Returning to Ireland in 2020? Taxation of income from offshore funds
Returning to Ireland in 2020? Here’s what you need to know.
Tax is always a major concern for any ex-pats looking to return to Ireland. Similar to our 2019 returning to Ireland series, our tax team has created a short series this Christmas outlining detail around three of the more common topics that they are asked about from people who are looking to return to Ireland and the tax implications of bringing home funds earned abroad.
The offshore fund regime is complex. Correctly identifying the tax treatment of the income and the gains on investments within the regime can be difficult to achieve as it is a highly technical area of tax. Income from certain offshore funds is subject to income tax at 41%. Gains from disposals may be either subject to income tax at 41% or Capital Gains Tax (CGT) at 40% or 33%. Unfortunately, any losses incurred on non-CGT-treatable investments are not available for offset against other gains from offshore funds within the income tax regime.
The tax treatment of investments outside the regime (normal shares) is not as complex. Generally, the income is subject to income tax, while the gains are subject to CGT at 33%. Additionally, any losses from the disposal of such shares can be offset against other chargeable gains.
Offshore funds located in an EU or EEA state, or in an OECD member with which a double tax agreement has been signed.
The tax treatment of offshore funds located in an EU or EEA state, or in an OECD member with which a double tax agreement has been signed depends on whether the fund is a “Regulated” Fund or an “Unregulated” Fund.
Taxation treatment of regulated offshore funds
Income from regulated offshore funds is taxable at 41%. There is a deemed disposal of the interest in the offshore fund every 8 years. Any gain on a disposal of units in such fund is also taxed at 41%. It should be noted that income and gains from regulated offshore funds are not liable to USC and PRSI. Furthermore, if a loss is made on a regulated offshore fund, this loss cannot be offset against other funds or CGT and vice versa.
In the event of death, a person who holds a material interest in a regulated offshore fund is deemed to have disposed of and reacquired that interest immediately before death for its market value on that date. This in effect means that a charge to tax will automatically arise on death.
This is a particularly important point to note when choosing to invest in offshore funds, particularly when one considers the investments possible under the next heading.
Taxation treatment of unregulated offshore funds
Unregulated offshore funds are taxed under the general principles of taxation. Therefore, income from unregulated offshore funds are chargeable to standard rate and/or marginal rate of income tax, USC and PRSI. Gains on the disposal of units in such an offshore fund are liable to Capital Gains Tax at 33%.
Please note that in the event of a death there are no special rules applicable, meaning that there is no deemed disposal on a death. Fundamentally different to the position outlined under regulated offshore funds above.
Offshore funds located in other territories (non-EU, non-EEA state and non-OECD member)
The tax treatment of funds located in other territories depends on whether the fund is a “Distributing” fund or a “Non-Distributing” fund.
The default position is that unless a fund applies to and is certified by Irish Revenue as a distributing fund, it is a non-distributing fund. Please note that distributing funds must distribute at least 85% of their income and/or gains annually.
Taxation treatment of distributing funds
Income from distributing funds is taxable at an individual’s marginal rate of income tax, USC, PRSI. Gains on disposal of such investments are subject to CGT at a rate of 40% (special rate).
The eight-year rule referred to above does not apply nor do any special rules on death.
Taxation treatment of non-distributing funds
Income from non-distributing funds is taxable at an individual’s marginal rate of income tax, USC and PRSI. Gains on disposal of such investments are subject to the individual’s marginal rate of income tax. USC and PRSI will apply.
Although disposals are charged to income tax, gains calculated according to normal CGT rules. Cost of acquisition may not be indexed for inflation in calculating the gain.
If loss arises disposal is treated as giving rise to neither a gain nor a loss, i.e. losses are ignored and cannot be used against other capital gains.
The eight-year rule referred to above does not apply. However, on death, a person who held a material interest in a non-distributing offshore fund is deemed to have disposed of that interest immediately before death for its market value on that date and tax will then automatically arise.
Conclusion
Whilst the above is only a short summary of the Offshore Fund Regime correctly identifying whether an individual has acquired a material interest in an offshore fund and the resulting tax treatment is extremely complex as both tax law and company law have to be meticulously analysed.
If you make investments through an intermediary, it is very important that you ask them firstly whether or not they have invested in a material interest in an offshore fund and secondly if the investment is within or outside the EU, EEA and OECD.
Careful examination of the terms under which the investments are made will then be required. This will include examining the prospectuses, offering memorandum, financial statements and marketing material regarding the fund structure.
Read our 2019 returning to Ireland series which answers eight of the most common questions people ask about returning to work in Ireland.
Read detail on the other topics in our 2020 series:
Topic #1: The tax treatment of termination payments
Topic #3: Rebasing assets
If you have any questions about returning to Ireland or any other personal tax issues, please contact a member of our tax team.
Topic #2: Taxation of income from offshore funds
Prior to returning to Ireland it will be important to gain an understanding of how investment portfolios held abroad will be treated for Irish tax purposes on return.The offshore fund regime is complex. Correctly identifying the tax treatment of the income and the gains on investments within the regime can be difficult to achieve as it is a highly technical area of tax. Income from certain offshore funds is subject to income tax at 41%. Gains from disposals may be either subject to income tax at 41% or Capital Gains Tax (CGT) at 40% or 33%. Unfortunately, any losses incurred on non-CGT-treatable investments are not available for offset against other gains from offshore funds within the income tax regime.
The tax treatment of investments outside the regime (normal shares) is not as complex. Generally, the income is subject to income tax, while the gains are subject to CGT at 33%. Additionally, any losses from the disposal of such shares can be offset against other chargeable gains.
Offshore funds located in an EU or EEA state, or in an OECD member with which a double tax agreement has been signed.
The tax treatment of offshore funds located in an EU or EEA state, or in an OECD member with which a double tax agreement has been signed depends on whether the fund is a “Regulated” Fund or an “Unregulated” Fund.
Taxation treatment of regulated offshore funds
Income from regulated offshore funds is taxable at 41%. There is a deemed disposal of the interest in the offshore fund every 8 years. Any gain on a disposal of units in such fund is also taxed at 41%. It should be noted that income and gains from regulated offshore funds are not liable to USC and PRSI. Furthermore, if a loss is made on a regulated offshore fund, this loss cannot be offset against other funds or CGT and vice versa.
In the event of death, a person who holds a material interest in a regulated offshore fund is deemed to have disposed of and reacquired that interest immediately before death for its market value on that date. This in effect means that a charge to tax will automatically arise on death.
This is a particularly important point to note when choosing to invest in offshore funds, particularly when one considers the investments possible under the next heading.
Taxation treatment of unregulated offshore funds
Unregulated offshore funds are taxed under the general principles of taxation. Therefore, income from unregulated offshore funds are chargeable to standard rate and/or marginal rate of income tax, USC and PRSI. Gains on the disposal of units in such an offshore fund are liable to Capital Gains Tax at 33%.
Please note that in the event of a death there are no special rules applicable, meaning that there is no deemed disposal on a death. Fundamentally different to the position outlined under regulated offshore funds above.
Offshore funds located in other territories (non-EU, non-EEA state and non-OECD member)
The tax treatment of funds located in other territories depends on whether the fund is a “Distributing” fund or a “Non-Distributing” fund.
The default position is that unless a fund applies to and is certified by Irish Revenue as a distributing fund, it is a non-distributing fund. Please note that distributing funds must distribute at least 85% of their income and/or gains annually.
Taxation treatment of distributing funds
Income from distributing funds is taxable at an individual’s marginal rate of income tax, USC, PRSI. Gains on disposal of such investments are subject to CGT at a rate of 40% (special rate).
The eight-year rule referred to above does not apply nor do any special rules on death.
Taxation treatment of non-distributing funds
Income from non-distributing funds is taxable at an individual’s marginal rate of income tax, USC and PRSI. Gains on disposal of such investments are subject to the individual’s marginal rate of income tax. USC and PRSI will apply.
Although disposals are charged to income tax, gains calculated according to normal CGT rules. Cost of acquisition may not be indexed for inflation in calculating the gain.
If loss arises disposal is treated as giving rise to neither a gain nor a loss, i.e. losses are ignored and cannot be used against other capital gains.
The eight-year rule referred to above does not apply. However, on death, a person who held a material interest in a non-distributing offshore fund is deemed to have disposed of that interest immediately before death for its market value on that date and tax will then automatically arise.
Conclusion
Whilst the above is only a short summary of the Offshore Fund Regime correctly identifying whether an individual has acquired a material interest in an offshore fund and the resulting tax treatment is extremely complex as both tax law and company law have to be meticulously analysed.
If you make investments through an intermediary, it is very important that you ask them firstly whether or not they have invested in a material interest in an offshore fund and secondly if the investment is within or outside the EU, EEA and OECD.
Careful examination of the terms under which the investments are made will then be required. This will include examining the prospectuses, offering memorandum, financial statements and marketing material regarding the fund structure.
Read our 2019 returning to Ireland series which answers eight of the most common questions people ask about returning to work in Ireland.
Read detail on the other topics in our 2020 series:
Topic #1: The tax treatment of termination payments
Topic #3: Rebasing assets
If you have any questions about returning to Ireland or any other personal tax issues, please contact a member of our tax team.
Lisa Kinsella on returning to Ireland from the Middle East:
