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HMRC internal manual

Offshore Funds Manual

Reporting funds: tax treatment of participants in reporting funds: participants chargeable to income tax: corporate funds - Regulation 95

Where a reporting fund takes corporate form, any sums distributed together with any excess of reported income will be treated as foreign dividends (unless the fund is a ‘bond fund’ - see below). Until 22 April 2009, dividends received from offshore funds did not carry any entitlement to a dividend tax credit but from that date they will do so unless the distribution is from a bond fund (section 378A ITTOIA 2005). Any sums treated as an excess of reported income also carry an entitlement to a foreign tax credit, unless the fund is a bond fund (regulation 95(4)).

Bond funds

From 22 April 2009 there is a change to the way dividends from offshore funds which are substantially invested in interest-bearing assets (commonly known as ‘bond funds’) are treated for tax purposes. Where an offshore fund holds more than 60% of assets in interest-bearing (or economically similar) form, any distribution or excess of reported income is treated as a payment of yearly interest (section 378A ITTOIA 2005 / regulation 95(3)). Such sums do not qualify for a dividend tax credit and the tax rates that apply are those applying to interest. Fund managers should be able to tell UK investors if a fund is a bond fund.

Remittance basis users

Where individuals not domiciled in the United Kingdom are taxed on the remittance basis then the normal remittance basis rules will apply to income arising from the reporting fund.

In the case of income that is reported but is not distributed then that income has not been remitted to the UK.