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HMRC Clarifies Definition Of Offshore Funds

by Jason Gorringe,, London

15 August 2007

HM Revenue and Customs has issued an update on the definition of an offshore fund under the Finance Act 2007, to address concerns from advisors and fund managers that certain funds may have fallen outside of the offshore funds regime for tax purposes.

Finance Act 2007 (FA 2007) announced a change in the definition of an ‘offshore fund’ for the purposes of section 756A of the Income and Corporation Taxes Act 1988 (ICTA). The change is introduced by section 57 FA 2007.

According to HMRC, it is intended to put beyond doubt that an open-ended company is not prevented from being an offshore fund in which an investor may have a material interest for the purposes of sections 756A and 759 ICTA, purely by virtue of failing the “reasonable period” test in section 236 Financial Services and Markets Act 2000 (“FSMA”).

An HMRC statement explained:

"It has been suggested that this FSMA test may result in companies in which investors are able to realise their interests in under seven years being excluded from the definition of a collective investment scheme at section 235 FSMA, and thereby being outside the scope of the offshore funds regime (OFR); whereas section 759 ICTA encompasses interests that can reasonably be expected to be realised at some time during the seven years from acquisition. Section 57 achieves its aim by removing the reference to 'reasonable period' in section 236 FSMA when that section is used in the context of the offshore funds regime."

"Some advisers and fund managers have raised concerns that this may bring some offshore companies within the rules that were previously not considered to be ‘open-ended’ for the purposes of either FSA regulation or the offshore fund regime."

"The offshore funds regime applies only to an entity defined as a collective investment scheme within section 235 of FSMA. In considering whether that is the case, the Economic Secretary’s statement that the definition of a collective investment scheme in FSMA is intended to cover companies that look to a reasonable investor like open-ended investment companies can helpfully be considered."

HMRC revealed that this view is also supported by the statement made by the Minister during the debate on the relaxation of the definition of an offshore fund that was introduced in 1995 by section 134 FA 1995 (when there was no reference to “reasonable period” in the Financial Services Act definition of open-ended companies). The Minister stated:

"If, however, evidence emerged that tax planners were attempting to abuse the relaxation by creating vehicles that did not fall within the Financial Services Act 1986 definition of collective investment schemes but that could in some way be used to roll up income, the Government would not hesitate to withdraw it."

According to HMRC, from a tax perspective the presumption ought therefore to be that a company with fixed capital is outside the offshore fund definition unless there are special conditions to suggest the contrary.

A comprehensive report in our Intelligence Report series examining offshore investment, offshore stock exchanges, trusts and hedge funds is available in the Lowtax Library at and a description of the report can be seen at

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