743 Material interest in offshore funds

Summary

This section lists the offshore funds to which the Chapter applies as being —

• non-resident companies,
• unit trusts with non-resident trustees, and
• arrangements which, under the laws of a foreign territory, create rights in the nature of co-ownership.

An interest is a “material interest” if, when it was acquired, it was reasonable to expect that the value of the interest could be realised within the next 7 years. A person is deemed to be able to realise the value of an interest in an offshore fund if an amount which is approximately equal to the proportion, represented by the interest, of the underlying assets of the company (or assets subject to the unit trust scheme or arrangements) can be realised. Realisation of an amount can be in money or in assets to the value of the amount.

Certain interests are excluded from the definition of “material interest”. They include an interest in respect of loan capital or other debt incurred for money lent in the ordinary course of banking business, and rights under an insurance policy. Substantial shareholdings by companies in overseas companies held for the development or maintenance of trade are also excluded where the shareholding company could only expect to realise their value due to either a buyout agreement, or an agreement to wind up the overseas company, or both. Certain majority shareholdings in overseas companies are also excluded.

Details

(1) References to an interest in an offshore fund mean references to an interest in any of the following —

• a company resident outside the State (in general, a company managed and controlled outside the State),
• a unit trust scheme, the trustees of which are not resident in the State, or
• any other arrangements taking effect under foreign law which create rights in the nature of co-ownership (without restricting that expression to its meaning under Irish law).

(2) The legislation defines offshore funds by reference to the structure of investors’ rights. Without a “material interest”, an investor cannot be charged to tax by reference to the offshore fund provisions; further, without at least one material interest existing, an overseas concern cannot be an offshore fund at all. For example, holdings of shares in a public company quoted and resident in the United Kingdom would not normally be material interests because the value of such shares are not normally expected to vary consistently with the asset value of the company.

The factor which determines whether or not a material interest exists is the investor’s prospect of realising or not realising the interest in question. If, at the time the interest was acquired, it could reasonably be expected that the value of the interest could be realised within 7 years, the interest is a “material interest”. The 7 year period is intended to exclude venture capital funds which normally have a life of just under 10 years. It should be observed that the test of the investor’s expectation is objective, that is, it is not sufficient for the investor to argue that he/she personally did not expect to realise his/her interest within 7 years.

(3) & (4) Provision is made to clarify what is meant by being “able to realise the value” of the investor’s interest. The investor must, to be within the section, be able to obtain, in cash or in kind, an amount which is reasonably approximate to the proportion which his/her interest represents of the market value of the assets of the fund.

If the value of the investor’s interest is disproportionately high by reference to the proportion of total assets which he/she owns, this is not regarded as an ability to realise the value of his/her interest. This provision is intended to prevent investors in overseas companies which are not offshore funds from being charged under these rules.

Where shares in an overseas company are listed on a stock exchange, it is possible that the quoted price will on occasions correspond to underlying net asset value. This, however, will not of itself make the shares a material interest in an offshore fund. The shares would be considered a material interest only if, at the time they were acquired, the investor had a reasonable expectation of a future sale at or near net asset value. However, if historically the shares have been habitually traded at or near net asset value, an investor is likely to have acquired a material interest.

(5) The interest arising in respect of lending by a bank or the issue of a policy of insurance are not to be treated as a material interest.

Normal commercial loans or other debt interests which entitle the lender to no more than a fixed return of principal on redemption, and which are not geared to the underlying asset value of the borrower’s business, are not to be regarded as a material interest within the legislation.

An overseas fund might offer a charge over assets as security for borrowing or an insurance policy issued. It is not intended that such transactions would be caught by the offshore funds legislation.

(6) An exemption is made to the definition of “material interest” to ensure that interests in joint trading ventures, carried on through the medium of a foreign company, are not brought within the charge. The 2 situations which might give concern are —

• buy-out agreements between participants in a trading venture, and
• short-term overseas trading operations.

In each of these cases it could be argued that the investors had a reasonable expectation of realising the value of their interests within 7 years. To prevent such interest from being chargeable, it is provided that shares in an overseas company do not constitute a material interest if the following conditions are satisfied —

• the shares are held by a company and the holding is necessary or desirable for the maintenance and development of its trade or of that of an associated company,
• the shares carry at least 10 per cent of the voting rights in the overseas company, plus a right to at least 10 per cent of its assets on winding up,
• not more then 10 persons hold shares in the overseas company, and all its shares confer voting rights and a right to assets on winding up, and
• at the time when it acquired the shares, the Irish company had a reasonable expectation of realising them within 7 years only because of either a buy-out agreement or because of provisions of an agreement between the parties or the constitution of the overseas company under which the overseas company would be wound up in less than 7 years.

(7) A company is associated with another company if one controls the other, or if both are controlled by the same person or persons. Section 432 is applied in respect of the meaning of “control”.

(8) An interest in an overseas company is not a material interest at a time when the holder has the right to have the company wound up and, in that event, would be entitled to more than 50 per cent of the assets remaining after discharge of all liabilities having priority over his/her interest.

(9) The capital gains tax rules apply for the purpose of determining the market value of any asset for the purposes of the offshore fund provisions.

Relevant Date: Finance Act 2021