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Tax - International Direct Tax > PLC - Offshore Funds & Tax > Flashcards

PLC - Offshore Funds & Tax Flashcards

1
Q

What is the key priority of any hedge fund in relation to UK tax?

A

To avoid the fund being either deemed to be resident in the UK or to be carrying on a trade in the UK.

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2
Q

What characteristic of hedge fund activity, absent the investment manager’s exemption, would give rise to a risk in principle to a risk of the fund trading in the UK?

A

The high turnover of contracts, frequency of transactions being a badge of trade.

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3
Q

What SP has been issued by HMRC in relation to the IME and which provides guidance as to what constitutes a trade?

A

SP 1/01.

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4
Q

According to SP 1/01, does the active management of an investment portfolio constitute a trade?

A

No.

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5
Q

According to SP 1/01, does HMRC regard short selling or taking ‘synthetic positions’ as indicative of trading in themselves?

A

No.

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6
Q

According to SP 1/01, if a non-resident carries on a financial trade outside the UK, are any transactions carried out through a UK investment manager likely to amount to trading in the UK?

A

Yes.

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7
Q

In addition to a transaction constituting an ‘investment transaction’ , how many additional conditions must be satisfied for the IME to apply?

A

Five - “Conditions A, B, C, D and E”

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8
Q

What sort of business must a UK resident manager be engaged in for the IME to apply in respect of the transactions carried out on behalf of the non-resident?

A

A business of providing investment management services (Condition A).

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9
Q

Does the relationship between a non-resident and a UK resident investment manager have to be one between independent businesses dealing with each other on arm’s length terms in order for the IME to apply to the relevant investment transactions?

A

Yes (Condition C).

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10
Q

What is the “20 per cent” rule in Condition D of the IME requirements?

A

There must be a qualifying period in which at least 80 per cent of the amounts derived from the investment transactions are amounts to which the UK manager and those connected to him have no beneficial entitlement.

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11
Q

In order for the investment manager exemption to apply for the purposes of the offshore funds regime, what does Condition E require in relation to the remuneration of the manager?

A

The remuneration the manager receives for the provision to the non-residents of the investment management services in question is at a rate that is not less than that which would have been customary for that person or class of business.

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12
Q

If the IME applies, what is UK tax confined to in relation to an offshore fund?

A

Any tax deducted at source, and any tax on non-qualifying transactions where the IME is not satisfied.

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13
Q

How is the IME test applied by HMRC in relation to start-up funds?

A

HMRC state in SP 1/01 that the independent agent test will be satisfied provided a fund is (i) a ‘widely held’ collective fund within 18 months of start-up or (ii) is being ‘genuinely marketed’ to third party investors.

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14
Q

When will HMRC consider an offshore fund to be widely held for the purposes of the IME?

A

Where (i) no majority interest in the fund is held by five or fewer persons and persons connected with them or (ii) no interest of more than 20% is held by a single person and persons connected with that person.

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15
Q

What does ‘actively marketed’ mean for the purposes of the IME and the offshore funds regime?

A

There must be evidence of ongoing genuine attempts to obtain third party investment into the fund in order to meet the widely held test, and that the terms on which interests in the fund are offered are not prohibitive or discriminatory for that class of business.

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16
Q

Why does the IME allow holdings of up to 20% in the relevant offshore funds?

A

To allow a financial group the flexibility to put seed money into offshore collective investment funds that it is promoting and to have cross-holdings of up to 20% in the offshure fund.

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17
Q

How many years of revenue are looked at for the purposes of satisfying the 20% rule in the context of the IME and offshore funds regime?

A

Up to five years. If the average over that period is below 20%, the test is passed.

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18
Q

If a fund manager fails to pass the 20% test wholly or partly for reasons outside their control, and despite having intended to do so, will the 20% test still be passed?

A

Yes.

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19
Q

If a transaction fails Conditions A, B, C or E of the IME test, will all of the relevant UK fund manager’s transactions be exposed to UK tax?

A

No, only those transactions that fail the relevant conditions.

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20
Q

If an IME fails the 20% test (Condition D), what becomes subject to UK tax as a result?

A

That part of the income of the offshore company to which the fund manager and connected persons are beneficially entitled to. The IME will continue to apply to the remaining part to which they are not beneficially entitled provided the other IME conditions are met.

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21
Q

If the IME applies, what is an offshore fund’s UK tax exposure limited to?

A

Tax deducted at source.

22
Q

How are UK investors in offshore funds taxeed?

A

According to the charging provisions relating to foreign source income and gains

23
Q

How are UK investors taxed in respect of holdings in offshore unit trusts?

A

As if they were holding shares in a non-UK company (see section 99 TCGA 1992).

24
Q

How are UK investors taxed in respect of income arising from offshore unit trusts?

A

Where the unit holders have a vested interest in the income of the trust, the source of the income is likely to be the underlying investment made by the trust and not the trust investment itself (Baker v Archer Shee [1927] UKHL 1). The foreign unit trust is in effect fiscally transparent for the purposes of tax on income.

25
Q

Does the UK give tax credits for overseas tax suffered by offshore unit trusts?

A

Yes, in certain circumstances - the fund needs to be largely invested in equities. If an offshore fund holds 60% or more of its assets in bonds and other ‘interest-bearing assets’, distributions are treated for UK income tax purposes as interest in the hands of investors and do not carry a tax credit.

26
Q

What is the offshore funds anti-avoidance legislation principally aimed at?

A

Preventing income being rolled up in an offshore fund and effectively converted into chargeable gains that are taxed at a much lower rate than income.

27
Q

When did the Offshore Funds anti-avoidance legislation undergo material reform?

A

New legislation was introduced under the FA 2009 and took effect from 1 December 2009. The rules are now contained in TIOPA 2010.

28
Q

What is the main gateway condition that must be satisfied in order for the 2010 TIOPA offshore funds anti-avoidance legislation to be potentially relevant to a particular fund?

A

(1) It must be a mutual fund, (2) it must not be an ‘excluded fund’, and (3) it must meet residence-related conditions.

29
Q

Where is the definition of a mutual fund for the purposes of the TIOPA 2010 Offshore Funds regime set out?

A

Section 356 TIOPA 2010.

30
Q

Are mutual funds where the participants have day-to-day control within the scope of the TIOPA 2010 Offshore Funds regime?

A

No. The rights of members within the scope of the rules are limited to a right to give directions or to be consulted.

31
Q

By reference to what must an investor be able to realise all or part of its investment in order for the mutual fund to fall within the TIOPA 2010?

A

The net asset value of the property or an index of any description.

32
Q

Boradly, will a mutual fund fall within the TIOPA 2010 if a ‘reasonable investor’ participates in arrangements whereby they can only expect to meet the reasonable investor condition in relation to a realisation of all or part of an investment in the event of a winding up, dissolution or termination of the arrangements?

A

No

33
Q

Is a fund an offshore fund for the purposes of TIOPA 2010 if it is constituted by a body corporate resident outside the UK?

A

Yes

34
Q

Is a unit trust a TIOPA 2010 offshore fund if it is constituted outside the UK?

A

Yes

35
Q

Is a fund where property is held on trust for the participants by trustees who are resident outside the UK an offshore fund for the purposes of TIOPA 2010?

A

Yes

36
Q

Is a fund constituted by arrangements that (1) create rights in the nature of co-ownership, and where (2) the arrangements take effect by virtue of the law of a territory outside the UK, an offshore fund for the purposes of TIOPA 2010?

A

Yes, but this category does not include partnerships

37
Q

Have HMRC provided a list of typical offshore funds for the purposes of the TIOPA 2010 offshore funds regime?

A

Yes - see OFM03200 to OFM03300.

38
Q

Is a Belgian SICAV an offshore fund for the purposes of TIOPOA 2010?

A

Yes

39
Q

Is a Luxembourg FCP an offshore fund for the purposes of TIOPA 2010?

A

Yes

40
Q

What are ‘umbrella arrangements’ for the purposes of the TIOPA 2010 offshore fund rules?

A

Arrangements that provide for separate pooling of the contributions of the participants and the profits or income out of which payments are made to them.

41
Q

How are umbrella funds treated for the purposes of the offshore funds regime?

A

The main fund is disregarded and each class of interests is teated as a separate fund.

42
Q

How do the characteristics of deemed funds relate to those of the main umbrella fund for the purposes of the offshore funds regime?

A

The characteristics of the deemed fund are the same as those of the main fund (eg residence, identity of trustees, etc.)

43
Q

What is the benefit of ‘reporting fund’ status for qualifying offshore funds?

A

Investors’ gains within the fund will be taxed as capital, not income. Investors will however still be subject to income tax on reported income, even if it is not actually distributed).

44
Q

What happens where an offshore fund does not obtain reporting status?

A

Subject to limited exceptions, investors’ gains are taxed as income, not capital.

45
Q

How is an interest in a ‘transparent offshore fund’ (that is neither a company nor a unit trust) treated for the purposes of TCGA 1992?

A

It is treated as an asset for chargeable gains purposes (section 103A TCGA 1992) so that investors are no longer required to consider disposals of the underlying assets for calculating tax on chargeable gains.

46
Q

When did the new definition of an offshore fund take effect?

A

21 July 2009 (subject to some transitional provisions), being the date on which the Finance Bill 2009 obtained Royal Asset).

47
Q

Can an offshore income gain be avoided by a merger or reorganisation of the offshore fund?

A

In principle no, as a result of the Offshore Funds (Tax)(Amendment) Regulations 2013.

48
Q

Can chargeable gains made by non-resident companies be apportioned to UK resident shareholders?

A

Yes (see section 13 TCGA 1992) if the company would be ‘close’ if it were resident in the UK.

49
Q

How do the non-resident close companies rules interact with the offshore funds regime?

A

Section 13 TCGA 1992 may apply to a person resident and domiciled in the UK whose proportionate interest in an offshore fund, when aggregated with that of ‘connected’ persons (within the meaning of section 286 TCGA 1992) is 10 per cent or more.

50
Q

What is the basic idea behind sections 720-726 ITA 2007?

A

Where an individual transfers assets to a person resident or domiciled outside the UK and, in consequence of the transfer, income is payable to a person resident or domiciled outside the UK, that income may be treated as income of the transferor where he has the power to enjoy that income.

51
Q

What is the basic idea behind sections 731-735 ITA 2007?

A

They can bring income within the charge to tax where assets have been transferred abroad and a resident individual other than the transferor receives a benefit.

Tax - International Direct Tax (3 decks)

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