Offshore fund

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An offshore fund is a collective investment scheme domiciled in an Offshore Financial Centre, for example British Virgin Islands, Luxembourg, Cayman Islands or Dublin.

1 Advantages
2 Regulation
3 Criticism
4 See also
5 Footnotes

Offshore funds offer eligible investors significant tax benefits compared to many high tax jurisdictions such as the United States and the European Union. However, where funds are repatriated to high tax jurisdictions, they are usually taxed at normal rates as foreign arising income.

Many of these tax-haven locations are considered investor-friendly and are internationally regarded as financially secure.

Many offshore jurisdictions, notably the British Virgin Islands, offer a zero-tax regime for investment funds which are domiciled there, which allows the fund to reinvest that part of its investment portfolio's gains which would otherwise have been lost to tax. In addition, the regulatory regime in these offshore jurisdictions is deliberately light, with emphasis placed on the importance of balancing effective regulation for the benefit of the protection of investors on the one hand, with the establishment of a regime in which the conduct of investment business is fast and simple. A number of offshore jurisdictions have recently tightened the regulation of offshore funds.[1]

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 require a high degree of regulation because of the nature of potential investors, and non-public funds on the other.^[1] Non-public funds are usually either categorised as private funds or professional funds. 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". Or the fund will 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.

The tax advantages of the funds encourage high tax countries to apply some draconian laws to limit their distribution. Nonetheless, the vast majority of offshore funds operate primarily in investor markets in the United Kingdom and the U.S.A., although they are usually subject to ordinarily taxation in those jurisdictions as they apply to distributions of income arising from foreign sources.

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. The vast majority of the world's estimated 9,000 hedge funds (generally considered the riskiest form of collective investment vehicle) are formed in Cayman Islands, British Virgin Islands, Luxembourg or Bermuda.

Critics, such as ATTAC (an NGO), alleged that they are a main player of the underground economy, allowing legalized tax evasion, in particular through the usage of shell corporations practicing transfer pricing.