Dublin – While Ireland positions itself as a major European hub for the funds industry, its domestic retail investors face a uniquely complex and punitive tax barrier that is widely seen as discouraging private investment outside of housing and pensions. The core issue lies in the controversial “deemed disposal” tax rule, which applies to many popular investment vehicles like Exchange-Traded Funds (ETFs).
The rule, introduced in 2006, dictates that Irish investors holding most ETFs are deemed to have sold their assets every eight years, even if no sale has actually occurred. This triggers a tax liability on any unrealised gains at a hefty “exit tax” rate, which is currently set at 41% but will be slightly reduced to 38% in Budget 2026.
Killing Compounding
The vast majority of Irish people keep their substantial savings in low-interest bank accounts, earning returns close to 0%, even as the global market-tracking ETFs, like those following the S&P 500, average annual returns of about 9% over the long term.
However, for a retail investor, the “deemed disposal” rule significantly hobbles the power of compound interest. An investor who is forced to pay a 38% tax on their gains every eight years must either sell off part of their investment or use personal cash to pay the tax bill, interrupting the long-term growth of their wealth.
Furthermore, the rule creates an administrative headache, requiring investors to track the exact purchase date of every ETF tranche to calculate when the eight-year disposal period is due.
An Absurd Tax on Unrealised Gains
Critics argue the rule is logically inconsistent with the taxation of other assets. For example, if an equivalent rule were applied to property, a homeowner whose house increased in value by €200,000 over eight years would be forced to pay a €76,000 tax bill in cash, an outcome widely considered absurd. Yet, this is essentially the reality for ETF investors.
The rule was implemented following a period where a “gross roll-up” regime allowed investors to defer tax until they actually sold the fund, which the government deemed an unacceptable “indefinite or long-term deferral” of the exit tax.
A Higher Tax Rate with No Loss Relief
The exit tax rate of 38% (down from 41%) is notably higher than the standard Capital Gains Tax (CGT) rate of 33% applied to the sale of individual shares. Crucially, investors subject to the deemed disposal rule cannot offset investment losses against their gains, a key advantage enjoyed by those subject to the CGT regime.
In an effort to encourage investment, many small investors and financial groups have long called for the removal of the deemed disposal rule and the alignment of ETF taxation with the simpler, more favorable CGT regime. Despite Ireland being a dominant domicile for ETFs globally, its own citizens are faced with a tax structure that actively works against long-term, passive wealth building.
