Taxation of income and gains from offshore funds
The purpose of this article is to set out a summary of the tax treatment of offshore funds under Irish Tax Law.
Broadly, the tax treatment of income and gains from offshore funds is dependent on where the fund is domiciled and whether it is a regulated fund. The tax treatment outlined in this article assumes that the investor has a material interest in an offshore fund.
Generally, an investor has a material interest in an offshore fund if, at the time the investor acquired the interest, it could be reasonably expected that at some time during the period of 7 years beginning at the time of acquisition, the person will be able to realise the value of their investment in some manner. Where an individual has a material interest in an offshore fund they will be subject to the offshore fund tax regime.
EU/EEA/DTA domiciled regulated funds
Regulated funds which are located in EU or EEA countries or countries which whom Ireland has a Double Tax Agreement (DTA) are taxed in a similar way to Irish regulated funds such that:
- All payments of income and gains from the fund are now taxable at 41% for individuals.
- For corporate investors the rate is 25%. However, in the case where the investment is made as part of the trading activity of the company then it will be taxable at the lower rate of 12.5%.
It should be noted that higher rates of tax apply to individuals where details of the investment are not correctly disclosed in the tax return in a timely manner or where the investor has the ability to control the investment decisions of the fund.
Funds which are located outside of the EU, the EEA and a DTA country are typically referred to as being traditional funds and would cover such funds that are located in jurisdictions such as BVI, Caymen, Bermuda etc.
A non-qualifying offshore fund is an offshore fund which has not been certified by Revenue as a distributing fund.
There are various nuances and details in relation to specific aspects of the legislation that covers traditional offshore funds which should be considered fully. However this article covers a high level summary of the tax treatment of income and gains. It is important to note that many aspects of the capital gains tax legislation come into play in respect of such disposals, particularly in relation to the calculation methodology and various rules around related party disposals etc. Say for example if there is a disposal to related parties, then the market value rules would apply in relation to such a disposal as they would under normal capital gains tax rules.
Individuals in receipt of income from a traditional offshore fund are subject to tax under Case IV of schedule D at 41% income tax plus PRSI plus USC. Irish resident corporate investors are taxable on income or gains from such offshore funds under Case IV at 25%. These tax rates apply to “non-qualifying offshore funds” which essentially funds which have NOT been certified by the Irish Revenue Commissioners as a distributing fund.
If, however, the fund is certified as being a distributing fund and meets other relevant conditions then the rate of capital gains tax in respect of chargeable gains arising to the person on the disposal of units in such a distributing fund will be 40%. In reality very few funds are certified as distributing funds.
Funds which are located in an EU/EEA/DTA jurisdiction but which are not regulated funds will fall outside the offshore fund regime and are taxable under general taxation principals.
Individual investors will be liable to income tax at up to 55% on income and capital gains tax at 33% on gains.
Corporate investors will be liable to tax at 25% on income and 33% on gains (unless it forms part of their trading activities in which case corporation tax at 12.5% will apply).
Summary of offshore fund rules
* Payments from EU/EEA/DTA domiciled regulated funds are taxable at 41%. Where details of the acquisition, income and disposal are
not correctly reported on the return the rate increases to 41% plus PRSI plus USC
** Normally the rate is 25%. However, where the corporate invests as part of its trading activity the applicable rate is 12.5%
*** Tax at 25% applies to corporate investors on exit