Luxembourg FCPs and ‘Baker’ JPUTs are income-transparent offshore funds, which are broadly defined as funds whose income is referable to each UK resident investor’s interest in proportion to his share of the fund *2, and are transparent for income but opaque for gains. These would likely have been classed as offshore funds under the old regime, but now face a whole new set of technical issues under the new regime, whether as reporting or non-reporting funds.
The diagrams illustrate how Luxembourg FCPs may be used as joint venture investment vehicles to hold European real estate through local holding and asset-owning companies (fig 2), and how JPUTs can act as an SDLT ‘blocker’ to hold UK real estate for trading purposes via a two-tier partnership structure (fig 3).
Transparent non-reporting funds (‘TNRF’)
Income from a TNRF is taxable on an arising basis. In practice, this generally means that an investor will be taxable on his share of the fund’s income when the fund’s accounts show amounts available for distribution (typically every three to six months). Investors in a ‘Baker’ JPUT are entitled to their appropriate share of income as and when it arises to the JPUT (subject to a deduction for trustees’ expenses) as though the trust income accrued directly to the investors. Both FCPs and JPUTs are treated automatically as TNRFs unless they apply to become transparent reporting funds (see below).
UK resident investors will realize capital gains on disposals of interests in FCPs as these are contract-based TNRFs under section 99 and 103A TCGA *3. Similarly, JPUT units are treated as company shares by virtue of section 99 TCGA, and accordingly generate capital gains when they are sold *4. However, unless certain requirements are met, the gains will be taxed as offshore income gains without regard to any income tax already paid in relation to arising basis income (such as interest or dividends) *5, resulting in effective double taxation in respect of the same income. These requirements are, broadly, that the TNRF must not hold more than 5% of its investments by value in other non-reporting funds (the “5% test”), and that the TNRF must also make sufficient information available to investors to enable them to meet their tax obligations.
In addition, disposals of interests in TNRFs cannot crystallize offshore income losses *6, which potentially leaves investors stuck with offshore income gains without any ability to offset them.
*2 – Regulation 11, Offshore Funds (Tax) Regulations 2009 (SI 2009/3001)
*3 – Inserted by Part 2, Sch 22 FA 2009
*4 – Offshore Funds (Tax) Regulations 2009 (SI 2009/3001), Reg. 33
*5 – Offshore Funds (Tax) Regulations 2009 (SI 2009/3001), Regulation 39(1)
*6 – Offshore Funds (Tax) Regulations 2009 (SI 2009/3001), Regulation 42