Offshore Funds: The limits of the White List - Mazars - United Kingdom
Offshore Funds: The limits of the White List
HMRC have issued a Press Release putting an end to speculation about the extent to which the so called “White List” could be used to protect certain offshore funds with a UK investment manager from UK tax exposure. The White List appears twice in rules relevant to offshore funds and this article explains its purpose in both cases and how they diverge.
What is the White List
The White List is a list of “investment transactions” which appears three times in the legislation relating to investment funds:-
- In the Authorised Investment Funds (Tax) Regulations 2006 (“The AIF Regulations”) automatically treats these transactions as non-trading whether or not they would be trading under normal principles of common law. This gives complete confidence to the managers of a UK Authorised Investment Fund (“AIF”) that the AIF’s capital profits derived from these transactions and which cannot be distributed will not be subject to corporation tax as trading profits.
- The Offshore Funds (Tax) Regulations 2009 (The “Offshore Funds Regulations”) cover the new reporting fund regime applicable to offshore funds for their periods of accounts commencing on or after 1 December 2009. Again these transactions are not treated as trading profits in calculating reportable income of diversely owned offshore funds which are considered equivalent to UK AIFs.
- In the Investment Managers Specified Transactions Regulations 2009 it gives a UK fund manager of an offshore fund access to the Investment Manager Exemption.
The issue at stake: The White List and the Investment Manager Exemption.
Depending on their activities, certain offshore funds (eg hedge funds) which appoint UK-based investment managers risk being treated as trading in securities and financial instruments in the UK through a Permanent Establishment. This could render the investment manager liable as the fund’s UK representative to account for UK corporation tax on the profits that it generates for the fund.
Investment managers are able to avoid this liability for “investment transactions” qualifying for the Investment Manager Exemption. Although the conditions required to retain the exemption have recently become more manageable, UK managers of such funds had hoped that transactions on the White List, being called “investment transactions” in the same way as under the AIF and Offshore Funds Regulations, would automatically be treated as non-trading. This would have made it unnecessary for the UK fund manager to meet the other conditions for the Investment Manager Exemption permitting for instance the fund manager or persons connected with the manager to invest in the fund without concern for the “20% rule”. This would have allowed more flexibility for investment banks or life insurance companies in the same group as the fund managers to issue structured products including bonds linked to the value of the fund in question.
However, HMRC have indicated that this is not the case and that the protection of the White List is limited to the measure of profits under the reporting fund regime. It therefore offers no shelter from any other consequences for the fund of being engaged in trading activities. The Investment Manager Exemption with the entirety of its conditions therefore remains the main tool available to the UK manager of offshore funds with activities which could bear the hallmarks of a trade.
A reporting fund may therefore successfully exclude profits from transactions on the White List in calculating its reporting income and still fall within the UK tax net if it has not taken every precaution to meet the Investment Manager Exemption.
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