Taxation of ETFs in Ireland

The taxation of EU domiciled ETFs (which usually have a UCITS structure) and US ETFs are very different in Ireland. Here’s a brief overview (most beneficial treatment highlighted in green):

EU/UCITS ETF US ETF
Taxes on Capital Gains 41% Exit Tax 33% CGT
When is this tax levied? Every 8 years (and also on withdrawal) On withdrawal only
Taxes on Income 41%* (USC + PRSI do not apply) Treated as income e.g. marginal rate + PRSI + USC (50%+)
CGT allowance applies? No. CGT allowance of €1,270 per annum
Offset agains other capital gains? No offset against losses on other investments nor across different ETFs within the same portfolio! You can offset losses when calculating CGT liabilities
*Can get accumulation ETFs in Europe which don’t pay out income. This will be auto-reinvested in the fund and thus rolls up tax free for 8 years

US Domiciled ETFs

From the above table, US domiciled ETFs are basically treated under Irish tax law as shares and as a result look more attractive than EU domiciled ETFs in almost every way.

If faced with a decision to purchase individual shares or US ETFs, given that they are taxed the same, US ETFs appear to be the obvious choice as you cheaply gain diversification across sectors and countries. A fund’s domicile doesn’t affect where the fund can invest e.g. US domiciled ETFs also invest in non-US assets.

The main issue is that US ETFs are required to produce a KIID (Key investor information document) under EU PRIIPs regulation before they can be sold to retail investors (i.e. me and you) within the EU. The largest players have confirmed that they don’t plan to produce these for their US domiciled ETFs so these are no longer available on DeGiro or other (law abiding) EU brokerages catering to retail investors.

However, there are at least three ways for EU customers to still invest in US domiciled ETFs.

  • If a professional money manager is making trades on your behalf, then they have access to the US ETFs. This is probably prohibitively expensive (Davy/Goodbody would provide this service).
  • My understanding is that it may be possible to still invest in US domiciled ETFs by opening a brokerage account in the US e.g. with Interactive Brokers (minimum investment to open an account is US $10k) but I haven’t verified this for myself.
  • I have heard that on some brokerage platforms it’s possible to simply click a checkbox saying that you understand the risks associated with US ETFs and they will then allow you to invest in them. I need to do some more research here but it would be great if someone could point me in the right direction.

There are four other points to make in relation to US domiciled ETFs:

  1. The ETF will withhold (US) tax on any dividends paid to you at a rate of 30% (15% if you complete a W8-BEN) but you can claim a credit for this withheld (US) tax in your Irish tax return effectively which results in no net monetary impact and is more an annoyance from a Form 11 personal tax return perspective.
  2. It looks like US estate taxes applying on death if you have >$60k in investments, see here. [I’d like if someone could confirm this.]
  3. US ETFs have smaller total expense ratios (TERs) or annual fees e.g. you can obtain S&P 500 ETFs with really tiny fees e.g. 0.04% on this Vanguard fund with ticker VOO and no fees on the Fidelity Total Market Index Fund.
  4. If investing in ETFs with a high dividend yield, EU ETFs which accumulate dividends (i.e. don’t pay them out and retain them in the fund) are more attractive than US ETFs (as you don’t need to pay the extortionate 52% tax applicable to dividends, assuming you are a higher rate taxpayer). See the charts further down this post!

EU Domiciled UCITS ETFs

ETFs domiciled in Europe (normally with a UCITS structure) are taxed heavily by the Irish Revenue.

The Exit Tax regime applies whereby capital gains are charged at a rate of 41%. This is higher than the rate of capital gains tax normally applied to investment gains which is 33%. Dividend income is also taxable at 41% (USC and PRSI does not apply).

Even more punishing is that under the Exit tax regime your funds are subject to a “deemed disposal” every 8 years. This means is that every 8 years you need to pretend that you sold your ETF holdings, calculate 41% of your gains at that point in time and pay them to the Revenue personally. You could liquidate some of your fund to do this if you wish. This inhibits the accumulation potential of your fund.

Finally, the most punishing element is that you cannot offset losses in your ETF investment against gains on other investments. Even worse, you cannot offset losses in one EU ETF investment with the gains in another!

All the same, if you do decide to invest in EU domiciled ETFs then here are some cheap, diversified, commission freeETF recommendations available on DeGiro:

ETF Recommendations.png

Tip: Searching for VUSA on DeGiro will not necessarily find you the commission free ETF as the VUSA ticker isn’t unique (see here). You also need to ensure you select the same exchange shown in their free ETF list above. For example VUSA can be purchased on the Frankfurt stock exchange (listed in EUR) or the LSE (listed in GBP).

Tip: The exchange you purchase an ETF on doesn’t matter too much provided the exchange has sufficient liquidity. The same ETF will trade for (slightly) different prices on each exchange but these price differences should be small, otherwise the arbitrage opportunity will be snapped up by traders.

EU Accumulation ETFs

Some ETFs don’t pay dividends and instead reinvest them back into the fund. These are called accumulation ETFs. US domiciled accumulation ETFs do not exist as all ETFs must distribute dividend gains under US tax law.

However, in the EU accumulation ETFs can be found and under Irish tax law the dividends are reinvested tax free. This effectively means you are only taxed every 8 years on any gains and it is tricky (without doing any projections) to see if investment returns will be better over the long term compared to US ETFs.

Here is a full diversified suite of share-backed EU Accumulation ETFs on DeGiro with low expense ratios:

Accum ETFs

Note: The above ETFs are not on Degiro’s commission free list, however this is a tiny outgo which barely affects the overall return on the ETF over an extended period. Don’t forget that fees which are a % of your fund make a huge difference. 

Tip: DeGiro offer most EU domiciled ETFs so a better way to find an ETF that suits your needs (e.g. accumulation/dividend paying indicator, sector, currency, AUM, asset class etc.) is to go to www.ishares.com and filter from all of the available ETFs.

Tip: You cannot buy a portion of an ETF share e.g. a single unit of the ETF CSPX is $250 so you must invest in increments of $250.

Tip: Information on the ishares core S&P 500 (ticker CSPX) can be found here. ETFs which don’t pay out dividends (i.e. accumulation ETFs) typically have “ACC” in the fund name.

So which is better?

Well don’t worry, I’ve done all the hard work for you and have created a spreadsheet projection model which compares the three types of ETF investments under Irish tax rules:

  1. US ETFs – Dividend paying (investing in individual shares will produce the same graph!)
  2. EU UCITS ETFs – Dividend paying
  3. EU UCITS ETFs – Accumulation

It can be downloaded here.

The projection produces a graph which and shows the total value of your investment (post tax) after 8,  16 and 20 years, assuming

  • you invest €100k at outset
  • you are a higher rate taxpayer

Depending on the ETF you are investing in, the expected ratio of dividend yield to capital gains will be different. For example, my assumption for an S&P 500 ETF is 6% p.a. capital growth and 2% p.a. dividend yield. The long-term S&P 500 dividend payout rate is closer to 4% but dividend payouts are reducing over time and have only averaged 2% of the share price over the past 20 years.

Below I show two graphs – one assuming a 7% capital gain and 2% dividend yield, and the other assuming a 4% capital gain and 4% dividend yield. (e.g. a high dividend yielding ETF). You can vary these parameters in the downloadable spreadsheet easily to suit your needs.

6% Capital Gain & 2% Dividend Yield

shares vs etfs (6 vs 2)

4% Capital Gain & 4% Dividend Yield

shares vs etfs (4 vs 4)

Summary:

  • The best ETF for your needs depends on your expected ratio of capital gains to dividends. I personally think a 6% to 2% assumption is more appropriate unless you are specifically choosing a high dividend yield ETF (which all ETF providers have).
  • US ETFs are a clear winner under the 6%/2% assumption. They also have the added benefit that you can offset losses on one ETF against gains on another (as you can on ordinary shares). Not having this right under EU ETFs could be punishing. The issue is that they are difficult to invest in.
  • EU domiciled accumulation ETFs come out on top under the 4% capital gains/5% dividend yield split giving the highest return on investment. This demonstrates the power of compounding as dividend payments grow tax free for 8 years). They also come out second in the 6%/2% split so if you can’t invest in the US ETFs then EU accumulation ETFs are your next best option. An added bonus is that you don’t need to reinvest dividends, you can just sit back and relax for the first 8 years until your exit tax payment comes due.
  • If you are a lower rate taxpayer then US ETFs are extremely beneficial under every possible scenario.
  • Recall that investing in individual shares has identical tax treatment to US ETFs so you could just invest in these but you won’t get the diversification ETFs provide and not even the best money managers can match the returns from a benchmark index consistently so don’t believe that you can. I’m still personally going to primarily direct funds towards EU accumulating ETFs until I can source an easy method for investing in US ETFs but I might supplement this with a few individual stock picks.

Warning: If you are not investing for the longer term then an important factor not taken into account here is that you can’t offset gains on the EU ETFs against losses on other EU ETF investments (or any investment in general). This may not be as relevant over a long period of time when you hope to have a capital gain!

References

  • A useful Revenue guidance note on ETF taxation is here
Disclaimer

All research within this blog is my own and does not in any way constitute advice. I am not a professional investor or financial adviser. See the full disclaimer here.

11 thoughts on “Taxation of ETFs in Ireland

  1. Thanks for this post, it’s very interesting, the very similar returns between EU and US non-accumulating ETFs was surprising to me. Just to make sure I’m not missing the point: this is due to the higher rate of tax on dividends (50% vs 41% for higher rate tax payers) right? So the US ETFs would pull ahead if we skew the yield towards capital gains?

    I look forward to future posts!

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  2. Both of your points are accurate. In my article I assume 10% investment growth p.a. split 50/50 between capital gains and dividend gains. Under these assumptions both the US and EU non-accumulating ETF offers similar returns. This is because (my understanding is) that US ETFs are taxed at 33% on gains and 50% on dividends whereas the EU ETF is taxed at 41% on both capital gains and dividends. These more or less balance each other out when you bring the deemed disposal rule into the equation.

    And yes, if you start skewing the expected returns more towards capital gains and less towards dividends then the returns on the US ETF starts to pull away from both of the EU ETFs. The 33% tax on capital gains incurred by the US ETF is overwhelmingly advantageous in this case.

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    1. Thanks for the update with all the new info!
      Minor request: could you add a note near the top for similar updates in the future? I only spotted all the new stuff because I went hunting through the article for some details I couldn’t remember and was pleasantly surprised 🙂

      One thing I wanted to double check/highlight: accumulating ETFs returns are always at least as good as identical but non-accumulating versions (assuming you don’t need the dividend cash), and get better the more returns skew towards dividends. However, this is not an argument for targeting dividend paying ETFs right? It’s an argument for picking accumulating ETFs if given a choice between accumulating/non-accumulating funds.

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  3. Hi, great work. Nice to find Irish FIRE enthusiasts. How are US Mutual Funds taxed (Vanguard Admiral total stock market to be exact) for Irish residents( US citizen)? This was my old 401k and taxable investments made when I used to live and work in US but can’t find on Revenue site what happens to mutual funds, just ETFs…..

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  4. Can’t tell you how delighted I am to find your site. Exactly what I was looking for.

    I’m in my early 30’s from Dublin and started investing via Degiro in recent months, so the journey is new to me but I’m fully committed to it now and learning every day.

    I’ve got a few shares recently in the S&P500 ETF – VUSA and wondering if that is the best option for me going forward or should I transfer that to the accumulating iShares etf you mentioned in the ETF taxation post. . . I’m leaning towards the accumulating (to save the hassle of the dividend taxes annually and take care of it via deemed disposal after 8 years) because of this post.

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  5. Hi there,

    thank you for your post, it’s a wonderful source of information.

    I have one doubt regarding Deemed Disposal. Let’s assume that I monthly purchase an ETF during 2018, 12 times. Does this mean that in 8 years time I have to file a deemed disposal every month? How does that work?

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  6. Would investment in individual equity stocks not be more tax efficient? 33% on CGT, no 8 year deemed disposal and a wealth of choice (vs. ability of European to invest in US ETFs).

    I appreciate you lose on the diversification side of things but that’s a different discussion

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  7. Hi,

    A great article, love it!

    One question – does this imply that these taxes only apply if you’re a tax resident in Ireland? I am at the moment but I’m planning not to be anymore in a year or two. Does ‘where you were tax resident when you invested your money’ have an effect on the capital gains given that you realize them when you’re a tax resident elsewhere?

    Thanks!

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    1. @Kasparas, good question and one I’ve already researched. However, I’m not a tax expert so my comment here is isn’t advice!

      It’s not about tax-residency only. Ireland has a concept of “ordinary residency” too which is what matters when deciding how you get taxed on the disposal of assets. You can become non tax-resident after leaving Ireland for a little over a year, but you need to be non-tax resident for 3 consecutive years to be non ordinary-resident – also called “non-resident” by Revenue. This would take you about 3.5 years in total to gain this status. See definitions here:
      https://www.citizensinformation.ie/en/money_and_tax/tax/moving_country_and_taxation/tax_residence_and_domicile_in_ireland.html

      Anyway, my understanding is that as a non-resident the rules stipulate you only pay taxes on your Irish sourced income. It’s trickier to find the rules on exit tax (which is how ETFs are taxed), but for CGT it’s clear. See page 2 of this Revenue guidance where it states that “Section 29(3) provides that a person who is not resident or ordinarily resident in the State is chargeable to CGT on gains from disposals of certain assets.”, and then lists a few specific asset types that would still be subject to CGT if you were non-resident: https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-02/02-03-01.pdf

      I doubt you need to pay exit tax / deemed disposal on ETFs if you’re non (ordinarily) resident, for the same reasons as CGT but it would be a good query for Revenue. I have found two sources of info:
      1. In the Revenue guidance on ETF taxation (https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-27/27-01a-03.pdf) it states “the aim of this note is to set out in a clear manner the tax treatment that
      Revenue will seek to apply to investments in ETFs held by investors that are tax resident in Ireland” i.e. it specifies tax residents.

      2. I’ve never been through a deemed disposal event (at the 8 year mark) personally but according to Deloitte’s article on ETF taxation in Ireland here (see the ‘Taxation for Non Irish Investors’ section):
      https://www2.deloitte.com/ie/en/pages/financial-services/articles/taxation-of-irish-etfs.html
      (and I am surprised by this), it states the ETF will automatically withhold the 41% tax unless you’ve made a specific declaration to it that you’re non-resident. I wouldn’t have thought ETFs would ever withhold taxes and it would be up to self-declare the exit tax if you were resident.

      I’m tempted to draft an article to this effect, and see if I get any useful comments as it’s definitely a question worth asking!

      Like

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