This article deals with the broad tax treatment of shares, unit-linked funds, exchange-traded funds, investment trusts and dividends. The information provided here is our current understanding of things, but should not be treated as tax advice (we are not tax advisors). Hence, the below observations are guidelines:
- The Tax Treatment of Collective Investment Vehicles Compared to Direct Share Investing
- Some In-built Tax Advantages of Using CFD Accounts
- The Tax Treatment of Dividend Income From Different Jurisdictions
- The Tax Treatment of Government Gilts (bonds)
- Additional PRSI and a Universal Social Charge for Individuals
The Tax Treatment of Collective Investment Vehicles Compared to Direct Share Investing
- Irish unit-linked funds: are taxed at the gains tax rate (currently 41%) and no loss relief is available unless you are in an ‘umbrella’ structure.
- Exchange-traded funds (ETFs): EFTs that are domiciled in the EU and regulated under UCITS are taxed in the same way as unit-linked funds i.e. dividends and gains are taxed at the gains tax rate of 41% and no loss relief is available. However, ETFs domiciled outside the EU are treated as securities. Dividends are taxed at your marginal rate, gains at the CGT rate and loss relief is available.
- Exchange-traded commodities: ETCs – which include gold, silver and other commodity-type trackers listed on stock exchanges- are not funds and for tax purposes should be treated as shares.
- Investment trusts: are not dealt with in the Irish Revenues guidelines. However, as Ireland introdroduced Real Estate Investment Trust legislation (REITs) a few years ago, it is now almost certain that general investment trusts should be treated like REITs for tax purposes. Our interpretation is that they are, in effect, shares/securities. In that case, dividends are taxed at your marginal rate, gains at the CGT rate and loss relief should be available.
Umbrella Structures Offer Tax Advantages
Investing in ETFs (and investment trusts) comes with a slight disadvantage to unit-linked funds in one area – Irish insurance companies have ‘Revenue’ approval for the opertaion of ‘umbrella’ structures which allows an investor to switch from one fund to another within that particular ‘umbrella’ structure without crystallising a gain. Tax is only due when the investor exits the ‘Umbrella’ structure or after an eight-year period (referred to as deemed disposal). This is an advantage if you are moving from one fund to another within the same umbrella structure.
If you are intent on trading your fund holdings i.e. moving from one equity fund to another or from an equity to a cash fund in an effort to time the markets, then using an ‘Umbrella’ structure like this is worth considering. On the other hand, if you are not intent on trading and are more likely to add monies to an overall program over time then the advantage is more modest. And the disadvantages of higher costs and the 8-year deemed disposal rule are issues to consider.
A Built in Advantage in CFD Accounts for Holding ETFS & Investment Companies
The tax treatment within CFD accounts (a contracts-for-difference account) for all ETFs and investment trusts is at the CGT rate and loss relief is available. The revenue has not stated this explicitly but the following is the best interpretation of where the Revenue stands on this issue:
An ebrief (no. 36) from the Revenue in 2007 stated that CFDs are capital assets to which the capital gains tax rules apply, unless they are held in the course of a financial trade which is chargeable under Case 1, in which instance the charge will be the accounting profit. The Revenue indicated in that same ebrief the contract (CFD) requires two parties to take opposing positions on the future value of a particular asset or index.
The bottom line is that it appears all instruments dealt in via a CFD account are chargeable under the CGT rules and loss relief is available. The Revenue has not been specific on this, but that is the interpretation put on it by the main accountancy firms in Dublin. Against this, you will be charged interest by the CFD provider on monies invested via CFD accounts. If you happy paying the funding cost (circa 1.5% above base rates) then this is an alternative and more tax effective way to hold UCITS regulated ETFs in particular.
The Tax Treatment of Dividend Income From Different Jurisdictions
Dividends on Irish Shares
There is a 20% with-holding tax on the dividend income from Irish shares. 100% of the dividend is assessable for income tax purposes and the 20% with-holding tax is deemed as tax already paid and for those with a marginal tax rate above 20% only the balance of tax in then due. For pension accounts, the dividend can be received without the with-holding tax (or it can be reclaimed).
Dividends on US Shares
There is a 30% with-holding tax on US shares for non-US residents, but if you complete a W8-Ben form for your stockbroker, a lower 15% with-holding tax will apply. Your therefore receive 85% of the dividend. You are assessed on the full 100% and the 15% withheld by the US Revenue is deemed as tax already paid by you in accounting for tax due to the Irish Revenue, and for anyone on a marginal tax rate above 15%, then the balance is due to the Irish Revenue. The 15% US With-holding tax is non-refundable so pension accounts cannot reclaim it.
Dividends on UK Shares
There is no with-holding tax on UK dividends and they are assessed by the Irish Revenue as received by an Irish resident. Prior to the amendments to the Irish/UK double taxation agreement in 1998 (approx), there was a 10% tax credit one could claim back from the UK Revenue. But that is no longer the case.
Dividends Received From Other OECD Countries
In general, the double taxation agreements between OECD countries allows the source country (where the dividend originates) to withhold a portion of the tax. The receiver of the dividend is then taxed where he/she is resident with credit given for the tax already with paid.
Encashment Tax on Foreign Dividends
An archaic Revenue rule dictates that Irish brokers must deduct a 20% encashment tax on foreign dividends. This is deemed as tax already paid by you in accounting for taxes to the Irish Revenue.
Tax Treatment of Government Gilts (Bonds)
There is a CGT exemption on capital gains on government bonds – in fact, the CGT exemption is quite broad extending to An Post, certain EU securities and local authority issues and is headed “Government and certain other securities”. Income on government gilts is subject to income tax in the normal way.
Additional PRSI, Inocme Levy & Health Contribution
For individuals, all dividend and government stock interest is chargeable to PRSI, income levy and health contribution, at the appropriate rates.