Introduction: overview of the 2009 offshore funds regime: Overview of transitional arrangements
Offshore funds may apply for reporting fund status only for periods of account commencing on or after 1 December 2009.
A fund can apply for distributing fund status under the rules of the previous regime for offshore funds, for any period of account that straddles the 1 December date (the ‘overlap period’ - paragraph 3 of Schedule 1 to the Regulations) as well as for earlier periods. Note that this is not an alternative to an application for reporting fund (“RF”) status - a fund will not be able to apply for RF status for a period of account commencing before 1 December 2009, so if it does not apply to be a distributing fund then it will simply be a non-distributing fund (or a ‘non-qualifying fund’ in the language of section 760 ICTA). In other words, the transitional provisions within paragraph 3 of Schedule 1 simply provide a mechanism to apply for distributing fund status for the overlap period, as it is not possible to apply for reporting fund status.
If a fund is successful in obtaining distributing status for the overlap period, it can obtain distributing status for the succeeding period as well, if desired (paragraph 3(3) of Schedule 1). However, no application for distributing fund status can be made for periods of account ending after 31 May 2012 - see OFM32300.
After the overlap period (or the succeeding period where relevant) neither the fund nor any investor on its behalf can make further requests for distributing fund status - the fund’s only options from that time will be to be a reporting or a non-reporting fund. See OFM32200 for full details.
UK investors who -
- held a ‘material interest’ in a qualifying fund (i.e. one that has held distributing fund status for all previous periods of account) and
- who continue to hold an interest in the fund if it becomes a reporting fund immediately following its last period as a qualifying fund
will not be subject to a charge to tax on an offshore income gain (‘OIG’) on disposal of their interest. This is likely to be a common situation, but there are other possibilities and the transitional rules set out what happens when -
- an investor held a ‘material’ interest in a qualifying (i.e. distributing) fund that is also within the new definition of an offshore fund but that does not become a reporting fund (para (4) of Schedule 1);
- an investor held an interest in a fund that did not come within the previous definition of an offshore fund but does subsequently come within the new definition of an offshore fund applying for interests obtained on or after 1 December 2009 (para (7) of Schedule 1).
The rules applying in each of these cases are set out at OFM32000 onwards.
In addition, an investor may have held a ‘non-material’ interest in a non-qualifying (i.e. non-distributing) fund that is also subsequently within the new definition of an offshore fund applying for interests acquired on or after 1 December 2009. This is not strictly a ‘transitional’ issue as it may have relevance for many years to come. Accordingly, the matter is dealt with by regulation 30 of the Offshore Funds (Tax) Regulations 2009: rights in certain existing holdings (as at 1 December 2009, i.e. ‘grandfathering’ provisions) - see OFM16550 for full details.
There are other matters that may arise on an ongoing basis and that are therefore also addressed in the main body of the regulations -
- Regulation 43: special rules for certain existing holdings (identification rules on disposal where investor has some rights in an offshore fund that are grandfathered and some that are not) - see OFM17600;
- Regulation 48: conversion of non-reporting fund to reporting fund (deemed disposal election by investors) - see OFM19000;
- Regulation 100: deemed disposals of interests (election by investors where a reporting fund becomes a non-reporting fund) - see OFM27700.