35. Deputy Barry Ward asked the Tánaiste and Minister for Finance if a calculation has been made regarding the rate of capital gains tax if deemed disposal was removed and ETFs moved to a CGT regime instead of an exit tax regime; and whether this has been given consideration. [74541/26]

An exchange-traded fund (ETF) is an investment fund whose units are traded on a regulated stock exchange. There is no separate tax regime for ETFs. The domicile of an ETF generally determines the applicable funds taxation regime, specifically whether the ETF falls within the domestic fund regime (gross roll-up), or the offshore funds regime. There are different rules applicable under the offshore funds regime dependent on the domicile and regulatory status of the fund.

The gross roll-up regime for Irish domiciled investment funds allows the monies invested in these funds to grow on a tax-free basis. Tax is payable when value transfers, or is deemed to arise, from the fund to the investor. Investment undertaking tax (IUT) must be deducted on the occurrence of a ‘chargeable event’. In the case of an Irish domiciled investment fund, a chargeable event includes –

• the making of relevant payments,

• the redemption of the investment,

• the transfer by an investor of their investment, and

• the ending of an eight-year period following the acquisition of the investment and then every eight years thereafter. This is commonly referred to as the eight-year deemed disposal.

The rate of IUT applying to chargeable events is currently 38% but, as recently announced in the Budget, the rate is due to decrease to 35% for chargeable events occurring on or after 1 January 2027. A chargeable event does not attract a liability to Pay Related Social Insurance (PRSI) or Universal Social Charge (USC). IUT must be operated by the fund on the occurrence of a chargeable event in respect of an investor (other than an investor that is exempt from the operation of exit tax).

Investors in Irish domiciled funds whose units are held in a recognised clearing system (e.g. an Irish domiciled ETF) are not subject to IUT. Instead, investors are required to self-assess for the tax due in respect of their investment through the filing of an income tax return. This includes self-assessing for any tax arising on the happening of the eight-year deemed disposal. These investors pay income tax on their investment returns at the IUT rate but do not pay PRSI or USC. Similar tax treatment applies to Irish investors in equivalent ETFs domiciled in an EU / EEA state, or OECD member state (EU/EEA/OECD member state) with which Ireland has a double taxation agreement. Irish investors in ETFs domiciled in non-EU/EEA/OECD member states or which are not equivalent to Irish ETFs can not avail of this treatment.

In the area of retail investments, CGT applies where investments are made directly, for example where an Irish resident individual invests directly in a company through a purchase of company shares. In such circumstances, CGT applies at a rate of 31% in respect of any gains arising on the disposal of those shares. In addition, any income payments received in respect of the ownership of the shares, for example dividends, are subject to income tax, PRSI and USC, at the individual’s marginal tax rate. While the CGT legislation includes a broad range of exemptions and reliefs, of particular relevance in a retail investment context are the availability of CGT loss relief (on a current year and carried forward basis) and the annual personal exemption (the first €1,270 of chargeable gains after any deductions for CGT loss relief are exempt from CGT).

If ETF investments were to be taxed on a similar basis to direct investments, CGT would apply when a gain arises (subject to available reliefs) and would have to be paid alongside any income tax, PRSI and USC due on any income or distributions received on an annual basis. This is in contrast to the position under the gross roll-up regime, where investments are allowed to roll-up tax-free with no CGT, income tax, PRSI or USC arising from disposals or distributions occurring within the fund and no tax is due until a chargeable event occurs.

As the two regimes are not aligned, a calculation of the tax collection impact of moving ETF investments from the gross roll-up regime to that which applies for direct investments is not available.

For Budget 2027, estimates were made of the cost of reducing Investment Undertaking Tax, Life Assurance Exit Tax and the rates of tax applicable to investments in equivalent offshore funds and certain foreign life assurance policies. These estimates apply to the overall cost of changing the tax rate for the range of investment products to which it applies, rather than isolating particular kinds of investment, such as ETFs.  According to those estimates, reducing that rate from 35% (the incoming rate for 2027) to 31% (the incoming CGT rate) would cost approximately €25 million annually. However, as outlined above, due to the differences between the two regimes, this does not accurately capture the Exchequer impact of transitioning from one regime to the other.