Offshore Funds

An offshore fund is a collective investment scheme domiciled in an Offshore Financial Centre, for example British Virgin Islands, Luxembourg, Cayman Islands or Dublin. For the purposes of the Income and Corporation Taxes Act 1988 of the UK, an offshore fund is one which is governed by the Offshore Fund Rules] set out in that Act. The vast majority of offshore funds are incorporated in the Cayman Islands, with the British Virgin Islands being the second most popular domicile.

Offshore funds offer entitled investors significant tax benefits compared to many high tax jurisdictions such as the United States. 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 fiscally 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 rapid and straightforward.

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 (for example, in the British Virgin Islands, which applies a three-tier regulatory approach in this manner.