In early 2023, Ireland’s investment community was stirred by news that the government would re-evaluate its tax treatment of funds, including Exchange-Traded Funds (ETFs). This review, initiated by then-Finance Minister Michael McGrath, came on the heels of public calls for reform of a system many see as outdated and overly complex. Following a consultation process that concluded in September 2023, Irish investors began to anticipate changes that could significantly affect how their investments are taxed.
The findings, released in October 2024 by current Finance Minister Jack Chambers, include proposals that could bring Ireland’s ETF tax regime in line with other investment products. Though not yet law, these recommendations could mark a turning point for ETF investors if adopted in the upcoming Budget 2025.
Let’s explore the key takeaways from the review and what they could mean for ETF investors in Ireland.
What Might Change?
The review outlined several measures intended to modernize ETF taxation and remove inconsistencies with other savings products. Here are the three main proposals:
- Scrapping the Eight-Year Deemed Disposal Rule
- Reducing the Tax Rate on ETF Returns to 33%
- Introducing Limited Loss Relief
1. Ending Deemed Disposal
Introduced in 2006, deemed disposal was a mechanism allowing the government to tax unrealized investment gains after eight years of holding a fund. Although the rule was designed to ensure timely tax collection, it’s long been criticized for penalizing long-term investors.
Eliminating this rule could bring about several benefits:
- Encouraging Long-Term Investing: ETFs are ideal for passive, long-term strategies. Removing the requirement to pay tax on gains that haven’t been realized would make it easier for investors to commit to such strategies without unnecessary disruption.
- Boosting Investment Returns: Without the need to reserve cash or sell assets prematurely to cover tax obligations, investors can keep more of their capital working in the market—leading to better long-term growth potential.
- Simplifying Investment Decisions: With fewer tax-related complications, investing in ETFs becomes more straightforward. This could reduce the deterrent effect of complex tax rules and promote greater participation in capital markets.
- Reducing Paperwork: Investors who use regular contributions (often called euro-cost averaging) currently face a complex web of tax events once the eight-year mark is reached. Doing away with deemed disposal would make tax reporting easier and reduce the burden on individual investors.
- Streamlining Inheritance Planning: Under the existing system, ETFs trigger a tax event upon the investor’s death. This can diminish the estate’s value and complicate the transfer of assets. Removing this rule would simplify the process for families and executors.
2. Aligning ETF Taxation with Capital Gains Tax
The report also recommends lowering the tax rate on ETF gains from the current 41% to 33%, matching the capital gains tax rate. While this would represent a drop in tax revenue on a per-investor basis, broader market participation could offset the difference over time.
By making ETF investment returns more tax-efficient, the government could encourage more people to invest rather than leave savings in low-interest deposit accounts. Greater participation in financial markets means more taxable gains in the long run—potentially resulting in higher overall tax revenue.
As of late 2023, Irish households held €178 billion in deposit accounts and government savings schemes. Redirecting even a portion of this toward ETFs could significantly boost capital markets and, by extension, the Exchequer’s intake from investment activity.
3. Introducing Loss Relief for ETF Investments
Currently, Irish investors who incur losses on ETF holdings can’t offset those losses against other gains, even within their broader investment portfolio. This restriction not only creates an uneven playing field but also encourages investors to steer away from ETFs in favor of products where losses can be deducted.
Allowing some level of loss relief would align ETFs with standard investment tax rules, giving investors a more accurate reflection of their net performance and reducing unintended distortions in investment behavior.
Final Thoughts
While the proposed changes have not yet been enacted, they represent a major step toward a more rational, investor-friendly tax framework for ETFs in Ireland. The current system is widely seen as outdated, inefficient, and misaligned with the needs of modern investors.
The fate of these recommendations lies in the hands of the next Irish government. With a general election looming, it’s uncertain whether the incoming administration will prioritize ETF tax reform. However, the momentum generated by the review process and the support from current policymakers offer a glimmer of hope.
Whether these changes come into force in 2025 or beyond, Irish investors can take comfort in knowing that long-overdue reform is finally on the table.
