Ireland is home to the greatest concentration of Exchange Traded Fund providers in Europe. It is also home to one of the most severe tax regimes in respect to fund growth as it applies to retail investors. Take for example the deemed disposal that applies to Exchange Traded Funds in Ireland. At present, the exit tax is 41%.
In recent months, the Irish Minister for Finance has indicated there may be some changes in the upcoming Budget later this year. So far, the expectation is 41% exit tax may be reduced to 33%. This would bring it in line with the tax applied for capital gains, DIRT and so forth. Also under review is the so-called ‘deemed disposal’.
A deemed disposal is a unique tax rule in Ireland that applies to certain investments, including Exchange Traded Funds (ETFs). Under this rule, even if you do not sell your ETF, you are treated as if you have disposed of it every 8 years. This triggers a tax liability, known as exit tax, on any unrealized gains.
Exit Tax on ETFs
What is Exit Tax?
Exit tax is a form of income tax applied to gains from certain investments, including ETFs. The current rate of exit tax in Ireland is 41%.
When Does Exit Tax Apply?
Exit tax applies in two scenarios:
Deemed Disposal:
Every 8 years, you are taxed on the market value of your ETF as if you sold it, even if you haven’t.
Actual Disposal:
When you sell or redeem your ETF, you are taxed on the gain.
Why Does Exit Tax Exist?
The deemed disposal rule ensures that long-term investors in ETFs pay tax on their gains periodically, rather than deferring tax indefinitely. However, it also penalizes investors unfairly. Those that do not have the ready-cash to settle a tax bill are forced to sell part of their portfolio to do so. However, in doing so, they could later face a very different investing landscape where values have fallen and their investment is loss-making.
How Exit Tax losses differ from Traditional Losses?
With CGT, you can offset capital losses against capital gains. However, with exit tax, capital losses cannot be offset against gains subject to exit tax.
Reporting and Payment:
For CGT, you report and pay tax on actual disposals only. For exit tax, you must self-assess and pay tax on both deemed and actual disposals.
Why ETFs Are Treated Differently
ETFs are often classified as offshore funds under Irish tax law. This classification subjects them to the exit tax regime rather than the CGT regime. Offshore funds include investments in non-resident companies, foreign unit trusts, or other arrangements that create co-ownership rights under foreign law.
How to Minimise the Impact of Exit Tax
Irish-Domiciled ETFs
Consider investing in Irish-domiciled ETFs, as they may have more favourable tax treatment compared to offshore ETFs.
- Pensions – Investing in ETFs through a pension fund can be a tax-efficient way to avoid exit tax, as pensions are exempt from this tax.
- Direct Stock Investments – Instead of ETFs, some investors opt for direct investments in individual stocks, which are subject to CGT at 33% rather than exit tax at 41%.
Frank Conway is a Qualified Financial Advisor and founder of MoneyWhizz
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