• New tax regime for offshore funds to be implemented on 1 December 2009
  • Definition of offshore fund changed to a characteristics-based approach
  • Concept of "material interest" will be abolished

As part of a new UK tax regime for offshore funds to be implemented on 1 December this year, the definition of "offshore fund" will be expanded.

The current definition is based on the regulatory definition of a collective investment scheme, as defined in the Financial Services and Markets Act 2000. However, the new definition for offshore fund will use a characteristics-based approach (see below). The Government's main aim in moving to a characteristics-based approach is to stop UK investors gaining tax advantages by investing in offshore funds that are not recognized as offshore funds because they technically fall outside the definition, even when they are "economically the same."

A key objective of the new tax regime is to give UK investors in offshore funds parity with investors in onshore funds, so investors make investment decisions based on commercial grounds rather than to obtain tax advantages. The new legislation does not aim to tax offshore vehicles themselves.

Another goal of the new tax regime is to simplify the current framework and give greater clarity to UK investors. The new characteristics-based definition will mean that all investors in the same offshore fund will face the same set of tax rules. To achieve this, the legislation will abolish the "material interest" concept including the "seven-year-rule," which currently prevents offshore tax rules applying to funds where investors cannot realise their investments within seven years.

Characteristics Of Offshore Fund, Finance Act 2008 (See: HMRC Draft Guidance)

  • It is not UK tax resident;
  • The participants do not have day-to-day control of the management of the property whether or not they have the right to be consulted or give directions; and
  • A reasonable investor would expect to be able to realise any investment based entirely or almost entirely by reference to the net asset value of the assets under management or alternatively, by reference to an index of any description

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