Dominic Coyle anwers your queries

Beware tax bill on offshore funds

There are an increasing number of non-Irish investment funds being offered to Irish resident investors.

1. Are there different tax treatments for EU versus other funds, eg Jersey-based?

2. What is the correct tax treatment for an Irish resident?

Mr P.McL., e-mail

As the Irish look at increasingly exotic places in which to invest the returns of the Celtic Tiger, a growing number of investment funds domiciled outside Ireland are being offered to investors here.

While they may promise all sorts of returns - a bit like some of the property investments currently playing on the desires of often unsophisticated Irish investors to clamber aboard the property portfolio gravy train - they also share a tendency to present some surprises on the tax front for those same investors.

Taxation of foreign domiciled funds does differ from the treatment for Irish funds - most notably for funds domiciled outside the EU and some associated areas.

The original offshore funds legislation was introduced to address the situation where Irish tax residents would avoid Irish income tax by investing offshore and leave themselves liable only to a lower amount of capital gains tax.

The 1990 legislation enabled the Revenue to tax gains on such offshore investments at the taxpayers' marginal, or higher, rate. Such income was also liable to PRSI and the health levy.

With the introduction of the new gross roll-up regime for investments in Irish domiciled funds in 2001, there was a need to address the tax treatment for EU funds.

Under the new rules, there are different tax liabilities depending on where the fund is based, the type of payment from the fund and whether the investor is upfront about the details in the annual tax return.

Essentially, "relevant" payments, such as dividends, are taxed at the standard rate of income tax, currently 20 per cent.

"Non-relevant" payments - once off or unusual disbursements from the funds - are taxed at the standard rate plus three percentage points.

This all assumes that the details are put down in the annual tax return. If not, the investor will find themselves paying tax at their marginal income tax rate.

Now, if you dispose of the investment, the gain is taxed in the same way as similar payments form Irish-domiciled funds would be - at the standard income tax rate plus three percentage points, provided the details are included in your return. If not, you are back to the prospect of a tax charge at your marginal rate. All income from the events outlined above is liable to PRSI but not the health levy, according to Revenue rules.

The above situation applies for funds domiciled in the European Union, in countries that are members of the European Economic Area even if not EU members - such as Switzerland - and to countries that are members of the OECD with which Ireland has double taxation agreements.

If you are outside these areas - and Jersey and Guernsey are - then the old rules continue to apply. That means that investors in such funds face a tax on their investment gain at their marginal income tax rate.

Clear. I thought so. And that is why a lot of people thinking of putting money into offshore funds in places like Jersey and Guernsey have no idea of the tax liability that awaits them down the line.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.