Definition of an offshore fund: Overview: Introduction
Characteristics based definition
The definition of an offshore fund is based on characteristics. The relevant legislation is at S354-S363 TIOPA 2010. S355 makes it clear that an ‘offshore fund’, whatever its legal form, must be a ‘mutual fund’. That term is defined at section 356. Sections 360 and 361 state that in the case of umbrella arrangements and arrangements with more than one class of interest respectively it is the sub-fund or class of interest that is to be considered rather than the main arrangements, so that for example umbrella arrangements could consist of sub-funds some of which come within the definition of an offshore fund and some that do not (this might typically be the case where one or more of the exclusions from the definition apply to a particular sub-fund(s) - see below).
Meaning of mutual fund
In considering whether any particular arrangements are a mutual fund it is necessary to consider all agreements and understandings which might form part of the basis for any contract or entity, that is, “arrangements” has a wide meaning and is not limited to, for example, the legal documents establishing a fund. In another sense however arrangements has a narrow meaning in that it is used here to describe the documents undertakings and agreements constituting a particular entity and not the wider economic arrangements that may be constituted by a group of entities. It follows, therefore, that in a ‘fund of funds’ situation, including those headed by fully transparent entities such as limited partnerships, it is necessary to consider each set of arrangements independently of the others in the structure - so, for example, a limited partnership cannot be viewed as being part of any other ‘arrangements’ and thus forming part of an ‘offshore fund’. However, if the terms on which investment in the underlying entities are communicated to investors or potential investors in documentation or marketing material relating to a top level entity (for example, a partnership agreement that makes it clear that underlying companies will be wound up by a certain date) then, in a case where the top level entity is in a position to control any underlying entity, those terms are relevant to determining whether the underlying entity itself is an offshore fund.
The characteristics based approach also means that all UK investors in the same offshore fund face the same set of tax rules (subject to certain preserved treatment for investments held before 1 December 2009 (see OFM32000 onwards)). This is subject to the situation where rights of investors change during the holding of their investment (see OFM15200).
Exceptions to the meaning of ‘mutual fund’
The intention of the offshore fund rules generally is to prevent the roll-up of income in pooled investment arrangements, with a subsequent realisation at (or nearly at) net asset value, (or by reference to an indexed value) in capital form. Section 357 therefore provides exceptions to the meaning of ‘mutual fund’ for certain closed-ended funds where income roll-up would not be possible, as well as for those closed ended funds with unlimited life so that the investor does not have an expectation of redemption at net asset value (or sale at net asset value).
If the arrangements are not a mutual fund then they cannot be an offshore fund, and so the operational rules will not apply (the operational rules relating to the treatment of UK resident investors in offshore funds are contained within the Offshore Funds (Tax) Regulations 2009 (S.I.2009/3001) - those rules apply when a UK resident holds an interest in an ‘offshore fund’as defined at Sections S354-363 TIOPA 2010.
The exceptions in section 357 only apply to ‘closed-ended’ arrangements; that is arrangements where an investor does not have a right to redeem their interest on a basis calculated entirely or nearly entirely by reference to the net asset value of their proportionate share of the scheme property. In particular, the exceptions apply in circumstances where it is only possible for an investor to realise their investment on that basis in the event of a winding up and the arrangements do not have a limited life, or where the arrangements do have a limited life but other conditions apply so that income cannot be rolled up (see OFM06000 onwards for details).
Requests for advice
HMRC is not able to provide an up-front clearance service confirming whether or not a particular set of arrangements comes within the definition of an offshore fund in every case. It will often be clear that a particular set of arrangements either does or does not come within the definition, but HMRC recognise that will not always be the case. If, after having considered the guidance in this manual in relation to all of the facts, there is material uncertainty as to whether particular arrangements are within the definition then HMRC will provide an opinion unless it is considered that the request does not come within published guidelines. Although this is not a formal clearance service, enquirers should consider the guidance concerning clearance requests available on the HMRC website at http://www.hmrc.gov.uk/cap/links-dec07.htm#annexb, including the circumstances in which HMRC will and will not provide an opinion. Queries should be sent at least 28 days in advance if the matter is material to whether or not to proceed with marketing to UK investors, and should be addressed to -
Collective Investment Schemes Centre (CISC)
1st Floor South
5 Young Street
(Please see OFM01000 for a list of contacts at CISC if you need to speak to someone prior to writing to HMRC.)