As the tax legislation becomes more complex, it can be difficult to determine the tax treatment surrounding the holding of certain investment types. It is common for clients to hold investments on which they expect normal Capital Gains Tax rules to apply, but actually come within the scope of the offshore fund tax rules.

What is an offshore fund?

An offshore fund has a very broad definition in Section 743(1) TCA 1997. It can relate to:

• A non-resident company
• A unit trust scheme with non-resident trustees
• Any arrangement under foreign law creating rights in the nature of a co-ownership

In circumstances where the investment type does not come within the definition of the above it will not be taxed as an offshore fund and instead be subject to 40% income tax, plus PRSI and USC on income and 33% CGT on disposal.

Does the person hold a "material interest" in the offshore fund?

A person will have a material interest if:

1. They can reasonably expect to realise their investment value within 7 years e.g. can they dispose of the investment, transfer it etc.

and

2. The value of the investment is reflected in the value of the underlying assets to which the fund invests e.g. if the fund invests in certain equity does the value of the fund relate to the value of the equity investments?

If the person does not hold a material interest then it will not come within the offshore fund regime similar to the above.

Where is the offshore fund located?

A good jurisdiction for an offshore fund pursuant to Section 747B TCA 1997 is a fund that is located in the EU, EEA or an OECD country in which Ireland has a double taxation agreement. If the fund is not located in these countries, then it will be taxed as either a distributing “bad” offshore fund or a non-distributing “bad” offshore fund.

Section 747B(2A) TCA 1997 provides that in order to qualify for the tax treatment afforded to an offshore fund in a “good jurisdiction” the offshore fund must be:

• “Similar in all material respects” to an Irish investment limited partnership
• “Similar in all material respects” to an Irish Part XIII company (investment companies)
• “Similar in all material respects” to an Irish regulated unit trust, or
• An Undertaking for Collective Investment in Transferable Securities (i.e. a “UCITS” fund”)

If the investment type does not fall into the above then it will not be taxed as an offshore fund.

Can an investor or person connected influence the decision?

Where the investor or person connected can influence the decision in respect of the investment type, then some further considerations are required to assess whether the investment type is taxed as a PPIU and subject to 60% income tax on income and 60% income tax on disposal. However, it is seldom this would come across our desks.

Where the investor is just a normal passive investor, then the investment type will be taxed as a “good” offshore fund.

Taxation of a good offshore fund

A “good” offshore fund will be subject to 41% income tax (but no PRSI or USC on income) and 41% income tax on disposal (and not CGT on disposal) – pursuant to Section 747D & Section 747E TCA 1997.

It is important to note that where an individual holds a material interest in a good offshore fund there is a deemed disposal every 8 years and the profit at that time is subject to income tax. The purpose of this is to prevent profits from rolling up in offshore funds indefinitely. In addition, unlike an asset held for the purposes of CGT legislation, a material interest in a regulated “good” offshore fund held at the time of death is deemed disposed of and immediately reacquired such that income tax under s747E(1) TCA 1997 arises on death.

The above is only a very brief overview of the issues that need to be reviewed when assessing firstly whether a client has invested in an offshore fund and secondly what the tax treatment of such an investment is.

There have been some recent Tax Appeals Commissioner cases (114TACD2024 & 42TACD2024) in which the commissioner upheld Revenue’s assessments that the investments should have been self-assessed under the offshore fund regime. As such, it is clear this is becoming an area of focus for Revenue.

Given the complexities involved in determining the correct tax treatment of offshore funds, it is essential to approach these matters with careful consideration and up-to-date knowledge. If you need guidance or have any questions regarding offshore funds and their tax implications, OmniPro Tax & Legal is here to help. Our team of experts can provide tailored advice to ensure compliance and help optimise your client’s tax position.