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ETFs Exchange Traded Funds. Leading business advisers


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ETFs 2015

Exchange Traded





ETFs are fund structures whose units are traded on regulated markets and investment exchanges. They are typically open-ended and redeemable on a daily basis. Most European ETFs are structured as UCITS funds.

The Irish Revenue recently published a Guidance Note on the Revenue website regarding the tax treatment of investments in Exchange Traded Funds. We summarise these developments, and provide an overview of ETFs and their evolution.

ETFs originated in the 1990s as a cost and tax efficient alternative to mutual funds. They have traditionally been structured as passively managed index tracking funds which aim to replicate indices (such as the FTSE 100 or S&P 500). They can be physical (where the fund invests directly in the underlying assets that comprise the index) or synthetic (where the fund gains exposure to the index by entering into a swap agreement with a counterparty). In theory, the fluctuations in the value of the shares in the basket should duplicate any fluctuations to the index.

The diagram below is an extract from the April 2011 Bank of International Settlements ("BIS") working paper on market structures and systemic risks of ETFs. It illustrates the operation of an ETF which uses physical replication. An authorised entity (the Marketmaker) purchases a basket of securities and delivers them to the fund manager in exchange for ‘creation’ units, ie, large blocks of ETF shares. The Marketmaker lists the ETF creation shares on an exchange. Investors trade the shares of the ETF through this exchange. The net asset value (NAV) of the ETF is determined by the market value of the basket of securities held by the ETF sponsor.

Figure. 1 Operational structure of ETFs

In recent years, ETFs have developed from their original passively managed format. Products such as ‘leverage’ and ‘smart beta’ ETFs are now being launched. ‘Leverage ETFs’ offer leverage under the ETF umbrella and deliver returns that are multiples of the daily performance of the index they track. Similarly, the leverage inverse ETF seeks to deliver a return that is a multiple of the inverse

performance of the underlying index. ‘Smart beta ETFs’ track an index using methods other than the traditional weighted method.

Modern ETFs are also being structured as actively managed, where the manager retains discretion over the portfolio composition rather than tracking an index.


In Europe, ETFs have typically been structured as UCITS to enable them to benefit from the UCITS passport. They consequently must comply with the UCITS rules on portfolio composition and eligibility of assets.

The 5/10/40 rule prohibits UCITS from investing more than 10% of its net assets in transferable securities (or money market instruments) issued by a single entity, as long as the total value of shares it can hold in entities in which it can invest more than 5% is less than 40%.

Index tracking enjoy slightly more freedom under the 20% and 35% rule. An index-tracking ETF may invest up to 20% of its net assets in ETFs shares/debt securities issued by the same body, or 35% where the index is recognised by the Central Bank of Ireland (CBI), it is sufficiently diversified, represents an adequate benchmark for the relevant market and is published in an appropriate manner.

Physical ETFs must ensure that the shares they hold comply with the UCITS eligible asset rules. This would preclude them from tracking an index of commodities.

The European Securities and Markets Authority has issued Guidelines on ETFs and other UCITS issues, as well as a related Q&A document.

These require all UCITS ETFs to disclose that they are ETFs. Index-tracking UCITS ETFs must also prominently disclose their promoted material that they track and index as well as details of the relevant index. Actively managed UCITS ETFs must disclose that they do not track an index and that they are actively managed.


4 The Irish Stock Exchange (ISE) claims to be the No. 1 exchange globally for listing investment

funds and has an active market in listing and trading Irish UCITS EFFs. The ISE’s efficient, low cost listing process minimises the time and resources required for an EU Regulated Market listing. The ISE hosts world class trading and post-trade infrastructure and leading specialist ETF market-making firms. European ETFs listed on the ISE can apply directly to the London Stock Exchange for admission to trading on its Main Market without needing to obtain a separate LSE listing. This cost efficient admission process is available only to ETFs already listed on an EEA stock exchange.


Listing process on the ISE

Establish fund

Seek regulatory approval from the Central Bank/ relevant regulator

Apply to the ISE for listing approval and the ISIN codes

Listing approval

The ISE reviews prospectus within two business days

Shares are listed on the Main securities market (an EU regulated

market) of the ISE

Admission to Trading

Direct admission to the relevant market can take place

Requirements include:

- Financial Conduct Authority fund recognition

- Approved prospectus stamped by the ISE


Ireland’s attractiveness as an ETF domicile is due to several factors, including Ireland’s extensive network of tax treaties with key jurisdictions worldwide which enables ETFs to access the double taxation treaties where the fund is demonstrated to be trading. In particular, Irish ETF’s can benefit from the USA/Ireland double tax treaty which reduces withholding tax to zero on interest and 15% on dividends.

Irish funds, including ETFs, are not subject to Irish taxation on any income or gains realised from underlying investments. They are also exempt from withholding tax. Similarly, no stamp duty regarding shares in an ETF, or on the underlying shares it holds (as long as those underlying shares are not issued by an Irish registered company, do not relate to Irish property). ETFs can also enjoy beneficial VAT exemptions.


Ireland's ETFs

Ireland is the domicile for almost 50% of ETFs. Irish ETFs have been

structured with the VCC the most popular vehicle of choice to date. It is

possible that the new ICAV structure may be used for future launches.

Regulatory focus

The Financial Stability Board noted that the ETF market has grown at an average of 40% since 2000 and that the global ETF industry has over US1.2 trillion in assets under management. Due to this growth and to ensure investor protection, ETFs have been the focus of regulation by bodies such as IOSCO and IMF. ESMA has issued guidelines and Questions and Answers documents, while the CBI has issued a Consultation Paper on the adoption of ESMA's revised guidelines on ETFs and other UCITS issues (CP84).

Following the publishing by the Irish Revenue of Guidance Notes regarding the tax treatment of investments in Exchange Traded Funds. The main points to be noted are:

 The tax treatment of investments in Irish Domiciled ETFs and ETFs domiciled in EU countries other than Ireland follows precisely the treatment set out in Chapter 1A of Part 27 TCA 1997 for investments in Investment Undertakings (IUs).

 The tax treatment of investments in ETFs domiciled in the US, EEA and other OECD countries follows precisely the treatment that would apply to share investments generally i.e. Income and Capital Gains tax treatment as appropriate.

 The tax treatment of investments in Exchange Traded Commodities (ETCs) will also follow precisely the treatment that would apply to share investments generally.

It will be noted that the investments within paragraphs 2 and 3 do not attract the same tax treatment as other collective investments within the gross roll-up regime for collective investment undertakings.


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With nearly 2,000 people in Ireland, Deloitte provide audit, tax, consulting, and corporate finance to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. With over 210,000 professionals globally, Deloitte is committed to becoming the standard of excellence.

This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, Deloitte Global Services Limited, Deloitte Global Services Holdings Limited, the Deloitte Touche Tohmatsu Verein, any of their member firms, or any of the foregoing’s affiliates (collectively the “Deloitte Network”) are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

© 2015 Deloitte & Touche. All rights reserved

For more details please contact:

Mike Hartwell Partner, Head of Investment Management T: + 353 1 417 2303 E: mhartwell@deloitte.ie David Dalton Partner,

Financial Services Consulting T: + 353 1 407 481 E: ddalton@deloitte.ie Deirdre Power Tax Partner, Financial Services T: + 353 1 417 2448 E: depower@deloitte.ie Brian Jackson Partner, Investment Management T: + 353 1 417 8567 E: chmacmanus@deloitte.ie Brian Forrester Partner, Investment Management T: + 353 1 417 2614 E: bforrester@deloitte.ie Christian MacManus Partner, Financial Services T: + 353 1 417 8567 E: chmacmanus@deloitte.ie Niamh Geraghty Partner, Financial Services T: + 353 1 417 2649 E: ngeraghty@deloitte.ie Darren Griffin Partner, Financial Services T: + 353 1 417 2376 E: dagriffin@deloitte.ie Aisling Costello Senior Manager, Investment Management T: + 353 1 417 2834 E: acostello@deloitte.ie



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