Draft Tax Regulations for Funds Investing in Non-Reporting Funds
Background
In February 2008 the Financial Services Authority (FSA) issued a consultation publication: ‘CPO8/4 Funds of Alternative Investment Funds (FAIFs): feedback on CP07/6 and further consultation’. In their publication the FSA proposed greater investment freedom for UK fund managers, by allowing Authorised Investment Funds (AIFs) constituted as Non-UCITs Retail Schemes or Qualified Investor Schemes to invest up to 100% of their assets into unregulated schemes.
On 22 February 2008 the Government published a tax framework for FAIFs: ‘Funds of Alternative Investment Funds: A Tax Framework’ and invited industry to provide comments on the proposed tax regime.
The Government has used the following key principles in developing the new tax regime:
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Certainty: Providing certainty to funds, their managers and investors as to the way in which UK investors are taxed.
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Consistency: Ensuring that, as far as possible, UK investors into UK AIFs are taxed in a similar manner as if they had invested directly in the underlying assets.
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Preventing unfair tax advantages: Ensuring that the new tax regime minimises the risk of avoidance of UK tax.
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Revenue neutral: Ensuring that the new regime does not result in a cost to the Exchequer.
Draft tax regulations
The FSA are intending to introduce updated regulations for the FAIF regime in the coming months. The Government has been working closely with the FSA to develop draft regulations for the tax regime, based on the Tax Framework previously published and the comments received from industry. Whereas the FSA’s definition is based on investments into unregulated funds, for tax purposes the Government is concerned with whether investments are made by AIFs into non-reporting offshore funds. To make this distinction the draft tax regulations refer to Funds Investing in Non-Reporting Funds (FINROFs).
Summary of key features
The key features of the FINROF tax regime include:
- The tax regime applies automatically to AIFs which invest more than 20% of the value of the fund’s assets in non-reporting offshore funds;
- The point of taxation is moved away from the AIF to the investors, with the result that the UK investors would face similar tax treatment as they would have had they invested into the underlying non-reporting offshore funds directly;
- Funds can elect into the regime even if they do not fall within the definition of a FINROF; and
- Investors can elect for deemed disposal of their investment on entry into the FINROF regime.
The introduction of the FINROF regime is a further step in strengthening the UK's position as a leading international financial centre. In drafting the tax regulations the Government has had to strike a balance between aligning the tax regime with the proposed imminent introduction of the FSA’s FAIF regime, and practical implications that may arise when an AIF invests in a mix of reporting and non-reporting offshore funds. The Government will continue to work with industry on the issue of mixed funds and intends to consider further development of the regulations following their initial introduction.
The Government welcomes comments as to whether the draft legislation will meet in practice the objectives previously stated. Interested parties should send their comments by Tuesday 2 February to:
- Zoe Hart,Assets, Savings and Wealth Team, HM Treasury, 1 Horse Guards Road, London, SW1A 2HQ
- Tel: +44 (0)20 7270 6031
- Email: zoe.hart@hmtreasury.gsi.gov.uk
Please could you copy responses to HMRC:
- John Buckeridge, Collective Investment Schemes, Financial Products and Services CT&VAT, 100 Parliament Street, London, SW1A 2BQ
- Tel: +44 (0)20 7147 2560
- Email: john.buckeridge@hmrc.gsi.gov.uk
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