Introduction Details of the Section
2.The section inserts a new section 378A into Chapter 2 of Part 4 of the Income Tax (Trading and Other Income) Act 2005.
3.Subsections (1) and (3) of section 378A determine when the section will apply.
4.The test in subsection (3) is similar to that which applies to corporate investors for the purposes of the loan relationships legislation. (See sections 490 and 493 CTA 2009). A distribution is treated as interest if the offshore fund, at any time during the ‘relevant period’, holds more than 60 per cent of its assets in the form of qualifying investments. The definition of a qualifying investment is set out in section 494 of the Corporation Tax Act (CTA) 2009 and, in summary, refers to interest bearing and economically similar investments.
5.Subsection (2) is the operative part of the new section. It determines the tax treatment of distributions from offshore funds to which the section applies.
6.Subsections (4) and (5) define the ‘relevant period’, to which the ‘qualifying investments test’ applies (subsection (3)). The period is normally the last period of account of the fund ending before the date the dividend is paid but there is an exception where that period is less than 12 months. In this case the period to be considered is the 12 month period ending with the last day of that period of account. This is subject to subsection (5)(b) which caters for interim distributions. When the distribution cannot be fully funded from profits available in previous periods then the ‘relevant period’ is the current period. Subsections (4) and (5) therefore apply, to the extent possible, the qualifying investments tests to the period of account in which profits to be distributed were earned.
7.Subsection (6) of section 378A extends the application of the section to include the case of a manufactured overseas dividend which represents a distribution to which the section would apply.