Income and gains on offshore funds are taxed differently than say ordinary equity shares. Offshore funds fall into different categories which have unique tax treatments. These, along with the tax treatment of offshore funds held at death, are discussed below from the perspective of an individual investor.
An interest in an offshore fund could be identified as an interest in any of the following:
- A company resident outside Ireland;
- A unit trust scheme, the trustees of which are not resident in Ireland; and
- Any other arrangements taking effect under foreign law which create rights in the nature of co-ownership.
The offshore fund regime only applies if the individual has a ‘material interest’ in the offshore fund. Generally speaking, an individual is said to have a material interest in an offshore fund if, at the time of acquisition, it could be reasonably expected that the value of the interest could be realised within seven years.
How are offshore funds taxed?
Offshore funds are taxed differently depending on their location and legal structure. It is important for one to look at all investment structures to identify the classification the investment will fall under.
Where an investment in an offshore fund does not qualify as a material interest, the tax treatment of both income and gains follows first principles, i.e. income will be subject to income tax at your marginal tax rate, along with USC and PRSI; whilst any gain will be liable to capital gains tax (CGT) @ 33%.
If the investment is seen as a material interest, then we must first consider where the fund is located and the structure of the fund to identify the appropriate tax treatment. Jurisdictions are classified as “good” or “bad” when examining the location and legal structure.
Both jurisdictions are then subdivided based on the legal structure of the fund and are either regarded as regulated or unregulated funds. Both structures carry different tax treatments.
Good jurisdictions – Regulated funds
A “good” fund is a fund that is located in the EU, EEA or an OECD country which Ireland has a Double Tax Agreement (DTA) with.
The structure of the offshore fund must be similar to either an Irish investment limited partnership, an Irish investment company, an Irish regulated unit trust or a UCITS fund to qualify for the same tax treatment as a domestic fund. Income from a “good regulated fund” is subject to income tax at 41% and is exempt from PRSI and USC. Profit arising on the disposal of a material interest in a regulated “good” fund by an individual is regarded as an income gain taxed at 41% as opposed to a capital gain taxed at 33%.
It is also important to note that the remittance basis of tax in relation to non-domiciled individuals does not apply to these offshore funds.
On the eighth anniversary of the acquisition of the units in a “good” regulated offshore fund, a deemed gain arises for the individual investor in respect of the uplift in value of the investment. This needs to be returned to Revenue. Where an actual disposal subsequently occurs, a tax credit is given for the tax paid on the deemed disposal event.
Good jurisdictions – Unregulated funds
Where a fund held by an investor does not have a similar legal structure to an Irish fund then the “normal” Income Tax rules (including PRSI and USC) and CGT rules apply, and the fund is not an offshore fund for tax purposes.
Bad jurisdictions – All funds
An investment in an offshore fund that is not located in an EU, EEA or DTA country and meets the aterial interest test is known as a “bad” fund. All “bad” funds are subject to income tax at the investor’s marginal tax rate, PRSI and USC.
Gains arising from the disposal of a distributing “bad” fund carry a special 40% CGT rate. A distributor fund is a fund that distributes at least 85% of its income and has been certified by the Revenue Commissioners as such. A list of such funds is available on the Revenue’s website.
Gains arising from the disposal of a non-distributing “bad” fund are regarded as income gains as they are taxed at investor’s marginal tax rate, PRSI and USC and capital losses cannot be used against capital gains.
“Bad” jurisdictions include locations that were historically associated as being “tax havens” including, for example, the Cayman Islands, British Virgin Islands, etc.
For non-Irish domiciled individuals, a gain on disposal of units may qualify for the Irish remittance regime.
Personal Portfolio Investment Undertakings – PPIU
PPIU legislation is only applicable to individuals. A fund may be a PPIU if it is regulated in a “good” jurisdiction. A PPIU is a regulated offshore fund in an EU/EEA/DTA country where all or some of the property was selected by an investor, a connected person or a person acting on behalf of an investor/connected person. A PPIU is subject to tax at a rate of 60% on income and 60% on gains. It is important to note that if a PPIU is not correctly returned, this increases the tax rate to 80%.
There is a difference in the treatment of offshore funds and equity shares which are held at the date of death of an individual.
Care is needed as a tax charge can arise on a deemed disposal of the funds on the day prior to their date of death. A credit to the beneficiary may be available. However, if the beneficiary does not have a charge to CAT the credit can be lost so some advance tax planning is required in this scenario, e.g. leaving these assets to a child rather than a spouse.
Where an individual holds equity shares at the date of death these are revalued at market value on the date of death and form part of the individual’s estate. Therefore, for equity shares, no CGT arises on death.
The tax treatment of the various offshore fund categories is outlined below:
If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars private client team below: