Offshore Funds - Finance Act 2007 Changes

Section 40 is an anti-avoidance provision, providing special rules for the taxation of personal portfolio investment undertakings in relation to payments made to unit holders. At present, income or gains are allowed to be rolled up within a fund without suffering tax. When payments are made to a unit holder out of the fund, the payment is generally subject to an exit tax of 23 per cent. It has come to attention that some investors are putting personal asset investments into investment undertakings so as to ultimately have a final tax liability of 23 per cent instead of the investor's marginal tax rate. The approach in the section is similar to that introduced for personal portfolio life policies in the Finance Act 2002.

A personal portfolio investment undertaking (PPIU) is defined in a new Section 739BA. It relates to a situation where the selection of the property of the undertaking or offshore fund in the EU, the EEA or OECD countries with which Ireland has a double taxation agreement, was or can be influenced by the unit holder or certain connected persons.

Under the new rules:

• Where a chargeable event happens in relation to an investment undertaking which is a PPIU on or after 20 February 2007, the gain will be taxed at the standard rate plus 23 per cent.
• Also, where a payment is made in respect of an offshore fund in EU and EEA Member States and certain OECD countries and that fund is a PPIU, the payment will be taxed at the standard rate plus 23 per cent where the income is correctly included in the individual's tax return, and at the marginal rate plus 23 per cent in other cases.