- New proposals will help to simplify tax regime and provide
greater certainty, according to AIMA
- New definition of offshore fund to be included in 2009
budget
- Draft regulations to be published by end of 2008; New regime in
place by spring 2009
The AIMA has given a lukewarm welcome to the Treasury's proposals for a new offshore funds tax regime. First announced in the 2007 Budget, the new regime has several objectives including simplification of the regime, to provide greater certainty for UK investors and funds, to give investors in offshore funds economic parity with investors in onshore ("authorised") funds, and to strengthen anti-avoidance rules so that UK investors make investment decisions on commercial grounds rather than to obtain tax advantages.
In a statement, AIMA said the proposals would go "some way towards simplifying the existing tax regime and providing more certainty to UK investors and funds."
Under the current regime, most hedge funds are classified as non-distributing funds. UK investors in non-distributing funds are subject to tax only when they dispose of their investment; however any profit is treated as income rather than capital gain (known as "offshore income gain") so investors do not benefit from capital gains tax exemptions. The Treasury is proposing to retain this arrangement.
UK investors in distributing funds, which must distribute all their income each year, are taxed differently being liable for both income tax on the annual income distribution and capital gains tax on eventual disposal. The Treasury is proposing to make it easier for funds to apply for distributing fund status by abolishing a 5% investment test, which limited a fund to investing no more than 5% of its assets in another offshore fund at any time during the tax period.
AIMA has endorsed the abolition of the 5% investment test as well as the greater flexibility for funds that inadvertently breach their distributing fund status. The proposals suggest three breaches will be permitted within 10 years.
However, AIMA still believes that the proposals will not reduce the administrative complexity of the existing regime and could also increase costs for hedge fund managers and investors.
As part of the new regime, the Treasury also intends to amend the definition of offshore fund from a regulatory-based definition to a characteristics-based definition. Its aim is to counter unfair tax advantages being obtained "where an offshore tax arrangement is technically outside the current definition of an offshore fund but the arrangement are technically the same." However, most respondents to the Treasury's discussion paper argued the list of proposed characteristics did not go far enough and could lead to greater uncertainty.
The draft regulations are expected to be published by the end of 2008, with implementation planned for Spring 2009.
For more information, see the Treasury's consultation paper, click here: Offshore Funds: A Discussion Paper.
To view the consultation responses, click here: Offshore Funds: Next Steps.
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