The Tax Treatment of Collective Investment Vehicles Compared to Direct Share Investing

Under Irish Revenue rules, exchange traded funds (ETFs) and investment companies are taxed the same as unit-linked funds i.e. like gross roll-up vehicles. Hence, gains tax includes the 3% government  levy bringing it to 28%, dividends at the lower DIRT rate of 25% and there is no loss relief available (draconian).

To that extent, direct shares investing has the advantage of (i) a lower CGT rate of 25% (ii) losses being allowable against gains but (iii) higher tax - the marginal rate - on dividends.

Strictly speaking, an investor should report investment holdings in the annual tax return irrespective of whether he/she has sold the investments or not. I don't think you have to disclose holdings in unit-linked funds and the reason (if I am right) is that tax on disposal is deducted at source by the insurance company.

Investing in ETFs (and investment companies) comes with a slight disadvantage to unit-linked funds in one area - Irish insurance companies have 'Revenue' approval for the opertaion of 'umbrella' structures which allows an investor to switch from one fund to another within that particular 'umbrella' structure without crystallising a gain. Tax is only due when the investor exits the 'Umbrella' structure. This is an advantage if you are moving from one fund to another within the same umbrella structure. Personally, I feel this distorts the market unfairly against investors who wish to manage their own monies.

If you are intent on trading your fund holding i.e. moving from one equity fund to another or from an equity to a cash fund in an effort to time the markets, then using an 'Umbrella'  structure like this is worth considering. Apart from the insurance companies, most boutique fund managers will also likely have a similar 'umbrella' structure - non-insurance fund managers such as Goldcore and Merrion Investment Managers come to mind. On the other hand, if you are not intent on trading and are more likely to add monies to an overall program over time then the advantage is more modest. And the disadvantages of higher costs and poor transparency in dealing with insurance companies in particular still applies.
 

A Built in Advantage in CFD Accounts for Holding ETFS & Investment Companies
However, the tax treatment within CFD accounts (a contracts-for-difference account) for ETFs and investment companies is at the CGT rate of 25% and loss relief is available. The revenue has not stated this explicitly but the following is the best interpretation of where the Revenue stands on this issue.

An ebrief (no. 36) from the Revenue in 2007 stated that CFDs are capital assets to which the capital gains tax rules apply, unless they are held in the course of a financial trade which is chargeable under Case 1, in which instance the charge will be the accounting profit. The Revenue indicated in that same ebrief the contract (CFD) requires two parties to take poosing positions on the future value of a particular asset or index. 

The bottom line is that it appears all instruments deal in via a CFD a ccount are chargeable under the CGT rules and loss relief is available. The Revenue has not been specific on this but that is the interpretation put on it by the main accountancy firms in Dublin (from what I understand). Against this, you will be charged interest by the CFD provider on monies invested via CFD accounts. If you happy paying the funding cost (circa 1.5% above base rates) then this is an alternative and more tax effective way to hold ETFs or investment companies.