Tax Changes For US Domiciled Exchange Traded Funds (ETFs) in Ireland

  • By: Walter Dunphy ACCA
  • Date: December 31, 2022
  • Time to read: 3 min.

The 1st of January 2022 brought changes to how the Revenue Commissioner in Ireland treats US-domiciled ETFs.

In this post, we will take a look at what the tax situation was up until this change and what are the significant changes going forward.

For example, Vanguard has multiple ETFs that track the performance of the S&P 500 Index. Up until now, the tax treatment was different if you invested in VOO vs VUSA as one of the funds is domiciled in the United States and one in Ireland.

  • VOO – Vanguard S&P 500 ETF (Domicile: United States)
  • VUSA – Vanguard S&P 500 UCITS ETF (Domicile: Ireland)

The Story So Far

Back in 2018, The EU pushed through regulatory changes that made it very difficult for European retail investors to invest in US-domiciled ETFs.

These regulations required providers of investment products to supply retail investors with a Key Investor Information Document (KIID) to help them better understand what they are buying.

US issuers cannot develop KIIDs for their ETFs because in the documents you need to include a section about the likely future performance of the fund. These US issuers cannot make such forecasts under US legislation.

The result was all of these US-domiciled ETFs were no longer listed on European brokerages like Degiro and Trading 212.

So the Revenue guidance up until 31 December 2021 was that it accepted that the US-domiciled ETFs were outside the normal regime of investment funds and were therefore subject to capital gains tax at 33% on gains.

Dividend distributions were taxed at your marginal income tax rates, which could be up as high as 52%. You were also be entitled to use your annual capital gains tax exemption of €1,270 and offset any losses made against other profitable investments.

This was far more attractive than the tax situation for Irish/EU domiciled ETFs, which are taxed are taxed at 41% (Exit Tax) on gains and income. They are also subject to the deemed disposal rules that require tax to be paid on unrealised gains after 8 years. There is also no annual exemption of €1,270 under this Exit tax, and losses made on these ETFs cannot be offset against other profits.

This resulted in investors finding a way to invest in these US-domiciled ETFs, even if it meant signing up for international accounts with US brokerages.

What are the updated Tax Rates on US Domiciled ETFs in Ireland?

In September 2021, the Revenue Commissioner issued new guidance on the tax treatment of US ETFs. Effective 1 January 2022 US ETFs will be taxed as Offshore Funds.

This will mean that income and gains on these ETFs will be taxed at 41%, and losses will not be available for offset against and other realised gains.

Basically, now the tax treatment of Europeans and US-domiciled ETFs will be aligned.

The Revenue Commissioner did leave one small loophole open.

If it can be shown that the US ETF does not compare with EU domiciled ETFs in terms of its structure and regulatory stance. However the responsibility of proving this is on the retail investor.

This is going to a take a lot of analysis and is beyond what most retail investors would be able to do without the help of a professional.

In summary, the new guidance will mean that US ETFs will now be treated the same as Irish and EU-domiciled ETFs going forward and taxed at 41% on profits and dividends. Many believe the current system encourages investors to choose riskier investments due to the lower tax rates on individual stocks than ETFs. The current government do not look like they have any appetite to change this.

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