Alan Dillon (Mayo, Fine Gael)
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283. To ask the Minister for Finance if he will clarify the position of deemed disposal being applied to distributing investment funds, for example, on exchange traded funds; if the deemed disposal and exit tax from such funds results in double taxation on the same dividend; if an analysis has taken place on this issue with a view to improving conditions for small personal investors and savers; and if he will make a statement on the matter. [37963/21]

Paschal Donohoe (Dublin Central, Fine Gael)
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The term “Exchange Traded Fund” or “ETF” is a general investment industry term that refers to a wide range of investments. ETF investments can take many different legal and regulatory forms even where they are established within the same jurisdiction.

An ETF is an investment fund that is traded on a regulated stock exchange. A typical ETF can be compared to a tracker fund in that it will seek to replicate a particular index.

There is no separate taxation regime specifically for ETFs.  Being collective investment funds, they generally come within the regimes set out in the TCA 1997 for such funds. The domicile of the ETF will decide the applicable fund regime (i.e. domestic or offshore).

The tax treatment of an investment in a fund depends on a number of factors, the first of which is whether the fund is an Irish fund or an offshore fund.  The response below addresses the Deputy's query firstly with respect to the domestic fund regime and secondly with respect to the offshore fund regime.

Domestic Fund Regime

Section 58 of the Finance Act, 2000 introduced the gross roll-up taxation regime for domestic investment undertakings. The legislation is contained in Part 27 – Chapter 1A – sections 739B to 739J of the Taxes Consolidation Act (TCA) 1997. 

The general thrust of the regime is that there is no annual tax on income or gains arising to a fund. However, a fund has responsibility to deduct exit tax in respect of payments made to certain unit holders in that fund. To prevent indefinite or long-term deferral of this exit tax, a disposal is deemed to occur every 8 years. Further information is contained within Tax and Duty Manual 27-01a-02 available on the Revenue website.

Exit tax on investments in collective investment undertakings (including Exchange Traded Funds “ETFs”) applies on the occurrence of a “chargeable event”. Exit tax applies to the profit element of each chargeable event, and chargeable events include –

- the making of relevant payments (which includes any dividend),

- the redemption of units,

- the transfer by a unit holder of their entitlement to units,

- the appropriation or cancellation of units by a fund to discharge tax payable on a gain arising from a transfer of units by a unit holder, and

- the ending of an 8-year period beginning with acquisition and each subsequent 8- year period (where such ending is not otherwise a chargeable event).

As such, exit tax applies on the payment of a dividend.

When looking at a deemed disposal, the amount to which exit tax applies is the growth in value of the investment.  Therefore, when calculating the amount on which exit tax applies for a deemed disposal, any amounts already paid out as dividends are excluded. There is no double taxation of the amount paid out as dividends.

In addition, any tax collected on a deemed disposal is available as a credit against any tax that arises on a subsequent actual disposal. 

Offshore Fund Regime

Offshore funds legislation is contained within Chapters 2, 3, and 4 of Part 27 Taxes Consolidation Act 1997. 

Where the fund is located in an EU, EEA or OECD country and has a double taxation agreement in place with Ireland, and the fund is similar to an Irish fund, then rules very similar to those set out above for an Irish fund will apply, including those in respect of deemed disposals.

Where the fund is located in an EU, EEA or OECD country and has a double taxation agreement in place with Ireland, and the fund is not similar to an Irish fund, the profits, gains and distributions are taxed in the same way as an investment in shares in a company (as such there are no deemed disposals).

Where the fund is located in another territory (i.e. other than an EU, EEA or certain OECD countries), the tax treatment will depend on whether the fund is a “distributing fund” or not. Of note there are no deemed disposals.

Revenue guidance on the taxation of offshore funds is published in Tax and Duty Manual 27-04-01 (offshore funds located in an EU or EEA state or in an OECD member with which Ireland has a double tax agreement) and Tax and Duty Manual 27-02-01 (offshore funds located in other territories), which are available on the Revenue website.  

Tax treatment of investments in “distributing funds”

A distributing fund is a fund located in another territory (i.e. other than an 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.

Investments in distributing funds are taxed in the same way as an investment in shares.  Income payments from a distributing offshore fund 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. 

Tax treatment of investments in non-distributing Funds

Income payments from a non-distributing offshore fund (being any offshore fund located in another territory (i.e. other than an EU, EEA or certain OECD countries), that is not certified as a distributing fund), are subject to income tax under the general principles of taxation. USC and PRSI may be applicable.

Where a person disposes of an investment in a non-distributing offshore fund, income tax under Case IV will apply. Although these disposals are charged to income tax, the amount of the gains 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. 

Review of savings and investment

The issue of the taxation treatment of financial products has come to the fore since reductions in the rate of DIRT in 2017, which led to an analysis of the savings and investment trends apparent in society.

In 2018 officials in my Department published a report entitled The Taxation of DIRT and LAET - A review on the comparisons and tax treatment of DIRT and LAET. This report examined the tax treatment of financial products subject to DIRT and financial products subject to life assurance exit tax (LAET).  It concluded the products subject to DIRT and products subject to LAET are different in a number of respects, namely, the level and application of fees to clients, the level of risk and return and potential losses, and hence the way in which they are taxed.

This was further  reviewed in the most recent Capital and Savings Taxes Tax Strategy Group paper, published in September 2020. The conclusion was that the option to reduce rates of LAET to 33% would cost €22 million in a full year, and that it could have potential consequences for the tax treatment of other similar investment products. It was also felt that given the current fiscal pressures, the possibility of reducing the rate of LAET is significantly diminished, particularly given the lack of evidence to support any distortionary impact of the rate.