Dáil Éireann Debate, Tuesday - 28 February 2023
228. Deputy Patrick Costello asked the Minister for Finance his views on the current rate of taxation on exchange-traded funds and capital gains tax; and if he will make a statement on the matter. [10105/23]
Amharc ar fhreagraIt is important to note that capital gains tax and the taxation of exchange –traded funds (EFTs) are separate and apply in different circumstances.
Capital gains tax is a tax you pay on any capital gain made when you dispose of an asset. It is the chargeable gain that is taxed, not the whole amount you receive. The chargeable gain is usually the difference between the price you paid for the asset and the price you disposed of it for. CGT is payable by the person making the disposal.
The current approach to CGT in Ireland is a flat rate of 33% for all gains, together with a range of targeted reliefs including principal private residence relief, retirement relief and revised entrepreneurs relief.
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. ETFs tend to be tax opaque, which means that an investor in an ETF is not taxed on any income earned by, or gains accruing to, the ETF, but rather the investor is taxed on any distributions received or gains made on the disposal of the units in the ETF. This is not dissimilar to a shareholder in a company – the shareholder is not taxed on the profits of the company as they arise but rather on distributions received from the company or on any gain arising on a disposal of shares in the company.
There is no separate taxation regime specifically for ETFs. As collective investment funds, they generally come within the regimes set out in the Taxes Consolidation Act 1997 for such funds. The domicile of the ETF will generally determine the applicable fund regime, specifically whether the ETF falls within the domestic fund regime or the offshore fund regime. This response confines itself to the position for domestic ETFs and ETFs deemed ‘equivalent’ to a domestic ETF located in the EU/EEA/OECD. However, I would note that, in order to assist taxpayers in determining the appropriate tax treatment for investments in ETFs, Revenue has published guidance, which is available at: www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-27/27-01a-03.pdf. This guidance provides a roadmap to detailed guidance for the different types of ETF.
The domestic fund regime applies in the case of an Irish domiciled ETF or a foreign domiciled ETF that is deemed equivalent to an Irish domiciled ETF. Under this regime, a ‘gross roll-up’ applies such that there is no annual tax on income or gains arising to a fund, but the fund has responsibility to deduct an 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, disposal is deemed to occur every 8 years. The rate of exit tax applied is generally 41% in the case of an individual.
As the Deputy may be aware, as part of his Budget 2023 speech, my predecessor announced the intention to establish a working group to consider the taxation of funds, life assurance policies and other investment products as well as commencing a review of specified institutional investment regimes. Specific detail on the parameters of such a review and timelines are still being worked out and once a thorough consideration of the matter takes place, I will share the terms of reference in due course.
