UK Relaxes Tax Rules For Offshore Funds

by Robert Lee, Tax-News.com, London

19 March 2004

The UK government on Wednesday proposed changes to the tax rules surrounding offshore funds, in an attempt to relax the barriers to entry to the UK market by bringing them more into line with rules governing onshore funds.

Current rules stipulate that investors must pay income tax on the proceeds from offshore fund investments unless they are classified as having distributor status. In order to achieve this status, they must satisfy three main tests: distribute annually at least 85% of their income as shown in their annual accounts; distribute at least 85% of their income as measured by the "UK Equivalent Profits" test (UKEP), which broadly measures what the income would have been had it been drawn up for the purpose of measuring profits chargeable to UK Corporation Tax; and the fund must satisfy certain investment rules.

Any sub-funds or separate share classes within the main fund must also satisfy these requirements to qualify.

Distributor status enables UK individual investors to take advantage of taper relief, meaning a maximum income tax rate of 25% is payable, provided the fund has been held for at least ten years.

Under the new changes however, the rules defining how a fund attains distributor status are being relaxed, and the tests for distributor status will be changed in the following ways: The UKEP test will follow UK Corporation Tax rules more closely, in particular by adopting the "loan relationships" rules, used by all UK companies; the investment restrictions will be abolished and if a fund crosses certain investment thresholds it must demonstrate that any underlying investments also satisfy the "distributor" tests; separate sub-funds and share classes of funds can now qualify on their own and will not be affected by non-qualifying sub-funds or share classes within the same fund.

The changes have been welcomed by members of the fund management industry, including the the Investment Managers’ Association, which announced that: "We're pleased with the proposals to reform the offshore funds rules, which relaxes barriers to entry to the UK market for funds domiciled in other EU jurisdictions."

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