Ireland has established itself as Europe’s favoured location to domicile ETFs, however, Irish investors are discouraged from using the wrapper due to prohibitively high gains taxes.
While investors based in the country pay 33% capital gains tax on profits made when selling stocks, they pay a 41% exit tax on profits when they sell ETFs within eight years.
For long-term investors, Ireland’s ‘deemed disposal’ system means they automatically pay a 41% tax on gains after eight years of holding an ETF, even if they do not exit their position.
The logic behind the disposal scheme, introduced in 2006, is that the Irish Revenue Commissioners did not want to wait decades to accrue tax revenue from long-term investors despite the fact taxes on gains that compound over decades are likely to see higher revenues.
Ireland’s Minister for Finance Michael McGrath plans to review the 41% tax, according to the Irish Times.
The currently unfavourable tax treatment of ETFs versus individual equities does nothing to improve investor outcomes and likely encourages Irish savers to opt for single stock bets.
It is also not in keeping with Ireland’s position as a tax-efficient ‘centre of excellence’ for ETFs. Due to its double taxation treaty with the US, ETFs domiciled in Ireland only pay 15% withholding tax on US dividends versus 30% in domiciles such as Luxembourg where no treaty exists.
If the S&P 500 has a dividend yield of 2%, an Irish-domiciled ETF will save 30 basis points (bps) a year, according to ETFbook.
This structural advantage has seen Ireland extend its lead over other jurisdictions in recent years, growing its domiciled ETF assets from $305bn in 2017 to $953bn by the end of last year.
Even French asset managers Amundi and BNP Paribas Asset Management, which traditionally preferred Luxembourg, have started domiciling ETFs in Ireland over the past year.