Offshore Funds Legislation

Transactions within Transparent Entities such as Partnerships

A number of queries have been received as to whether certain types of foreign entities and structures fall to be taxed as offshore funds. The purpose of this article is to state that in Revenue’s view the offshore funds legislation does not apply to certain foreign entities.

Background

The offshore funds legislation (Sections 740 to 747 TCA, 1997) was introduced in 1990. It was supplemented by further provisions (Sections 747B to 747E) in 2001 to bring the taxation of offshore funds within the EU closer to the regime applying to Irish domestic funds.

The offshore funds legislation was introduced to address a situation where Irish taxpayers were investing in non-transparent foreign entities within which income was being generated and rolled up. These investors were not subject to Irish income tax on profits generated by their investments as it was not possible to tax the investors on a look-through basis on income arising, as would have been possible for investment via transparent entities.

Transparent Entities

Transparent entities or look-through entities are so called because, for income tax purposes, income arising to the entity is treated as income of those who invested in or have the underlying interest in the entity. The most common example of this is the direct taxation of partners on income arising within a partnership.

Foreign Investment Vehicles

A wide variety of foreign entities can be used for investment purposes, with their precise characteristics being determined by the laws of the relevant foreign state. Some of these entities have characteristics similar to an Irish company. Others more closely resemble our partnerships and more have, what appear by Irish standards to be, hybrid characteristics.

Foreign Entities Treated in Ireland as Transparent

As the charging provisions of the offshore funds legislation contained in Section 747D TCA 1997 are triggered by the receipt of payments from an offshore fund, it would not be appropriate to apply those provisions where investors are directly chargeable to either income tax or capital gains tax on income or gains arising within a transparent foreign entity.

Accordingly, the receipt of payments from foreign entities that are treated in Ireland as transparent does not generally give rise to a further liability to tax under the offshore funds provisions. Instead, taxation by first principles applies in such cases. In the same way that partners are taxed directly on income and gains arising within an Irish partnership, Irish investors in foreign entities that are treated in Ireland as transparent, will be taxed in Ireland on their share of the income and gains arising within the foreign entities as those income and gains arise.