The of shore fund is a financial vehicle domiciled in an offshore jurisdiction. Offshore funds are usually kept outside a financial institution’s country to benefit from an easier regulatory environment and a better tax treatment. In particular, offshore jurisdictions impose less or even no restrictions on a fund’s investment strategy.
This means that offshore mutual funds, placed outside the United States, do not have to comply with the burdensome U.S. Securities and Exchange Commission (SEC) rules, even though they are de facto managed in the United States.
Given the low- or even zero-tax rate, offshore funds usually offer significant tax benefits to investors domiciled in high-tax countries. For this reason, hedge funds operating in high-tax countries, such as the United States, usually set up offshore vehicles to raise capital from investors domiciled in high-tax countries.
Moreover, offshore funds allow tax-exempt investors, such as nonprofit entities and pension funds, to reinvest their tax-exempt capital gains in a low- or even zero-tax rate country. High-tax countries, including many EU countries, usually apply ad hoc rules aimed to contrast these benefits. In many cases, therefore, income distribution from these funds is taxed at normal rates, whenever repatriation occurs.