Revenue Note for Guidance

Schedule 20

[Section 745]

Offshore Funds: Computation of Offshore Income Gains

Overview

This Schedule relates to the taxation of offshore funds under Chapter 2 of Part 27. It provides the rules for calculating the amount of gains on disposals of interest in offshore funds. Although they are to be charged as income, gains on disposals of material interests in non-qualifying offshore funds are calculated according to normal capital gains tax principles. However, costs of acquisition are not indexed for inflation in calculating gains. The unindexed gains charged as income are the gains arising from 6 April, 1990. A material interest held on 6 April, 1990 is treated as disposed of and immediately reacquired at its market value on that day. Therefore, the gain calculated on any subsequent disposal only includes the gain arising from the date of the deemed reacquisition, that is, 6 April, 1990. The charge is on the actual gain on the disposal if that gain is less than the gain based on the 6 April, 1990 market value. Losses arising on disposals of material interests are ignored for the purposes of the charge under section 745 and this Schedule.

Part 2 of the Schedule provides for disposals of material interests in distributing funds operating equalisation arrangements. The equalisation element of redemption proceeds are charged as income. The equalisation element of redemption proceeds is the payment of the part of the next distribution to be made by the fund that has accrued to the date of disposal of the interest. In general, the equalisation element is only part of the gain on the disposal of an interest in a fund operating equalisation arrangements. The charge as income is only applied to the equalisation element of the gain.

PART 1

Disposals of interests in non-qualifying funds

Interpretation

par 1 Part 1 of the Schedule applies to material disposals of interests in offshore funds which are within the scope of the provisions of Chapter 2 of Part 27, otherwise than by virtue of their being disposals of interests in funds operating equalisation arrangements (that is, disposals of interest in funds which are not certified as distributing funds). Part 2 of the Schedule deals with disposals of interests in distributing funds which operate equalisation arrangements.

Calculation of unindexed gain

par 2(1) The first step in charging a material disposal is to calculate the unindexed gain arising on the disposal.

par 2(2) The “unindexed gain” is simply the amount of the gain arising on the disposal, taking no account of any income tax or corporation tax charge under the offshore fund provisions or the capital gains tax indexation allowance.

It is necessary to ignore the income tax or corporation tax charge under the offshore provisions because otherwise the provisions of section 551 (exclusion from consideration for disposals of sums chargeable to income tax) could be said to apply so that the unindexed gain would be reduced to nil.

In addition, the applicable capital gains tax provisions are subject to the modifications (for death and share-for-share transactions) set out in section 741 and in paragraph 3.

Modifications to be made in calculating unindexed gains

par 3(1) Firstly, where a business is transferred to a company in exchange for shares in the company, income tax will not be deferred in charging the offshore income gain in respect of the transfer of assets of the business which are interests in an offshore fund. To the extent that the proceeds of the transfer are taken by the owner of the business as shares in the company acquiring the business, the charge to tax on the gain arising on the transfer is normally deferred. No such deferral arises in the case of offshore income gains on transfers of assets of a business representing interests in offshore funds.

par 3(2) Secondly, if an investor incurs a loss on disposal of his/her interest in an offshore fund, this is treated for the purposes of calculating tax under the rules as a nil gain. In other words, the rules cannot give rise to an income tax loss. Hence, any loss incurred is a capital loss which may be offset against any capital gains of the investor.

Gains since 6 April 1990

par 4(1) & (2) Where an interest is disposed of which was acquired, or deemed to have been acquired, by the disponer before 6 April, 1990, the gain is calculated on the assumption that on 6 April, 1990 the interest was disposed of and immediately reacquired for a consideration equal to its market value at that time. Thus, the market value on 6 April, 1990 of an interest held, or deemed to have been held, on that date by the disponer must be ascertained.

Apart from the substitution of the 6 April, 1990 market value for the actual consideration given for the interest, the disponer’s gain is calculated in the same way as an “unindexed gain” under paragraphs 2 and 3.

par 4(3) Where the disponer acquired the interest on or after 6 April, 1990 in circumstances such that no gain or loss was deemed to arise (other than under provisions dealing with the indexation allowance producing a loss), the previous owner’s acquisition is treated as the disponer’s acquisition.

Example

In 1987 B acquired an interest in Gannet Limited, an offshore fund, for €15,000. In 1991 B made a gift of his interest to his wife, Mrs B. In 1994, Mrs B sold the interest for €24,000. The market value of the interest on 6 April, 1990 was €20,000.

Mrs B is treated as having acquired the interest in 1987 and thus she is also treated as having owned it on 6 April 1990. In computing her offshore income gain, one takes as the base cost whichever is the higher of the 1987 acquisition cost or market value on 6 April 1990. In this case, the latter, namely, €20,000.

par 4(4) Where an interest has changed ownership more than once on a “no gain/no loss” basis on or after 6 April 1990, the ownership of the asset by the person making the disposal, in respect of which a gain or loss may be treated as arising, is deemed to have begun on the date of the latest disposal before 6 April 1990 in respect of which a gain or loss could have been treated as arising.

The offshore income gain

par 5(1) The gain on a disposal of a material interest in a non-qualifying offshore fund is the unindexed gain which is defined in paragraph 2(2) as the gain which would arise ignoring the indexation allowance.

par 5(2) If the interest was acquired before 6 April, 1990 and the gain since that date is less than the gain over the entire period of ownership, or deemed ownership, of the interest by the person disposing of it, the charge is limited to a charge on the gain arising since 6 April 1990. Whether the gain charged is the entire gain or the gain since 6 April 1990, the indexation allowance is not given.

PART 2

Disposals involving an equalisation element

par 6(1) The income element of disposal proceeds of interests in funds operating equalisation arrangements is chargeable as an offshore income gain where the fund is a distributing fund. The income element chargeable as an offshore income gain is restricted to the income accruing after 6 April 1990 and during the disponer’s period of ownership of the interest.

An investor who redeems his/her interest in a distributing offshore fund which is an equalisation fund is charged to tax on an amount equal to the “equalisation element relevant to the asset disposed of”. This applies even where the fund is a distributing fund.

par 6(2) The “equalisation element relevant to the asset disposed of” is the amount which would be credited to the fund’s equalisation account if on the date of the disposal the interest were acquired by another investor directly from the fund managers. In other words, tax is charged prima facie on the same amount as is treated as distributed by the fund under paragraph 2 of Schedule 19.

par 6(4) The equalisation element on which the investor is charged may be reduced in two circumstances, namely —

where the interest is acquired on or after 6 April 1990 and disposed of again before a distribution is made out of the fund, only that part of the income accruing since the date of acquisition is taxable, and
where the interest was acquired before 6 April 1990, only that part of the income accruing since that date is taxable.

par 6(5) Where the interest is acquired before the beginning of the period in which the equalisation element accrues and that period begins before 6 April 1990, only the part of the income accruing since 6 April 1990 is taxable.

par 6(6) The amount of the equalisation element of the disposal proceeds in respect of an interest in an equalisation fund is halved to the extent that the equalisation element represents commodity income of the fund. This is in keeping with the rest of the provisions relating to commodity income.

par 7(1) Provision is made for a comparison of the amount chargeable under Part 2 which affects distributing funds operating equalisation arrangements with the amount which would be chargeable under Part 1 in respect of interests in non-distributing funds.

Where an investor is charged to tax on the occasion of a disposal of his/her interest in a fund operating equalisation arrangements, the sum on which he/she would be charged to tax under the rules applying to non-qualifying funds must also be calculated. If this sum is lower than the “equalisation element”, the investor is charged on that sum instead. The purpose of this is to prevent an investor being subject to higher taxation if he/she invests in an equalisation fund which distributes its income than if he/she had invested in a fund which rolls up its income.

The sum on which the investor would be taxed under the rules applying to non-qualifying funds, referred to as the “Part 1 gain”, is to be calculated in all cases.

par 7(2) If there is no Part 1 gain, the investor is not charged to tax. If the Part 1 gain is less than the equalisation element, the investor is charged on the Part 1 gain.

Example

In 1989, C purchases (by subscription) an interest in Seagull Limited, an offshore fund operating equalisation arrangements. The purchase price is €8,000 including an element attributable to accrued income. On 6 April 1990 the value of C’s interest is €10,000. In 1993 C redeems the interest for €13,000, which includes €1,400 attributable to income accrued since the last distribution, which took place in December, 1992.

The “equalisation element” on which C will be charged is €1,400. The “Part 1 gain” is €13,000 – €10,000 = €3,000. Since the Part 1 gain is not less than the equalisation element, C is taxed on €1,400.

par 8(1) The “Part I gain” is the gain computed under Part 1 of Schedule 20 in respect of the disposal of an interest in an equalisation fund as if it were a disposal of an interest in a non-distributing fund.

par 8(2) Although the general rules for the computation of offshore income gains are to be used, a transaction will, nevertheless, be treated as giving rise to a disposal by reference to the special rules in section 742 for equalisation funds. These rules deem disposals to have been made on reorganisations and exchanges of shares as an exception to the general rule in respect of such reorganisations and exchanges.

par 8(3) If the disposal with the equalisation element is an event to which no gain or loss is deemed to arise (other than because an indexation allowance produces a loss), then, for the purposes of computing the Part 1 gain, the actual gain or loss may be taken to arise on the disposal

Relevant Date: Finance Act 2021