Investment funds are usually understood to refer to vehicles owned collectively in which each unit holder has a portion of the net assets represented by those units. Most funds are closed in that purchases and redemptions increase or decrease the capital or total pool.
Certain funds are subject to EU harmonisation rules which make recognition of them in other EU jurisdictions clear in these cases.
Exchange traded funds and those quoted on a stock exchange. They may be classified as shares or funds for the purpose of Irish funds taxation legislation. The exact categorisation will depend on the nature of the investment concerned.
Fund investments are subject to a special regime of taxation. Some funds are quoted on stock exchanges notwithstanding that they are not shares (the latter being subject to income tax and capital gains tax).
Fund treatment applies to investments established as such under Irish legislation or equivalent legislation in other EU or DTA (with which Ireland has a double taxation agreement) states. Non-Irish structures which are substantially similar to an Irish authorised fund may be subject to funds treatment. This would generally imply a closed fund by which investments and redemptions are to add to or subtract from the overall capital value of the fund.
The tax categorisation of a fund is looked at relative to the various categories of Irish funds. There are some classes of funds which are subject to harmonised EU legislation. Accordingly it would be relatively easy to identify these funds established in other EU/EEA states. See the sections on the regulation of funds.
What is considered a fund the purpose of offshore funds legislation is narrower, more precise and less restrictive in the case of an EU/EEA/OECD DTA country. Generally such a fund must be authorised and regulated on a similar basis to Irish funds.
The definition of a fund in this context contemplates that it raises capital by promoting sale of units/ shares to the public and provides facilities for participation by the public as beneficiaries under a trust in profits or income of the fund.
Taxation & Administrator
For Irish based funds, the fund administrator must generally deduct the tax. In this case, it is not required to be included in the fund holders tax return.
In other cases Irish resident and ordinarily resident persons must include the charge and account for it in their tax return.
Traded funds are not subject to the withholding obligation. Therefore, the obligation will apply to non-Irish funds and to funds where there is no deduction at source.
The administrator of an Irish fund is obliged to deduct tax at source on realisation/distributions from the fund based on the increase in the fund value. The general rate is 41%.
For exchange traded funds this obligation does not apply. Accordingly the taxpayer must possess and pay the gain in its annual tax return. USC and PRS I does not apply.
If the fundholder subsequently disposes of the investment in the fund, an adjustment is made so that the overall tax applies as if the eight year charge had not applied. This may include repayment if the fund value has dropped.
The deemed eight-year charge on the fund applies to those purchased after 1 January 2001. This applies the equivalent to an exit charge on the eighth anniversary based on the increase in value of the fund. This is subject to income tax of 41%. Losses on funds cannot be set against gains on other funds. There are not available for offset against capital gains tax.
It is necessary to declare the acquisition and disposal of an interest in a fund in the annual tax return. There is a surcharge if the investment is not disclosed and included.
There is deemed to be a realisation of an offshore fund on the death of the holder. This is calculated at the market value of the fund. Provided the investments are held for at least two years there is a credit for the exit tax against inheritance tax for the beneficiaries. No tax is payable where the fund passes to the fundholder’s spouse.
The eight-year deemed disposal takes place once the investment has been held for eight years. It does not apply to holders who are neither resident nor ordinarily resident.
Certain Offshore Funds
Funds based outside of the EU/EEA/OECD DTA countries are subject to a more onerous tax regime. They are more likely to be treated as funds by Revenue, regardless of their structure.
This may be so even if the price of units in the fund does not equate to net asset value on an ongoing basis. They may be argued otherwise if there is no reasonable expectation of realising a figure equating to the net asset value.
The more onerous offshore funds treatment applies to a material interest in an offshore fund. This requires that the fund must be one in which the investor can realise a portion of the market value of the assets (net of borrowings) of the fund.
Personal Portfolio Investments
A personal portfolio investment undertaking is an offshore investment arrangement by which the investor, a connected person or an agent on its behalf may select or influence the investments of the fund. They are subject to high rates of taxation unless there are distributions from the funds to the holders.
A rate of 60% tax applies on income and gains. It is 80% if not reported on the tax return.
Certain types of foreign structures are accepted by Revenue as being funds are not funds as such. Difficult issues of categorisation may arise. If they are in the nature of shares and securities they are subject to income tax and capital gains tax. If they are treated as funds, they are subject to the special funds regime of taxation.