Taxation of Irish Exchange Traded Funds (ETFs)
Why Ireland is the European domicile of choice for over 50% of ETF assets
- Overview of taxation of Irish ETFs
- Taxation at the Fund Level
- Taxation for Non Irish Investors
- Treaty Access
- Investor Tax Reporting
Overview of taxation of Irish ETFs
Irish ETFs reap the benefits of operating in a jurisdiction which adopts a tax neutral regime in relation to funds, and which has the added benefit of being able to access the reduced rates of withholding tax provided for under the terms of the US/Ireland Double Tax Treaty.
Taxation at the Fund Level
Irish regulated funds are exempt from Irish tax on income and gains derived from their investments and they are not subject to Irish taxation on their net asset value tax. As such income and gains arising to an ETF are allowed to accumulate (or roll-up) “gross” of tax.
Taxation for Non Irish Investors
Non-Irish resident investors do not suffer any Irish tax on the occurrence of a chargeable event provided that relevant non-resident declarations have been provided to the fund. If the relevant declarations are not in place the ETF is obliged to withhold tax at the appropriate rate (i.e. 41% for individual investors and 25% for corporate investors).
As noted above, no withholding tax applies to payments made in respect of units held in a recognised clearing system (regardless of whether or not there are declarations in place).
Another major attraction for ETFs establishing in Ireland is the existence of an extensive network of tax treaties with key jurisdictions worldwide. Such tax treaties enable ETFs to access the double taxation treaties where the fund has invested. In particular, Irish ETFs can benefit from the US/Ireland double tax treaty which reduces standard withholding tax rates from 30% to zero on US-source interest and 15% on US-source dividends.
The US/Ireland double tax treaty is currently being renegotiated and there is uncertainty as to what changes will be implemented and what the outcome will be for Irish funds. However, contributions from industry and practice have been sought by and provided to the Department of Finance, which clearly highlight the importance of ensuring all Irish funds, including ETFs, continue to enjoy the same tax treatment under any new treaty.
Investor Tax Reporting
Many European countries, notably Austria, Belgium, Italy, Germany, Switzerland and the United Kingdom impose local tax reporting obligations on funds. These generate various levels of complexity which organizations need to comply with to avoid adverse fiscal consequences for investors domiciled in these countries. Fund managers will only be able to compete effectively if they ensure that their investors achieve the most beneficial tax treatment available in this regard. In order to attract investors in these jurisdictions fund managers must be familiar with the various legislative requirements in each jurisdiction and interact with the relevant authorities.
Withholding Tax Reclaims
Global portfolio investors may be eligible to claim repayment of withholding tax on investments in European equities and bonds imposed by an EU Member State, which is not already recoverable under a double tax treaty or domestic exemption, and has not been offset against a domestic tax.
There may be opportunities to file a protective claim for the repayment of such withholding tax based on an analysis of EU Non-Discrimination Articles and both domestic and European case law.
This opportunity is of particular relevance to funds. Claims can generally be quantified through liaison with custodians. Case law was developed significantly in 2012 to strengthen the claim basis and depending on fact patterns; withholding tax claims may be available in up to 15 EU markets.
A number of cases are currently in the pipeline in various EU territories court systems, from which many claimants may benefit.
FATCA & CRS
Not being FATCA or CRS compliant may result in reputational, commercial and even legal issues for entities. As such these issues should be a major consideration for all players in the investment management industry.
Generally funds will fall within the definition of a Reporting Financial Institution for FATCA and CRS purposes. However, there are a wide range of exemptions from this, such as certain pension funds or certain collective investment vehicles that may be considered to be Non-Reporting Financial Institutions.
While FATCA allowed the option to report either at a sub fund or an umbrella level, CRS provides for no such option. All reporting under CRS must be done at an umbrella level. This means for some funds, the method for collecting and reporting information under FATCA & CRS may be different and more burdensome under CRS. Similarly, many Irish funds would have used the “sponsoring entity” concept for FATCA reporting. Such a concept does not exist under CRS.
Irish Funds (the Irish funds industry association) has published sample self-certification forms that can be used by Irish RFIs as part of their on-boarding procedures for new customers and the opening of new customer accounts. These sample forms are a useful tool to ensure compliance with FATCA/CRS obligations.
The investment management industry will inevitably be impacted by the OECD’s BEPS project which aims to ensure that the global tax architecture is equitable and fair, and to prevent jurisdictions seeking to attract foreign investors without requiring any economic substance. The output under each of the BEPS Actions are intended to form a comprehensive and cohesive approach to the international tax framework, including domestic law recommendations and international principles under the model tax treaty and transfer pricing guidelines. They are broadly classified as ‘minimum standard’, ‘best practice’ or ‘recommendations’ for governments to adopt.
There are a number of Actions which will have a significant impact on the investment management industry:
- Action 6 deals with preventing the granting of treaty benefits in inappropriate circumstances. Treaty abuse or treaty shopping was one of the main concerns of the OECD in the BEPS project and Action 6 seeks to deal with this. This had been well flagged as an action that could have a significant impact on the funds industry. Although it is likely that widely-held funds investing in portfolio securities deriving income and capital gains (“collective investment vehicles” or “CIVs”) will continue to enjoy access to Treaty benefits (subject to satisfying, at a minimum, that the principal purpose or one of the principal purposes of the structure or transaction was not to gain access to the Treaty in question), work is continuing in relation to other investment vehicles (“non-CIVs”).
- Action 7 refers to preventing the artificial avoidance of permanent establishment (‘PE’) status. One of the backbones of the BEPS project is that a company or group’s profits should be taxed in the State in which they are earned and tax treaties generally provide that the business profits of a foreign enterprise are taxable only to the extent that the enterprise has a PE in the State. Action 7 called for a review of the definition of PEs to prevent the use of certain common tax avoidance strategies that are currently used to circumvent the existing PE definition. The definition of a PE in treaties is going to be key in determining the tax status of Irish funds and companies involved in the investment management industry. Firms involved in the investment management in Ireland often have activities outside of Ireland that will need to be considered carefully to determine if there is any risk of a PE in a foreign jurisdiction.
- Action 2 seeks to neutralise the effects of hybrid mismatch arrangements. Hybrid mismatch arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation or double deduction. Action 2 looks to increase the coherence of the taxation of income at the international level.
- Transfer pricing rules are used in determining the conditions, including the price, for transactions with a multinational group resulting in the allocation of profits to group companies in different countries. Actions 8 to 10 look at aligning transfer pricing outcomes with value creation. Action 13 looked at transfer pricing documentation and country-by-country reporting.
The recently released “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS” includes further details regarding the granting of treaty benefits in inappropriate circumstances under BEPS Action 6 and provides amendments to the definition of "permanent establishment" as recommended under BEPS Action 7. A first high-level signing ceremony for the Multilateral Convention will take place in June 2017, in which a large number of countries, including Ireland, are expected to participate. It is expected that, for those countries choosing to be “early adopters”, the provisions of the Convention may take effect from 1 January 2019.
Country By Country Reporting
On 27 January 2016, Ireland signed a multilateral agreement (along with 30 other countries) providing for the automatic exchange of “country by country” (CbC) reports with other participating jurisdictions if the multinational group that has submitted the CbC report has operations in that jurisdiction. CbC reporting applies to multi-national groups with annual consolidated group revenue of €750m or more in the preceding fiscal year.
Entities that will report to Irish Revenue must complete a notification procedure by the last day of the fiscal year to which the CbC report relates. E.g. reporting entities with a first reporting period ending 31 December 2016 completed their notification procedure by 31 December 2016. CbC reporting requirements apply in Ireland for fiscal years beginning on or after 1 January 2016. First reports must be filed within 12 months of the first fiscal year to which CbC reporting applies e.g. for reporting entities with accounting periods ending 31 December 2016, CbC reporting will be due by 31 December 2017.
CbC reports will be required to be made in XML format in accordance with a prescribed schema. The information to be provided includes details of revenue, profits, income taxes, capital, accumulated earnings, employees and tangible assets in each jurisdiction in which the multi-national group operates.
How Can we Help?
Our ETF experts are ideally placed to:
- Advise on all tax considerations of setting up and operating an Irish ETF
- Assist you with establishing an ETF structure
- Advise on the availability of Treaty benefits for the ETF in its countries of investment
- Assist with obtaining withholding tax reclaims
- Help you manage investor tax reporting obligations
- Help you to classify the ETF for FATCA/CRS purposes and manage your ongoing obligations with respect to same.
- Perform an impact assessment with regard to the IREF regime
- Perform an impact assessment with regard to BEPS
If you would like assistance or further information on any of the matters outlined above, please feel free to contact any of the individuals listed below.