LAM12130 - International and cross border: Equity funds: an exclusion for offshore funds mainly holding equities Regulation 4 of SI2012/3044

Life companies will hold investments in multiple funds that hold mainly equities, many with sub structures at different levels. The compliance effort of ensuring the CFC tests were met for all the sub-holdings related to BLAGAB business could be extensive. The return on these investments is generally for the benefit of policyholders and any CFC charge would only relate to any return accruing to shareholders. Given the minimal risk of tax loss, the CFC rules do not apply where, for the principal CFC or any associated CFC:

• at least 95% of the total assets of the CFC consists of shares, and
• no more than 5% of the sum of the CFC’s assumed taxable total profits (as defined in (TIOPA10/S37SB(1)) and exempt distribution income consists of interest or a return which is economically equivalent to interest.

This regulation reduces the compliance burden of reviewing individual equity funds that meet the accounting control test, where the return would in any case be within the scope of the I-E charge to tax and accrue to policyholders. The 5% non-equity holding condition is set at the same level as that for ‘incidental non-trading finance profit’ within the main CFC rules. This allows for small amounts of interest that might accrue on temporary holding of cash.

Regulation 4(2) of SI2012/3044 disapplies this easement if there are arrangements in place with a main purpose to secure a tax advantage.