5. Taxation of investment products

Introduction

Given the complexity arising from the number of investment products available in both the Irish and international markets and the different structures used to invest in them, there are concerns that the differing tax regimes may cause investors to choose one type of investment over another, more suitable, product. The tax rate and treatment can vary depending on:

• the type of investment product;
• who the investor is and their tax residence or domicile position;^[18]
• the percentage holding or level of influence of the investor;
• the source jurisdiction; and
• in some cases, depending on whether certain administrative or filing obligations have been complied with.

The investment market has expanded exponentially over recent years with a wide array of investment products and platforms now available to investors. Individual products are continually developed so there is no set list of products and their treatment for taxpayers to review. These investments are also more accessible to a broader cohort of taxpayers (both retail investors and professional investors) with varying levels of access to professional advice. While the Revenue Commissioners publishes guidance for taxpayers, practitioners and investors, it is not possible to provide comprehensive guidance for all products.

In its 2022 Report, the Commission on Taxation and Welfare (COTW) expressed the view that, as a general principle:

• different forms of investment and savings income should be subject to the same level of tax on horizontal equity grounds; and
• the level of income of a taxpayer should determine the marginal rate payable, rather than the type of investment product used.

This is consistent with the findings of the Commission on Taxation 2009 which recommended that there should be parity of treatment for different forms of savings and investment income.

The COTW’s recommendation for an examination of the taxation regime for funds, life assurance policies and other related investment products, with the goal of simplification and harmonisation where possible; and to do so with a net revenue-raising or neutral mandate will be considered within the context this Review.

Relevant Terms of Reference

Illustrative rates of tax on savings and investments

The current treatment of financial products is confusing and may potentially distort the neutrality of the tax system in this area. Examples include the different treatment of products liable to Deposit Interest Retention Tax (DIRT) vs Life Assurance Exit Tax (LAET)^[19]; the treatment of direct equity investment vis-a-vis an Exchange Traded Fund (ETF) or other vehicle; and where offshore funds are considered to be distributing or non-distributing.

In some cases, taxes represent final liability taxes deducted by a financial institution at source whereas others must be included in a self-assessed tax return and, where the amount is included in a self-assessed return, in some cases it will be a final liability and in others reliefs or credits will be available for offset against the liability.

Other incongruities and inconsistencies between the regimes have emerged:

• Capital Gains Tax (CGT) losses can be offset against CGT gains, whereas when a loss arises on the disposal of a unit in an Irish fund or a material interest in an offshore fund, no CGT or other loss relief is available.
• There is no CGT charge for disposals on a death whereas exit tax applies for payments on the death of a unit holder in a fund. The exit tax payable on the death of an individual is allowed as a credit against Capital Acquisitions Tax (CAT) payable by the beneficiary.

Concerns have also been raised in terms of how the application of an exit tax interacts with general tax exemptions and the complexity that comes from different exemptions applying to the taxation of life policies, fund investments and the taxation of deposit accounts.

In 2018, the Department of Finance published a paper entitled “The Taxation of DIRT and LAET: a review on the comparisons and tax treatment of DIRT and LAET” which considered products subject to DIRT or LAET under three headings (i) fees/costs to the client; (ii) taxation treatment and exemptions; and (iii) risk and return.^[20]

The paper concluded that these products are different in their conception, fees, level of risk and security of capital. These differences, in addition to the different profits to which the tax rates apply (e.g. gross roll-up versus annual charges), are relevant to any proposal to simplify and harmonise the taxation of these products.

The tables below illustrates the different categories of investment and the headline rate(s) that can apply to Irish investors in those investments.

Table 6. Rates of Tax on Different Forms of Savings and Investments (Source of Income)
	Tax charge / scope	Tax rate		Notes
Distributions (including dividends)	Dividend withholding tax (DWT)	25%		DWT is a payment on account and is offset against the final tax liability.
	Companies liable to Corporation Tax (CT)	Exempt (Franked Investment Income)
	Income tax (IT)	20% / 40%
	Universal Social Charge (USC)[21]	0.5%/ 2% / 4.5% / 8%[23]
	Pay Related Social Insurance (PRSI)[22]	4%
Rental income	Individuals liable to IT, USC and PRSI	Marginal rates (as above)
	Companies liable to CT	25%
	REITs	Exempt
Deposit interest[24] [25]	Individuals liable to Deposit Interest Retention Tax (DIRT)	33%[27]		Final liability tax
	PRSI may apply[26]	4%
	Companies liable to CT	25%[28]
Deposit interest arising from foreign deposits	IT, calculated at the DIRT rate, applies to individuals who have have deposit interest arising in an EU Member State	33%
	PRSI may apply	4%
	IT, calculated at the DIRT rate, applies to  interest from a non-EU source if the taxpayer is a standard rate taxpayer	33%
	PRSI may apply	4%
	IT, calculated at an individual’s higher rate, applies to: Deposit interest arising in an  EU Member State if the individual has not made a timely return Deposit interest arising in  a non-EU Member State  if the individual: has not made a timely return; or is a higher rate taxpayer (for IT purposes)	40%

Source: Revenue Commissioners

Table 7. Rates of Tax on Life Assurance Products
	Tax charge / scope		Tax rate		Notes
Life assurance policy	New Basis Business (written on or after 1 January 2001) Life Assurance Exit Tax (LAET) applies as follows:				Gross roll-up regime at life policy level. LAET applies to chargeable events, including a deemed disposal every 8 years. It is operated by the life company, or by the Courts Service where applicable, and is a final liability tax. As such, individual investors are not required to file a tax return (Form 11) in relation to income from these policies.
	Individuals [29]		41%
	Companies		25% (increased to 41% if appropriate declaration has not been made)
	Personal Portfolio Life Policy		60% (increased to 80% if details not correctly included in a timely tax return)
	Old Basis Business (written on or before 31 December 2000) The investment return from the life assurance policy is apportioned between policy holders and shareholders:		Income less expenditure[30] taxed at:		Annual charge. This is a final liability tax for policyholders who are not required to file a tax return in relation to these profits.
	Shareholders’ share of profit taxed at standard rate of CT		12.5%
	Policy holders’ share of profits taxed at standard rate of Income Tax		20%
	IT on Certain Foreign Life Assurance Policies				Applies to payments from the policy and on a 8 year deemed disposal. Tax is paid through self-assessment. Loss relief cannot be used to shelter the amount of tax arising.
	Companies		25%
	Individuals		41%
	Personal Portfolio Life Policy (for individuals)		60% (increased to 80% if details not correctly included in a timely tax return)

Source: Revenue Commissioners

Table 8. Rates of Tax on Fund Structures
	Tax charge / scope	Tax rate	Notes
Irish domiciled funds	Investment Undertakings Tax (IUT)		Gross roll-up regime at fund level. IUT applies to chargeable events, including in some cases a deemed disposal every 8 years.[31]  IUT is a final liability tax for individuals. IUT may be refundable for companies.
	Individuals	41%
	Companies	25% (increased to 41% if appropriate declaration has not been made)
	Personal Portfolio Investment Undertaking (PPIU) (for individuals)	60% (increased to 80% if details, when required, not correctly included in a timely tax return)
Offshore funds	Tax on ‘Equivalent’ offshore funds in the EU/EEA/OECD[32]		Treated broadly the same as an Irish fund (including deemed disposal after 8 years). IT or CT applies to both income and any gain on disposal of a material interest in the fund. The tax arising at 41% / 60% for individuals cannot be reduced.
	Individuals	41%
	Companies	25%
	PPIU	60%/ 80% where payment/gain on disposal is not recorded correctly in the persons return
	Tax on ‘Non-equivalent’ offshore funds in the EU/EEA/OECD		These are treated as normal income and gains (outside scope of special offshore funds rules) and included in the Form 11 / CT1 as normal.
	Individuals	IT, USC and PRSI at marginal rates and CGT at 40%
	Companies	CT at 0%, 12.5% or 25% on income and 33% on gains
	Tax on offshore funds in other territories (non EU/EEA/OECD) - Distributing fund[33]		Income payments are taxed in accordance with general principles of taxation. Payments in respect of disposals subject to CGT.
	Individuals	IT, USC and PRSI at marginal rates and CGT @ 33%
	Companies	CT at 25% on income and 40% on gains.
	Tax on offshore funds in other territories (non EU/EEA/OECD) - Non - Distributing fund		Income payments are taxed in accordance with general principles of taxation. Payments in respect of disposals charged to IT but calculated according to CGT rules.
	Individuals	IT, USC and PRSI at marginal rates
	Companies	CT at 25% on income and gains
Investment Limited Partnerships	Income, gains or losses are allocated to partners in proportion to that partner’s capital interest in the partnership. The partnership is generally treated as tax transparent.	CT @ 0%, 12.5% or 25%   IT, USC and PRSI at marginal rates and CGT @ 33%
Common Contractual Funds	Income, gains or losses are allocated to investors in proportion to that investors’ capital interest in the fund. The fund is generally treated as tax transparent.	CT @ 0%, 12.5% or 25% IT, USC and PRSI at marginal rates and CGT @ 33%

Source: Revenue Commissioners

Tax regimes for savings and investment products

The evolution of the tax regimes for savings and investment products is explored below. 

Deposits with Irish Financial Institutions (Deposit interest income)

Tax policy in relation to deposit interest has largely focused on the rate. As illustrated below, the DIRT rate has changed numerous times since 2008 with changes generally introduced to increase revenues or to incentivise consumption or savings depending on economic conditions at the time.

Table 9. Comparison of DIRT and Exit Tax Rates – January 2002 to date
Period Rate applied / Date Chargeable Event arose	DIRT Rate (%)	Exit Tax Rate (%) [34]
1 January 2002 to 31 December 2008[35]	20	23
1 January 2009 to 7 April 2009	23	26
8 April 2009 to 31 December 2010	25	28
1 January 2011 to 31 December 2011	27	30
1 January 2012 to 31 December 2012	30	33
1 January 2013 to 31 December 2013	33	36
1 January 2014 to 31 December 2016	41	41
1 January 2017 to 31 December 2017	39	41
1 January 2018 to 31 December 2018	37	41
1 January 2019 to 31 December 2019	35	41
Since 1 January 2020	33	41

Source: Revenue Commissioners

DIRT is collected at source by the financial institution when the interest is paid or credited to the deposit account of an Irish resident. It is a final liability tax in that it satisfies an individual’s liability to income tax in respect of the deposit interest. Deposit interest is excluded from the Universal Social Charge (USC) charge although Pay-Related Social Insurance (PRSI) may apply.  

The COTW recommended that tax on deposit interest should be charged at an individual’s marginal rate of Income Tax (IT) and USC. Such a move would require administration changes to facilitate collection of the right amount of tax as the marginal rate of IT, USC and PRSI will vary from person to person and from year to year, and may even change month to month, depending on total income and personal circumstances.

While unincorporated businesses are charged DIRT on their interest income, DIRT does not apply to interest on deposit accounts opened by companies provided that the deposit taker has been provided with the tax reference number of the company. Companies are generally liable to Corporation Tax (CT), at the rate of 25 per cent, on their investment income (although interest may be regarded as a trading receipt in certain limited circumstances). Companies may use current year trading losses to reduce the tax due on passive interest income arising in the same year.

Irish domiciled funds

The growth and development of the funds industry has in many ways impacted the tax system and how it has evolved. As discussed in Chapter 3, Irish domiciled funds can be established as:

• Investment Companies, under Part 24 Companies Act 2014

• Unit Trusts, under the Unit Trust Act 1990
• Irish Collective Asset-management Vehicles (ICAVs) under the Irish Collective Asset-management Vehicles Act 2015
• Investment Limited Partnerships (ILPs), under the Investment Limited Partnership Act 1994 (as amended)
• Common Contractual Funds (CCFs), being
  • a UCITS that is not established under trust or statute, or
  • established pursuant to the Investment Funds, Companies and Miscellaneous Provisions Act 2005

The profits and gains of these vehicles are taxed either on a tax transparent basis or on gross roll-up basis. 

Taxed on a tax transparent basis	Taxed under the gross roll-up basis
Common Contractual Funds (CCFs) ILPs granted authorisation on or after 13 February 2013[36]	Investment Companies Unit Trusts Irish Collective Asset-management Vehicle (ICAVs) ILPs granted authorisation prior to 13 February 2013

Under the gross roll-up regime, the profits and gains arising to the fund are exempt from tax until the happening of a chargeable event which, generally speaking, are events where value passes from the fund to the investor such as a distribution or a redemption with profit. Upon the happening of a chargeable event Investment Undertaking Tax (IUT) arises. Where the investor is an Irish individual the rate of IUT is 41 per cent while it is 25 per cent where the investor is an Irish company.  There are certain investors such as non-residents, pension funds, charities etc. who, on the making of an appropriate declaration, are exempt from IUT.

Where IUT is applicable in relation to a chargeable event, in most cases, a gain, calculated as the amount of the chargeable event, is deemed to arise to the fund with IUT operated on that gain. Where that happens and the unit holder is an individual, the payment of the IUT by the fund is a final liability tax in that the individual does not have to include the amount of the chargeable event in a tax return made to the Revenue Commissioners. Where the units in the fund are held in a clearing system, such as would be the case with an ETF, it is not possible for the fund to operate the IUT system and the investor will have to include the income or profit in their tax return and pay the associated tax to the Revenue Commissioners.

IUT is non-refundable where the investor is an individual. Companies may be eligible to a refund of IUT if they have, for example, losses which can offset the amount of their taxable profits.  However, companies may also be subject to the close company surcharge on any amounts received from funds. IUT may be operated on payments to entities which are tax exempt, if they are not specifically exempted from IUT, and in such cases is non-refundable.

In 2001, a new chargeable event known as the 8-year deemed disposal was introduced in certain circumstances. This was to prevent the avoidance of tax by way of indefinite deferral of a chargeable event. Any tax payable on this deemed disposal is available as a credit against any tax ultimately due on the actual disposal of the units.

In 2007 additional anti-avoidance rules were introduced, known as the personal portfolio investment undertaking (PPIU). The PPIU rules apply where the selection of property within the fund was or can be influenced by the investor or a connected person. The rate of IUT that applies where the fund is a PPIU is 60 per cent compared to the normal rate of 41 per cent. In 2016 anti-avoidance rules in the form of the Irish Real Estate Fund regime were introduced, which is considered in a separate chapter.

The fact that no IT, CT, subscription tax, redemption tax, etc. is applied at fund level in Ireland is favourable. Some other countries may impose some form of charge on the fund vehicle. Furthermore, as provided under EU law, the provision of fund management, distribution and global custody services to an Irish regulated fund is exempt from Irish VAT.^[37] Finally, a stamp duty exemption applies on the issue, redemption, transfer or repurchase of units of an investment undertaking (though stamp duty may apply where the fund is involved in a transaction involving Irish immoveable property).

Life policies

Life policies can be taxed under the “Old Basis” or “New Basis”.

The “New Basis” regime applies to policies commenced by the life business on or after 1 January 2001. Under this regime the shareholder profits are taxed as trading profits while the policyholder profits are subject to Life Assurance Exit Tax (LAET) on a gross roll-up regime similar to that described in relation to Irish domiciled funds. There are certain investors such as non-residents, pension funds, charities etc. who, on the making of an appropriate declaration, are exempt from LAET. Am 8-year deemed disposal was introduced for life policies in in 2001 and anti-avoidance rules dealing with personal portfolio life policies were introduced in 2007.

Under the “Old Basis” regime, for policies written on or before 31 December 2000, life companies are taxed on the “Income less Expenditure” (I-E) basis. The amount of Expenditure that is deductible may be reduced through the application of the Notional Case I computation. The profits calculated under I-E are split between shareholder and policyholder business, with the shareholder business taxed at 12.5 per cent and the policyholder business taxed at 20 per cent. 

Offshore funds

Investment income and gains, such as dividends from a foreign company or a profit on the sale of shares in a foreign company, are generally taxed as they arise. That is, dividends are taxed under IT when they are paid and the gain is taxed under CGT when it arises.

Under the current offshore funds regime, introduced in 1990, foreign life assurance policies and offshore funds certified by the Revenue Commissioners as distributor funds would remain liable to CGT while all other offshore funds would be liable to the top rate of IT on exit. The normal rate of CGT was reduced from 40 per cent to 20 per cent in 1998, but the higher 40 per cent CGT rate was retained for disposals of offshore distributor funds and life policies. The 40 per cent rate is still in force today for funds in certain territories.

In 2001, the offshore funds regime was split into two separate regimes:

• that applying to funds located within the EU, EEA or an OECD member state with which Ireland has a double tax agreement; and
• that which applies to funds in other territories (non EU/EEA/OECD).

From 2001 to 2007 all offshore funds in the EU/EEA/OECD were taxed in the same manner as Irish domiciled funds (issues such as distributing status were not relevant). However, given the broad range of structures that could be treated as an offshore fund, a disparity arose between the treatment of unregulated investments in Ireland and similar structures that were treated as offshore funds. This created opportunities for investors to create offshore structures that fell within the favourable offshore funds regime. As a consequence, these funds were split into what are known as “equivalent funds” and “non-equivalent funds” (i.e. whether or not the offshore fund was similar in all material respects to Irish domiciled funds) in 2007, with the income and gains from each subject to different rules.

Reporting Requirements

Ireland has signed up to a number of information exchange agreements, such as the Foreign Account Tax Compliance Act (FATCA) ^[38] with the United States, the OECD Common Reporting Standard (CRS) ^[39] and the EU Directives on Administrative Co-operation (DACs) ^[40]. Under these standards, banks, life companies, funds, credit unions and the Post Office are required to report certain information in relation to non-resident account holders. Separately, Ireland has a number of domestic reporting obligations^[41] which apply to financial accounts, investments in funds and investments in life policies.