Offshore Funds: investors in non-reporting funds: exceptions to the charge to tax: non-participating loans
Regulation 28 of SI 2009/3001
Where an asset is disposed of and it consists of a loan made to an offshore fund on such terms that the loan is not a participating loan, then any gain arising on disposal will not be taxed as an offshore income gain.
A ‘participating loan’ is a loan where the amount payable on redemption exceeds the issue price by an amount which is determined in whole or in part by reference to the income of the non-reporting fund. For example, a loan made to an offshore fund on the basis of charging a particular rate of interest, and where the outstanding balance was determined by reference to the principal remaining unpaid plus any accrued interest charges, would not be subject to an offshore income gain if that loan was assigned to another party for a sum that resulted in a gain.
The purpose of this regulation is to ensure that a loan made to an offshore fund on normal commercial terms (and which does not represent an ‘equity’ interest in the fund) is not treated as an interest in the fund for tax purposes.
Conversely, if the terms of a loan are such that it gives the lender the right to participate in the income of the fund, then it will be within the terms of the offshore funds rules and its disposal may give rise to an offshore income gain.