Revenue Note for Guidance
This section and Schedule 19 set out the requirements for a fund to be certified as a distributing fund and the certification procedure.
Essentially, a fund is to be certified as a distributing fund for an “account period” if it distributes 85 per cent of its income in that period. The detailed rules are set out in Part 1 of Schedule 19. Section 744 ensures that a company is not to be treated as a distributing fund even though it satisfied the 85 per cent distribution requirement itself if it holds substantial interests in companies or other offshore funds which do not distribute. Without such a provision, offshore funds could satisfy the 85 per cent distribution requirement by simply accumulating the bulk of their income in subsidiary companies or funds.
(1) An offshore fund is a non-qualifying fund except during an account period – defined in subsections (8), (9) and (10) – for which the Revenue Commissioners have certified the fund as a distributing fund. A fund is only to be so certified if it has pursued a full distribution policy during the period, that is, if it has distributed 85 per cent of its income of the period in question.
(2) The provisions of Part 1 of Schedule 19 apply for the purposes of determining whether a fund has pursued a full distribution policy for any period.
[Part 1 of Schedule 19 provides that a fund is to be treated as pursuing a full distribution policy for an account period if —
In applying test two above, half of any income of an offshore fund which is derived from dealing in commodities is left out of account, so that commodity funds deriving their income wholly from such dealing must only distribute 42.5 per cent of their income to be certified as distributing funds. The application of test four above is also relaxed to enable funds operating equalisation arrangements, under which some of their income is distributed in capital form, to obtain distributor status.
The distribution test will be satisfied if there is no income in an account period but not if a fund fails to make up accounts. Allowance is made for legal restrictions on the amount which a fund may distribute.]
(3) The possible avoidance of the charge under the offshore fund legislation by the rolling up of gains at one further remove from the investor is addressed. For example, Fund A, which receives investors’ money could reinvest it in Fund B. Provided Fund B rolled up the income accruing, Fund A would have no income to distribute and would pass the distributor test. Therefore, when the investors disposed of their interests in Fund A the gain would not be chargeable as income. To prevent the 85 per cent distribution requirement being circumvented by such arrangements, it is provided that a fund is not to be certified as a distributing fund —
(4) [Part 2 of Schedule 19 modifies these general conditions in the case of reinvestment in another fund which distributes 85 per cent of its income, investment in a trading company, investment in a wholly-owned subsidiary, investment in a company providing management and administrative services, and de minimis holdings in companies.]
A fund investing a sum in a company could, at the time of investment, be within the 10 per cent limit in subsection (3)(b), but subsequently exceed the limit because of an appreciation in the company’s value. Thus, the fund could lose its distributor status merely because it has made a successful investment. To prevent this, it is provided that the 10 per cent limit is to be applied by reference to values of the fund’s interest in the company and the funds total assets valued at the most recent time when the fund acquired an interest in the company. In this way a company cannot be treated as having more than 10 per cent of its value in one company simply because the value of shares in that company rises. In deciding when the fund last acquired shares in the company, reorganisations of shares, not involving new subscriptions, are ignored.
(5) A fund is not to be treated as having 10 per cent of its value in one company if the investment in question is merely a normal current or deposit account with a bank.
(6) There is an exception to the requirements of subsection (3)(d). A fund is disqualified under subsection (3)(d) if it does not pursue a full distribution policy in respect of all classes of material interest. However, this does not apply to interests held by employees and fund managers which carry no right or expectation to participate in fund distribution policy in respect of all classes of material interest. However, this does not apply to interests held by employees and fund managers which carry no right or expectation to participate in fund profits or to receive anything on winding up other than the return of the price which they paid. Such persons, therefore, may be given different distribution benefits from those of ordinary investors.
(7) An offshore fund is not to be treated as pursuing a full distribution policy in respect of each class of its investors unless it pursues an 85 per cent distribution policy for each class of investor in respect of the income arising from the assets held on behalf of that class of investor.
(8) to (10) The concept of an “account period” in terms applicable to companies, unit trusts and other offshore funds is defined. In general, an account period in a 12 month period for which a fund makes up accounts.
(11) Effect is given to the provisions of Schedule 19 which are concerned with the certification procedure as initiated by a fund (Part 3) or by an investor in a fund (Part 4).
[In order to be certified as a distributing fund in respect of an account period a fund must apply to the Revenue Commissioners within 6 months of the end of the account period in question. If certification is refused, then the fund (or, as the case may be, its trustees) may appeal against the refusal within 30 days of the date of the notice of the refusal. Where the fund fails to apply for certification and as a result is not certified, an investor in the fund, who might otherwise be subject to the charge imposed by the Chapter, may require the Revenue Commissioners to invite the offshore fund concerned to apply for certification. If the fund declines to apply, the Revenue Commissioners are to determine the matter on the basis of the available information including any accounts or other information supplied by investors.]
Relevant Date: Finance Act 2019