Equalisation Opportunities

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New regulations to amend the UK’s tax regime for offshore funds will take effect on 27 May. Managers of offshore funds with UK reporting fund status should pay particularly close attention to the final provisions regarding income equalisation and the opportunities and obligations these provisions present.

The UK’s new tax regime for offshore funds and the associated reporting fund rules which enable UK resident investors to obtain favourable capital gains tax rates have been in place since December 2009. In February 2011, draft regulations were published setting out a series of proposed amendments to improve the practical operation of the rules. The draft placed particular emphasis on changes to the rules on income equalisation with a view to eliminating the ‘last man standing’ issue which can currently arise where a reporting fund does not operate equalisation. Essentially, this could result in UK investors in the fund at the end of a reporting period being allocated a disproportionate amount of fund income for tax purposes which would be especially unwelcome for certain investors, such as UK individuals, who pay a higher rate of tax on income than capital gains. A detailed explanation of this issue and the draft proposals is set out in our article “Changes to Report” in the Dechert Financial Services Quarterly Report (March 2011), a copy of which can be found at http://www.dechert.com/library/Financial_Services_Report_03-11.pdf.

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