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HMRC internal manual

Offshore Funds Manual

HM Revenue & Customs
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Reporting funds: transactions not treated as trading: conditions - Regulations 74 & 75

The equivalence condition (regulation 74)

The equivalence condition will be met if the reporting fund is:

  • Recognised by the Financial Services Authority (‘FSA’) under one of sections 264, 270 or 272 of the Financial Services and Markets Act 2000 (‘FSMA 2000’),
  • A UCITS (‘Undertaking for Collective Investment in Transferable Securities’) fund authorised under article 5 of the “UCITS IV” Directive (Directive 2009/65/EC of the European Parliament and of The Council), or
  • Constituted in another EEA state, is authorised by the competent authority in that state to market to retail or professional investors and is required either by the local authority or by another binding agreement to limit its borrowing and its exposure under derivative contracts and forward transactions to 100% of its net asset value.

The genuine diversity of ownership (‘GDO’) condition (regulation 75)

The GDO condition in the Offshore Fund Regulations is intended to prevent close groups of investors from taking advantage of the ‘white list’ provisions as they are only aimed at investors in widely pooled schemes, rather than those using closely held arrangements that may in reality be for the benefit of a tightly restricted group, for example a group of family members or a group of companies in common ownership.

The concept of the GDO was first introduced in 2008 for Property AIFs, and the GDO rules in the Offshore Funds Regulations are generally similar to those applying to UK AIFs in regulation 9A of The Authorised Investment Funds (Tax) (Amendment) Regulations 2009 (SI 2009/2036) except that there is no prescribed form of the documentation that must be produced by reporting funds containing the statements and undertakings in Condition A (regulation 75(2)) (in the regulations applying to UK AIFs those statements must be made in the instrument constituting the fund and the prospectus). Where the fund has a prospectus or other offering documents available to investors and potential investors then the statements and undertakings may be made in those documents.

Conditions for meeting GDO conditions

An offshore fund will meet the GDO condition if the fund meets conditions A to C. Where an offshore fund is constituted by a class of interests in the ‘main arrangements’, that offshore fund will meet the GDO condition if the main arrangements (see OFM09000) meet conditions A to C.

Condition A is that the fund must produce documents (available to HMRC and Investors) which contain:

  • A statement specifying the intended categories of investor.
  • An undertaking that the shares will be widely available
  • An undertaking that interests in the fund will be marketed and made available sufficiently widely to reach and attract the intended categories of investors.

Condition B is that neither the specification of the intended categories of investor nor any other terms governing participation in the fund has a limiting or deterrent effect.

Condition C is that the interests in the fund are marketed and made available:

  • Sufficiently widely to reach the intended categories of investors
  • In a manner appropriate to attract those categories of investors, and
  • That a person who falls within the intended categories of investor can, upon request, obtain information about the fund and acquire units in it.

A fund will also meet the GDO condition if:

  • An investor in the fund is an offshore fund, an open-ended investment company or an authorised unit trust scheme (the feeder fund),
  • Conditions A to C above are met in relation to the fund after taking into account:
    1. the fund documents relating to the feeder fund, and
      1. the intended investors in the feeder fund, and
  • the fund and feeder fund have the same manager (or proposed manager).

Guidance on the GDO conditions for UK AIFs is available in the Company Taxation Manual (‘CTM’) on the HMRC website and, subject to the modifications noted above, will also apply for the purposes of the GDO condition at regulation 75 of the Offshore Funds Regulations. Additionally, for the purposes of condition C in regulation 75(4)(a), ‘marketing’ in the context of alternative funds includes via local private placement mechanisms.

In particular, it should be noted that the CTM guidance states that -

‘If there is no doubt that a fund has or is intended to have a wide range of unconnected investors then it will clearly have no difficulty in meeting the GDO and advance clearance will not be necessary.’

The following page deals with advance clearances, but the important point is that if a fund can demonstrate that it is, as a matter of fact, widely held (and continues to be so) then HMRC will accept that the GDO condition is met.