Offshore Funds - Finance Act 2007 Changes

The 2007 Finance Act was enacted on 2 April 2007. The following pages highlight some of the changes introduced in the Act.

Section 39 amends the taxation rules in relation to offshore funds that are created under the law of EU and EEA Member States and certain OECD countries. These funds are covered by the ''gross roll up'' taxation regime introduced in the Finance Act 2001. This regime was brought in to match a similar regime for collective funds in the State that was put in place in 2000. Under gross roll up, funds may accumulate without the imposition of tax. However, an exit tax applies when payments are received from the fund or when there is the disposal of an interest in the fund.

This section modifies the definition of offshore fund in EU and EEA Member States and certain OECD countries, in order to achieve a more coherent and logical match between such funds and domestic funds which also operate under a ''gross roll up'' regime. The changes are twofold.

• Firstly, the type of offshore fund that will qualify for inclusion in the ''gross roll up'' regime is being clearly spelt out. Under the new rules, only offshore funds that are similar in all material respects to domestic ''gross roll up'' funds will benefit from the favourable tax regime. In practice, this means that four categories of offshore fund will come within the scope of ''gross roll up'' in future: These are UCITS, unit trust schemes, investment companies and investment limited partnerships, but only where the funds in question are comparable to funds operating in Ireland.
• Secondly, offshore funds in the EU, the EEA or in certain OECD countries that fall outside the scope of the gross roll up regime by virtue of the new rules will not qualify for offshore fund treatment of any sort. Instead, income and gains will be taxed under general taxation principles. This is similar to the treatment of income and gains in the case of Irish entities that do not come within the scope of the domestic ''gross roll up'' regime.

The new rules apply with effect from 20 February 2007. However, where a person had a material interest in an offshore fund on 20 February, which is now excluded from the gross roll up regime, the existing rules will continue in relation to that material interest, unless the fund is in the nature of a ''personal portfolio investment undertaking''. Any new shares, etc. acquired after 20 February 2007 will be subject to the new rules.