Offshore contract-based funds – Capital gains tax treatment aligned for corporate investors - Mazars - United Kingdom
Offshore contract-based funds – Capital gains tax treatment aligned for corporate investors
From 1 April 2010, an option introduced in the Finance Act 2009 for corporate investors in offshore contract based funds like Luxemburg FCPs and Irish CCFs will become compulsory. Under the rule, companies can ignore gains realised on the underlying fund portfolios in their corporation tax returns. Instead they must treat their participations in those funds in the same way as shares in a company or an investment in a unit trust and calculate chargeable gains and losses arising on disposals of those participations.
Background information
Contract based offshore funds, unlike unit trusts, are treated as fiscally transparent for tax purposes and the fund’s investors are deemed to be co-owners acting through investment managers and custodians in an agency relationship. As such, prior to the change in legislation, investors were individually liable to tax on their share of any gains made by the fund as they accrued, regardless of whether they were distributed or reinvested, based on their underlying investment portfolio
Changes for investors chargeable to capital gains tax
There were similar changes implemented with compulsory effect from 1 December 2009 for individuals and trustees investing in these funds, which significantly reduced the administrative burden associated with identifying the daily transactions of the fund.
Alignment of treatment for corporate investors
The new provisions in respect of corporate investors were introduced as optional in the Finance Act 2009, but they have now been made compulsory in line with the rules for individuals. Corporate investors who make disposals post 1 April 2010 in relation to interest held prior to this date will be treated as having an acquisition costs equal to the ‘pre-commencement acquisition cost’ – that is the total of the consideration, costs and expenditure that would have been allowable as a deduction if the investor had disposed of the rights immediately before the change in legislation.
The facility to make an election for the new treatment to be backdated for accounting periods beginning on or after 1 April 2003 but before 1 April 2010 remains available. We recommend that companies which held participations in contractually based funds in the course of that period:-
- Obtain the information required to identify their pre-acquisition costs
- Review their chargeable gains to ascertain whether a claim to apply the new legislation retrospectively should be made.
The relevant offshore funds remain fiscally transparent for all purposes other than the calculation of chargeable gains.
If you would like further details on how to make a claim in respect of any of the transactions described in this article please contact Carine Beidas on 0207 063 4311, or e-mail carine.beidas@mazars.co.uk.
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- Copyright 2012 - Mazars - United Kingdom
