Exchange Traded Funds

Electronically Traded Funds

In recent years these have become a common method of fund investing. However, they can sometimes lead to tax problems as the correct treatment is not understood. many investors believe that they qualify for Capital Tains Tax treatment. This is not the case.

What are Exchange Traded Funds(ETFs)?

ETF’s are funds which invest in baskets of shares and securities across international exchanges. The investor buys units of these funds. This enables him to spread his investment risk across a number of investments using a single fund. in effect, this is the same as investing in unit trusts.

What are the tax implications?

The investments are liable to income tax under a special regime. The key factor is where the fund is resident. These will almost certainly be offshore i.e. non-irish resident. The treatment depends on whether the fund is a

  • good offshore fund
  • bad offshore fund

When you acquire a “material interest” in the fund you must diclose it in your return. A material  interest is any investment which can be sold within 7 years.

Good Offshore Fund

These are resident in an OECD country which has a Double Tax Treaty with Ireland. Both conditions must be met. China has a ttreaty but is not in the OECD. Therefore it does not qualify.

Tax treatment

Tax is chargesd at 30% on

  • receipts from the fund
  • sale of units
  • accumulated gains during an 8 year roll up period

If you fail to declare the acquisition of a material interest in a “good” fund it will be treated as a “bad” fund

Bad Offshore Funds

These are taxed at a special rate of 48%.

Losses on funds

Losses cannot be offset agains gains on other funds. They cannot be carried forward. In effect, they are useless.

These are brief notes for guidance. When dealing with the tax treatment of funds you should seek professional advice.

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