(Non)-UCITS ETFs and taxation complications

blashyrkh

Greetings,

I have recently moved to Ireland and am a tax resident here now. Looking to invest some money (around 40-50k for now), presumably in ETF/index funds, I will be also holding some stocks of my company which is part of my compensation (other than that I'm not particularly fond of stock investment as it is too risky IMO).

Anyway, while the exact investment strategy is really matter of personal preference, the taxation rules are the same for everyone. For the last month I have been reading countless threads and resources on how different types of investments are taxed in Ireland. Amongst endless rants about how bad everything is, the key points I found:

- UCITS ETFs are taxed at 41% rate (both gains and dividends), and gains are taxed after 8 years due to so-called "deemed disposal"; losses are NOT offsetable

- Non-UCITS ETFs are taxed like stocks i.e. 33% on gains and around 55% on dividends; losses are offsetable + there is a 1270 EUR allowance

- Non-UCITS ETFs are not available to European investors anymore due to MIFID, the fact some brokers are still selling them is rather a bug than a feature (please correct me if I'm wrong) - see the neighbouring thread "US ETFs no longer purchasable in Europe" (the forum doesn't allow me to embed a URL)


What I would like to know:

1. What exactly is the tax on the UCITS ETF? Do I understand correctly that it is DIRT? Aren't they going to gradually decrease it to 33%?

2. A big concern is the inability to offset losses for UCITS ETFs. However, one is not required to sell on a given year (when a particular ETF scored losses). Does this make sense?

3. Another thing is that if I invest gradually (say every month), then after 8 years I will have this "deemed disposal" every month. Looks like just a poorly organized red tape. As of now I don't really think about it since I'm not sure I will stay in Ireland for 8 years (this is also the reason I don't consider investing in the Irish pension system, but the life situation might change, who knows).

4. Let's imagine MIFID hadn't been in place and UCITS/Non-UCITS ETF were equally available. Would there be any reason to buy any UCITS ETF for any reason other than diversification? What would be that reason?

The Haven

This Irish Times article from March 13th 2018 contains all the information:
https://www.irishtimes.com/business/personal-finance/don-t-invest-in-an-etf-until-you-understand-the-tax-1.3421331

This is my take on it.

Irish Domiciled ETFs: tax on income 41% and gains of 41%, (so no CGT of 33% and no spare of 1270 EUR?)

EU Domiciled ETFs: tax on income 41% and gains of 41%, however, some could be taxed at the lower CGT rate of 33%.

US, EEA and other OECD Domiciles: tax on income (income tax + prsi + usc) and gains of 33% CGT

"Offshore ETFs": tax on income AND gains of income tax + prsi + usc

Deemed disposals
So if you invest in a fund, and leave it for 8 years, then you have to pay on the gains.
Does this apply to ETFs?

blashyrkh

Yeah, I have seen that article.

The valid point there is that UCITS ETF are not going to be taxed on dividends if they are reinvested. Does that pertain only automatic reinvestment (DRIP)? If I get dividends in cash, am I going to pay the tax, before being able to reinvest them manually? For instance Degiro doesn't support DRIP, as far as I know. It would be great to hear from someone who had personal experience with this.

Also, I still don't understand where does the magic number 41% come from. The article says it is DIRT, which is 37% as of 2018 and will be 33% by 2020.

howiya

blashyrkh wrote: »

Also, I still don't understand where does the magic number 41% come from. The article says it is DIRT, which is 37% as of 2018 and will be 33% by 2020.

The 41% is exit tax not DIRT. The article says dirt or exit tax. Dirt reducing as you've pointed out. Exit tax hasn't though.

Dardania

blashyrkh wrote: »

Yeah, I have seen that article.

The valid point there is that UCITS ETF are not going to be taxed on dividends if they are reinvested. Does that pertain only automatic reinvestment (DRIP)? If I get dividends in cash, am I going to pay the tax, before being able to reinvest them manually? For instance Degiro doesn't support DRIP, as far as I know. It would be great to hear from someone who had personal experience with this.

Also, I still don't understand where does the magic number 41% come from. The article says it is DIRT, which is 37% as of 2018 and will be 33% by 2020.

You should keep an eye out for Accumulating ETFs. These are ye ones which receive the dividend to the fund and reinvest it automatically without triggering a taxable event.
There’s a good list of them available here:
https://www.justetf.com/en/find-etf.html?groupField=none&sortField=ter&distributionPolicy=distributionPolicy-accumulating&sortOrder=asc

Generally for any of the big ETFs there is both a distributing option and an Accumulating option.

Last year I did an exercise comparing notional performance of a non UCITS ETF with a UCITS over a timespan, and the tax due etc. I found that getting an Accumulating ETF was essential to even approach the performance of non UCITS in the 8 year deemed disposal world.
See the rough numbers here:
https://docs.google.com/spreadsheets/d/e/2PACX-1vSeQni67A5rcgf8drQP8KgQIntNSibeG5KSKHX5PgR1TXnsvQ8jymFVGvvvD87f8SYJ0AuAoppVz6mu/pubhtml

Also, bear in mind that if you’re buying monthly, you don’t need to start seeking monthly starting from 8 years later. You can just sell everything at that time, and start the 8 year period again. Far less hassle.

Lastly I saw some advice from an ould cynic here a few weeks ago, advising it might be better to invest in statesavings.ie products, pay down your mortgage, and top up yoUr PRSA rather than invest in taxable ETFs. Might be worth bearing in mind depending on your life situation.

The Haven

Nice google doc showing the numbers - cheers.

Yeah, it's not DIRT, but termed Exit Tax at 41% - different.

Dardania

The Haven wrote: »

Nice google doc showing the numbers - cheers.

Yeah, it's not DIRT, but termed Exit Tax at 41% - different.

Thanks for that - I was referring to it as Deemed Disposal, but I've added Exit Tax to it.
DIRT is deposits instead?

The Haven

Dardania wrote: »

Thanks for that - I was referring to it as Deemed Disposal, but I've added Exit Tax to it.
DIRT is deposits instead?

DIRT is the savings tax

So, if you have a savings account from a bank, then the DIRT is taxed from the interest allowed.

----

For deemed disposal, is it better to purchase ETFs every month or once per year (in a lump sum)?
Do all purchases in a year, count for that tax year?
Then it would be ok, to purchase once per month to build up.

Dardania

The Haven wrote: »

Dardania wrote: »

Thanks for that - I was referring to it as Deemed Disposal, but I've added Exit Tax to it.
DIRT is deposits instead?

DIRT is the savings tax

So, if you have a savings account from a bank, then the DIRT is taxed from the interest allowed.

----

For deemed disposal, is it better to purchase ETFs every month or once per year (in a lump sum)?
Do all purchases in a year, count for that tax year?
Then it would be ok, to purchase once per month to build up.

From what I understand the 8 years starts ticking from the moment of purchase.
If purchasing monthly, just bear in mind transaction costs etc. - degiro for example has a list of ETFs which one can buy fee free (however interestingly, not the ones with super low TERs)

The Haven

I get that now, cheers.

blashyrkh

Dardania wrote: »

You should keep an eye out for Accumulating ETFs. These are ye ones which receive the dividend to the fund and reinvest it automatically without triggering a taxable event.
...

Wow, this is very helpful, thanks!

This leaves me in a sort of a quandary since there are no real benefits of the UCITS ETF, but it seems that EU is vehemently trying to "protect" its investors from the US ETF, so there will be no other option. But it's good to know that amongst the UCITS ETF it's worth for the accumulating ones.