Oct 2009 A new offshore fund taxation regime came into force on 1 December 2009 in the UK.
The new regime seeks to provide more certainty and commercial viability for offshore funds to enter into the UK market by introducing:
- an up-front application qualifying fund certification procedure and
- a requirement that income (calculated under UK tax and accounting principles) of the fund be reported to investors, as opposed to being physically distributed as cash.
The reported income should then be included in the investors' tax returns annually. Upon disposal of their interests in the reporting funds, UK investors will then be afforded the preferential capital gains tax treatment on any gains realised. We highlight below some of the imminent issues which funds should consider prior to entering into the new regime.
- Initial feasibility review - Fund managers should review their fund ranges and identify which funds (including which share-classes) would be eligible to apply for UK reporting fund status and hence could be distributed more tax efficiently to UK investors. The feasibility of becoming reporting funds depends on the types of investors, the fund structure, the level of reportable income as a percentage of total return, and the nature and complexity of investments in bonds, derivatives and other offshore funds.
Please note that UK reporting fund status may also be relevant to a fund even where it has no direct UK investors. Non UK fund of funds, or other non UK funds that make portfolio investments in other funds that distribute into the UK will be keen to ensure that the underlying funds that they invest in have reporting fund status in order to maximise the tax effective return for UK investors.
- Up-front application - Funds must prepare and submit an up-front application to HM Revenue & Customs ("HMRC") to join the regime within three months of the start of the first accounting period in which they wish to be reporting funds. Hence, for funds with December year ends which are already distributing into the UK, the application deadline for the first applicable accounting period (accounting period beginning on 1 January 2010) is 31 March 2010. It is thus crucial for such applicant funds to commence the application process as soon as possible.
For funds yet to commence distribution into the UK the three months timeframe for the up-front application commences broadly from the date that the fund interests are first issued to or made available to investors in the UK.
- Investor election - Where a fund has existing UK investors but has not sought qualifying fund status historically in the UK (i.e. UK distributor status), the existing UK investors have an opportunity to make an election, at the point of conversion (from non reporting fund to reporting fund), to protect the capital gains tax treatment on any future gains realised from their investments in the reporting funds. If investors make the election they may crystalise a deemed gain at the point of conversion which will be taxed as income but would not obtain tax relief for any losses on the deemed disposal.
- Annual tax compliance - A reporting fund must make a report available to each investor and HMRC for each reporting period within 6 months of the end of the accounting period, containing specified information including, inter alia, the amount of reported income per unit and the amount distributed during the reporting period.
- Investor communication - Prior to making the up-front application, the fund's prospectus and marketing documents should be updated so that any existing and prospective UK investors can be duly informed of the fund's intention to seek reporting fund status and the relevant tax implications thereof.
Get your copy hereRead more by downloading our
Tax Bulletin - The new UK tax regime for offshore funds is imminent (Oct 2009) (pdf file, 39KB) for your reference.
