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UK Treasury Consults On New Offshore Funds Regime

by Jason Gorringe,, London

16 October 2007

As part of last week's pre-budget report the UK Treasury has issued a Discussion Paper on reform of the Offshore Funds Regime (OSFR). The government is proposing that taxation of offshore funds should distinguish between income and capital gains as long as a fund reports its results in a prescribed format to UK investors and the tax authority.

Currently, the gains of an offshore fund are taxed as income unless it has 'distributor' status, which requires that it cannot hold more than 5% of its investment in non-distributing funds, and is determined retrospectively, making such funds unattractive to investors.

The Government says it aims to:

  • simplify the operation of the offshore funds tax regime;
  • provide more certainty to UK investors and funds;
  • achieve, to the extent possible, economic parity with the position of UK investors in UK authorised funds, whilst recognising that the Government has
    no taxing rights over non-UK vehicles themselves;
  • strengthen existing anti-avoidance rules so that UK investors who choose to invest into offshore funds do so based on commercial decisions and not to
    obtain unintended tax advantages;
  • implement a modernised regime at no increase in cost to the UK Exchequer.

The proposals would allow offshore funds to invest any amount in non-distributing funds and make provision for both funds and sub-funds to provide information about the separation of income and capital ('reporting' funds). For non-reporting funds, increases in fund value will continue to be treated as income for tax purposes.

Julie Patterson, Director of Authorised Funds and Taxation at the Investment Management Association, said:

"IMA welcomes these proposals which are a response to industry concerns about the relative attractiveness of such funds for UK investors. The proposals represent a significant improvement. The regime provides certainty to investors that the fund in which they are invested is a distributing fund, thus allowing income and capital growth in the fund to be taxed accordingly."

The proposals would create a new definition of offshore funds for tax purposes based on their characteristics, such as their domicile, their governing law and their tax residence, separate from the existing regulatory definition.

Taxation of fund income would move away from any concept of distribution, so that income and capital gains in 'reporting' funds would be taxed annually based on fund value. This would allow abandonment of the current 'material interest' rules.

The consultation is open until 9th January.

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