All European domiciled funds and ETFs are subject to the deemed disposal rule. This was introduced in 2006 because people were saving their money and not spending it. As the dividends and gains paid were reinvested tax free under a “gross roll up” regime, the Revenue weren’t getting any taxation from these savings. The deemed disposal rule meant that you had to pay tax, currently 41%, on any profits every 8 years.
Investing directly in shares avoided this rule but many people didn’t have enough capital to build a diversified portfolio. So they looked to investing in US ETFs. Unlike their European counterparts, US ETFs do not operate on a gross roll up regime and taxes are paid on gains and dividends every year. The Revenue were quite happy to treat these ETFs like shares. The dividends were subject to income tax, PRSI and USC while the gains were taxed under CGT at 33%.
From the start of the 2018, an EU wide regulation came into effect that all investors must be provided with a Key Investor Information Document (KIID) before they can invest in an ETF or fund. This 2 page document sets out past performance, charges, risk profile etc of an ETF or fund. All advisors and stockbrokers are obligated to provide their clients with one of these documents. Except, US ETFs being US domiciled, they are not bound by EU regulation and they don’t produce KIIDs. That means they cannot be sold in Europe.
The KIID rule applies to retail investors. Like with many situations, if you have the money, there are options available to you:
The short answer is no. Two of the largest ETF providers, Blackrock and Vanguard have said they have no intention to start producing KIIDs. Blackrock said that their target market is the Professional Investor, so they do not intend to start targeting the retail investor and the extra regulation that goes with it. Vanguard explained that their US ETFs are regulated by the SEC, not the EU, so they will meet the SEC’s requirements, not the EUs.
For Irish investors, there is not much choice; invest in gross roll up investments or purchase shares directly. Having dividends and gains reinvested without tax is a pretty tax efficient investment strategy. It is paying tax every 8 years that is the pain. But we pay it every year in DIRT on deposit interest, so every 8 isn’t as bad as it seems.
If you have any questions, drop me an email at steven@bluewaterfp.ie