30th September, 2021

In September 2021 the Revenue Commissioners published new guidance notes on the tax treatment of US ETFs. The new guidance results in a fundamental change in the tax treatment of income from and gains/losses realised on the disposal of US domiciled ETFs.

Heretofore the Revenue Commissioners accepted that, in the case of investments made on or after 1 January 2014 in US ETFs, income payments (dividends) would be subject to income tax at the standard or higher income tax rate as appropriate, and gains on disposals would be subject to capital gains tax. In other words, that such ETFs would not be subject to the tax regime applicable to offshore funds (i.e. income and gains liable at 41%). US ETFs were not regarded as having structures and regulation that would be similar in all material respects to Irish ETFs. This took them out of the Offshore Funds tax regime and instead brought them in to the mainstream income tax and capital gains tax treatment that would apply to share investments generally.

The Revenue Commissioners have indicated that, with effect from 1 January 2022, their guidance on the tax treatment of US ETFs will change. From that date US ETFs will, in many instances, be taxed as Offshore Funds. This will result in income and gains realised on the disposal of a US ETF being taxed at 41%. Losses incurred on the disposal of a US ETF will not be available for offset against any other realised gains. This will align the tax treatment of most US ETFs with the tax treatment of Irish ETFs and other offshore funds domiciled in the EU.

If it can be shown that a US ETF does not have comparable legal structures and generally is not subject to comparable regulatory oversight as an Irish/Eu offshore fund then it can be treated as being outside of the Offshore Fund tax regime, i.e. it will be subject to income tax at the standard or higher income tax rate as appropriate, and gains on disposals would be subject to capital gains tax. This will require a detailed analysis which may not be possible as the appropriate information to establish the correct tax treatment may not be available. The default position will be to treat US ETF as being subject to the Offshore Funds tax treatment. The onus will be on the taxpayer to prove that this is not the case and that the mainstream income tax and capital gains tax treatment would apply.

Investors in US ETFs may need to consider whether or not to sell such securities in advance of 1 January 2022 so as to:

• Realise gains which would be taxed at the 33% CGT rate (as opposed to 41% post 1 January).

• Realise gains that could be sheltered from tax by other losses for CGT purposes.

• Realise losses that would be available for offset against other gains on non-Offshore Fund assets under CGT rules in either 2021 or carried forward to 2022 and subsequent tax years.

Eddie Coleman, Tax Compliance Partner said. “This is a retrograde move which will introduce uncertainty as to the tax treatment of a major class of investment assets and increase the cost of tax compliance”

Need more information?

For more information, please speak to Eddie Coleman our Tax compliance partner.