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HMRC internal manual

Offshore Funds Manual

HM Revenue & Customs
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Reporting funds: transactions not treated as trading: introduction - Regulation 73

The Authorised Investment Funds (Tax) (Amendment) Regulations 2009 (SI 2009/2036) introduced rules that prevent defined financial transactions carried out by diversely owned UK authorised investment funds (AIFs) from being characterised as trading transactions for tax purposes. The rules give diversely owned AIFs certainty that gains on the realisation of certain types of investments cannot be re-characterised as profits arising from a trade which would then be taxable as income. The rules operate by reference to certain conditions that must be met and to specified transactions contained within a ‘white list’ (in Part 2B of those regulations).

Chapter 6 of Part 3 of the Offshore Funds (Tax) Regulations 2009 introduce similar rules for the computation of reportable income for offshore reporting funds. Specifically, regulations within that chapter provide certainty that specified transactions will not be treated as trading transactions for reporting funds that meet the ‘equivalence condition’ at regulation 74, and the genuine diversity of ownership (‘GDO’) condition at regulation 75 in that chapter.

The type of offshore funds able to access the white list within the Offshore Funds (Tax) Regulations 2009 is intended to replicate as closely as possible the type of fund comprising UK AIFs meeting the GDO condition. It follows that the test does not therefore rely on any particular fund ‘type’, but whether or not the conditions for equivalence are met. Any reporting fund meeting those conditions will be able to access the white list and, equally, any fund unable or unwilling to meet those conditions will not be able to do so.

The following pages provide further guidance on the conditions, and the white list transactions.

Tax-transparent Funds

The ‘white list’ does not apply to tax-transparent funds as the income of such funds arises directly to their investors (Regulation 49(3)). General guidance on trading income and investment income can be found in the Business Income Manual