have to be paid from the estate one way or another:
- The child may receive the full €300,000 worth of shares, at the cost of a lower estate value for other dependents; or
- The child may receive a lower number of shares if some of the shares are sold to cover the tax liability.
In either case, the existence of a deemed disposal on death complicates tax planning. This isn’t the case for regular investments.
Key Insight: Deemed disposal tax on death is deducted before the taxable value of the ETF shares is calculated for Capital Acquisitions Tax (CAT). If the ETF gain at death was €100,000 then €38,000 would be owed as Exit Tax. Assuming no CAT thresholds are available, the remaining €62,000 would be taxed in the hands of the beneficiary at 33%, giving rise to CAT of €20,460.
Therefore, the total tax paid on the gain would be €58,460. That’s an effective tax rate of 58.46%! This ignores any CAT due on the inherited capital too. To make matters worse, unlike with Capital Gains Tax (CGT), there is ‘no same event tax credit’ that allows the exit tax incurred to be offset against the CAT due.
Administrative Burden
The administrative burden of deemed disposal is too heavy on the modern-day investor. The vast majority of ETF investors use some form of a euro cost averaging investment strategy. In other words, most investors are buying shares in ETFs every single month. From a tax administration perspective, this means that the average ETF investor, employing a euro cost averaging investment strategy, will have a deemed disposal tax liability every single year after the first 8-year anniversary.
This has a distortionary effect on investor behavior because it inherently encourages lump sum investing over euro cost averaging. Lump sum investing will result in a more straightforward tax administration exercise. However, the investor's decision between lump sum investing and euro cost averaging should be made on the basis of unique personal circumstances and desired investment outcomes, not taxation.
Key Insight: The Government’s concern is that, without deemed disposal, tax won’t be collected from investors. This concern is blown out of proportion. Most investors who are investing in ETFs are doing so for the purposes of wealth accumulation over multiple decades. The intention, more often than not, is to live off of this wealth in retirement in addition to any pension provisions that the individual may have. It’s at this point that tax would be collected, just like it would with other forms of unrealised gains.
Yes, the individual could pass away before they sell their assets and, in the absence of deemed disposal, those assets could pass to the next generation tax-free. But is that really a bad thing? We are faced with an unprecedented retirement crisis and the promotion of individual wealth accumulation should be a top priority for the Government.
Sure, it could be decades before the Exchequer sees tax revenues, but at least your citizens will be accumulating wealth in one of the most data-proven and cost-effective ways possible.
The Government should apply 33% capital gains tax to ETF gains and marginal rate income taxes, USC and PRSI to ETF dividends. This will result in a simplification of the taxation of investments. The exchequer will receive less tax revenue from every €100 of ETF gains but more tax revenue from every €100 of ETF dividends.
Key Insight: By reducing the rate of gains tax on ETFs from 38% to 33%, more people will start investing. This would result in larger net tax revenues for the Exchequer over the long-term. This is especially true when you consider that an individual's capital is much more valuable to the Exchequer when it's invested, as compared to being left on deposit in a bank account.
Why? Because deposit interest rates are abysmal, which means the tax-take from deposit interest retention tax is also abysmal. Contrast this to the equity markets which have returned, on average, about 9% annually over the past century. The Exchequer will participate in this appreciation to the extent that taxable persons participate in the equity markets.
All dividends accruing to ETF investors should be taxable, irrespective of whether the ETF is accumulating or distributing. The primary benefit of accumulating ETFs to investors should not be the avoidance of tax on dividends. This is inequitable when compared to the tax treatment of investors who own the underlying dividend-paying stocks directly.
The primary benefits of accumulating ETFs should be convenience and the avoidance of additional brokerage costs. This policy change would result in a significant additional annual tax-take for the Exchequer, especially when paired with the application of marginal rate income taxes, USC and PRSI to ETF dividends.
A big part of the reason why deemed disposal exists in the first place is because of reinvested dividends. So let’s just tax the dividends and get rid of deemed disposal. To be clear, we’re not suggesting that dividend withholding tax should be introduced at the fund level, we’re solely talking about taxing dividends at the investor level.
This change would mitigate the Government’s concern that taxation won’t be collected from investors. Given that most index-linked products have some form of dividend yield, the Exchequer will be collecting tax revenues on an annual basis. This also simplifies the tax reporting requirements of investors given that they’d only have to include their annual ETF dividend income on their tax return, which is easily accessible information.
For ETFs with no dividend yield, the Exchequer would have to wait to collect tax revenues. But that’d be on unrealised gains, not reinvested income, which is a globally accepted principle of taxation.
The Government should remove the ringfencing of ETF losses and extend the annual CGT exemption of €1,270 to ETF gains. If an investor makes a loss on ETF investments, that loss should be allowable against other investment gains, including ETF gains. Ringfencing ETF losses creates inequities and it encourages distortionary behavior. It also doesn’t capture the true economic position of the investor. In other words, whether or not they have made a net gain or net loss on investments.
Frequently Asked Questions
No, investing apps like Trade Republic, Trading 212 and Lightyear will not handle your ETF tax for you. You must track, calculate and self-assess your own ETF taxes.
Irish domiciled ETFs aren’t required to deduct exit tax when their shares are publicly traded and cleared through a recognised clearing system. The stock ETFs that Irish investors would be interested in meet these conditions, hence why self-assessment is nearly always required.
No, deemed disposal doesn’t apply to non-Irish tax resident investors. This creates huge inequalities, making Irish domiciled ETFs much more attractive to foreign investors.
ETF income and gains, including deemed gains, must be declared on your tax return by the 31st October of the following year. For most investors, this will be done by filing a Form 11. The tax is paid once the return is filed.
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