Tax Implications of Offshore Funds

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As the landscape of tax legislation continues to evolve, it can be increasingly difficult to navigate the tax treatment of various investment types.

At EcovisDCA, we are here to help clarify the intricacies of offshore funds and their tax implications.

What is an Offshore Fund?

An interest in an offshore fund can be identified as an interest in any of the following:

  • A company outside of Ireland.
  • A unit trust scheme, the trustees of which are not resident in Ireland.
  • Any other arrangements taking effect under foreign law which create rights in co-ownership.

Any investments that do not fall under the above categories will not be classified as an offshore fund.

What is a Material Interest?

Determining whether you have a material interest in an offshore fund depends on two main criteria:

  • Access: Can you expect to access the investment’s value within 7 years?
  • Link to Assets: Is the value of your investment directly tied to underlying assets within the fund?

If these criteria are not met, the investment will also not be classified as an offshore fund.

Where is the Fund Located?

The location of your fund has significant tax implications. To qualify for “favourable” tax treatment, the offshore fund must be:

  • Similar in all material respects to an Irish investment limited partnership.
  • Comparable to an Irish Part XIII investment company.
  • Similar to an Irish regulated unit trust.
  • A UCITS (Undertaking for Collective Investment in Transferable Securities) fund.

Funds not meeting the above criteria, will not be treated as offshore funds.

What is a “Good” Offshore Fund?

“Good” offshore funds are taxed at 41% income tax rate with no PRSI or USC on income. There are however restrictions:

  • There is a deemed disposal every 8 years, meaning the profit is subject to income tax even if no actual disposal takes place.
  • On death, a material interest in a “good” offshore fund is treated as disposed of and immediately reacquired, triggering income tax.

It is important to keep abreast of all changes within the tax landscape. Recently, the Tax Appeals Commissioner ruled in favour of Revenue in two cases where the investments should have been self-assessed under the offshore fund regime. This highlights that offshore fund taxation is becoming more of a focus for Revenue.

Should you require any further advice on business or financial matters, please do not hesitate to contact us here at Ecovis DCA, where we are always happy to help.