The truth about offshore alternative investment funds
By Paul Hale, Head of Tax Affairs, AIMA
Published: 19 December 2017
There are often fundamental misunderstandings when it comes to hedge funds and taxation. Here are some of the basics on the subject:
- Investing in an offshore alternative investment fund does not confer a tax advantage over investing in an onshore fund, because investment funds (and “collective investment schemes” in general) are tax neutral, whether registered offshore or onshore. That means that investors in the funds remain liable to tax on their gains but the fund itself does not incur tax which would be an additional cost to the investors. Tax neutrality thus is not unique to the offshore world. All developed economies with funds industries, such as the US, France, Germany and the UK, have tax neutral fund structures in their regulatory and tax regimes. The reason hedge funds, private credit funds and private equity funds tend to be set up in offshore jurisdictions such as the Cayman Islands is that the regulatory regimes of those financial centres permit much more flexibility over the investing and risk-management tools the funds may use as well as being more suited to an international institutional investor base.
- The identity of investors in offshore alternative investment funds may be private, but it is not secret. Under the Common Reporting Standard (CRS), a set of global tax transparency rules that were drawn up by the OECD and have been implemented by more than 90 countries, including all the main offshore alternative investment fund jurisdictions, the identities and financial details of beneficial owners (such as investors in offshore alternative investment funds) are shared with tax authorities in the investors’ home countries. These reports are sent automatically - there are no legal hoops for tax authorities to jump through first. The offshore alternative investment fund jurisdictions also have or are establishing registries of beneficial ownership from which details can be provided to official agencies on request. The information is treated as private and confidential by tax and law enforcement agencies, meaning the data may not enter the public domain without good reason. The wider public interest is served by official agencies having access to the data.
- Offshore alternative investment funds are set up in offshore jurisdictions such as the Cayman Islands, Bermuda, the British Virgin Islands, Jersey and Guernsey, many of which have regulatory and supervisory regimes that have been comprehensively and positively assessed by the European Securities Markets Authority from the point of view of investor protection and systemic risk monitoring. All of the mentioned jurisdictions have implemented global anti-money laundering standards, comply with US and global tax information exchange rules and meet global transparency standards.
- Money invested in offshore alternative investment funds is not kept in a bank account offshore but is invested in financial markets around the world. This activity helps to provide additional sources of financing to businesses and infrastructure projects in developing and developed economies, creating significant jobs and generating tax revenues around the world.
- The majority of investment into hedge funds is made by institutional investors such as pension funds, insurance companies and charitable institutions. Such investors require high standards of corporate governance, in addition to compliance with the regulatory regimes in the jurisdictions they operate and are established in.
Further readingTransparent, Sophisticated, Tax Neutral: The truth about offshore funds (2017)