An offshore fund shall not be certified as a distributing fund in respect of any account period unless, with respect to that period, it pursues a full distribution policy.
The legislation contains timing, quantitative and qualitative tests that the fund must meet in relation to distributions to be regarded as pursuing a full distribution policy.
However, before looking at quantity and quality, it is important to note that the first requirement is that a distribution has to be made. And it has to be made for the account period or for some other period which, in whole or in part, falls within that account period.
Timing
The test also has a timing requirement in that the distribution should be made
- during the account period, or
- within 6 months of the end of the account period, or
- within such longer period as the Board allow.
Although there is an element of discretion in the timing of the distribution, any extension of the time limit will be considered only on the facts and merits of a particular case and if there are very good reasons why a distribution within the normal period was not possible.
Quantity
The amount of the distribution to be made for the account period should be
- at least 85{e68217344b855fcd608ed2c4c41f83644da7cd41ea524fbfa2ad06c632d3255d} of income of the fund. In this context ‘income’ is as shown by the fund accounts, and
- not less than 85{e68217344b855fcd608ed2c4c41f83644da7cd41ea524fbfa2ad06c632d3255d} of the United Kingdom Equivalent Profit of the fund.
Quality
The distribution must be in a form which, to the extent that it does not form the profits of a trade, profession or vocation, would be chargeable, in the case of an individual resident in the UK , to Income Tax under a provision specified in section 830(2) of ITTOIA 2005 or, in the case of a company resident in the UK, chargeable to Corporation Tax under Case III or Case V of Schedule D in accordance with section 18 ICTA 1988.. So, for example, a distribution of fund capital might not fall to be taken into account (Paragraph 1(1)(d) Schedule 27 ICTA 1988)
Modifications and Extensions
The distribution test is modified in the following circumstances
- When investors sell their interests in a fund operating equalisation arrangements, the sale proceeds may include amounts that represent income accruing from the last distribution date up to the date of sale. These amounts of income may be added to the actual income distributions that have been made for the distribution period, for the purposes of the distribution test.
The sum of the distributions for any period is reduced by any amounts paid to the fund by investors on purchase or issue of interests in the fund, where the price paid by investors includes a sum that represents income that has accrued from the last distribution date up to the date of purchase or issue.
For accumulation funds, provided the fund operates the appropriate ‘reinvestment mechanics’ to ensure that a distribution is paid out, then the amount reinvested can be regarded as a distribution for the purposes of the distribution tests.
For funds where sums that form part of its income are of such a nature that they can be regarded as the direct income of the investor if a UK resident (and domiciled) person, then such sums can be treated as distributions made for the purpose of the test.
The fund’s interest in any wholly owned subsidiary company and, in certain cases, other offshore funds, has to be taken into account when considering the distribution test.
- Finally, there is a de minimis rule as a result of which a fund can be regarded as pursuing a full distribution policy even though no distribution is actually made.