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HMRC internal manual

Offshore Funds Manual

HM Revenue & Customs
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Investors in non-reporting funds: exceptions to the charge to tax: interests treated as loan relationships - Regulation 25(2)

Certain investments in offshore funds are treated as loan relationships under Chapter 3 of Part 6 Corporation Tax Act (‘CTA’) 2009 if they are held by a UK company.

Further guidance on when such treatment applies can be found in the Corporate Finance Manual (CFM).

All income arising from a corporate holding in an offshore fund that is treated as a creditor relationship will be regarded as a loan relationship credit, as will the relevant fair value movement in the value of the holding.

This means that corporate investors will be charged to corporation tax on any distributions received and also their proportionate share of income arising to the fund under the loan relationships rules and accordingly regulation 25(2) prevents an OIG charge from arising in relation to any periods when the loan relationships rules apply.

Interests not treated as loan relationships for entire period held

It is possible that an interest in an offshore fund might not be treated as a loan relationship for the entire period that an interest in an offshore fund is held, because the test that determines that matter is applied to each period for which the investing company prepares accounts. There are rules in Chapter 3 of Part 6 CTA 2009 that determine what happens on acquiring or disposing of a loan relationship (see the CFM for further details). The effect is to treat any gains on disposal for periods when an interest in an offshore fund is not treated as a loan relationship as being an offshore income gain, but an OIG will not arise in respect of any gains relating to periods where the loan relationship rules apply.