With more than €2.03 trillion in exchange-traded funds (ETFs) assets domiciled here, Ireland is Europe’s leading hub for ETFs, representing about 71 per cent of the European market. These funds pool groups of securities together into a fund that can be traded on the market like an individual stock, making them highly attractive to investors due to their low costs, high liquidity and strong diversification. Yet their attractiveness for Irish investors falters due to our stringent tax rules, necessitating a “deemed disposal” of apparent gains every eight years. PwC’s Andrea Kelly is the chairperson of the Irish Funds Members Council and she says the experience for Irish retail investors stands in “stark contrast” to that dominant position. “Ireland applies one of the more stringent tax regimes for retail investors in ETFs in Europe, including a 38 per cent tax rate on both income and gains, restrictive loss relief rules, and the eight-year deemed disposal rule that taxes unrealised gains,” explains Kelly. “This combination creates a material disadvantage for Irish investors relative to their European peers.”The Irish tax treatment of Irish-resident retail ETF holdings remains among the most onerous in Europe, agrees Aoife O’Connor, partner in asset and wealth management with PwC Ireland. “The cumulative effect of these features is a material erosion of the effects of compounding over time, placing Irish investors at a pronounced disadvantage relative to their counterparts in comparable European markets.”Traditionally, in Europe, compared with the United States and elsewhere, there hasn’t been a self-directed investment culture, but the European Union is working hard to change that, notes Tony O’Brien, chief commercial officer Ireland with US Bank Global Fund Services.Tony O'Brien, chief commercial officer Ireland, US Bank Global Fund Services “Some countries have put policies in place to encourage more tax-efficient savings accounts, to encourage investors to take the trillions that are languishing in bank deposit accounts, earning very little, and put it to work,” he says. “It’s good for investors because it encourages diversified investing. It’s good for the economy as it puts capital into the markets, encouraging growth, innovation and job creation.”Indeed, our European neighbours have markedly different attitudes to stimulating ETF adoption. In Germany, retail ETF adoption has grown strongly through savings plans, with contributions as low as €1, and more than 14.5 million investors now holding ETFs. Kelly also notes that Sweden operates a tax-incentivised investment account model where the effective rate is linked to benchmark government bond yields, a model the Irish Government’s proposed “special account” structure may draw upon. Andrea Kelly, PwC asset and wealth management partner and chairperson of the Irish Funds Members Council “In the UK, ETF holdings within an ISA or SIPP are entirely tax-free, and even outside these wrappers the maximum rate on gains is typically 20 per cent,” she points out. “Crucially, in each of these jurisdictions, tax policy has been deliberately designed to encourage retail participation rather than deter it.”Irish investors are not avoiding self-directed investing because they don’t understand markets, they avoid because of the tax implications and administrative burden, O’Brien adds. “If we remove or change deemed disposal, we’ll see investors going from holding cash to self-directed investing. Even a modest reallocation of household deposits could activate billions of euro currently sitting idle in cash savings accounts.”According to statistics from the Central Bank of Ireland, household cash and deposit balances in Ireland currently stand at about €171 billion and continue to grow at a rate exceeding €10 billion per annum. “These savings are held in low-yielding or zero-yielding deposit accounts, generating limited real returns for savers and contributing little to productive capital allocation within the economy,” O’Connor notes.Observers had hoped the eight-year deemed disposal rule would be abolished in Budget 2026 and that the exit tax rate would be fully aligned with the 33 per cent rate of capital gains tax. Yet this did not happen, and just a small reduction in the rate from 41 to 38 per cent was given. “The Funds Sector 2030 Implementation Plan identifies the removal of the eight-year deemed disposal rule as an item for active consideration, an important signal for current and future retail investors,” says O’Connor. As well as the abolition of deemed disposal, Irish Funds believes losses on ETF holdings should be permitted to offset gains on other funds or capital assets, bringing ETFs into line with broader investment norms. These measures would improve coherence and essentially level the playing field for Irish investors, Kelly says.According to Paul Heffernan, chief executive of Waystone ETFs, Ireland could also explore an approach of “long-term investor relief”, where tax rates taper down the longer an asset is held (eg 15 per cent for holdings of more than 20 years). Another solution is ETF-linked auto-enrolment, defaulting pension contributions into diversified portfolios.James Costello, Davy Stockbrokers. Photograph: Iain White/Fennell Photography “By reforming these rules, Ireland can shift its domestic landscape from an over-reliance on property toward market-based wealth building,” Heffernan says. “It is reputationally awkward for Ireland to remain hostile toward the very financial products it dominates globally. Bridging this policy gap is not just a matter of fairness for retail investors, it is a strategic necessity for the nation’s financial future.” While the fiscal incentive for deemed disposal is understandable, the reality is likely that the national tax take would be higher if the system encouraged more diversified investment behaviours and did not create fiscal incentives for early disposals, says James Costello, head of portfolio management group at Davy. Kelly agrees, saying a broader base of retail investors, attracted by a simpler and fairer regime, would likely generate greater aggregate exchequer revenue even at a lower rate. A comprehensive programme of taxation change, Costello says, including the introduction of tax-incentivised savings and investment accounts, could be “transformative” to our national investing behaviours. “Our older population, like many other developed nations, is fast-growing, presenting challenges to State finances where retirements are not appropriately funded. Many households are already doing the prudent thing by saving, but most do not fully appreciate the adverse impacts of inflation on the spending power of those savings.” The policy gap between what Ireland offers international investors and what it offers its own citizens is both a policy failure and an opportunity, Heffernan says. “The changes required are well-understood, internationally precedented and entirely achievable. What is needed is the political will to prioritise fairness for the Irish retail investor.”But according to Kelly, the Government’s proposed “special account” structure, which would apply a modest annual flat-rate tax on asset values above a tax-free threshold, represents a clear signal of intent. “ETFs should form a significant part of such a proposed savings product, as is already the case in Germany and the UK,” she says. “If designed effectively, this account could be a catalyst for a significant expansion of the investor landscape in Ireland.”Kelly also points out that the next generation of investors is increasingly using ETFs as a default wrapper, supported by robo-advisers, digital banks and neo-brokers. “Ensuring that Irish investors can access ETFs efficiently will be central to turning Ireland’s dominance as a European ETF hub into tangible benefits for its own citizens.”The trajectory of the retail investment market is clear, O’Connor adds. “The next generation of digital-first savers and investors is increasingly engaging with capital markets through ETFs, supported by digital platforms that have dramatically lowered the barriers to entry.”But alongside structural tax reforms, O’Connor also believes a sustained push on financial literacy is imperative. “A recent BlackRock study highlighted that 67 per cent of adults in Ireland either have never heard of an ETF or have no understanding of them,” she says. “Promoting ETFs while maintaining a 38 per cent tax rate and deemed disposal is inherently contradictory. Reform and education must move in tandem if we are to address the tax treatment for Irish investors in ETFs and improve financial literacy among Irish investors.”