- By domiciling ETFs in Ireland, the percentage of withholding tax (WHT) on US equity dividends is halved.
- Tax advantage of Irish-domiciled ETFs can help add performance or “alpha” to investors’ portfolios.
- UCITS ETFs have significant advantages compared to US 40 Act funds.
- HANetf can help asset managers launch Irish-domiciled UCITS ETFs and convert mutual funds to ETFs quickly, efficiently, and with minimal barriers to entry.
March 2023, London
HANetf, Europe’s first and only independent white-label ETF and ETC platform, and leading provider of digital asset ETPs, has published a new whitepaper highlighting the potential tax advantages of using Irish domiciled UCITS ETFs.
The explosive growth of ETFs in the US is often credited to the preferable tax treatment ETFs receive compared to mutual funds. This tax benefit was credited with the initial boon in index ETFs and now the second wave of Active ETFs. As a result the majority of new ETF launches in the US over the last few years has been Active ETFs. Many of these have been conversions from mutual funds to ETFs as well. However, as the whitepaper notes, UCITS ETFs in Europe have their own tax advantage over UCITS mutual funds if they are domiciled in Ireland.
In Europe, mutual funds are typically subject to a 30% WHT on US equity dividends. However, Irish-domiciled ETFs are only subject to a 15% WHT. Therefore, Irish-domiciled ETFs have a tax advantage when it comes to holding US equities.
This tax advantage can help add performance or “alpha” to investors' portfolios. The 15% WHT means that for every 1% of yield on a US equity portfolio, 15 basis points (bps) is saved compared to mutual funds paying 30%. Put differently, 15bps of alpha is generated through using the Irish UCITS ETF wrapper.
UCITS ETFs also have their own tax advantage for investors in the Middle East, Asia and Latin America when compared to US 40 Act ETFs. Distributions from US 40 Act ETFs are typically subject to WHT of 30% at source (similar to that on US equities). Some investors may be able reclaim some or all of this WHT deduction but it requires forms to be completed and submitted to US tax authorities and investors have to wait for any reclaimed amount to be paid to them. Investors would then have to include the total income received as part of any tax returns filings in their home jurisdiction.
Distributions from UCITS ETFs domiciled in Ireland are not subject to any WHT at source. Investors effectively receive the distribution “gross” and there is no need to complete any forms to reclaim taxes. Instead, all investors have to do is include the income received as part of any tax return filings in their home jurisdiction. So, for many investors, owning a UCITS ETF has many advantages compared to owning a US 40 Act ETF.
HANetf, Europe’s first and only white-label ETF provider, can provide these benefits to asset managers by enabling them to launch Irish-domiciled UCITS ETFs in Europe, quickly and efficiently, with minimal barriers to entry.
Manooj Mistry, COO of HANetf, comments:“While the specific tax advantage of ETFs in the US does not apply in Europe, the UCITS wrapper has its own potential tax benefits, particularly so for any UCITS ETFs domiciled in Ireland. It’s important that asset managers looking to launch an ETF are aware of this as it can have notable impact of performance. We believe these advantages will encourage traditional asset managers to enter the European ETF market with new ETFs and conversions of mutual funds.”
Please remember that the value of your investment may go down as well as up and past performance is no indication of future performance. When you trade ETFs, your capital is at risk.