What is OFFSHORE FUND? What does OFFSHORE FUND mean? OFFSHORE FUND meaning - OFFSHORE FUND definition -
OFFSHORE FUND explanation.
Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license.
An offshore fund is a term which generally refers to a collective investment scheme domiciled in an offshore jurisdiction. Like the term "offshore company", the term is more descriptive than definitive, and both the words 'offshore' and 'fund' may be construed differently.
The reference to offshore, in the classic case, usually means a traditional offshore jurisdiction such as the Cayman Islands, Jersey or the British Virgin Islands. However, the term is also frequently used to include other corporate domiciles popular for cross border investment structuring, such as Delaware and Luxembourg. In the widest sense, offshore is sometimes used to include any type of cross border collective investment scheme, and popular fund domiciles such as Ireland may be included within the definition of offshore, notwithstanding their substantial size as a country.
Similarly, although the reference to fund can be taken to include any sort of collective investment, within offshore jurisdictions themselves, the term offshore fund is often limited to purely open-ended investment funds (i.e. a fund where the investor can redeem his investment during the life of the fund) where the investment is by way of equity (rather than by debt). This is often because closed-ended investment funds (where the investor cannot redeem out), and funds where the investment is structured by way of debt, are not normally subject to the usual regulatory requirements for investments funds, and so are not treated as funds in the stricter sense of that word.
Although the term is often used as a simply descriptive one, many onshore countries have specific definitions in their legislation or their tax codes for when an investment is treated as an offshore fund. For example, in the United Kingdom see the Offshore Funds (Tax) Regulations 2009, and in the United States see section 871 of the Internal Revenue Code of 1986.
Most developed offshore jurisdictions provide a broadly similar regulatory regime in relation to funds formed in their country.
Typically, the regulatory regime will take a two tier approach, making a distinction between funds which are offered generally to members of the public (which will require a high degree of regulation because of the nature of potential investors), and non-public funds. Non-public funds are usually either categorised as private funds or professional funds or some equivalent label. Typically, investors in non-public funds can be assumed to be sophisticated because of the nature of the offering – there may, for example, be a high minimum initial investment, say US$100,000, and/or a requirement that investors establish that they are "professional investors" (although some offshore jurisdictions allow investors to self-certify this). Alternatively the fund may be designed for a small and select group of investors and the constitutional documents will limit the number of investors, say to no more than 50. Although most offshore jurisdictions permit funds to obtain licences to operate as public funds, the onerous regulatory requirements associated with such licences usually means that only a small minority of offshore funds are available for subscription by the general public.
Most offshore domiciling of funds tends to be regulatory driven rather than tax driven. The relative absence of regulation relating to leveraging and investment strategies in offshore jurisdictions encourages higher risk funds, such as hedge funds, to form themselves in those jurisdictions.
Typically the offshore jurisdiction in which a fund is incorporated will not impose any direct taxation on the income of the fund. Nor will it impose any withholding or similar income taxes on distributions by the fund to its investors. However, this does not normally operate to exempt the fund from taxes which may arise as a result of its investment activities in other countries. So, for example, if a fund former in the Cayman Islands realises a capital gain on trade in New York, it will still normally be liable to U.S. capital gains tax in the usual way. Similarly, if a person domiciled in the United Kingdom invests in a Guernsey fund, they will still be liable to taxation of income and capital gains received under British tax laws (subject to the rules on remittance of foreign earned income), notwithstanding the absence of any taxation imposed in Guernsey.