Offshore Funds

Domestic & EU Roll-up Treatment

In 2001, Ireland introduced a system of roll-up tax on distributions from  gains from domestic funds, charging 20%-23% on distributions and gains.  Tax is paid only on distributions, although later legislation deems a distribution at year eight, if there is no actual distribution.

Income and gains arising from investments into Irish and EU domiciled ETFs are now subject to income tax at a rate of 41% on a self-assessment basis. Such income and gains are not subject to Pay Related Social Insurance (PRSI) or Universal Social Charge (USC) liabilities

This treatment was extended to funds in EU, EEA, and OECD states with which Ireland has a double taxation agreement. Offshore funds regulated as such in one of those states qualify for this treatment. In these cases, they enjoy the benefit of the Irish domestic gross roll-up treatment. Regulation refers to qualification under the above provisions.

Offshore Funds

There are special provisions taxing offshore funds. It deems disposals to be subject to  top rate income tax and not CGT. There are other provisions which tax some funds at a higher quasi-penal rate.

An offshore fund is not limited to a fund in the regulated sense. It is defined to include a non-resident company, a unit trust scheme with non-resident trustees, and arrangements under law creating rights in the nature of co-ownership.

An authorised unit trust is not deemed an offshore fund if the trustees are resident in an EU state, the EEA, provide trustee services to an Irish branch, and the general administration of the scheme is carried on in the State.

Investments in other offshore funds remain liable to income tax at the marginal rate plus PRSI and levies.

If the investment is not a material interest, it is taxed in the same way as other assets.   The special income tax treatment does not apply. Gains on the disposal of a material interest in an offshore fund are subject to special provisions.

Material Interest

The special treatment  applies to the disposal of  a “material” interest in an offshore fund. It treats disposals of a material interest as subject to income tax at marginal rate and not the lower CGT rate.

There is a is  the case if, at the time the interest is acquired, it could reasonably be expected that the person will be able to realise the value of their investment within seven years, whether by transfer, surrender, or any other manner.

The value realised must be reasonably approximate to the proportion that their interest represents of the market value of the assets of the offshore fund.

Exclusions

There are exclusions as follows:

• If, at any time, the interest is substantially greater in market value than the proportion it represents of the market value of the assets of the offshore fund, it is deemed not to be a material interest.
• Certain shareholdings in overseas companies for the maintenance and development of trade are also excluded from being deemed material interests.
• If the interest is in respect of a loan-like instrument incurred in the ordinary course of banking or arises on the purchase of an insurance policy, it is not deemed a material interest.
• If the holder of an interest has the right to wind up the company and is entitled to more than 50% of the assets upon winding up, it is not deemed a material interest.

Funds can apply to be certified by Revenue as distributing funds, although this is relatively unusual. Revenue publishes a list of distributing funds. Other funds are non-qualifying funds.This is relevant in some contexts below.

Standard Rates

The profit on disposal by an individual of a material interest in a regulated good offshore fund is subject to income tax at 41% (no USC / PRSI). Profits on disposal by a company that does not hold the fund as a trading investment is subject to corporation tax of 25%.

A material interest in a regulated offshore fund held at the date of death is treated as if it has been disposed of and reacquired, so income tax arises. This contrasts with capital gains tax treatment.

There is a deemed disposal if a material interest in a regulated fund is held for eight years and then at any subsequent eight-year anniversary.

Where there are umbrella funds, a material interest in some forms of regulated funds can be exchanged for another fund at arm’s length without a tax charge.

There is no loss either for capital gains tax and income tax purposes on the disposal of a material interest in a regulated offshore fund. The amount chargeable to income tax under the special provisions cannot be offset against usual loss claims.

Standard Treatment Non-Material Interest

If the investment is not a material interest, it is taxed in the same way as other assets. Income is subject income tax, USC and PRSI. Capital gains are subject to CGT.

The income will be subject to tax at the marginal rate, and gains will be subject to capital gains tax at 33%. However, there are higher rates applicable in certain  circumstances .

Anti-avoidance provisions may apply under general principles in relation to transferring assets to an offshore entity.

Good but Non-Regulated/ Bad Jurisdiction

A good jurisdiction of establishment in this context is an EU EEA or OECD double taxation agreement jurisdiction. Where the fund is a material interest in an offshore fund in a good jurisdiction but does not have a similar legal structure to Irish equivalents, the offshore fund regime does not apply.

Bad jurisdictions effectively include many tax havens. Companies, trusts, and co-ownership arrangements under the laws of another country with which Ireland doesn’t have a double taxation agreement or are not members of the OECD are subject to this regime.

Good jurisdictions effectively constitute the EU, EEA countries, Australia, Canada, Ethiopia, Chile, Israel, Japan, , Mexico, New Zealand, Pakistan, Turkey, USA, Zambia, and the UK.

Gains arising on the disposal of the material interest in a non-qualifying offshore fund are treated as income payments, chargeable at the marginal rate of income tax plus PRSI and USC. Companies are subject to 25% tax unless it is a trading investment.

“Bad” Offshore Fund

A material interest in a bad offshore fund (regulated or not) is taxed as if it is a disposal, subject to income tax (not CGT). Irish individuals are subject to Irish income tax PRSI and USC at marginal rates on income received from a material interest. Companies are taxed on income received at 25%. Gains and the disposal an interest are taxed as income at marginal rate plus PRSI and USC.

Material interest in a bad offshore fund is deemed disposed of and reacquired at death so that income tax applies.

No relief or loss relief is available for income tax or capital gains tax purposes on the disposal of a material interest in a bad offshore fund.

Personal Investment Portfolios

The above refers to passive funds. Investment entities in a good jurisdiction that are not similar to onshore funds and do not satisfy the other requirements are passive funds. There is another category of funds known as personal portfolio investment undertakings (PPIU). They may be regulated in good offshore jurisdictions or otherwise.

A PPIU applies to investments held by an individual. It is a PPIU if some or all of the assets of the fund are selected or influenced by a connected person, person representative, or person connected with a representative person acting on behalf of the investor.

It is not a PPIU if the property or assets selected by the fund were available to the public, the opportunity to select the property was widely marketed to the public, the fund does not subject any person to any more burdensome treatment than any other investor, and the terms of the investment opportunity require that 50% or more of the property available for selection is land with  one investor holding only a maximum of 1%.

PPIU Rates

A PPIU is subject to income tax at 50% on income payments and gains on disposal and interest. If it is not disclosed in the tax return, the 80% tax rate applies.

A 60% rate applies to a PPIU (personal investment vehicle, and 80% if the offshore fund is a PPIU and the details are not included in the tax return. The profit is not subject to PRSI or USC.

A rate of 60% applies if the offshore fund is a PPIU, and 80% if it is a PPIU and is not disclosed in the individual’s tax return. The payments are exempt from PRSI and USC.

Tax Return

Where an Irish investor acquires an interest in a regulated fund in a good jurisdiction, they must make a tax return. An intermediary making payments to residents in such funds must include them in their tax return in relation to each payment requisition that the intermediary made or assisted in.

A PPIU applies where there is a regulated fund in a good jurisdiction.