I note the Deputy's query regarding the taxation of Exchange Traded Funds (ETFs). I am advised by Revenue that there is no separate taxation regime specifically for ETFs. Being collective investment funds, they generally come within the regimes set out in the Taxes Consolidation Act 1997 for such funds. The domicile of the ETF will generally determine the applicable fund regime, specifically whether the ETF falls within the domestic fund regime or the offshore fund regime.
To assist taxpayers in determining the appropriate tax treatment for investments in ETFs, Revenue has published guidance which is available at www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-27/27-01a-03.pdf. This guidance provides a roadmap to detailed guidance for the different types of ETF.
The domestic fund regime applies in the case of an Irish domiciled ETF or a foreign domiciled ETF that is deemed equivalent to an Irish domiciled ETF. Under this regime, a ‘gross roll-up’ taxation regime applies such that there is no annual tax on income or gains arising. Rather, tax generally arises for a unit holder where value passes from the ETF to the unit holder either in the form of income (dividends) or gains on the disposal of the units. To prevent indefinite or long-term deferral of tax, a unit holder is deemed to dispose of the units every 8 years, with any gain arising being taxable. The rate of tax is 41% unless the fund is a Personal Portfolio Investment Undertaking in which case tax at 60% applies.
For a foreign domiciled ETF that is not deemed equivalent to a domestic ETF, the applicable tax treatment in respect of income and gains arising in respect of the investment will depend on the territory in which the ETF is located. If it is located in the EU, EEA or OECD, then the general principles of tax will apply such that:
• income payments (dividends) will be subject to income tax at the standard or higher rate as appropriate and taxed under Case III of Schedule D, and
• gains on disposals will be subject to capital gains tax (CGT) at 33%.
Any tax arising must be paid under the self-assessment system.
Where an ETF is not located in the EU, EEA and OECD, the offshore fund regime applies, the applicable tax treatment of income and gains arising from the investment will depend on whether the fund is considered a distributing or non-distributing ETF.
Broadly, a distributing ETF is a fund located in another territory (other than in the EU, EEA or certain OECD countries), that distributes its profits to its unit holders from year to year. The default position is that unless a fund applies to, and is certified by, Revenue as a distributing fund, it is a non-distributing fund. The list of distributing funds approved by Revenue is published on the Revenue website at: www.revenue.ie/en/companies-and-charities/documents/list-distributing-offshore-funds.pdf.
Investments in distributing ETFs are taxed as follows:
• income payments from a distributing offshore ETF are subject to income tax under the general principles of taxation. USC and PRSI may therefore be applicable.
• gains arising on disposals are subject to CGT at a rate of 40%.
• the individual must account for any tax due under self-assessment.
A non-distributing ETF is a fund located in another territory (other than in the EU, EEA or certain OECD countries) and is not certified as a distributing ETF. Investments in non-distributing ETFs are taxed as follows:
• income payments are subject to income tax under the general principles of taxation. USC and PRSI may be applicable.
• gains arising on disposals of an investment in a non-distributing offshore ETF are charged to income tax under Case IV. Although these disposals are charged to income tax, the amount of the gain on the disposal is calculated according to general CGT rules. USC and PRSI may be applicable.
• the individual must account for any tax due under self-assessment.
The Form 11 is a tax return for self-assessed individuals to declare their income, claim tax credits, and calculate their tax liability. I am informed by Revenue that the Personal Details Panel of the return must always be completed; however, if taxpayers have no entries to make under a particular category, they should leave it blank and proceed to the next section. The majority (98%) of taxpayers file their Form 11 electronically using ROS. On ROS, the filer can navigate directly to the sections relevant to them and identify mandatory fields, making it easier to file the return.
Revenue’s Tax and Duty Manual on Exchange Traded Funds provides information on the tax treatment of ETFs and directs taxpayers to the relevant section (Offshore Funds) that should be completed on the Form 11 in respect of income. Electronic filers have an option to “add additional investments” when completing the Offshore Funds section. Therefore, multiple entries can be included where a number of investments have been made.
When returning gains on the disposal of units in a non-equivalent ETF fund or a non-distributing ETF form, the CG1 form may be used.
It should be noted that on 6 April 2023, the former Minister for Finance published the terms of reference for a review of Ireland’s funds sector and some related taxation issues.
A draft report was submitted to me for consideration in recent weeks and this is in line with the Review’s Terms of the Reference. The review was wide ranging and examined a range of issues relevant to the funds sector. As part of my consideration of the draft report, I will consider the exact timing of the publication of the Funds Review.
