Exchange Traded Funds (ETFs) have gained huge popularity in recent times with Irish investors; however, there has been much complexity and uncertainty in relation to their tax treatment.

The concept of an ETF is not specifically provided for in Irish tax legislation. It depends on the legal form and characteristics of the ETF whether it falls under general Irish tax principles; the tax regime for Irish regulated funds; or the Irish offshore funds rules.

New Guidance

Revenue has recently published guidance on the tax treatment of ETFs providing more clarity on this area. While the same legislative provisions apply to a non-Irish fund irrespective of whether it operates as an ETF or not, it is understood that Revenue intends for the guidance to apply to ETFs only.

The guidance is a very significant and welcome development as it provides a clear analysis of the Irish tax consequences for Irish investors of investing in ETFs in different domiciles.

The Guidance considers three categories of non-Irish ETFs:

ETFs domiciled in the EU (other than Ireland)

In Revenue’s view, the tax treatment of this category of ETFs is similar to that of Irish domiciled ETFs i.e. the investor is required to self assess income and gains and eight year deemed disposals apply in respect of such funds. This tax treatment is on the basis that the EU ETF is regulated as a UCITS.

For EU domiciled ETFs that are not regulated as UCITS, Revenue has stated that they will treat the ETF investment in the same way as a UCITS where it has a comparable legal structure and is subject to comparable regulatory oversight.

While this approach leaves some uncertainty in relation to what is “comparable”, non-UCITS ETFs are not common. However, Revenue appears open to considering specific alternative ETFs to determine their treatment on a case by case basis.  This should allow ETF managers, investors and investment advisors to seek clarifications from Revenue in situations where there is doubt. 

ETFs domiciled in the US, EEA and OECD countries which have a double tax agreement with Ireland

In Revenue’s view, US domiciled ETFs are not generally regarded as having structures and regulations that would be considered “similar in all material respects” to Irish funds. Therefore, such ETFs would generally fall outside the scope of the tax regime for offshore funds and normal Irish tax rules should apply on income and gains earned by Irish investors in US ETFs i.e. income tax, PRSI and USC on income payments and capital gains tax on realised gains.

The same treatment also applies to ETFs domiciled in an EEA state or in an OECD member state (other than the US) with which Ireland has concluded a Double Taxation Agreement.

ETFs domiciled in all other countries

For ETFs which are not domiciled in Ireland, the EU/EEA or OECD countries which have a double tax treaty with Ireland, Revenue will, in general, view investments in these ETFs as constituting “a material interest in an offshore fund”, therefore, income and gains in respect of such funds will be subject to income tax together with PRSI and USC (the key difference being that gains are subject to income tax and not capital gains tax).

Conclusion

The taxation of investment income and gains in Ireland is complex which makes compliance with the rules a significant challenge for investors (particularly non-sophisticated retail investors). Revenue’s guidance goes a long way in simplifying the treatment of investing in ETFs and brings more clarity and certainty to the area, even though complexity and uncertainty remain for other non-ETF offshore funds.