ICLG The International Comparative Legal Guide to: Alternative Investment Funds 2018

6th Edition

A practical cross-border insight into Alternative Investment Funds work

Published by Global Legal Group, with contributions from:

5Lex Lenz & Staehelin Advokátní kancelář KF Legal, s.r.o. Maples and Calder Attorneys-at-Law Trust McCarthy Tétrault LLP Bonn & Schmitt Mori Hamada & Matsumoto Brodies LLP Paul, Weiss, Rifkind, Wharton & Garrison LLP Cadwalader, Wickersham & Taft LLP PricewaterhouseCoopers Ltd Cases & Lacambra Ropes & Gray LLP Colin Ng & Partners LLP Skadden, Arps, Slate, Meagher & Flom LLP Davis Polk & Wardwell LLP and Affiliates Dillon Eustace Taylors (in Association with Walkers) Dubiński Jeleński Masiarz i Wspólnicy sp.k. Travers Smith LLP FenXun Partners Vieira de Almeida Ferraiuoli LLC Flick Gocke Schaumburg Vivien Teu & Co LLP Harvest Advokatbyrå AB Webber Wentzel Lacourte Raquin Tatar Wikborg Rein Advokatfirma AS The International Comparative Legal Guide to: Alternative Investment Funds 2018

General Chapters: 1 A Game of Two Halves: Haves and Have-Nots in Alternative Investment Funds – Stephen G. Sims & Greg Norman, Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates 1

2 The Global Subscription Credit Facility and Fund Finance Markets – Key Trends and Forecasts – Michael C. Mascia & Wesley A. Misson, Cadwalader, Wickersham & Taft LLP 4

Contributing Editor 3 Adviser Exams: Mitigating Enforcement Risks – Leor Landa & James H. R. Windels, Stephen G. Sims, Skadden, Davis Polk & Wardwell LLP 7 Arps, Slate, Meagher & Flom LLP and Affiliates 4 Private Equity’s Seesaw: Changing Dynamics in Fundraising Terms – Marco V. Masotti & Lindsey L. Wiersma, Paul, Weiss, Rifkind, Wharton & Garrison LLP 14 Sales Director Florjan Osmani 5 Financing European Commercial Real Estate Debt Funds – Alternatives and Considerations – Account Director Partha S. Pal, Ropes & Gray LLP 18 Oliver Smith 6 Bringing Foreign Investment Funds into Japan – Yasuzo Takeno & Fumiharu Hiromoto, Sales Support Manager Mori Hamada & Matsumoto 21 Toni Hayward

Sub Editor Country Question and Answer Chapters: Hollie Parker 7 Andorra Cases & Lacambra: Miguel Cases & Marc Ambrós 26 Senior Editors 8 Angola Vieira de Almeida: Pedro Simões Coelho & Carlos Filipe Couto 32 Suzie Levy Caroline Collingwood 9 Bermuda Taylors (in Association with Walkers): Jonathan Betts 39

CEO 10 British Virgin Islands Maples and Calder: Richard May & Heidi de Vries 48 Dror Levy 11 Canada McCarthy Tétrault LLP: Sean D. Sadler & Nigel P.J. Johnston 56 Group Consulting Editor 12 Cayman Islands Maples and Calder: Grant Dixon & Andrew Keast 64 Alan Falach 13 China FenXun Partners: Sue Liu 71 Publisher Rory Smith 14 Cyprus PricewaterhouseCoopers Ltd: Andreas Yiasemides & Constantinos A. Constantinou 77 Published by Global Legal Group Ltd. 15 Czech Republic Advokátní kancelář KF Legal, s.r.o.: Mgr. Jakub Joska 86 59 Tanner Street SE1 3PL, UK 16 England & Wales Travers Smith LLP: Jeremy Elmore & Emily Clark 91 Tel: +44 20 7367 0720 17 Finland Attorneys-at-Law Trust: Mika J. Lehtimäki 102 Fax: +44 20 7407 5255 Email: [email protected] 18 France Lacourte Raquin Tatar: Damien Luqué & Martin Jarrige de la Sizeranne 108 URL: www.glgroup.co.uk 19 Germany Flick Gocke Schaumburg: Christian Schatz 117 GLG Cover Design F&F Studio Design 20 Hong Kong Vivien Teu & Co LLP: Vivien Teu & Sarah He 122

GLG Cover Image Source 21 Ireland Dillon Eustace: Brian Kelliher & Sean Murray 132 iStockphoto 22 Italy 5Lex: Francesco Di Carlo & Camilla Fornasaro 142 Printed by 23 Luxembourg Bonn & Schmitt: Jeannette Vaude-Perrin & Amélie Thévenart 152 Ashford Colour Press Ltd July 2018 24 Mozambique Vieira de Almeida: Pedro Simões Coelho & Carlos Filipe Couto 160

Copyright © 2018 25 Norway Wikborg Rein Advokatfirma AS: Christoffer Bergene & Global Legal Group Ltd. Jens Fredrik Bøen 166 All rights reserved No photocopying 26 Poland Dubiński Jeleński Masiarz i Wspólnicy sp.k.: Tomasz Masiarz & Rafał Lidke 173

ISBN 978-1-912509-23-2 27 Portugal Vieira de Almeida: Pedro Simões Coelho & Inês Moreira dos Santos 180 ISSN 2051-9613 28 Puerto Rico Ferraiuoli LLC: Yarot T. Lafontaine-Torres & Alexis R. González-Pagani 190 Strategic Partners 29 Scotland Brodies LLP: Andrew Akintewe & Karen Fountain 201 30 Singapore Colin Ng & Partners LLP: Amit R. Dhume & Abel Ho 209 31 South Africa Webber Wentzel: Nicole Paige 217 32 Spain Cases & Lacambra: Miguel Cases & Toni Barios 223 33 Sweden Harvest Advokatbyrå AB: Gustav Sälgström & Emelie Persson 231 34 Switzerland Lenz & Staehelin: Dr. François Rayroux & Dr. Patrick Schleiffer 237 35 USA Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates: Heather Cruz & Anna Rips 245

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Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

WWW.ICLG.COM Chapter 1

A Game of Two Halves:

Haves and Have-Nots in Stephen G. Sims Alternative Investment Funds

Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates Greg Norman

With the football World Cup kicking off in Russia this summer, we biggest disruption for private equity in the future [will be] when can expect to hear various commentators telling us that the beautiful investors will only invest money if the manager takes no fee on game is “a game of two halves”. At the same time, the world of committed capital and you have lower carry”. However, he added: Alternative Investment Funds shows stark contrasts and divisions. “If you are at the top of the heap in any industry you are reluctant Some managers and investors look poised to capitalise on the to do anything to change your business model”. That sums up the environment, while others struggle. difference nicely, and also the difficulty for investor industry bodies such as ILPA (the Institutional Limited Partners Association) in staying relevant at a time when investors are struggling to access The Importance of Size the best funds. ILPA’s answer appears to be to focus primarily on educating investors and policymakers and on driving best News that Blackstone’s real estate arm has added over €40 billion of practice and standardisation in reporting and other areas such as assets under management to €184 billion, topping the list of global the production of model subscription agreements to drive down real estate managers for the second year running, will not surprise friction costs of investing, and ensure that investors are equipped i many readers. Stepping back, what is staggering is the ease with to compare fund managers and focus less on driving change in the which the larger fund managers across the illiquid alternatives space commercial terms of funds. are able to raise capital and the terms on which they are able to do so. The last few years have seen the biggest and best managers raise record-breaking funds in ever shortening time frames. Perhaps Regulation: The Direction of Travel more significantly, many of these have been able to do so while improving the economics and other terms in their favour. Examples A lawyer in the alternatives space recently bemoaned the increasing of improved economics include high-profile managers removing tide of regulation, remarking that he chose to specialise in alternative the requirement to pay a hurdle or preferred return before receiving funds to get away from all the regulation. Regulation has, however, carried interest or performance fees, or increasing the management caught up with him and with all of us. In the United States, few fees payable after the investment period, without there being an fund managers were required to register with the SEC before obvious justification for the change. Other economic changes, 2010, and the increase in regulation has been felt mainly through such as higher caps on organisational expenses, can be justified by the increased supervisory activities of the SEC, which has taken reference to the enhanced regulatory regimes imposed on managers enforcement action against a number of private fund managers for of alternative investment funds. Non-economic changes can perceived failings. When the SEC announced that it was looking include giving greater discretion to managers to allocate investment into compliance with offering and organisational documents opportunities between different funds and managed accounts, by managers, some investors and their counsel were bemused, or reducing key man obligations to specific funds, and reflect the expecting that the SEC was unlikely to uncover instances of non- growth of diversified managers as contrasted to the single product compliance where the investors themselves had failed to do so. But managers that were around when many of the limited partnership the regulator’s focus on disclosure and compliance with fiduciary agreements governing funds were originally crafted, as well as duties when faced with conflicts of interests, rather than simply investors’ reliance on increased oversight by regulators to ensure compliance with the strict terms of legal agreements, has resulted that managers do the right thing. Others, such as watering down in actions around failure to disclose unusual fee arrangements such managers’ liability, seem to be more a case of taking advantage of as accelerated monitoring fees, and unequal treatment of investors a buoyant fundraising market summarised by one manager as “if or allocation of investment opportunities and expenses between you can walk in a straight line at the moment, then you’ll be able to different funds managed by investors. raise a fund”. Across the Atlantic, European regulation has been characterised by Meanwhile, less well established managers face a series of obstacles much more prescriptive requirements. These had their origins in the on the fundraising trail. Some of the causes are considered below, Global Financial Crisis and in politicians’ beliefs, often ill-advised but the result is that while ever-increasing amounts of capital are or wrongly-held, that alternative fund managers were responsible being raised by alternative fund managers, capital is increasingly for many of the problems that beset the world economy. As a flocking to the largest players leaving smaller and newer managers result, managers are held to capital resources requirements more fighting over the remains, often offering significant fee breaks and sensibly suited to banks, to long-term remuneration requirements negative control rights to entice investors into their funds. Carlyle more suited to third-party owned businesses than owner-managed co-founder David Rubenstein remarked a few years back that “the businesses which fund managers typically are, disclosure and

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anti-asset stripping rules that put them at a disadvantage to trade or One factor influencing these transactions can be the perceived lack industry competitors, and a host of other cumbersome requirements of other identifiable opportunities at attractive pricing. GPs know that have increased the costs of setting up and running alternative the assets and are comfortable with them. But another factor may funds, driving investors to the bigger and more established players. be the increase in managers with multiple product lines and skill sets At the same time, the European Union has implemented a “Fortress who are comfortable retaining ownership of assets even though they Europe” approach, penalising non-EU managers and funds with no longer fit the risk or return profile of the original fund. Investors, rules designed or implemented to make it difficult and in some too, as highlighted above, are increasingly turning to the larger, cases impossible to market non-EU funds to EU-based investors. diversified asset managers, and at a broader level this strategy can Interesting responses to the EU’s consultation on opening up the allow investors to hold a more diversified portfolio through a single marketing “passport” to non-EU managers made clear that some manager group. Issues around valuations and perceived conflicts of continental managers feared this would lead to an uneven playing interests can typically be addressed through robust disclosure and field due to perceived economies of scale and other advantages third-party valuation mechanisms coupled with giving investors the held by larger non-EU managers. It is assumed that most investors option to exit or roll over. would welcome a greater range of choice, although in that regard the European Commission feels that investors are not as professional as they think they are, and may need greater protection. Onshore v Offshore: Can Everyone Really With this backdrop, what is interesting is the direction of travel. be a Winner? Financial services in the United States may be on the cusp of a de- One consequence of the introduction of the EU’s Alternative regulatory phase, as has been seen across other industries in the Investment Fund Managers Directive was that some non-EU United States. Market commentary suggests that changes to the managers actively sought to avoid soliciting contributions from EU Volcker Rule may be afoot. investors due to uncertainty over the rules and the perceived cost of However, in the EU, there seems little prospect for de-regulation. compliance including in relation to certain disclosure rules. That Discussion of a marketing passport for non-EU funds appears to anxiety appears to have abated, and many non-EU managers have have been shelved as a negotiating tool while Britain negotiates included an EU-based parallel fund in their latest fund offerings. its exit from the EU, and the European approach to regulation can Similarly, some EU-based managers have moved their fund be seen in other initiatives such as the recent call by an influential domiciles to the EU in order to benefit from the marketing passport, group of the UK’s MPs to impose mandatory reporting on the risk making it easier to target investors throughout the whole of the EU. of climate change to fund managers, and the EU’s General Data This, coupled with a number of other initiatives, may result in Protection Regulation, which has laudable aims but is so strict that significant challenges to the traditional offshore jurisdictions as they it arguably prevents – absent their consent – with prayers being said seek to maintain relevance in the new, more regulated environment. for the sick at Mass. The BEPS (Base Erosion and Profit Shifting) rules seek to challenge tax avoidance strategies that exploit gaps and mismatches in tax GP-led Secondaries and Other rules to artificially shift profits to low- or no-tax locations and focus Developments on the substance of fund structures. Other initiatives requiring disclosure of beneficial owners may also lessen the perceived Once apparently the preserve of zombie funds looking for an advantage held by some of these jurisdictions. It should be noted injection of new life, GP-led secondaries and other exits where the however, that the jurisdictions themselves often question whether manager retains control of the underlying investment or portfolio public disclosure is necessary or even disadvantageous, and point are increasingly used as tools by leading fund managers. instead to the highly regulated nature of the funds industry and the need for service providers to conduct a detailed “know your client” GP-led secondaries typically allow an incoming investor (or take on procedures and to share the results with the regulators.ii investors) to acquire existing investors’ stakes in a private equity fund. This may be coupled with a commitment to a successor fund But events such as the (probably) forthcoming Brexit have also being raised by the manager, and is intended to benefit all parties: focused legislators from the onshore world on making their existing investors are offered the chance to exit, the new investor jurisdictions more attractive to managers. Britain already has gains immediate exposure to the manager and its portfolio without a judicial system envied throughout Europe and the wider world having to wait for the manager to deploy new capital, and the for its independence and reliability, and has now turned its mind manager may be paid performance fees and also receive a shot in to updating its archaic laws governing fund vehicles. The limited the arm for its next fundraising. partnerships law, for example, dates to 1907 and since its inception appears to have been as popular with Scottish crofters (tenant The sale of an individual asset where the manager retains control, farmers) as with alternative fund managers. Drawbacks or through a fund managed by it, often achieves a similar objective comparative disadvantages within the legislation include public although sometimes with different motivating factors. In this case, registers of investors, potential taxation on transfers, uncertainty at a certain point in the manager’s ownership of the asset, a decision as to the correct establishment and limited liability protections of is made that it should be sold. This could be because the fund is investors, although the latter two have effectively been remedied coming to the end of its life, or because the (lower) anticipated return by recent legislative changes. So there is much to play for between on the asset in the future is unlikely to make it ideally suited to the the onshore and offshore jurisdictions, and of course between the fund’s investment policy. Examples could include infrastructure individual onshore and offshore jurisdictions as between themselves. assets that have been built out and are operating, or real estate The European Securities and Markets Authority (ESMA) last year assets that have been stabilised. In this scenario, investors may issued an opinion, widely seen as a warning shot to regulators not to be given the choice of exiting or rolling over into a new vehicle, make it easy for post-Brexit UK managers to establish operations in with an outside investor underwriting the sale. The management the EU, seeks to prevent a “race to the bottom” among jurisdictions and performance fees levied going forward may reflect the different touting for business. anticipated returns. As with GP-led secondaries there are benefits for each of the parties involved.

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Initiatives such as this one, and the perceived dominance of the EU by Germany, bring to mind another footballing quote, this time by Endnotes Gary Lineker: “Football is a simple game. Twenty-two men chase a i. INREV Fund Manager Survey 2018. ball for 90 minutes and at the end the Germans win”. ii. See, for example, the letters to The Economist, edition 31 May 2018, from Geoff Cook, CEO, Jersey Finance, and D. Orlando Smith, Premier and finance minister, British Virgin Islands.

Stephen G. Sims Greg Norman Skadden, Arps, Slate, Meagher & Flom LLP Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates and Affiliates 40 Bank Street, 40 Bank Street, Canary Wharf London, E14 5DS London, E14 5DS United Kingdom United Kingdom

Tel: +44 20 7519 7127 Tel: +44 20 7519 7192 Email: [email protected] Email: [email protected] URL: www.skadden.com URL: www.skadden.com

Stephen G. Sims is a Partner at Skadden, Arps, Slate, Meagher & Greg Norman is a Counsel at Skadden, Arps, Slate, Meagher & Flom Flom and the European Practice Leader of its Investment Management in its Investment Management Group. Group. He is also the Chair of the International Bar Association’s Private Funds Sub-Committee.

Skadden is one of the world’s leading law firms, serving clients in every major financial centre with over 1,700 lawyers in 22 locations. Our strategically positioned offices across Europe, the U.S. and Asia allow us proximity to our clients and their operations. For almost 60 years Skadden has provided a wide array of legal services to the corporate, industrial, financial and governmental communities around the world. Wehave represented numerous governments, many of the largest banks, including virtually all of the leading investment banks, and the major insurance and financial services companies.

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The Global Subscription Credit Facility and Fund Finance Markets – Key Trends Michael C. Mascia and Forecasts

Cadwalader, Wickersham & Taft LLP Wesley A. Misson

number of highly experienced law firms. Transaction terms moved Introduction slightly in favor of the borrowers; not a surprising development at this point in the cycle. Facility borrowing bases (“Borrowing The Subscription Credit Facility (each, a “Facility”) and related Bases”) largely held to the traditional Included Investor/Designated Fund Finance markets had a fascinating 2017. On the one hand, Investor structure (particularly in the United States). Advance everything stayed exactly the same. Like virtually every year since Rates moved slightly higher and concentration limits were relaxed the financial crisis, Facility credit performance remained pristine, moderately. But these changes were really at the fringe; Facility with no monetary defaults having become public last year. And the structures remain quite consistent with where they have been in out-paced growth rate continued. But, on the other hand, outside of recent years. Spreads changed very little in 2017. the four corners of the transactions, change seemed to come daily. This chapter summarizes the key trends in the Facility and Fund Finance markets in 2017 and forecasts developments for 2018. Industry Developments and Press Coverage

A. ILPA Guidelines. In June 2017, the Institutional Limited Credit Performance Partners Association (“ILPA”) published a guidance paper to their constituents on Facilities (the “Guidelines”). The To our knowledge, there were again no payment events of default in Guidelines dominated market discussion the remainder of the Facility or related Fund Finance markets in 2017. Virtually all the year, and have been the subject of multiple seminars, of our transactions, both Facilities and on the NAV-side, performed conference panels and articles. At the suggestion of from a credit perspective last year. We are for the first time in current market participants, the Fund Finance Association (the memory aware of several funding defaults by limited partners “FFA”) published an analysis and set of recommendations (“Investors”) on their capital calls (“Capital Calls”), but these defaults on the Guidelines in the Fall (the “FFA Response”). The FFA Response sought clarification on several items in the seemed to be isolated to Chinese Investors grappling with local law Guidelines and made suggestions to the Guidelines to ensure monetary policy preventing cash outflows. As we understand it, they protected Investor interests without unintentionally none of these Investor defaults led to Facility problems. prescribing key aspects of the utility of a Facility.1 In January 2018, ILPA invited the FFA board of directors to join a call to discuss the Guidelines and the FFA Response with ILPA Resilient Growth personnel and several large institutional Investors. The call was productive and both sides received a good explanation 2017 was another very healthy year for private equity fundraising of the other’s perspective. ILPA indicated that they do not and, correspondingly, the Facility markets. According to Preqin forecast publishing an updated version of the Guidelines research, private capital raised in 2017 exceeded $750 billion and in the immediate future, but may publish some interpretive private equity dry powder climbed to $1 trillion. Many of the major guidance. lending institutions in the market (each, a “Lender”) again reported B. Press Coverage. The steady stream of coverage of Facilities portfolio growth in excess of 20% last year, exceeding our forecasts. in both the private equity and mainstream press continued While there are certain Lenders that have reached their institutional throughout 2017. Even accounting and consulting firm PwC 2 lending limits for particular Fund sponsors (each, a “Sponsor”) and published a “thought leadership” piece on Facilities. The for the Facility product, the market continued its expansion. Many Facility market has seemed to have gotten accustomed to this; these articles cause far fewer fire drills than they did lenders increased their Facility program limits and new entrants originally. The market does not appear impacted by the continued efforts to gain traction. published inaccuracies. C. Bank Hiring. For many years, growth in the Facility market Structural Evolution substantially exceeded Lender hiring, leading to growing workloads. That finally shifted in 2017. Many Lenders in the Facility market invested substantially in staffing in 2017, In 2017, structural evolution in the Facility market remained very hiring at both senior and junior levels. Several prominent muted. Frankly, very little changed. From a Lender’s viewpoint, bankers switched firms and many Lenders are advertising private equity fund (each, a “Fund”) limited partnership agreements open positions. We expect to see additional transitions (“Partnership Agreements”) continued to improve, likely driven by in 2018. Many bankers also received promotions in 2017 the increasing concentration of Fund formation occurring at a fewer putting upward pressure on compensation.

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D. Publications. Global Legal Group Ltd., the publisher of this Fund Finance Symposium at the Four Seasons Hotel in Hong Kong. legal guide, published the second edition of Global Legal The 4th Annual European Fund Finance Symposium is scheduled Insights – Fund Finance 2018, a comprehensive legal guide for October 24, 2018, to be held at the Landmark Hotel in London.4 on the Fund Finance markets. The guide includes 18 product- And, in an exciting change, the FFA has announced that the 9th oriented chapters and 20 jurisdictional updates contributed by Annual Global Fund Finance Symposium will move to Miami with many of the world’s preeminent Fund Finance law firms, a an expanded format on March 24–26, 2019. substantial improvement over the inaugural edition.3

2018 Market Forecast Conclusion

From a Facility structural perspective, we expect evolution to The Facility market appears poised for another solid year in terms continue to be limited to the margins in 2018. Credit performance of portfolio growth in 2018. While Facility structures have been of Facilities during the financial crisis validated current structures trending ever so modestly in favor of Fund borrowers, we continue and Lenders have expended significant institutional resources the to believe that the credit profile of market-structured Facility past several years developing their Facility product programs and transactions forecasts well for Facility performance in the coming policies. Borrowers are familiar with current structures and they year. seem to be working well. We believe any structural changes will be incremental. Endnotes While we do expect the rate of Facility growth to slow in 2018 as compared to the 20%+ of the past few years, we forecast 2018 1. A copy of the FFA Response is available at http://www. growth in Lender portfolios in the 8%–12% range year-over-year. fundfinanceassociation.com/wp-content/uploads/2017/12/ The historical factors supporting expansion remain sufficiently FFA-Analysis-on-ILPA-Guidelines.pdf. pronounced. But there are market realities that will push against 2. A copy of Cadwalader’s response to PwC’s article is available historical growth rates. Lenders are going to be more focused on at http://www.cadwalader.com/resources/clients-friends- their internal policies, form documentation, hiring and staffing, and memos/subscription-credit-facilities--misperceptions-remain- credit and risk analysis in 2018 as they try to absorb the growth aplenty. of the past few years. And benchmark interest rates are widely 3. An electronic copy of Global Legal Insights – Fund Finance forecasted to increase in 2018, creeping up as a percentage of 2018 can be accessed at https://www.globallegalinsights.com/ preferred returns. We also think that the ILPA Guidelines may result practice-areas/fund-finance-laws-and-regulations. in side letter provisions that conflict with certain Lender credit 4. Information on these events is available at the FFA’s website, parameters, potentially slowing certain transactions. http://www.fundfinanceassociation.com/.

Upcoming Events Acknowledgment The authors would like to thank Jeremy Cross, Partner at On March 21, 2018, the FFA hosted the 8th Annual Global Fund Cadwalader, Wickersham & Taft, for his invaluable assistance in the Finance Symposium at the Grand Hyatt in New York, New York. preparation of this chapter. And, on June 13, 2018, the FFA hosted the 2nd annual Asia-Pacific

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Michael C. Mascia Wesley A. Misson Cadwalader, Wickersham & Taft LLP Cadwalader, Wickersham & Taft LLP 227 West Trade Street 227 West Trade Street Charlotte, NC 28202 Charlotte, NC 28202 USA USA

Tel: +1 704 348 5160 Tel: +1 704 348 5355 Email: [email protected] Email: [email protected] URL: www.cadwalader.com URL: www.cadwalader.com

Mike Mascia is Co-Chair of the firm’s Finance Group and a member of Wes Misson is a partner in Cadwalader, Wickersham & Taft’s the firm’s Management Committee. He has a globally recognized fund Finance Group. Wes’s practice focuses on fund finance and he finance practice, having represented lenders in subscription credit has represented financial institutions as lenders and lead agents in facilities to real estate and private equity funds sponsored by many of hundreds of subscription credit facilities and other fund financings, with the world’s preeminent fund sponsors. He has been lead counsel on his experience encompassing both subscription and hybrid facilities. numerous hybrid facilities, and is one of the few attorneys in the United Wes also works with fund-related borrowers on the negotiation of States with experience in both subscription credit facilities and CLO’s. third-party investor documents with institutional, high-net-worth and Mike represents lenders on leverage facilities to secondary funds and sovereign wealth investors. other credits looking primarily to fund assets or NAV for repayment. Wes has served as lead counsel on many of the largest and most Mike is the founder of the annual Global Fund Finance Symposium, sophisticated fund financings ever consummated, notably having now in its 8th year, and he is a founding member and the Secretary of assisted more than 37 banks as lead or syndicate lender during the the Funds Finance Association. past three years with transaction values totaling in excess of $35 billion. Many of the transactions he advises on are precedent setting, carrying unique structures and complex international components – whether that be foreign limited partners or funds, multi-currency advances or foreign asset investment. Wes has been recognized as a “Rising Star” in the US in the area of Banking and Finance in the International Financial Law Review’s IFLR1000 Legal Directory, and is also a frequent speaker and an accomplished author in the area of fund finance. He has worked extensively with financial institutions to develop form agreements for fund finance transactions, many of which are the dominant forms used in the market today, and to educate bankers, internal legal counsel and credit officers on hot issues and trends affecting the fund finance market.

Cadwalader, Wickersham & Taft LLP, founded in downtown New York in 1792, is proud of more than 200 years of service to many of the world’s most prestigious financial institutions and corporations. With more than 450 attorneys practicing in New York, London, Charlotte, Washington and Brussels, we offer clients innovative solutions to legal and financial issues in a wide range of areas. As a longstanding leader in the securitization and structured finance markets, the Cadwalader team features lawyers with a broad range of experience in corporate, securities, tax, ERISA, bankruptcy, real estate and contract law. Consistently recognized by independent commentators and in the league table rankings, our attorneys provide clients unparalleled insight regarding fund finance, asset-backed and mortgage-backed securitization, derivatives, securitized and structured products, collateralized loan obligations, synthetic securities, swap and repo receivables, redundant insurance reserves, and other financial assets. For more information please visit www.cadwalader.com.

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Adviser Exams: Mitigating Enforcement Leor Landa Risks

Davis Polk & Wardwell LLP James H. R. Windels

This article will first explore five key SEC priorities for investment I Introduction adviser examinations and Enforcement actions. It will next focus on how advisers can proactively identify and address OCIE examination In an evolving securities landscape, examinations of investment risks before those exams are requested. Next, the article will discuss advisers remain a key priority for the SEC’s Office of Compliance approaches to responding to exam requests given the potential Inspections and Examinations (OCIE). By understanding OCIE’s Enforcement backdrop, particularly approaches to responding to exam priorities, proactively testing policies and procedures, and requests for documents, emails, and witness interviews that both prudently managing issues as they arise in the course of exams, minimise risk to the adviser and ensure timely, accurate, and complete investment advisers can reduce the risk that an OCIE exam will lead cooperation with OCIE. Finally, the article will discuss the process for to an investigation by the SEC’s Division of Enforcement. OCIE referrals to the Division of Enforcement, and the circumstances OCIE conducted a record-setting 2,100 investment adviser in which an exam deficiency is most likely to lead to a referral. examinations in FY 2017, a 46% increase over FY 2016, OCIE’s previous all-time high.1 The percentage of advisers examined has similarly increased over time, from 8% in FY 2012, to 11% in FY II Exam Priorities 2016, to 15% in FY 2017.2 The nature of OCIE examinations has also evolved as the SEC seeks to use its limited resources to focus on Exam and Enforcement risk is best minimised by implementing critical risks impacting market participants and examine registered a comprehensive compliance programme covering all aspects of investment advisers that have never previously been examined.3 an adviser’s operations and proactively addressing any issues of OCIE Director Peter B. Driscoll recently stated that examinations concern prior to the start of an exam. A review of Enforcement have become “targeted, shorter, deep dives into high-risk areas that actions and settlements and public statements by SEC officials are published in our priorities”.4 OCIE has expended substantial highlights five key areas which may pose particular risks of referral time and effort improving its risk assessment and surveillance from the exam process to Enforcement, each of which will be capabilities to ensure that it spends its time and resources examining discussed briefly below. “those firms and practices that pose the greatest potential riskof 5 violations that can harm investors and the markets”. These efforts Fee, Expense and Trade Allocation have included developing technological tools that can analyse data 6 provided by all registrants, not just those selected for examination. Allocation of fees, expenses, and trades or other investment In describing their shift in priorities, both OCIE and the SEC as a opportunities has been a perennial focus of OCIE attention and whole have emphasised the difficulty of monitoring the investment SEC Enforcement actions. Investment advisers’ responsibility to adviser universe, which has grown 15% in terms of the number of allocate expenses between the adviser and managed funds, and to 7 advisers and 40% in assets under management in the last five years. allocate fees, expenses, and trades among clients, create a number Even with a vastly expanded number of examinations, the technical of potential conflicts of interest between the adviser and its clients. deficiency rate has remained largely stable. In FY 2017, 72%of As discussed at length in our June 2017 and 2016 article, Allocating examinations identified some deficiency, on par with FY 2016’s Fees and Expenses: The SEC Is Paying Close Attention,12 the SEC 8 72%. The number of examinations resulting in a “significant has settled nearly two dozen cases with investment adviser firms finding”, however, has declined substantially, from 35% in FY 2013 regarding fee and expense allocation. Many of these scenarios 9 to 27% in FY 2016, and to 20% in FY 2017. Similarly, the number involved allocations among advisers, client funds, and co-investment of examinations referred to the Division of Enforcement has steadily vehicles. In its April 2018 Compliance Outreach Program, and trickled downward, from 13% in FY 2013, to 9% in FY 2016 and 7% accompanying Risk Alert,13 the SEC distilled the findings of over 10 in FY 2017. More frequent, risk-based examinations and industry 1,500 adviser examinations into several categories of violations. In recognition of the SEC’s willingness to take more aggressive broad overview, three key lessons follow: Enforcement action when necessary has likely contributed to First, the SEC expects that potential conflicts of interest will be investment advisers’ proactively examining and updating policies disclosed at the time the investor makes an investment decision. and procedures, in turn increasing compliance and reducing the Once an investment decision has been made, the SEC appears to number of serious infractions. As OCIE Director Driscoll has made believe that disclosures describing how an adviser will act are far clear, the SEC hopes that increased transparency of OCIE’s priorities less effective in protecting even the most sophisticated investors, have encouraged and enabled firms to focus their internal compliance unless investors are able to act on such disclosure by consenting or and “anticipate and preemptively solve compliance issues”.11 by redeeming.14

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Second, the SEC expects that disclosures regarding fee, expense, that review may be interviewed. OCIE often requests significant and trade allocations must precisely describe the mechanics of background information to understand the sources of information allocation and specify both the types of fees, expenses, and trades used by the adviser and to confirm that there was no improper use of that will be allocated and how the adviser will allocate them in material nonpublic information. specific circumstances. The SEC has refused to allow advisers to Third, OCIE exam teams will likely scrutinise the compliance point to “catch-all” provisions that permit discretionary allocations department’s control and oversight over the use of nonpublic 15 of expenses to avoid liability. information. Materials analysed will include written policies and Third, the SEC will require advisers to comply with their procedures, logs of contacts with industry consultants and with established and disclosed allocation procedures. The SEC may personnel of publicly-traded issuers, and records of trainings bring Enforcement actions against advisers that do not comply with regarding insider trading. Recent settlements have demonstrated established procedures even in the absence of significant investor the SEC’s close attention to alleged failures in sufficiently tailoring harm.16 OCIE’s 2018 Risk Alert highlighted a number of categories policies regarding the misuse of material nonpublic information. of deviation from established procedures. Some, such as charging fees based on improper valuations, charging fees at rates or according Valuation to a time schedule different from that disclosed to investors, highlight the importance of careful recordkeeping and operations. Valuation methodologies and disclosures are consistently identified Others, such as failing to aggregate holdings that would comply as an examination focus in the SEC’s annual publication of national for volume discounts, failing to disclose fee sharing practices, or exam programme examination priorities. Kristin Snyder, OCIE’s improperly charging fund expenses, highlight the importance of a Co-Head of the SEC’s Investment Adviser/Investment Company well-resourced compliance function that can effectively monitor all Examination Program, reaffirmed the focus on valuation for aspects of an advisers’ operations. private fund advisers at a Q&A panel following the SEC’s 2018 Advisers can expect OCIE to review the sufficiency of adviser’s examination priority announcement. Investors and the SEC demand allocation disclosures and compliance from multiple perspectives. reliable calculations of a fund’s value. Advisers can expect to face OCIE routinely asks advisers to provide and identify disclosures continued scrutiny of both valuation policies and procedures and the made to investors at the time they are committing capital and in the oversight of those policies. course of a fund’s life cycle. OCIE will also request the adviser’s The SEC has made clear that particular attention will be paid to compliance policies and procedures governing allocations and advisers’ valuations used to calculate management fees. Examiners documentation demonstrating compliance with these policies and will also review whether assets are valued in accordance with investor procedures. agreements, disclosures, and the firm’s policies and procedures To test the adviser’s compliance with its disclosures and policies, and whether there have been breakdowns in compliance controls. OCIE may request financial records showing how the adviser has Difficult-to-value or illiquid instruments will face enhanced scrutiny. allocated fees, expenses, and trades for a lengthy period of time. In Advisers can also expect that OCIE exam staff will devote particular the event an adviser lacks the necessary records, the SEC may ask attention to any instances in which the valuation process described the adviser to create charts showing the allocated amounts. Finally, to clients is not ultimately followed or the valuation methodologies the exam team may ask advisers to explain the rationale behind are modified without being communicated to investors. allocations of particular interest, either by written explanations, SEC examiners will expect firms to have a clearly defined, step-by- by providing contemporaneous documentation, such as email, or step valuation procedure which is memorialised in written policies potentially in interviews. and procedures. Any alternative methods for valuation should be similarly memorialised. OCIE staff will examine whether detailed Insider Trading and the Treatment of Material Nonpublic pricing methodologies exist and are consistently applied. Examiners Information will also look for documentation of pricing errors, if and when they occur, and a record of how such errors were corrected. Insider trading and the treatment of material nonpublic information With the need for accurate valuation information comes the need remain a top priority for both OCIE and the SEC’s Enforcement for a well-defined and substantial oversight of the valuation process. Division, and likely will always occupy an important position on the OCIE will look for a valuation committee that routinely reviews SEC’s exam priority list. Both substantive insider trading issues and valuation methodologies and, where applicable, pricing decisions the advisers’ insider trading compliance programme are likely areas and will expect to see clearly defined roles for all those involved of scrutiny during an OCIE exam. in the valuation process, as well as policies and procedures that OCIE exam teams are likely to request general information address monitoring and controls for such individuals. regarding a firm’s research and investment decision-making process, both through requests for documents and through written Advertising questions. The exam team will then drill down into specific relationships and communications that a firm’s portfolio managers and research analysts have with corporate insiders and other market Consistent with the SEC’s focus on investor protection, advertising participants. In recent years, this inquiry has included a particular has been a priority since the SEC launched its advertising review focus on how firms control and monitor one-on-one and small- initiative in 2016, which the SEC described as a response to having group communications with corporate insiders. frequently identified deficiencies in adviser advertising practices. Indeed, many of the “most frequent advertising rule compliance Second, the exam team will likely identify particular transactions for issues” are directly relevant to the kinds of marketing communication closer review where either there is unusually positive performance that frequently occur between funds and their investors.17 or the transaction is outside the scope of the adviser’s ordinary The Advertising Rule prohibits an adviser from publishing or areas of investment focus. The exam team can be expected to distributing any advertisement that contains any untrue statement review sample investment files and emails relevant to those flagged of material fact or that is otherwise false or misleading, and the transactions. Portfolio managers and analysts identified through

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definition of what constitutes an advertisement is quite broad.18 The home computers in their professional capacity or must use secure most common and problematic deficiencies involve the sharing of mobile devices, OCIE will seek evidence that, in fact, employees misleading performance results, misleading claims of compliance are not using home computers in a professional capacity and cannot with voluntary performance standards, cherry-picked profitable accept firm emails on an unsecured personal mobile device. 19 stock selections, and misleading one-on-one presentations. OCIE will also look for risk assessments, such as tests of cyber In a sweep investigation of potential violations of the Advertising vulnerabilities or documented understandings of where sensitive Rule, the SEC demonstrated its willingness to bring significant data resides and whether it is adequately protected. OCIE will charges against investment advisers when it found 13 investment similarly expect advisers to have in place an incident response plan, advisory firms had repeated F-Squared Investments’ false which should address potential cybersecurity incidents. Because performance data, which had been substantially inflated.20 The 13 vendors are entrusted with sensitive data, OCIE expects firms to firms did not sufficiently substantiate the information that F-Squared also consider whether to perform due diligence on third parties Investments had provided, and the then SEC Enforcement Director with access to investor information. If an adviser’s internal review emphasised that advisers “must verify the information first rather identified cybersecurity deficiencies, OCIE will scrutinise the efforts than accept it as fact”.21 made to mitigate the issue and expect policies and procedures to Over the course of an exam, OCIE can be expected to scrutinise have been revised to prevent the same future deficiency. presentation decks used when meeting with investors, standard due diligence questionnaire responses, investor letters, and other routine III The Exam Process marketing communications. Because in-person or telephonic meetings can be just as important as printed disclosures and marketing material, OCIE will also scrutinise compliance manuals A. Before OCIE Arrives: Exam Preparation and policies and procedures governing these kinds of oral marketing communications. OCIE’s review of advertising materials is, of The first step in the OCIE exam process is preparing for an exam – course, not only targeted at advertising compliance: many of the which should begin before an exam is on the horizon. By knowing other exam priorities, such as fee, expense, and trade allocation turn the areas OCIE likely will focus on during an examination, advisers on how an adviser describes its practices to investors in disclosures can identify potential issues and take corrective action, if necessary, and advertising material. before OCIE arrives. The SEC’s focus on transparency, continued effort to effectively allocate its limited resources through risk-based Cybersecurity analytics, and advocacy of strong adviser compliance programmes provide an encouraging environment for investment advisers to OCIE first identified cybersecurity as an exam priority in2014 address potential issues before they develop into an Enforcement and, recognising the growing threat of cyber intrusion and the action. Cooperation, proactive remediation, and, where appropriate, increasing reliance of investors on the internet for account access self-reporting benefit investment advisers, investors, and the SEC and securities transactions, the SEC has since placed greater alike. emphasis on evaluating and addressing cybersecurity risk. The SEC There are several key measures advisers should consider taking has noted the increasing frequency and complexity of cyber-related on a routine basis to best prepare for OCIE exams and prevent misconduct affecting the securities markets.22 In August 2017, the subsequent SEC Enforcement actions: SEC described cybersecurity as “one of the top compliance risks ■ Evaluate written policies and procedures to ensure they are for financial firms.”23 OCIE’s cybersecurity concerns have grown in place, properly tailored to your firm’s circumstances, as the market becomes increasingly entangled with cyberspace, and up to date. As noted above, a key area of OCIE focus creating heightened risks for targeted firms, market participants, is evaluating whether written policies and procedures are in and retail investors alike. The SEC has noted that the rapid growth place, sufficiently tailored to the specific firm, up todate, of distributed ledger technologies and the cryptocurrency markets and followed. Advisers should thus regularly review their policies and procedures, with particular attention given to present challenges to the staff, requiring additional expertise and a 24 those relevant to the SEC’s priorities. Where applicable, continuously improving programme. Accordingly, in its FY 2019 policies should be updated to reflect current best practices. budget request, the SEC has specifically sought additional staff to Advisers should also ensure that policies are followed and monitor critical securities market infrastructure for significant cyber that steps taken pursuant to policies are documented. 25 events and outages. ■ Ensure any deficiencies noted in prior OCIE exams have In August 2017, the SEC issued an alert detailing observations from been addressed. Because OCIE is focused on addressing 75 examinations conducted in connection with OCIE’s cybersecurity repeated deficiencies, firms should closely examine any initiative. The findings were troubling: while nearly all investment issues that have been addressed in prior examinations. All advisers had written policies and procedures addressing cybersecurity deficiencies previously identified by OCIE should have been issues and corresponding protections, those policies were often too fully resolved in a timely manner. Firms should expect OCIE to follow up on those earlier issues, and advisers general, not tailored to the firm’s business model, or simply not 26 should be prepared to explain changes made to policies or reflective of actual practices at the firm. implementation practices to address those deficiencies, and In preparing for an OCIE exam, investment advisers should first demonstrate that past deficiencies have not been repeated. ensure that it has in place sufficient written cybersecurity policies ■ Determine if any further action is needed to remedy past and procedures. OCIE’s August 2017 cybersecurity observations deficiencies or to proactively address potential deficiencies. have a detailed list of the kinds of policies that OCIE says firms Once risk areas have been identified, the adviser must also may “wish to consider”. OCIE expects mandatory cybersecurity determine whether any proactive remedial action is needed. awareness training for employees and contractors. Some remedial steps will be straightforward – updating out- of-date policies or implementing new procedures to follow After examination of the contents of the firm’s policies and an emerging best practice. Judgments around other potential procedures, OCIE will consider whether these policies are followed. remediations may be more complex and nuanced and involve For example, if there is a policy that states employees cannot use a balancing of considerations, particularly in areas where

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OCIE and Enforcement priorities appear to be evolving. It is important to maintain thorough records of all materials Whether or not a decision is made to remediate, it is essential provided to OCIE. Even though information requests often arrive to be prepared to explain to OCIE the firm’s decision and on short notice with tight deadlines, firms should keep a detailed log decision-making process. of every document or item provided to OCIE, as well as a copy of ■ Develop a regularised procedure for OCIE exams, all materials produced. including a process to manage interactions with examiners, document production, and responses to requests. Advisers should designate a coordinator to serve as a primary point C. Responding to Email Requests of contact for the OCIE staff in order to maintain clear communication and ensure that requests are dealt with OCIE exams frequently include requests for the production of promptly. This also facilitates proper recordkeeping and email. Recent practice indicates that OCIE increasingly seeks improves the ability to efficiently produce documents upon all emails from selected senior personnel (including portfolio request. managers and analysts) over extended time periods, resulting in Perhaps the best way to ensure that the above exam preparation extensive initial email production. Email collection, review, and steps occur on a routine and regularised basis is to make them part production can become expensive and time intensive and are fraught of an adviser’s regular compliance procedures. By integrating this with pitfalls, from inadvertent production of privileged material to prospective review into a regular compliance review, advisers can technical issues in search or production. In contrast to document ensure that steps are taken regularly, systematically, and with ample review in the civil litigation context, the timeline for most OCIE time to assess and implement any remedial action. This is only exams typically makes it impossible and unduly expensive to possible, of course, if advisers ensure that their compliance function review, before producing, every email of multiple employees sent or has sufficient resources to proactively address potential exam issues, received over a broad time period. It is essential, however, to have allowing the firm to substantially lessen resource expenditure, steps in place to protect privileged information and obtain a general disruption and risk later on. understanding of what information is being produced and what the exam team may focus on. The essential parts of a review strategy B. Responding to Written Requests include the following: ■ Identify potentially privileged material before production. OCIE exams ordinarily commence with a series of written requests Producing privileged materials to the SEC without taking reasonable steps to avoid production risks waiving the for documentation and information. Before responding to written privilege with respect to the documents or potentially over requests from OCIE, investment advisers should consider the full the entire subject matter of the communications. Advisers context of each request and the potential Enforcement implications. should therefore take reasonable efforts to remove privileged Although responding to such requests can seem like a rote exercise, material from the production before the documents are initial requests offer critical insight into what OCIE may have produced to OCIE. Among other search approaches, identified through its pre-exam risk assessment as issues for advisors should consider identifying relevant attorneys, enhanced scrutiny. OCIE inquiries should not be viewed through and documents or communications sent to or from those the adversarial lens of civil litigation, however. Rather, written attorneys, or created by or for counsel, should be searched requests should be approached as an opportune time to begin for and analysed. This narrowing of criteria can help identify building a cooperative relationship with OCIE examiners through the documents that most require review so that privileged material is not inadvertently produced. timely and accurate responses: ■ Develop a search strategy to identify highly relevant ■ Consider the aim of written requests and evaluate whether documents, ideally before production. An additional search additional information should be provided. An adviser’s strategy will be needed to identify the key non-privileged goal in responding to a request should be both to fulfil the documents in the production. This search, which will likely request and to ensure that the adviser has provided a complete feature search terms and may be narrowed to particularly and accurate response to OCIE. When a written request is significant document custodians over a particular time period, received, an investment adviser should first consider the aim will depend on the relevant exam priorities and the factual of that request. Does the request relate to the examination context of the exam. Ideally, the search strategy employed and Enforcement priorities identified above? How does the will yield a small document set that is manageable to review request relate to the firm’s business and strategies? What before production or before follow-up communications are would someone in an Enforcement capacity be looking for in required with OCIE. the responses? By reflecting on these questions, an adviser can better determine whether there is information outside the scope of the request that might be provided to ensure that D. Requests for Interviews OCIE has a complete and accurate picture of the adviser’s practices. OCIE frequently requests one or more interviews with an adviser’s ■ Evaluate follow-up requests with particular care to personnel in the course of an exam. Initial interviews routinely identify potential target areas. Follow-up requests offer cover general questions about the entity and the activities to be even more refined insight into OCIE’s thinking. These requests enable advisers to determine whether the OCIE examined, which allows the exam staff to develop a preliminary inquiry is, in fact, aimed at the issues initially believed to understanding of the firm’s compliance practices and its adherence be the focus. By their nature, follow-up requests suggest to policies and procedures. To the extent that the exam staff has OCIE’s interest has been piqued: a follow-up request for fee identified particular areas of focus, they may request supplemental allocation data for the past X years, for example, is a strong interviews. The topics of such interviews may suggest that the exam indication that OCIE has flagged this area as high-risk for team is giving increased scrutiny particular aspect of the adviser’s the firm and is taking careful look at the issue. Follow-up business or a particular transaction. Such targeted interviews require requests should also prompt advisers to more closely consider a shift in thought process and preparation, with witness preparation whether there exists additional information that, while not demanding careful attention. directly responsive to the request, would be relevant to the general line of inquiry and may be beneficial to proactively ■ Treat OCIE interviews with the same care you would share. afford to an interview or deposition in an Enforcement investigation. While there should be no lessening of

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cooperation and transparency with OCIE, preparation for adviser benefited, and whether the deficiency was caused by a interviews should be thorough and comprehensive. The good faith error or technological glitch or whether it resulted interviewee’s statements about what occurred and why will from mal-intent or compliance programme shortcomings. become part of the permanent record of the matter and will The particular facts and circumstances will drive every follow the adviser to any Enforcement action that may arise judgment, but if a firm is faced with an ambiguous or out of the exam. If the interviewee’s statements are inaccurate borderline position on the merits of an issue, which resulted for any reason, it may be difficult to correct them at a later in determinable financial costs to investors to the benefit stage or dispel any misunderstandings they may have caused. of the adviser, prompt remedial action should be strongly Advisers must therefore carefully consider the background considered. of an interview request, understand the intended scope of ■ Consider the form of potential remedial action. the interview, gather documents and emails relating to the Remediation can take many forms: enhancing policies relevant transactions or events, and determine a preparation and procedures, making additional client disclosures, approach with the interviewee. amending fund agreements, and making financial payments. ■ Carefully consider which adviser personnel can best serve Determining how to handle possible remediation begins with as interview subjects. OCIE may request to conduct an fully understanding the relevant facts and applicable laws and interview on a particular subject or transaction rather than to regulations and how they might apply to the circumstances. interview a specific person. Advisers and their counsel should There is often ambiguity about this, as applicable laws and consider who among the adviser’s personnel with knowledge regulations frequently do not address the situations that arise of the subject would best present a complete and accurate and OCIE’s expectations may be based on industry best account of the relevant facts, and have sufficient “big picture” practices which are evolving. Given the complex judgments perspective to situate a transaction or occurrence in the required to reach a remediation decision, investment advisers adviser’s overall business. For example, junior employees should begin considering remediation options as soon as issues may have had direct “hands-on” involvement in a particular arise. Waiting for OCIE to raise a concern and then appearing transaction but may lack the perspective or experience to to remediate only because OCIE has focused on the issue does provide a complete report to OCIE. Conversely, a senior not put the firm in the most favourable position. employee may be able to present the best overview of a ■ Consider how remediation may be perceived as OCIE subject but may lack detailed firsthand knowledge of a evaluates whether to refer the matter to Enforcement. relevant occurrence. Advisers and their counsel should When corrective action is undertaken appropriately, the risk carefully balance these considerations when selecting of an issue being referred to Enforcement may be reduced. interviews subjects. Alternatively, the decision not to remediate an issue which ■ Prepare for OCIE interviews just as you would prepare OCIE clearly believes should be remediated can substantially for a deposition. Ideally, advisers would provide interview increase the risk of a referral to Enforcement, which in turn subjects with relevant documents and conduct preparation could lead to substantially greater financial and reputational meetings in advance of the interview. The purpose is to costs for the adviser. Remediation itself does not, however, understand fully what the witness recalls and what the create a “safe harbour” to avoid Enforcement, and there witness would state in response to questions. Mock Q&A are many situations where OCIE will refer an issue to sessions are also an indispensable part of preparation, as an Enforcement even when an adviser remediates in the course investigative interview – like a deposition – is very different of an exam. from an ordinary conversation. While the short timetable for ■ Remedial action should generally not be seen as an OCIE interviews may limit the ability to conduct as extensive admission of noncompliance. Advisers may focus preparation as for a litigation deposition, advisers and their unduly on whether taking remedial action will constitute counsel should develop a preparation process that ensures the a concession, thereby increasing the likelihood of an issue witness will be prepared in the fundamentals of the interview going to Enforcement, or whether, if there is an Enforcement process and relevant facts. investigation, the firm will not receive credit for taking remedial action in a settlement, resulting in an additional sanction by Enforcement. While every set of circumstances E. Remedial Action is different and should be evaluated accordingly, advisers should not overthink the extent to which taking remedial Whether to take remedial action in the course of an exam can be action will impact potential future Enforcement actions. one of the most important and difficult decisions to be made in the Instead, advisers should focus on making the best decision context of managing the risks of subsequent Enforcement action. with the available information. It is highly unlikely that Where it is feasible to take corrective action before the conclusion positive remedial steps taken during an OCIE exam will have of an exam, advisers should weigh the following considerations in greater negative ramifications later on. Even if the issue is making this judgment: referred to Enforcement, if the SEC’s process works as it should, the firm should receive full credit, or even greater ■ Carefully assess the merits of the underlying deficiency. credit, if the issue was remediated promptly and appropriately. If OCIE identifies a deficiency, investment advisers should thoroughly assess the nature and cause of that deficiency. Advisers should first examine relevant fund agreements F. Referrals to Enforcement and client disclosures with the goal of identifying opposing arguments on whether there was a violation of those At the conclusion of an exam, OCIE will provide a deficiency letter agreements and disclosure. Recognising that the SEC may expect increased levels of detail in agreements and which identifies where the SEC views potential violations of laws disclosures, advisers should consider the strength of the and regulations and invites the firm to respond in writing and take firm’s position on the merits. appropriate action in response to the issues raised.27 Firms should ■ Consider whether adviser clients may have been harmed take full advantage of this opportunity and make as thorough a by any deficiencies, and if so, how clients may be made submission as possible. whole. In situations where there is a close question on the The firm’s submission will be closely considered by both OCIE and, merits and financial remediation is contemplated, firms need in situations where OCIE has determined that Enforcement action look closely at whether clients were harmed, whether the should be considered, by Enforcement as well. Ultimately there

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will be a process involving both groups within the SEC to decide 15. Id. whether Enforcement should open an investigation. It is possible 16. Id. to ask for additional meetings or calls with the SEC as this process 17. National Exam Program Risk Alert, The Most Frequent progresses, but firms should assume that their written submission Advertising Rule Compliance Issues Identified in OCIE will be the principal basis on which the SEC makes its decision. Examinations of Investment Advisers (Sept. 14, 2017) In FY 2017, 7% of investment adviser exams resulted in a referral (“Advertising Risk Alert”) available at https://www.sec.gov/ to Enforcement.28 While it is impossible to predict with certainty ocie/Article/risk-alert-advertising.pdf. whether a particular issue will result in a referral to Enforcement, 18. The Advertising Rule states that an “advertisement the following factors may be relevant: shall include any notice, circular, letter or other written ■ Referral to Enforcement is more likely where investors communication addressed to more than one person, or any have been injured. OCIE is more likely to refer matters to notice or other announcement in any publication or by Enforcement in instances where there has been a recognisable radio or television, which offers (1) any analysis, report, injury to investors which is traceable to a clear violation of or publication concerning securities, or which is to be used the securities laws, in particular to inadequate disclosures in making any determination as to when to buy or sell any or an undisclosed conflict of interest between the adviser security, or which security to buy or sell, or (2) any graph, and clients. Injuries to markets through misuse of material chart, formula, or other device to be used in making any non-public information and fraud or intentional misconduct determination as to when to buy or sell any security, or which generate similar Enforcement attention. security to buy or sell, or (3) any other investment advisory ■ Referral to Enforcement is more likely if the deficiencies service with regard to securities”. Advisers Act Rule 206(4)- identified relate to areas of SEC policy focus. The SEC 1(b). may also identify particular areas – such as the subject matter 19. Advertising Risk Alert. areas referred to above – that present emerging trends in wrongdoing and want to take a public position on an issue. 20. SEC Press Release No. 2016-167, Investment Advisers As a result, Enforcement referrals may be more likely as a Paying Penalties for Advertising False Performance Claims policy or deterrent matter. If the issue is of interest to the (Aug. 25, 2016), available at https://www.sec.gov/news/ SEC and the SEC sees value in an Enforcement settlement pressrelease/2016-167.html. creating precedent on the issue, this can result in referrals 21. Id. even when there has been remedial action and cooperation. 22. Stephanie Avakian, The SEC Enforcement Division’s Initiatives Regarding Retail Investor Protection and IV Conclusion Cybersecurity (Oct. 26, 2017) available at https://www.sec. gov/news/speech/speech-avakian-2017-10-26. With OCIE focused on more targeted, deep-dive examinations 23. National Exam Program Risk Alert, Observations from into high risk areas, the potential for Enforcement investigations Cybersecurity Exams (Aug. 7, 2017) (“Cybersecurity Risk following on to exams has never been higher. Accordingly, Alert”) available at https://www.sec.gov/files/observations- from-cybersecurity-examinations.pdf. investment advisers should take scrupulous care in preparing for and managing the exam process. 24. SEC FY19 Budget at 28. 25. Id. at 4. 26. Cybersecurity Risk Alert. Endnotes 27. Under Section 4E of the Exchange Act, which was added as 1. U.S. Secs. and Exchs. Comm’n, Fiscal Year 2019 part of the Dodd-Frank act, OCIE must provide the deficiency Congressional Budget Justification Annual Performance letter not later than 180 days after the conclusion of the exam, Plan (Feb. 12 2018) (“SEC FY19 Budget”), 30, available unless senior OCIE employees extend the deadline for an at https://www.sec.gov/reports-and-publications/budget- additional 180 days after providing notice to the Chairman reports/secfy19congbudgjust. and Commission. 15 U.S.C. § 78d-5(b). 2. Id. at 105. 28. SEC FY 2019 Budget. 3. Id. at 27. 4. Melanie Waddell, SEC to Probe Adviser, BD Fiduciary Acknowledgment Compliance With ReTIRE Initiative, ThinkAdviser, Mar. 3, 2017, available at https://www.thinkadviser.com/2017/03/03/ This chapter builds on a Davis Polk webcast entitled “How to sec-to-probe-adviser-bd-fiduciary-compliance-with/?slretu Reduce the Risk That Your OCIE Exam Becomes an Enforcement rn=20180411160149. Investigation”, which the authors presented with Davis Polk litigation 5. Improving Investment Adviser Compliance, Peter B. Driscoll partner Amelia T.R. Starr and Davis Polk litigation associate Marc (Sept. 14, 2017) (“Driscoll Speech”) available at https:// Tobak. The webcast is available at https://www.davispolk.com/ www.sec.gov/news/speech/speech-driscoll-2017-09-14. publications/webcast-how-reduce-risk-your-ocie-exam-becomes- 6. Id. enforcement-investigation. Ms. Starr’s practice focuses on a wide 7. SEC FY19 Budget at 27. variety of commercial litigation, securities litigation, regulatory 8. Id. at 106. enforcement proceedings and insolvency matters. She has a detailed knowledge of the funds industry, representing the largest fund 9. Id. managers on issues revolving around breach of contract, breaches 10. Id. of fiduciary duty, valuation disputes, trade allocation practices, 11. Driscoll Speech. securities and fraud claims, insider trading and other misconduct. 12. Leor Landa & James H.R. Windels, Allocating Fees and (Tel: +1 212 450 4516 / Email: [email protected]). The Expenses: The SEC is Paying Close Attention, 5 Int’l Comp. authors would also like to thank Davis Polk litigation associates Legal Guide to Alternative Inv. (2017). Marc Tobak and Danielle Hustus for their assistance in the 13. Id. preparation of this chapter. 14. Id.

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Leor Landa James H. R. Windels Davis Polk & Wardwell LLP Davis Polk & Wardwell LLP 450 Lexington Avenue 450 Lexington Avenue New York, NY 10017 New York, NY 10017 USA USA

Tel: +1 212 450 6160 Tel: +1 212 450 4978 Email: [email protected] Email: [email protected] URL: www.davispolk.com URL: www.davispolk.com

Mr. Landa is a partner in Davis Polk’s Investment Management Group. Mr. Windels is a partner in Davis Polk’s Litigation Department. He He advises a wide range of clients on the development, formation, has experience in a wide variety of federal and state court commercial marketing and operation of private investment funds, including private litigation matters and arbitrations, regulatory enforcement proceedings equity funds, hedge funds, hybrid funds, real estate funds, secondary and internal investigations. Mr. Windels represents public and privately funds, funds of funds, fund and advisory platforms and asset allocation held corporations, financial institutions, hedge funds, accounting firms, products. He also regularly provides regulatory and compliance and corporate directors and officers. advice to his private fund clients. Representative clients over the last 20 years include Alliance Capital He advises fund managers on compensation and profit-sharing Management, Banco Santander, Barclays Capital, Credit Suisse, arrangements. He also advises on structuring and executing private Delta Air Lines, Deutsche Bank, Digicel Group, Highbridge Capital equity, structured equity and public market transactions, as well as Management, J.P. Morgan & Co., Lehman Brothers International acquisitions of investment advisers. Mr. Landa also represents (Europe), Metalmark Capital Partners, Morgan Stanley & Co. and several large institutional investors that invest in private funds. PricewaterhouseCoopers LLP. Representative private fund clients have included Strategic Partners, Credit Suisse, Avenue Capital, Oaktree Capital, Mudrick Capital, Hitchwood Capital, Perella Weinberg Partners, Royal Capital, Reverence Capital, Scopus Asset Management, Citadel, Fore Research, Morgan Stanley & Co. and J.P. Morgan & Co.

Davis Polk & Wardwell LLP (including its associated entities) is a global law firm with offices strategically located in the world’s key financial centres. For more than 160 years, our lawyers have advised industry-leading companies and global financial institutions on their most challenging legal and business matters. Davis Polk ranks among the world’s preeminent law firms across the entire range of its practice, which spans such areas as capital markets, mergers and acquisitions, credit, antitrust and competition, litigation and enforcement, private equity, tax, financial regulation, investment management, insolvency and restructuring, executive compensation, FinTech, intellectual property and technology, real estate, and trusts and estates. Davis Polk has more than 800 lawyers in offices located in New York, Menlo Park, Washington DC, São Paulo, London, Paris, Madrid, Tokyo, Beijing and Hong Kong. For more information, please visit: www.davispolk.com.

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Private Equity’s Seesaw:

Changing Dynamics in Marco V. Masotti Fundraising Terms

Paul, Weiss, Rifkind, Wharton & Garrison LLP Lindsey L. Wiersma

The private equity fundraising market remains robust and competitive. “Early Bird” Discounts. In addition, some private equity funds 2017 was a record year and 2018 has not showed signs of slowing provide a discount on management fees to limited partners who down. The negotiation of terms between general partners and limited come in at the first closing (or early in the offering), sometimes partners is taking place in a market divided between highly prized only with respect to the pre-step down rate but other times with and oversubscribed offerings, on the one hand, and firms that are respect to both the pre-step down and post-step down management struggling to reach their target sizes, on the other hand. As a result, fee rates. “Early bird” discounts may be combined with size-based the negotiating leverage of general partners and limited partners discounts. In some cases, these “early bird” discounts apply only to differs greatly from fund to fund even though overall market terms a portion of a limited partner’s commitment (for example, the first seem largely unchanged. The available dollars in the marketplace $100 million of the commitment) or the total amount of capital from appear to be heading increasingly to the same privileged group of all investors that may be subject to the discount may be limited (for firms. At the same time, the fundraising process has become – more example, the discount may only be available to the first $200 million than ever – a balancing act between the increasingly bespoke requests of commitments, even if additional capital comes into the first of individual limited partners and the need to create a pooled vehicle closing of the fund). In our experience, a small number of private that serves a wide array of partners for a decade or more. In this equity funds offer “early bird” discounts on management fees, and context, a number of important trends have emerged in today’s private it is often the case that firms are able to extract a better overall fee equity marketplace. arrangement by offering only size-based discounts that incentivise larger commitments.

Alternative Management Fee Arrangements Performance-Based Sharing of Profits General partners are experiencing varying degrees of pressure from limited partners to lower, adjust or calculate differently their While the carried interest rate has remained largely unchanged at management fees. For their part, general partners are responding by the traditional 20% level, there have been some modifications at the margins of how carried interest is calculated. offering alternative fee arrangements and discounts that are consistent with their business goals of attracting large and diverse investors, Distribution Methodology. The deal-by-deal distribution building strategic relationships and closing funds quickly. As a methodology remains the market norm for U.S.-based private result, there is growing market precedent for fee discounts based on equity funds. Under this methodology, proceeds attributable to an size, relationship or being an “early bird” (i.e., first closer). Some investment are distributed to the limited partners until they recover general partners are creating multiple classes with varying rates of the capital they invested in the deal generating the distribution and management fees, including options like a reduced management fee any capital they invested in other deals that have been disposed of at in exchange for a higher carried interest, management fee “holidays” a loss prior to the preferred return and carried interest being paid, as early in the life of the fund and “J-curve” mitigating interests that opposed to receiving a return of all contributed capital as in an all- “back-end load” management fees. While there is precedent for capital-back or “European” waterfall. Typically, the limited partners fees to step down after the commitment period, the trend of further also receive a return of the capital that they contributed to fund an lowering fees during a fund’s winding-up period has gathered allocable portion of the fund’s expenses at this step of the waterfall. momentum. Limited partners routinely seek to have fees lowered, However, there is increasing precedent for a hybrid model in which or at least renegotiated, during the winding-up period to address limited partners receive a return of all expenses paid to date, or all organisational expenses (as opposed to an allocated portion of those concerns about “zombie” funds that continue to accrue management expenses), at this step. fees. Preferred Return. In our experience, 8% remains the most common Size-Based Discounts. Based on our experience, it is increasingly preferred return rate. However, a few top performing general partners common to provide a discount on management fees based upon the have successfully argued for the removal of the preferred return. size of the limited partner’s capital commitment. Discounts are While the overwhelming majority of funds will continue to offer a typically granted in increments of 10 to 25 basis points per tier preferred return, it may be time to revisit the conventional 8% rate of commitment (for example, a fund may offer a management fee to better reflect today’s low interest rate environment. Further, given rate of 2.0% for commitments under $150 million and 1.75% for the increased use of subscription line credit facilities, some limited commitments over $150 million). The investor community seems partners are pushing to have the preferred return clock start ticking to be increasingly at ease with differing economics based on size. when the fund draws on a subscription line credit facility (rather than

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when capital is actually called from the limited partners). However, Key Person Triggers. In the event that one or some combination general partners are typically successful in resisting this request given of principals cease to dedicate the requisite amount of time and the intended alignment of interests between limited partners and attention to the fund, limited partners may often terminate the general partners on the benefits of the use of a subscription line credit commitment period, usually after the expiration of a specified facility. The preferred return is conceptually intended to be calculated suspension period during which the general partner may put forward on the actual contributions of capital to the fund. In the context of proposals for replacing the departed principals and resume the a subscription line credit facility, calculating the preferred return on fund’s investment activities. The specific parameters of key person amounts drawn under the facility would cause a misalignment of the terms, including which principals are covered and the extent of their benefits associated with its use. time commitments, are necessarily tailored to the dynamic realities General Partner Catch-Up. Because the basic deal is that the general of each individual firm. As more firms have experienced key person partner should receive the applicable carried interest percentage of departures and as the industry matures, some limited partners are all profits, private equity funds uniformly provide for a “catch-up” increasingly requesting that the key person provisions cover a of profits due to the preferred return to limited partners. Inour broader group of professionals (including those with less seniority). experience, this “catch-up” rate is split fairly equally between 100% At the same time and due to the growth and institutionalisation and 80% to the general partner, while a few firms have agreed to of their businesses, some general partners have sought increased general partner catch-up rates below 80% (such as 50%). flexibility in the mechanisms and procedures for replacing individual Carried Interest Percentage. The traditional 20% of profits going to key persons or in their ability to otherwise cure a key person event. the general partner remains by far the most common carried interest No-Fault Termination Rights. Limited partners typically have percentage. A few general partners with exceptional track records the right to terminate the commitment period and/or terminate the have been able to negotiate for a carried interest percentage of as high fund for any reason. Although rarely invoked, the existence of as 25% or 30%. Some general partners have also offered classes of these provisions gives a measure of leverage to limited partners interests that trade a lower management fee rate for a higher carried during circumstances where a private equity fund encounters interest percentage. Additionally, a few funds provide for tiered adversity. In our experience, the voting threshold required for no- carried interest percentages depending on the performance of the fault termination is between 75% and 85% in interest of the limited fund. For example, the carried interest may be 20% until the fund partners. Limited partners sometimes argue for a lower threshold, reaches a performance threshold based on the IRR of the fund and, but the market seems to be settled at a higher threshold – which in thereafter, the carried interest may be increased to 25%. our view provides balance and alignment in a committed product General Partner Clawback. Historically, the general partner clawback while providing investor protections. obligation was calculated only once, at the end of the life of the fund. GP Removal – for Cause. The limited partners’ right to remove However, limited partners have become increasingly concerned that the general partner of the fund is often limited to circumstances the clawback obligation may not be due for many years after losses in which the general partner and/or the investment professionals begin to accrue in the fund or that the general partners (or the ultimate have taken actions constituting “cause”. The threshold for actions carry recipients) who have received carry distributions during the meriting removal for “cause” is typically high, such as fraud, gross early years of a fund may not have the means to satisfy their clawback negligence, willful misconduct or material violations of securities obligation upon the liquidation of the fund. Interim clawbacks may laws; however, in our experience, there has been renewed focus on be requested by some limited partners to address this concern and, in the parameters around GP removal for cause. The limited partner our experience, a significant number of private equity funds provide vote required for a removal of the general partner following an action for interim general partner clawbacks during the life of the fund, constituting cause is typically that of a majority or supermajority of frequently starting at the end of the commitment period and occurring limited partners. The economic consequences of a GP removal for as often as annually thereafter. When interim clawbacks are provided, cause range from requiring a replacement general partner to purchase there is typically a true-up mechanism allowing the general partner the carried interest at fair market value to applying a discount (or to recover any excess clawback amounts paid by the general partner “haircut”), typically ranging between 20% and 50%, to future carried (for example, if an unrealised loss is ultimately recovered) so that the interest distributed to the removed general partner with respect to general partner is not inadvertently shortchanged to receive less than investments made by the fund while it was the general partner. 20% (or the other applicable carried interest percentage) of the profits. GP Removal – without Cause. In today’s marketplace, limited partners are more frequently requesting the right to remove the Investor Protections: Taking Away the Keys general partner without cause. General partners are typically highly resistant to this proposal, which, in addition to being generally The non-economic terms of a private equity fund are meant to achieve inconsistent with the notion of a “committed” vehicle, would a balance between giving the general partner sufficient flexibility effectively allow the limited partners to hand the portfolio created to exercise its duties and responsibilities to the fund, on the one by the general partner to another firm to manage. When a private hand, and adequately protecting the limited partners, on the other equity fund does provide for removal of the general partner without hand, given the limited partners’ passive role in the fund. Limited cause, it is typically upon the vote of a large supermajority of limited partners typically seek to ensure that appropriate mechanisms are partners, although some limited partners have pushed for this right in place to work through unforeseen conflicts as well as changes to at thresholds of as low as 75% in interest of the limited partners. the investment team. These protections are usually provided either In our experience, the majority of private equity funds still do not via limited partner consents or through action by a limited partner permit removal of the general partner without cause and, where it is advisory committee. While limited partner advisory committees permitted, the requisite voting percentage is often higher than 75%. can be a useful tool to the general partner, and other limited partners are often eager to have the advisory committee weigh in on a variety of matters, their members are sometimes reluctant to decide certain Succession: Handing over the Keys types of matters put to them. To avoid operational bottlenecks, both general partners and limited partners need to exercise care in General partners are increasingly confronted with succession deciding which types of matters will be required to be brought to the issues in their businesses. Although many private equity firms advisory committee.

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remain tightly controlled by a few partners, the ageing of founders, routinely request information about general partner ESG policies, the ambitions of talented “next generation” professionals and including whether ESG forms a part of the investment process, the maturation of the industry as a whole are forcing sensitive whether an ESG officer has been appointed and what the sponsor’s discussions among partners across the marketplace. Because the key reporting practices are. Side letter requests with respect to ESG assets of private equity businesses “walk out the door” at the end of matters are becoming more common as well. In addition, some each day, general partners increasingly appreciate that a controlled, general partners are coupling the growing investor interest in ESG thoughtful and well-communicated transition process can avoid issues with the launch of niche funds. While the market for social a talent vacuum and maintain the confidence of investors. Many impact funds (funds dedicated to addressing one or more ESG issues private equity firms appear to be making operational adjustments – to while seeking to achieve a return) is still quite nascent, some of the governance and economics – in a manner designed to foster growth largest institutional sponsors have already raised dedicated social as an institutionalised business. This process is most successful impact funds and we expect this trend to continue. when done over a number of years in a deliberate, orchestrated manner, with careful consideration of related issues presented in the Transactions Involving Managers fundraising process, including key person triggers, time commitment covenants and assignment or change of control provisions. The trend of investors focusing their commitments on an ever- narrowing list of private equity firms and the maturation of these Steady Demand for Co-Investments businesses generally are driving consolidation and transactional activity among private equity managers. General partners seem Over the past several years, the demand from some of the largest to be increasingly interested in institutionalising their businesses institutional investors, state pension plans and sovereign wealth by partnering with other financial institutions (and, in some cases, funds for increased capacity in large transactions has accelerated. corporations outside of the financial services industry) through Co-investments offer investors more exposure to the asset class transactions that, at the same time, monetise the value of their firms. These transactions come in a variety of shapes and sizes, but most and the ability to select specific subsectors within the asset class often involve majority or minority investments in managers, spin- on potentially more favourable terms (including, in many cases, ins and spin-outs of investment teams and, in some cases, strategic reduced or no management fees and carried interest). As the co- partnerships. Importantly, although limited partners seem cautiously investment market continues to mature, the process of offering comfortable with these types of deals, their reactions are a key factor and documenting co-investment opportunities is becoming more that should be carefully managed as their consent may be required elaborate and time consuming. While there are a myriad of other for certain transactions. The availability of willing buyers in the economic, governance, regulatory and tax issues to consider when marketplace is likely to accelerate the rate of transactional activity structuring these arrangements, general partners have shown involving private equity managers in the coming months and years. increasing flexibility in offering these arrangements in order to This trend, coupled with the continued drive towards corporate-style build goodwill with investors, facilitate consummation of sizeable governance features (such as enhanced limited partner advisory transactions and enhance diversification at the fund-level. The committees), suggests that alternative investment managers will access to large amounts of nimble capital allows general partners to operate more like mainstream financial institutions in the future than act more opportunistically, and strategic co-investors often provide they have to date. access to or insight into markets and industries that may otherwise have not been available to the general partner. The Unlikely Standardisation of Terms and Documents Long-Dated Funds The quest for standardisation of terms and documentation has The formation of private equity funds with longer terms has been gathered steam recently. The Institutional Limited Partners a notable feature in the marketplace in recent years. Instead of Association (ILPA) released a model form of subscription agreement traditional private equity funds that wind up after 10 years, several for private equity funds and is at work preparing a model form of general partners have offered fund structures and terms that offer a partnership agreement. The rationale for standardisation includes continuing supply of long-term and patient capital with terms of as an attempt to create a more efficient and fair market. However, long as 20 to 25 years. The expectation is that these private equity considering the level of customisation among firms and the level funds will make larger investments with longer time horizons than is of negotiation of terms between general partners and limited permitted by the typical middle-market private equity fund. In our partners, the private equity market does not readily lend itself to experience, these funds often provide for reduced management fees standardisation. Sponsors are composed of businesses of differing and carried interest rates as compared to a typical middle-market sizes, strategies and histories. For their part, the investor base is private equity fund. We can expect to see more of these types of equally diverse and there is growing demand from some of the products in the coming years as the demand for larger and longer- largest investors for customised arrangements, co-investments and duration investments is being driven by both general partners and by single-investor products. There are also particularised demands limited partners with large cash reserves in need of sizeable longer- of investors in traditional pooled vehicles, as evidenced by the term allocation opportunities. exponential growth in both the number and length of side letters. As a result, we believe the trend towards standardisation is doomed to failure in the foreseeable future. Environmental, Social and Governance Programmes Conclusion General partners and limited partners alike are increasing their focus on environmental, social and governance (ESG) considerations There are many more trends at work in the marketplace. In terms as part of their investment programmes. Institutional investors of the regulatory environment, offering interests in private equity

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funds remains complicated and challenging within the United years. The opportunities presented within an ever evolving and States, in Europe (especially as managers continue to grapple with maturing industry have never been more dynamic. the Alternative Investment Fund Managers Directive and enhanced data protection rules) and in most major jurisdictions around the globe. While the market currently has an abundance of “dry Acknowledgment powder” and frothy deal valuations may signal challenges ahead, The authors would like to thank Conrad van Loggerenberg, associate 2018 has continued the strong fundraising trend of the last several at Paul, Weiss, Rifkind, Wharton & Garrison LLP, for his invaluable assistance in the preparation of this chapter.

Marco V. Masotti Lindsey L. Wiersma Paul, Weiss, Rifkind, Wharton & Garrison LLP Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas 1285 Avenue of the Americas New York, NY 10019-6064 New York, NY 10019-6064 USA USA

Tel: +1 212 373 3034 Tel: +1 212 373 3777 Fax: +1 212 492 0034 Fax: +1 212 492 0777 Email: [email protected] Email: [email protected] URL: www.paulweiss.com URL: www.paulweiss.com

Marco V. Masotti is a partner at Paul, Weiss, Rifkind, Wharton & Lindsey L. Wiersma is a counsel in the private funds group of Paul, Garrison LLP. For over two decades, Marco has led and built the firm’s Weiss, Rifkind, Wharton & Garrison LLP, where she focuses her private funds group into one of the elite practices in the marketplace. practice on the organisation and operation of a variety of private Marco’s clients include a “who’s who” of alternative asset managers. investment funds in the private equity market, including buyout He also counsels many founders and partners of private equity funds, mezzanine funds, co-investment funds, venture capital funds businesses on their strategic initiatives. Ranked Band 1 in Chambers, and funds of funds. In addition to advising on a wide range of fund Marco is described as a “spectacular private funds practitioner who formation issues, she also advises fund managers on regulatory brings deep industry insight to the mega capital-raising mandates” issues, management company “upper tier” arrangements, investment and clients “trust his judgment completely”. In 2016, he was one of management M&A transactions, seeding arrangements and secondary four lawyers in the nation named as an Asset Management MVP by transactions. Law360. Marco has been featured by The Deal as one of the “Movers & Shakers” in the industry, named by Crain’s New York Business to its annual “40 Under 40” list, and profiled by the New York Observer as one of New York’s top corporate lawyers. Private Equity International named Marco one of “The 100 Most Influential of the Decade”.

Recognised as one of the premier private equity funds practices in the marketplace, the Paul, Weiss Private Funds Practice serves as industry- leading advisors to a diverse group of private equity firms, ranging from up-and-coming middle market firms to large alternative asset managers. Our business judgment and extensive market knowledge is built on decades of experience working hand-in-hand with private equity managers, investors and other key market participants making us uniquely positioned to offer cutting-edge yet practical advice. We have an established track record of helping our private equity clients achieve their most important objectives and long-term business goals. The full suite of the firm’s resources are at our clients’ fingertips and we work closely across practices to provide seamless advice to private equity funds throughout their lifecycle.

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Financing European Commercial Real Estate Debt Funds – Alternatives and Considerations

Ropes & Gray LLP Partha S. Pal

There can be no doubt that the landscape for European commercial In this chapter, we describe some of the “wholesale” financing real estate lending has changed markedly since the onset of the structures that we have seen in our professional practice and examine Global Financial Crisis. some of the considerations that these pose, both to providers of these In the pre-GFC era, the main source of finance for commercial real facilities and their users. We focus on commercial real estate debt estate assets were banks. Commercial banks made loans which they funds, as their use of these facilities is the most common. held on their balance sheets or syndicated to other commercial banks. Investment banks made loans and securitised them by arranging Loan-on-Loan Financings commercial mortgage-backed securities transactions or, in some cases, divided loans into senior and subordinated tranches and sold This is the most typical form of wholesale financing structure. the subordinated tranches to specialist investors while securitising the senior tranches. The amount of lending by commercial banks In basic terms, a commercial real estate debt fund manager uses far exceeded the amount of lending by investment banks and CMBS capital provided by the limited partners in its fund to originate was, relatively speaking, a cottage industry. commercial real estate loans (the “underlying loans”). The underlying loans will be secured by commercial real estate assets The position now is much more nuanced. and the payment of interest on and the repayment of principal of The commercial banks and investment banks continue to be active the underlying loans will be funded by the cash flows generated by players but the kind of commercial real estate lending that each these assets. However, rather than funding the underlying loans undertakes is very different. It is unusual, for example, for an entirely through the capital from its limited partners, a commercial investment bank to make a number of small and medium-sized loans real estate debt fund manager may borrow money from a third party and securitise them through a CMBS transaction. Investment banks such as a bank, a pension fund or an insurance company in order tend to favour large loans which they can distribute either through to do so in part (the “loan-on-loan financing”). The loan-on-loan a single loan securitisation or syndication. It is similarly less usual financing will be secured on the underlying loans and the security for commercial banks to lend to sponsors who are not already interests that the underlying loans benefit from. Payments of interest established clients. The efficient use of capital is a key priority for on and the repayment of principal of the loan-on-loan financing will both commercial and investment banks. However, the gap has been be made from the cash flows generated by the underlying loans. The filled by alternative lenders. In our professional experience, these loan-on-loan financier will occupy the position of a senior creditor fall into two main categories and certain additional categories. The to the entity that holds the underlying loans. It will be paid first. first is investment fund managers who are able to raise capital from The limited partners will be paid after the loan-on-loan financier third party investors (such as pension funds, sovereign wealth funds, has been paid. However, they are also advantaged because, by endowments, family offices or insurance companies) for investment using loan-on-loan financing, the commercial real estate debt fund funds structured specifically for the purpose of making commercial manager makes more efficient use of the capital of the limited real estate loans (the so-called commercial real estate debt funds). partners and can originate a greater volume of loans. The loan- The second are institutional investors themselves, who have always on-loan financing is also cheaper than the limited partners’ capital, had access to capital but have now created their own commercial enabling the internal rate of return of the commercial real estate debt real estate lending platforms in order to originate loans themselves. fund to be enhanced. There are also challenger banks which raise capital both from depositors and from shareholders and technology-enabled lending platforms which raise capital from investors on a loan-by-loan basis. Note on Loan Financings This is a welcome development in terms of increasing the sources of debt finance, making the European commercial real estate finance This is essentially the same as loan-on-loan financings, at least in industry more akin to its United States counterpart. However, it economic terms. This variant is used because some providers of has made the industry competitive and lenders have to fight hard wholesale finance prefer to provide funding through the form of a to source and secure lending mandates, with pricing coming under note with an ISIN, as such instruments are more easily tradeable. pressure. Against this background, commercial real estate debt While these are the same in economic terms, they are very different funds in particular are increasingly seeking to introduce leverage in terms of documentation. They involve the entity that holds the with efficient debt provided by other parts of the commercial real underlying loans issuing one or more classes of notes with different estate finance universe. This reduces their overall cost of capital and levels of seniority. The notes will generally be issued following enables them to pass on the savings to borrowers, as well as enhance the conventions of the Eurobond markets. Thus, they will be returns to their investors. constituted pursuant to a note trust deed, security will be held and

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enforced through a security agent, where they are cleared through the use of these facilities for more than just liquidity management Euroclear and Clearstream, there will be a paying agent and they purposes. Indeed, if an investment manager had a particular will be generally be transferable without the restrictions common in disposition towards leverage, it could combine a subscription line credit agreements. with asset-based leverage.

Repurchase Arrangements Considerations when Using Wholesale Finance Loan-on-loan financing has long been provided in the US through repurchase agreements (agreements under which one party Irrespective of whether a wholesale financing arrangement is (the seller) sells a financial asset to another party (the buyer) structured as a loan-on-loan financing, a note on loan financing, subject to an obligation to repurchase financial assets of that type a repurchase arrangement or a securitisation, there are some from the buyer at a future date and for an agreed price). For the considerations that both investment fund managers and the providers generalist, the reason for this was certain provisions of the US of these types of credit facility will have to consider. We set out Bankruptcy Code. According to these provisions, if a repurchase some of these below: agreement is structured with particular characteristics, it will not (a) structure of the borrowing entity: as a general rule, a be recharacterised as a secured loan for the purposes of the US provider of wholesale financing will want the entity to which Bankruptcy Code and so enforcement action will not be subject to it lends be restricted in its purpose and activities so that the enforcement moratoria applicable to secured loans. possibility that it could be subject to financial distress is Because the same rationale does not apply in Europe, the use of minimised. Further, an entity borrowing wholesale financing repurchase agreements as a means of structuring wholesale financing will also need to be established in a place and in a manner where it can receive payments in respect of the underlying has been less prevalent. That said, in our professional experience we loans without any tax withholding by their borrowers and have seen US-based real estate debt funds use repurchase agreements make payments of interest to the provider of the wholesale to finance European commercial real estate loans that they have financing without any deductions for tax reasons. Finally, originated. These facilities have been used because the real estate a provider of wholesale finance will not, generally, want the debt fund had them in place to begin with. However, we have also entity to which it lends to have assets which it is not financing seen European banks opt to use a repurchase agreement format to and which are being financed by an alternative provider. Thus, finance a pool of non-performing loans. a wholesale financing will impose operational restrictions on a commercial real estate debt fund; (b) characteristics of the underlying loans: this can be a Securitisation considerable source of commercial tension. The borrower in a wholesale financing will want comfort that if it originates While the CMBS market is showing signs of activity, there is as of loans with a certain profile it will be able to access wholesale yet no sign of a multiple loan conduit CMBS making a significant financing. The provider of wholesale financing will want comeback. Nonetheless, there are signs of other securitisation-style to make sure that it is fully understands all aspects of the products developing. Among those are commercial real estate loan underlying loans before it makes funding available, though CLOs, a product which is now in use in the US, as well as large it will generally specify eligibility criteria as well (in the absence of compliance with which an underlying loan cannot loan CMBS. be financed). The eligibility for funding and the available advance rate are both driven by the qualities of the underlying Subscription Lines loans; (c) security package for the wholesale financier: it would be The four variants of wholesale financing described above all rely typical for the wholesale financier to want to take security over all of the underlying loans that it is financing and their on the collateral value of the underlying loans and the cash flows related security interests. If a commercial real estate debt that they generate in order to achieve debt service. However, fund is making underlying loans in a variety of countries one of the most popular forms of financing for many investment under a variety of laws which have security packages which fund managers, irrespective of the underlying investment, is the are also governed under a variety of laws, structuring the subscription line. A subscription line is not secured on the assets of security package which satisfies the requirements of the an investment fund. Rather, it is secured by the commitments of the provider of wholesale finance will be complicated. Suppose, limited partners to make capital available. Thus, if a commercial for example, that a commercial real estate debt fund has real estate debt fund has five limited partners, all of whom are highly made three loans: the first, governed under English law is rated institutional investors, the provider of a subscription line will made to a Jersey-incorporated borrower which owns an asset rely on the ability of the debt fund manager to call for such capital in England and has a security package governed by English and Jersey law; the second, governed under German law, is and will be secured by such rights. The provider of a subscription made to a Luxembourg-incorporated borrower that has an line has a much more limited interest in the assets that an investment asset in Germany and has a security package governed under fund holds. Its main asset-related concern is that if the investment Luxembourg law and German law; and the third, governed fund holds assets that are outside the investment parameters that under French law is made to a borrower in the Cayman have been agreed with the limited partners, the limited partners could Islands that owns an asset in France and has a security refuse to make capital available. It is much more concerned with the package governed under French law and Cayman Island ability and requirement that the limited partners honour their capital law. If the provider of the wholesale financing was adopting commitments at the appropriate time. While subscriptions lines a rigorous approach, the security package would have to be have conventionally been used by investment managers for liquidity tailored to match the underlying assets; management purposes (i.e. not having to trouble limited partners (d) servicing requirements: a commercial real estate debt with repeated capital calls), their use can have a significant effect in fund will have its own arrangements in place in relation to boosting an investment fund’s internal rate of return and so motivate servicing the loans that it makes. This will typically involve the appointment of a facility agent and security agent who

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follow directions from the lenders or the appointment of a purposes, as may a note on loan-on-loan on financing. If servicer who has discretionary servicing powers subject to this is the case, the transaction will need to be structured varying degrees of lender control and oversight. A provider to comply with securitisation risk retention requirements, of wholesale finance will need to be comfortable with the which, in broad terms, will require the real estate debt fund to servicing arrangements and have the right to intervene in retain a certain minimum proportion of the economic risk of matters such as material amendments to the terms of the the transaction. underlying loans and what enforcement strategy should be These are just some of the matters that can have a bearing in followed if an underlying loan defaults; structuring a wholesale financing arrangement. However, they (e) cash management requirements: as with any structured illustrate a variety of considerations for both users and providers of lending arrangement, a provider of wholesale finance will their facilities. require that the rules relating to the management of cash flow is disciplined. Payments of interests and repayments We anticipate that as the commercial real estate lending market of principal in respect of the underlying loans will have to be continues to evolve, the market for wholesale financing will continue collected into controlled accounts and applied in accordance to evolve as well and will develop its own norms. However, a with a priority of payments. It is entirely possible for the number of commercial real estate debt fund managers (particularly provider of the wholesale financing to impose cash trap tests those who remember the lessons of the Global Financial Crises and which would prevent distribution of cash flow to limited are aware of how leverage can destroy equity value) are still cautious partners or “turbo” repayment provisions if there was about introducing leverage and, of course, there is still no empirical evidence of distress at the level of the underlying loans; evidence of how these facilities will behave during a downturn. (f) risk for limited partners: in the event that a commercial real estate debt fund uses wholesale financing, it is exposing its limited partners to both the benefits and burdens of leverage. If there were a number of defaults in respect of Partha S. Pal underlying loans and the provider of wholesale finance had Ropes & Gray LLP the determinative voice in respect of what enforcement 60 Ludgate Hill strategy should be adopted, the likelihood is that it would be London EC4M 7AW predisposed towards a strategy which allowed it to achieve United Kingdom recovery at the expense of the limited partners. Similarly, if the wholesale financing was pre-disposed towards default, the Tel: +44 20 3201 1641 position of the limited partners could again be compromised; Email: [email protected] URL: www.ropesgray.com (g) recourse to non-financed assets: this is a matter of considerable sensitivity to investment fund managers. In the US repurchase agreement financings, recourse was a common Partha S. Pal is a partner in the firm’s real estate group. He isa feature so that if the buyer did not achieve satisfaction from finance lawyer whose work, for almost 20 years, has focused heavily the assets that it was financing, it would have the ability to on the financing of real estate assets, during which time he has led look to other assets that the investment fund or its manager the execution of transactions involving real estate assets in the UK, had access to. As the European market has evolved, real estate Germany, France, Italy, Belgium, the Netherlands, Spain, Portugal, debt fund managers are evidencing a strong disinclination to Sweden and Finland, as well as in South Korea, PRC and Hong accept any form of recourse; Kong. Mr Pal’s expertise covers both senior and mezzanine lending (h) match funding: in the event that the wholesale financing has a arrangements and related intercreditor agreements and construction lending, as well as sophisticated capital markets products such as shorter lifepsan than the lifespan of the commercial real estate cash-flow and synthetic commercial mortgage backed securities, debt fund, the limited parties could be exposed to refinancing commercial real estate loan-related wholesale financing arrangements risk. This could be a considerable problem in the event that the (both loan-on-loan and repurchase agreements) and non-performing availability of wholesale finance deteriorates; and loan securitisations. He also advises regularly on regulatory matters (i) risk retention: strange as it may seem, a loan-on-loan relating to investments in securitised products, particularly in relation financing may be regarded as a securitisation for regulatory to risk-retention considerations.

Ropes & Gray is a preeminent global law firm with more than 1,200 lawyers and legal professionals serving clients in major centers of business, finance, technology and government. Ropes & Gray has a leading international real estate practice advising investors and lenders on structuring and executing complex domestic and international transactions. The team advises on transactions across the risk spectrum from core to opportunity, in multiple geographies and on transactions ranging from asset acquisition to operating businesses. They are also actively involved in post-acquisition repositioning and asset management strategies including redevelopment/refurbishment, lease re-engineering, capex and pre-letting.

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Bringing Foreign Investment Funds Yasuzo Takeno into Japan

Mori Hamada & Matsumoto Fumiharu Hiromoto

bilateral trust agreement between a management company and a 1 Overview of Regulations for Foreign trustee. As a result, most foreign investment trusts publicly offering Investment Funds in Japan units in Japan are established by bilateral trust deeds, as opposed to unilateral declarations of trust. While there are many varieties of investment vehicles in the world, Japanese courts must have jurisdiction over lawsuits relating to any in this chapter we discuss unit trust-type investment funds and transaction where a Japanese investor has acquired trust units. partnership-type investment funds, as these are frequently used in bringing foreign investment funds into Japan. An agent company for the fund must be appointed in Japan. Usually, one of the distributors of the fund in Japan (i.e., a Japanese securities company) is appointed as the agent company for the 1.1 Foreign unit trust-type investment fund offer. The agent company is required to check whether the JSDA requirements have been satisfied before making the public offering, When conducting an offer in Japan, a foreign unit trust that is similar and will disclose the net asset value of the fund to the public after to a Japanese investment trust fund (toshi shintaku) is treated as a the public offering. foreign investment trust in Japan and is subject to Japanese securities The amount of securities sold short must not exceed the net asset laws; specifically, the Financial Instruments And Exchange Act of value of the fund. Japan (the “FIEA”) in respect of marketing, and the Investment As a general rule, the borrowings by the fund must be less than 10% Trust and Investment Corporation Act of Japan (the “ITICA”) in of the net asset value of the fund. respect of regulatory filings with the Financial Services Agency of Japan (“FSA”). The fund and other funds managed by the management company of the fund must not have voting rights in excess of 50% of the total 1.1.1 Public offering of a foreign investment trust in Japan voting rights in any company. Based on a survey conducted by the Japan Securities Dealers The exposure to derivative transactions must be calculated using Association (“JSDA”), among foreign unit trust-type investment a reasonable method determined in advance by the management funds that publicly offered units in Japan, those domiciled in company or the investment manager, and must not exceed the net Luxembourg or the Cayman Islands had an aggregate market share asset value of the fund. of more than 80% in the first half of 2017 on a net asset value basis. These are followed by unit trusts domiciled in Ireland. This requirement was introduced on December 1, 2014 with no grandfather provision. When units of a foreign investment trust are publicly offered in Japan, they must satisfy certain requirements imposed by JSDA, as The credit concentration risks borne by the fund must be managed detailed below. using a reasonable method determined in advance by the management company or the investment manager. JSDA requirements This requirement was introduced on December 1, 2014. There is a JSDA is a self-regulating body of securities companies acting as grandfather provision, whereby the requirement will not apply, for distributors of foreign investment trusts. A member of JSDA cannot a period of five years, to existing funds publicly offering units in engage in a public offering of units of a foreign investment trust Japan on or prior to December 1, 2014. that does not satisfy the JSDA requirements, the so-called standards When a foreign investment trust is a master-feeder fund and units of selection. The JSDA requirements do not apply to a private of the feeder fund are publicly offered in Japan, the question arises placement of units of a foreign investment fund. as to whether the JSDA requirements will be applicable only to the The JSDA requirements for the public offering of units of a foreign feeder fund or also to the master fund – in other words, whether the investment trust include the following: JSDA will look through to the master fund. Currently, the general ■ The net asset value of the fund must be, or after the public practice is to apply the JSDA requirements to the feeder fund only, offering in Japan is expected to be, greater than JPY 100 and not to look through to the master fund. The exception is the million. credit concentration restriction, which cannot be complied with ■ The net asset value of the management company of the fund, without looking through to the master fund, due to all of the assets which is the issuer of units of the fund, must be greater than of the feeder fund being invested or concentrated in the master fund. JPY 50 million. Disclosure – securities registration statement and prospectus It appears the JSDA requirements assume that the foreign investment The issuer of a foreign investment trust, i.e., the management trusts publicly offering units in Japan will be established by a company of the fund, must file a securities registration statement

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with the regulator in advance of the public offering via EDINET, effective), the FSA statement in a private placement must be filed a web-based disclosure system managed by FSA. The securities prior to any solicitation in Japan. registration statement is a disclosure document under the FIEA, for Registration requirement for self-solicitation securities that are publicly offered in Japan, and is disclosed to the A solicitation of units in Japan by the issuer of a foreign investment public through the internet. The securities registration statement trust (i.e., the manager of a bilateral trust deed-type unit trust, or the becomes effective 15 days after filing. Solicitation of investments in trustee of a unilateral declaration of trust-type unit trust), is regarded the securities can be made before the securities registration statement as self-solicitation (jiko boshu) under the FIEA. The issuer will be becomes effective, but the investment cannot be made until the required to register as a Type 2 financial instruments transaction securities registration statement becomes effective and a mandatory business. However, if the issuer retains a distributor (usually a prospectus (kofu mokuromisho) is delivered to the investor. securities company) for the securities it will issue, and the issuer itself The prospectus of an investment trust consists of a mandatory does not conduct any solicitation, registration will not be required. prospectus and a prospectus upon request (seikyu mokuromisho). Issuer – manager or trustee The contents of the prospectus upon request are substantially similar Under Japanese law, the issuer of units of a Japanese investment to those of the securities registration statement, but with minor trust is the trust settlor and, in that capacity, will also act as the trust adjustments and omissions. The mandatory prospectus is a summary manager. of the prospectus upon request. The mandatory prospectus needs to be delivered to investors on or prior to the purchase of securities. As for the issuer of a foreign investment trust, it will be classified The prospectus upon request is delivered to investors only when the on the basis of the applicable governing law and documents. If investors specifically request. a foreign investment trust is established by a bilateral trust deed between the manager and the trustee, and the governing law or FSA filing document provides that the units of the trust are issued by the Pursuant to the ITICA, the issuer of units of a foreign investment manager, the manager will be the issuer of the investment trust. If trust that is publicly offered in Japan must file an FSA statement a foreign trust is established by a unilateral declaration of trust by a with FSA immediately before the securities registration statement trustee, the trustee will be the issuer. becomes effective. Most of the contents of the FSA statement overlap with those of the securities registration statement and, as 1.2 Foreign partnership type investment fund a result, the FSA statement is usually prepared by extracting the necessary information from the securities registration statement. Public offering/private placement The FSA statement is for administrative purposes only, and is not disclosed to the public. A foreign partnership-type investment fund, such as limited partnership, is usually treated as a collective investment scheme 1.1.2 Private placement of units of a foreign unit trust in Japan under the FIEA. Interests in a collective investment scheme are Types of private placement in Japan Type 2 securities under the FIEA, while ordinary securities, such as There are two categories of private placement of securities in Japan units of an investment trust, are Type 1 securities. (minor variations aside): private placement to qualified institutional A different standard applies to determine if an offer of Type 2 investors (“QIIs”) only; and private placement to a small number securities in Japan is a public offering or private placement. An of investors. offering of Type 2 securities constitutes a public offering if the In a private placement to QIIs only, investors are limited to QIIs. number of the investors that actually acquire the securities is 500 or There is no limit on the number of QIIs who can invest in a private more. In contrast, the limit of 49 investors for a private placement placement. However, the QIIs are prohibited from selling their of Type 1 securities is based on the number of investors who are securities to non-QIIs. solicited, including those who do not acquire the securities. The reason for this is that a fund issuing Type 2 securities (such as limited In a private placement to a small number of investors, the number partnership) is usually formed through discussions with potential of investors who are solicited for investment is limited to 49. The investors. As far as we know, most foreign partnership-type number of investors who are solicited for investment but did not investment funds are offered in Japan through private placement. actually invest is also counted in the investor number limitation. In addition, the number of investors who have been solicited for Self-solicitation (jiko boshu) investment into securities with the same nature within the last six Solicitation by an issuer of interests in a foreign collective investment months is also counted in the investor number limitation. This is scheme, such as limited partnerships, is regulated as self-solicitation intended to avoid a situation where an offering is split into multiple (jiko boshu) under the FIEA. offerings in terms of timing to circumvent the 49-investor limitation. An issuer of interests in a foreign collective investment scheme who These investors are prohibited from selling securities acquired in the solicits investments in its own securities is required in principle to private placement unless all such securities held by a transferor are be registered as a Type 2 financial instruments transaction business. transferred to a single investor. This restriction ensures that the cap However, if the issuer retains a distributor for the securities it issues, on the total number of investors will not be breached. and the issuer itself does not conduct any solicitation, registration No securities registration statement or prospectus will not be required. Neither a securities registration statement nor a prospectus is In foreign collective investment schemes, the general partner of a required if units of a foreign investment trust are offered in Japan by limited partnership will be the issuer of the securities. way of a private placement. Self-management (jiko un-yo) FSA filing The management of assets by operators of foreign collective An FSA statement needs to be filed in the case of a private placement. investment schemes, such as limited partnerships, is regulated as Unlike an FSA statement in a public offering, which is filed after self-management (jiko un-yo) under the FIEA. A person offering the securities registration statement is filed, (i.e., where solicitation collective investment scheme management services is required to has begun but before the securities registration statement becomes register if the fund to be managed invests more than 50% of its assets in securities or derivatives.

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Prior to the enactment of the FIEA, which replaced the Securities The filing must identify all QIIs investing in the collective investment and Exchange Act of Japan in 2007, the management of assets by scheme so the regulator can check for abuse of the QII Exemption such fund operators was regarded as management of the operator’s by putting sham QIIs. It may seem inconsistent to require QIIs to be own assets, and was outside the scope of the regulation. However, identified in the filing, which is filed prior to solicitation. However, the FIEA now recognise this as management of investors’ assets, for practical reasons, the candidate QIIs need to be consulted extending the law to cover the management activities of fund in a manner not constituting a solicitation, so their names can be operators. included in the filing. It is believed that limited partnership-type Qualified institutional investors exemption (tekikaku kikan toshika collective investment schemes can be organised through discussions to tokurei gyomu) with candidate large investors; such discussions are not considered solicitation because details are not yet fixed. General Some information in the filing will be disclosed to the public by the The registration requirements for carrying out: (i) a Type 2 financial regulator (and the applicant will also be required to do so), including instruments transaction business (for self-solicitation); and (ii) the number, but not the names, of the QIIs. The applicant is also discretionary investment management (for self-management), are required to file with the regulator an annual management report, and waived if the qualified institutional investors exemption (the “QII disclose such report or its summary to the public. These can be Exemption”) under the FIEA is available. written in English. The QII Exemption is available if the investors of a collective De minimis exception to self-management for foreign partnership- investment scheme consist of one or more QIIs and up to 49 non- type investment funds QII specified investors. QIIs include banks, insurance companies, securities companies, and other operators carrying out a financial If investments from Japan into a foreign partnership-type investment instruments transaction business. Business corporations can be QIIs fund are limited, the management activity of the general partner of if they: (i) have securities investments greater than JPY 1 billion; the foreign partnership investment fund is excluded from the scope and (ii) make an additional filing with FSA. of the collective investment scheme management services subject to regulation in Japan. Specifically, the exclusion applies if the The rationale for this exemption is that a QII usually has enough following requirements are met: financial expertise and bargaining power against fund managers to prevent them from setting up and managing a fund that is one- ■ all Japanese investors investing in the foreign partnership- type investment fund are QIIs; sidedly disadvantageous to the investors. A QII under the QII Exemption is expected to monitor the fund manager on behalf of ■ the number of Japanese investors is less than 10; and the non-QII investors. ■ the total contributions from such Japanese investors are less than one-third of the total contributions of all investors in the The QII Exemption has been widely used for not only domestic foreign partnership-type investment fund. collective investment schemes, such as nin-i kumiai partnerships and tokumei kumiai partnerships, but also foreign partnerships. Exception to self-management by delegation of entire management However, it was sometimes abused, by putting in a sham QII, authority such as an affiliate of the general partner or another investment If a general partner of a collective investment scheme delegates its partnership managed by the general partner, which could not be entire investment authority to a discretionary investment manager expected to monitor the general partner. The FIEA was amended, registered under the FIEA, the management activity of that general and the requirements for the QII Exemption were strengthened, partner will be excluded from the scope of collective investment effective March 1, 2016. scheme management services subject to regulation in Japan and the Under the amended requirements: (i) if the QIIs only consist of registration requirement for discretionary investment managers will (a) a limited liability investment partnership with assets under not apply. This exception would not be a viable option for a foreign management, less the amount of borrowings, of less than JPY 500 limited partnerships managed outside Japan. million, or (b) an affiliate of the general partner, the QII Exemption is not available; (ii) non-QIIs must be sophisticated investors, such 1.3 Reverse solicitation – Investment from Japan into a as listed companies, corporations with a capital amount or net assets foreign investment fund without any solicitation in of more than JPY 50 million, foreign corporations, and individuals Japan with investment financial assets of more than JPY 100 million (and having a securities/derivatives account for more than one year); If a Japanese investor, usually a sophisticated institutional investor, and (iii) if the general partner is a foreign entity, it must appoint a approaches a foreign investment fund (regardless of whether it representative in Japan. is a unit trust-type or partnership-type) that has not conducted Where the QII Exemption is used to avoid registration as a Type any solicitation in Japan, and makes an investment in the foreign 2 financial instruments transaction business, additional transfer investment fund, the fund is not subject to Japanese private restrictions apply so that: (i) the QIIs are prohibited from selling placement regulations, as there is no solicitation in Japan. For their interests in the collective investment scheme to non-QIIs; and unit trust-type foreign investment funds, an FSA statement is not (ii) the non-QII specified investors are prohibited from selling their required. interests unless all such interests held by a transferor are transferred Whether or not there has been any solicitation in Japan is a factual to a single non-QII specified investor. In order to take advantage of matter; however, it should be emphasised that if the foreign the QII Exemption, a filing with the regulator needs to be made in investment fund has any involvement in Japan through a subsidiary, advance. In a self-solicitation, the issuer of the collective investment or an affiliate or representative office, there may be a risk that the scheme will make this filing, while in a self-management, the activities of such entities will be regarded as soliciting investments manager of the collective investment scheme will make the filing. in the foreign investment fund. Typically, in a limited partnership, the general partner will be the issuer or the manager (as the case may be). The filing is relatively simple and can be prepared in English.

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In principle, a foreign partnership will not be subject to tax on profits 2 Taxation from the management of partnership assets. However, in 2015, the Supreme Court of Japan ruled that a Delaware limited partnership 2.1 Taxation of individual investors in Japan investing in should be classified as a corporation for tax purposes, generating a foreign investment trust concerns that Japanese residents investing in the U.S. through Delaware limited partnerships may not enjoy certain tax benefits Foreign stock investment trust under the U.S.-Japan Income Tax Convention; particularly, the reduced tax rate, or tax exemption, with respect to U.S. withholding As to individual investors of a foreign stock investment trust tax on income, such as dividends or interest from investments in the publicly offering units in Japan, distributions are treated as dividend U.S., which are not available if the limited partnership is treated as a income and subject to withholding tax at the rate of 20%, which corporation in Japan. On February 9, 2017, the National Tax Agency rate has been tentatively increased to 20.315% from January of Japan (“NTA”) stated that it will treat U.S. limited partnerships as 1, 2013 to December 31, 2037 due to an interim tax called the pass-through entities under Japanese tax law, seemingly to address Special Reconstruction Income Tax (for the reconstruction of the the concerns generated by the Supreme Court decision. However, area damaged by the Great East Japan Earthquake in 2011). If a with the apparent conflict between the NTA statement and Supreme foreign withholding tax is already imposed on the distributions, the Court decision, it remains to be seen how this issue will be handled. amount after deducting the amount of foreign withholding tax will be subject to Japanese withholding tax. Individual investors will be able to choose among aggregate taxation, separate self-assessment 3 Co-Operation or Information-Sharing taxation and not requiring self-assessment taxation. The tax credit Agreements with Foreign Governments for dividends, which is intended to avoid double taxation due to or Regulators the imposition of corporate tax on the issuer and income tax on the dividends, is not available to foreign investment trusts. AIFMD Profits from the sale (including repurchase by the investment trust) FSA entered into the “Memorandum of Cooperation concerning of the units of a foreign stock investment trust are treated as capital Consultation, Cooperation and the Exchange of Information related gains and taxed at the rate of 20% (tentatively 20.315% for the to the Supervision of Funds and Fund Managers” with European reasons stated above). Losses from sale can be: (i) aggregated with securities regulators on July 19, 2013. The memorandum is intended (a) profits from sale, or (b) dividends of listed stocks or units of to set a framework of mutual cooperation among regulators, which other publicly offered investment trusts; and (ii) carried forward for is required by the Alternative Investment Fund Managers Directive. three years. FSA and its counterpart foreign regulators are expected to exchange Foreign bond investment trust regulatory information upon request. A bond investment trust is an investment trust whose portfolio is FATCA strictly limited to bonds. An investment trust that does not meet The Japanese authorities, including the Ministry of Finance, NTA the requirements of bond investment trust is classified as stock and FSA, and the U.S. Department of Treasury jointly issued the investment trust. “Statement of Mutual Cooperation and Understanding between As to individual investors of a foreign bond investment trust the U.S. Department of the Treasury and the Authorities of publicly offering units in Japan, distributions are treated as interest Japan to Improve International Tax Compliance and to Facilitate income and subject to withholding tax at the rate of 20% (tentatively Implementation of the Foreign Account Tax Compliance Act (the 20.315% for the reasons stated above). From January 1, 2016, “FATCA”)” on June 11, 2013, which was amended on December individual investors are able to choose between separate self- 18, 2013. Japan is a Model 2 country, where financial institutions assessment taxation and not requiring self-assessment taxation. If a are required to provide information on accounts held by U.S. persons foreign withholding tax is already imposed on the distributions, the who agree to such provision of information to the U.S. Internal amount of foreign withholding tax will be deducted from Japanese Revenue Service (“U.S. IRS”). As to information on accounts of withholding tax. U.S. persons who do not agree to such provision of information, the Profits from the sale (including repurchase by the investment trust) U.S. IRS may request NTA to provide such information pursuant of the units of a foreign bond fund were not subject to Japanese tax to the treaty. NTA will obtain such information from the relevant until December 31, 2015. Since January 1, 2016, the profits have financial intuitions pursuant to the local law implementing the been treated as capital gains and taxed at the rate of 20% (tentatively treaty, and will provide such information to the U.S. IRS. 20.315% for the reasons stated above). Losses from sale were not CRS given any tax treatment until December 31, 2015. However, from A law to implement the reporting requirement under the Common January 1, 2016, such losses can be: (i) aggregated with (a) profits Reporting Standard (the “CRS”) of the Organisation for Economic from sale, or (b) dividends of listed stocks or units of other publicly Co-operation and Development became effective from January 1, offered investment trusts; and (ii) carried forward for three years. 2017. NTA collects account information of non-residents from 2.2 Taxation of investors in Japan investing in foreign Japanese financial institutions pursuant to the law and provides it to partnership type investment trust the competent foreign tax authorities under the CRS. As Japan is a Japanese partnerships are not subject to taxation. However, the Model 2 country under the FATCA, Japanese financial institutions partners will be subject to taxation on profits from the management are required to provide account information in a bifurcated manner: of partnership assets. to the U.S. IRS as to U.S. persons under the FATCA; and to NTA as to non-residents under the CRS.

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Yasuzo Takeno Fumiharu Hiromoto Mori Hamada & Matsumoto Mori Hamada & Matsumoto Marunouchi Park Building Marunouchi Park Building 2-6-1 Marunouchi, Chiyoda-ku 2-6-1 Marunouchi, Chiyoda-ku Tokyo 100-8222 Tokyo 100-8222 Japan Japan

Tel: +81 3 5220 1844 Tel: +81 3 5223 7723 Fax: +81 3 5220 1744 Fax: +81 3 5223 7623 Email: [email protected] Email: [email protected] URL: www.mhmjapan.com URL: www.mhmjapan.com

Yasuzo Takeno is a partner at Mori Hamada & Matsumoto. Since Fumiharu Hiromoto is of counsel at Mori Hamada & Matsumoto and the early 1990s he has had extensive experience in advisory work advises on an extensive range of financial transactions and financial for both domestic and foreign investment managers and investment regulatory matters, including asset management, investment funds funds businesses, including structuring, public offerings and private (including public offerings and private placements of foreign-domiciled placements of offshore investment funds in Japan. He has represented investment funds), real property investments (including inbound issuers of foreign investment trusts established in the Cayman Islands, investments using a TK-GK (a collective investment scheme) or Luxembourg, Ireland and other jurisdictions, providing advice on legal a TMK (specified purpose company for asset securitisation) with and execution issues where issuers offer their units, either publicly or leveraged debt financing), healthcare property investments (including privately, in Japan. His investment fund work also covers legal advice hospitals and nursing care facilities), banking, derivatives and dispute on the day-to-day management of investment fund businesses. As resolutions relating to financial transactions. He received his LL.B. well as his work dealing with asset management, his practice spans from The University of Tokyo in 1995 and his LL.M. from Columbia corporate finance activities and financial regulation. He obtained his University School of Law in 2003. He also worked with Kirkland & Ellis LL.B. from Waseda University in 1985 and his M.Litt. from Oxford in Chicago from September 2003 to August 2004. He was admitted to University, Worcester College, in 1993. He was admitted to practise in practise in Japan in 1997 and New York in 2004 and speaks Japanese Japan in 1987 and speaks Japanese and English. and English.

We are one of the largest full-service law firms in Japan, with our principal office in Tokyo, branch offices in Osaka, Nagoya and Fukuoka, and overseas offices in Beijing, Shanghai, Singapore, Bangkok and Yangon, and an MHM desk in Jakarta. Our clients include multinational corporations from sectors such as insurance, finance, telecoms, information technology, real estate and manufacturing. The firm advises on complex cross-border transactions, particularly in mergers & acquisitions and finance. The firm has strong international capital markets, Japanese real estate investment trusts and asset management practices, and is a leader in the development of the Japanese syndicated loan and securitisation, and growing private equity market in Japan. Our firm is widely regarded for its expertise in insolvency and restructuring, and complex litigation, arbitration and regulatory proceedings, IP, IT and antitrust. The firm’s IP practice is known for its work in the rapidly developing telecommunications, media and technology field. Other core practice areas include antitrust, tax and labour law.

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Andorra Miguel Cases

Cases & Lacambra Marc Ambrós

■ Technical Communication 28/SGOIC of 29 November 2011, 1 Regulatory Framework on transactions with related entities and individuals. ■ Technical Communication 35/SGOIC of 31 July 2014, on 1.1 What legislation governs the establishment and publicly available tariffs. operation of Alternative Investment Funds? ■ Technical Communication 189/09 of 27 July 2009, on registration of foreign collective investment undertakings. The establishment and operation of Alternative Investment Funds As Andorra is not a member of the European Union, the freedom to (AIFs) are governed by Law 10/2008 Regulating Andorran provide financial services in the European Economic Area does not Collective Investment Schemes, dated 12 June 2008 (Law 10/2008). apply (the “community passport” is not recognised). Consequently, The Law includes the constitution of collective investment schemes all financial activities directly carried out within the Andorran in the Principality of Andorra and regulates their functioning and jurisdiction are subject to prior authorisation by the INAF. distribution. Depending on the type of investor, the purpose of the vehicle and the advertising involved, various schemes may be 1.2 Are managers or advisers to Alternative Investment found from fully regulated collective investment vehicles to closed Funds required to be licensed, authorised or Alternative Investment Funds. regulated by a regulatory body? As Andorra is not a member of the European Union, Directive 2011/61/EU of the European Parliament and of the Council of 8 Only Andorran financial entities which are authorised to manage June 2011 on Alternative Investment Fund Managers, this does not OICs can be management companies of Andorran AIFs. apply. Consequently, the Andorran legal framework, dating from The INAF is the regulatory and supervisory authority of such entities. 2008, does not define AIFs as European regulations do. With the Accordingly, they must comply with licensing requirements. exception of undertakings for collective investment in transferable securities, “organismes d’inversió col·lectiva en valors mobiliaris” 1.3 Are Alternative Investment Funds themselves (OICVMs), which are aligned with the UCITS Directive, the required to be licensed, authorised or regulated by a definition of AIFs comprises other open-ended and closed-ended regulatory body? collective investment schemes (“organismes d’inversió col·lectiva” – OICs), such as alternative funds per se (also known as hedge The INAF is responsible for authorising the establishment of funds), real estate funds and other OICs as a catch-all term for Andorran AIFs. They acquire the condition of OICs when they are private equity entities or those which, because of the composition registered before the INAF. The distribution of foreign AIFs, if this of their assets and diversification risk policies, cannot be included in is considered active commercialisation, will also trigger registration any other regulated categories. obligations. Obtaining a specific performance objective and fundraising are the distinguishing elements of AIFs. 1.4 Does the regulatory regime distinguish between In addition, the Andorran National Institute of Finance (INAF) – open-ended and closed-ended Alternative Investment the regulatory and supervisory authority of the Andorran financial Funds (or otherwise differentiate between different system – is competent to issue technical communications and types of funds or strategies (e.g. private equity v recommendations in order to develop regulations and standards hedge)) and, if so, how? regarding activity related to OICs. Furthermore, its constitutive law grants the INAF the ability to set the applicable fall-back There is no specific distinction between open-ended and closed- of international standards for interpretational and prudential ended AIFs under Andorran legislation. The only categorisation supervision purposes. The most relevant technical communications regulated by Law 10/2008 and the INAF’s technical communications regarding AIFs are the following: is as follows: (i) money market funds; (ii) fixed-income funds; (iii) mixed fixed-income funds; (iv) equity funds; (v) mixed equity ■ Technical Communication 7/SGOIC of 27 May 2011, on funds; (vi) guaranteed funds; (vii) real estate funds; (viii) alternative rules for ethics and behaviour. funds; (ix) private equity funds; (x) securitisation funds; and (xi) ■ Technical Communication 20/SGOIC of 27 May 2011, on other funds. clarification regarding Law 10/2008. Notwithstanding the aforementioned, the different types of OIC are ■ Technical Communication 23/SGOIC of 27 May 2011, on classification of OICs. subsumed within two general categories: (i) OICVMs; and (ii) other

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undertakings for collective investment schemes (Altres OICs), which includes real estate OICs, alternative OICs and other OICs. 1.9 What co-operation or information sharing agreements have been entered into with other governments or The Andorran regulatory regime does not distinguish either between regulators? different strategies of the funds. In June 2011, Andorra signed a Monetary Agreement with the 1.5 What does the authorisation process involve and how European Union. The Monetary Agreement not only recognises long does the process typically take? the euro as the official currency of the Principality of Andorra, the right to issue euro coins and the obligation to grant euro banknotes Prior to the distribution of Andorran AIFs and their subscription, and coins with legal tender status issued by the Eurosystem and

they must be registered before the INAF. Indeed, the regulation the Member States which have adopted the euro but represents the Andorra of funds is subject to the INAF’s approval in the authorisation and cornerstone of the legal changes envisaged for the next 10 years. This registration process of the OIC which would take around three is because the Monetary Agreement requires that the Principality of months. Andorra adopt, within certain timeframes, a substantial part of all The documentation which is required in order to obtain authorisation, the EU financial legislation. prior to the establishment of an Andorran AIF, is the following: Furthermore, in September 2013, the International Organization ■ The prospectus. of Securities Commissions (IOSCO) protocol for multilateral ■ The agreement between the management company and the agreement on consultations was signed. depositary entity. A Memorandum of Understanding (MoU) was signed between ■ A technical document detailing the particular features of the Andorra and Spain on 4 April 2011. The MoU: (i) constitutes AIF and the specific investment programme. an agreement for consolidated cooperation in the supervisory ■ The depositary entity of the OICs being invested in (only for framework between the INAF and the Bank of Spain; (ii) establishes subordinated funds). the terms of the protocol for the relationship and collaboration ■ An explanatory memorandum of the control levels conducted between both authorities; and (iii) enables the supervisory authority by the management company (only for alternative funds). of the country of origin to request information on consolidated risks of banking groups from the relevant authority of the country where ■ A service delegation agreement. the entity has subsidiaries. The authorisation also requires the INAF’s approval regarding the Andorra signed, on 12 February 2016, the Multilateral Competent management company and the choice of the depositary entity. Authority Agreement with the European Union to automatically exchange information under the Common Reporting Standard. 1.6 Are there local residence or other local qualification requirements? 2 Fund Structures As mentioned above, only Andorran financial entities which are authorised to manage OICs can be management companies of 2.1 What are the principal legal structures used for Andorran AIFs. Alternative Investment Funds?

1.7 What service providers are required? It can be either an investment fund or an investment company. Investment funds can only be managed by a management company, According to applicable law, there must be a depositary entity with whereas an investment company can be managed directly or by which the securities, cash or any other asset, subject to the activity delegating management to an authorised institution, provided that of any AIF, are deposited. the shareholders’ meeting or the board of directors, by delegation, In the case of investment funds, they must be managed by a decides it. management company (in the case of investment companies, the appointment of a management company is optional). Functions 2.2 Please describe the limited liability of investors. of management, administration and control can be provided by the management company itself or by a third party. Investors are liable for the debts of the AIF to the extent of their Investment companies must also have a suitable administrative contributions. Consequently, under normal circumstances, an AIF’s and accounting system and internal control procedures, including creditors cannot claim against the investors’ assets. risk management procedures, together with IT control and safety procedures, money laundering bodies and procedures. 2.3 What are the principal legal structures used for An AIF must be audited and can be marketed by the management managers and advisers of Alternative Investment company or by a local licensed distributor. Funds?

Investment funds 1.8 What rules apply to foreign managers or advisers wishing to manage, advise, or otherwise operate As mentioned above, only Andorran financial entities which are funds domiciled in your jurisdiction? authorised to manage OICs can be management companies of Andorran AIFs. Such entities must be established as an Andorran All financial activities carried out in Andorra are reserved to local limited company. Management companies must have a minimum licensed entities that compose the Andorran financial system. equity share capital of EUR 300,000, fully subscribed and paid-in. Therefore, foreign managers or advisers wishing to manage, advise In addition, they must have a board of directors of at least three or otherwise operate funds in Andorra have to obtain the relevant members. Management companies are obliged to comply with licence from the INAF. specific solvency and core capital ratio provisions.

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Investment companies 3.2 What are the key content requirements for marketing An investment company must be established as an Andorran limited materials, whether due to legal requirements or company and can be self-managed or delegate to a management customary practice? company the management of all or part of the assets of the institution. Both the management company and the investment company may Advertising must be clear, sufficient, objective and not misleading contract intermediaries or financial agents, who must have the and must state explicitly that it is an advertisement. relevant authorisation for rendering such services. Prior to the investment, the latest published reports and the simplified prospectus – and, if requested, the full prospectus – must be delivered 2.4 Are there any limits on the manager’s ability to free of charge to the investors. Andorra restrict redemptions in open-ended funds or transfers Marketing materials should contain: (i) a reference to the full in open-ended or closed-ended funds? prospectus and where it can be consulted; (ii) information regarding the managing company, the custodian and their authorisations to In general, both subscriptions and redemptions are made on the operate; and (iii) relevant information about the product’s main basis of the net asset value, which is subject to the subscription/ characteristics, which must not lead to confusion regarding its redemption fees and other possible costs borne by the investor. content. Moreover, subscriptions and redemptions (which set the value date Marketing materials may also contain past performance information, of the request) are made through contributions or charges to the in which case they should: (i) include a disclaimer stating that past OIC. These circumstances must be set out in the prospectus. performance does not condition future performance, or similar; Both the management company and the investment company can and (ii) designate where and how to access quarterly and annual justifiably limit redemptions, according to the prospectus, which may reports. They should avoid any expression or argument that may establish certain limitations, including the provisional suspension lead the investor to believe that there is a guaranteed positive return, of redemptions, in exceptional cases, in the investors’ interests. unless there is a minimum return guaranteed, in which case all its In addition, the INAF may temporarily suspend subscription and elements should be clearly exposed (object, duration, conditions, redemption when value determination is not possible. commissions, etc.). Regarding real estate funds, investors may subscribe or request the Also, the typography, format and content of marketing materials redemption of their units at least twice a year. should be transparent, clear and accurate; and should not be comparative or estimative. 2.5 Are there any legislative restrictions on transfers of When marketing activities are conducted through the internet, investors’ interests in Alternative Investment Funds? information shall be displayed in such a manner that the investors have access to the full prospectus prior to subscription. There are no Andorran legislative restrictions on transfers of investors’ interests in AIFs. 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? 2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, All marketing materials shall be registered before the INAF prior asset stripping rules)? to its publication. Any marketing materials shall include the fund’s registration number before the INAF. Andorran AIFs are composed by Common AIFs and AIFs for well- informed investors. 3.4 What restrictions are there on marketing Alternative Common AIFs have to comply with some diversification Investment Funds? requirement: ■ they cannot invest more than 20% of its assets in financial Alternative Investment Funds for well-informed investors cannot be instruments of the same issuer; made available by any disclosure means not specifically addressed ■ they may be leveraged to up to 200% of its net asset value; to this investor profile. and ■ they are able to engage in short selling of securities with some restrictions. 3.5 Can Alternative Investment Funds be marketed to retail investors? On the other hand, AIFs for well-informed investors are only subject to limits established in their own prospectus. According to Law 10/2008, the INAF can restrict the marketing In the Andorran funds law, there are no specific asset stripping of AIFs to well-informed investors, in case of a low liquidity limitations. level or a high risk of loss for the AIFs. The marketing of AIFs which are limited to well-informed investors is prohibited to retail investors, whose definition is aligned with the Markets in Financial 3 Marketing Instruments Directive (MiFID).

3.1 What legislation governs the production and offering 3.6 What qualification requirements must be carried out of marketing materials? in relation to prospective investors?

The production and offering of marketing materials are governed by Investment in an AIF reserved for well-informed investors requires Law 10/2008 and the Technical Communication 7/SGOIC, 27 May a limited level of protection. Pursuant to Law 10/2008, “well- 2011, on rules for ethics and behaviour. informed” investors are those which meet the criteria of being

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either: (i) institutional investors; (ii) professional investors; or (iii) other investors who confirm in writing that they adhere to the status 4.3 Are there any restrictions on borrowing by the of “well-informed” investors and who either: (a) invest a minimum Alternative Investment Fund? of EUR 50,000; or (b) have been assessed by a credit institution, an investment firm or a management company which certifies the Under Andorran legislation, there are no restrictions on borrowing investors’ ability to understand the risks associated with investing by AIFs. in the AIF. With the exception of those limited to well-informed investors, AIFs 5 Disclosure of Information can be marketed to retail investors.

5.1 What public disclosure must the Alternative Andorra 3.7 Are there additional restrictions on marketing to Investment Fund or its manager make? public bodies such as government pension funds?

The management company of an AIF must publish a prospectus of There are no restrictions in the Andorran jurisdiction. National and each of the AIFs it manages, as well as quarterly reports (for Altres regional governments, the INAF, public institutions, central banks OICs it is not necessary to report on a quarterly basis, according to and other international institutions are expressly recognised as the INAF criteria). The simplified prospectus and annual reports professional investors. must also be disclosed. Such information must be published in accordance with the 3.8 Are there any restrictions on the use of intermediaries prospectus. to assist in the fundraising process? Andorran AIFs and foreign AIFs which are going to be distributed in Andorra must be registered with the special INAF registry. There are no specific restrictions in the Andorran jurisdiction.

5.2 What are the reporting requirements in relation to 3.9 Are there any restrictions on the participation in Alternative Investment Funds or their managers? Alternative Investment Funds by particular types of investors, such as financial institutions (whether as sponsors or investors)? Management companies (for each of their managed AIFs) and investment companies are obliged to prepare annual reports which shall be published and submitted to the INAF and to the investors. There are no specific restrictions on the participation of particular In addition, it is also compulsory to prepare quarterly reports which types of investors other than those that may be imposed by the must be submitted to the INAF. investors’ applicable regulation. Management companies and investment companies must report to the INAF any decrease in net assets (if it is less than 10%). 4 Investments Finally, as mentioned above, prior to the marketing of AIFs, management companies and investment companies must send to the 4.1 Are there any restrictions on the types of activities INAF a copy of the marketing materials. that can be performed by Alternative Investment Funds? 5.3 Is the use of side letters restricted?

AIFs in Andorra are divided into three categories: (i) Real Estate There are no Andorran provisions regarding the use of side letters. Investment Funds; (ii) common Alternative Investment Funds; and However, using specific language to determine obligations and (iii) Alternative Investment Funds only for qualified investors. duties, mentioning their binding character, as well as their signing A Real Estate Investment Fund shall invest at least 90% of its annual by the parties, is advisable. average of monthly balances of its real estate assets. Additionally, (i) any asset, including rights on such asset, can represent more than 35% of the total assets in the acquisition moment; (ii) real estate 6 Taxation assets being part of the asset state of the fund, rented to legal entities that are part of the same group, cannot represent more than 35% of 6.1 What is the tax treatment of the principal forms of the assets of the AIF; and (iii) entities belonging to the same group Alternative Investment Funds identified in question can only acquire a real estate asset when it is a new construction, it is 2.1? permitted by its bylaws, the managing company informs about it on the prospectus and periodical information, and it does not represent All the different forms of Alternative Investment Funds have the more than 25% of real estate investment fund assets. same tax treatment. All of them are subject and not exempt to The rest of the AIFs under Andorran legislation cannot invest more corporate income tax, but the tax rate is 0%. Consequently, no tax than 20% of their assets in securities or financial instruments from burden is supported by the fund for any kind of income. the same issuer.

6.2 What is the tax treatment of the principal forms of 4.2 Are there any limitations on the types of investments investment manager / adviser identified in question that can be included in an Alternative Investment 2.3? Fund’s portfolio whether for diversification reasons or otherwise? The management company/investment manager does not have any special tax treatment and it is subjected to corporate income tax at Please see question 4.1 above. the standard rate of 10%.

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6.3 Are there any establishment or transfer taxes levied 6.7 What steps are being taken to implement the OECD’s in connection with an investor’s participation in an Action Plan on Base Erosion and Profit-Shifting Alternative Investment Fund or the transfer of the (BEPS), in particular Actions 6 and 7, insofar as they investor’s interest? affect Alternative Investment Funds’ operations?

This is not applicable in Andorra. Andorra assumed the commitments on CRS/OECD on 18/06/2014 and it will make its first reporting in September 2018 for major value accounts and in September 2019 regarding the rest of accounts. 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative

Andorra Investment Funds? 6.8 Are there any tax-advantaged asset classes or structures available? How widely are they deployed? a) If the investor is an individual tax resident: (i) no tax on distribution of dividends; (ii) 10% of tax burden for capital This is not applicable in Andorra. gains, unless the investor only holds a stake of less than 25% or have maintained the investments for at least 10 years; and (iii) 10% if the shareholder is a resident legal person. 6.9 Are there any other material tax issues for investors, b) If the investor is an individual or legal person non-tax managers, advisers or AIFs? resident, Andorra does not apply any withholding tax either for income coming from dividends or capital gains distributed No, there are not. to non-residents. c) Not applicable, since pension funds are not regulated in 6.10 Are there any meaningful tax changes anticipated in Andorra as a special class of fund. the coming 12 months?

6.5 Is it necessary or advisable to obtain a tax ruling from No, there are not. the tax or regulatory authorities prior to establishing an Alternative Investment Fund? 7 Reforms No, this is not necessary in Andorra.

7.1 What reforms (if any) are proposed? 6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act There are no reforms in the pipeline for the time being. 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard?

The country itself did not sign any IGA, but all the banks assumed the commitments through the corresponding registration before the Internal Revenue Service (IRS).

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Miguel Cases Marc Ambrós Cases & Lacambra Cases & Lacambra C/ Manel Cerqueda I Escaler 3–5 C/ Manel Cerqueda I Escaler 3–5 AD700 Escaldes-Engordany AD700 Escaldes-Engordany Andorra Andorra

Tel: +376 728 001 Tel: +376 728 001 Email: [email protected] Email: [email protected] URL: www.caseslacambra.com URL: www.caseslacambra.com Andorra Miguel Cases is the Managing Partner of Cases & Lacambra and leads Marc Ambrós is Partner of the Commercial & Corporate law and the Corporate and Banking & Finance practice. He has extensive Financial Services practices at Cases & Lacambra in the Principality experience advising credit institutions and investment services firms, of Andorra. He has extensive experience in corporate and commercial being the legal counsel of several national and international financial matters. He has advised in mergers, acquisitions, joint ventures, institutions, public authorities and investment funds. private equity, corporate restructuring and refinancing, representing both Andorran and foreign clients in international transactions. He regularly advises during the entire process of a transaction, from both the buying side as well as the selling side perspective using different legal structures. He is also specialised in project and corporate finance issues. His practice includes advising on regulatory cross-border matters to foreign credit institutions and investment services firms. He has also advised on the incorporation of Andorran supervised entities.

Cases & Lacambra is a client-focused boutique law firm with top-tier specialisation in banking, finance and tax law. We offer bespoke advice and solutions to our clients, which rank among the most highly reputed national and international financial institutions, family offices, investment firms, group companies and high-net-worth individuals.

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Angola Pedro Simões Coelho

Vieira de Almeida Carlos Filipe Couto

The UCI Law does not foresee any de minimis exemption or fast- 1 Regulatory Framework track authorisation procedure. Accordingly, all fund managers, regardless of the asset under management, will need to comply, in 1.1 What legislation governs the establishment and general terms, with the same requirements. operation of Alternative Investment Funds? Nonetheless, considering the type of AIFs the fund manager intends to manage, i.e. AIFs investing in securities or financial assets or real The activity involving the management, investment and marketing estate, there will be some specific requirements to be met as regards of Alternative Investment Funds (AIFs) is mainly regulated by the investment policies, contracts with services providers, etc. Undertakings for Collective Investment Law (Regime Jurídico dos Organismos de Investimento Coletivo), enacted by Decree no. 1.3 Are Alternative Investment Funds themselves 7/2013 of 11 October 2013 (UCI Law) and CMC Regulation no. required to be licensed, authorised or regulated by a 4/2014 on Undertakings for Collective Investment (Regulation regulatory body? no. 4/2014), which sets forth more specific rules regarding certain aspects of the UCI Law and the Angolan Securities Law (Lei dos Yes. The setting up of any fund, including AIFs, is subject to Valores Mobiliários or ASL), enacted by Law no. 12/05 of 23 authorisation by the CMC, which is the competent regulator to September 2005, as amended from time to time. Lastly, please note conduct the supervision of AIF management, ancillary service that venture capital merits a specific legal framework, set forth by providers, distribution and compliance with the general rules Decree no. 4/15 of 16 September (Venture Capital Law). applicable to AIFs, notably those relating to the protection of the The Angolan Securities Exchange Commission (Comissão do investors’ interests. Mercado de Capitais or CMC) is the main regulatory body in relation to the aforementioned matters. 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment 1.2 Are managers or advisers to Alternative Investment Funds (or otherwise differentiate between different Funds required to be licensed, authorised or types of funds or strategies (e.g. private equity v regulated by a regulatory body? hedge)) and, if so, how?

Yes. Fund managers, as non-credit financial institutions, are subject Yes. In general terms, the UCI Law distinguishes between AIFs to the CMC’s supervision, notably in respect of prudential matters investing (i) in securities or financial assets, and (ii) in real estate and in what concerns most of the rules governing their management (real estate investment funds). of AIFs’ activity. Both AIF types may be open or closed-ended, but the real estate Therefore, the fund managers’ authorisation procedure will be investment funds may also be of a mixed type, thus allowing the conducted before the CMC pursuant to Law no. 13/05 of 30 coexistence of both features in the same AIF. September 2005, on financial institutions, and thus any entity In general terms, open-ended AIFs are addressed to the retail market, wishing to provide alternative fund management services ought while closed-ended AIFs target affluent or professional investors, to be authorised by and registered with the CMC. Financial thus in open-ended AIFs the scrutiny of the CMC tends to be tighter. institutions, provided the authorisation to provide fund management Furthermore, depending on the type of AIF at stake and if such services has been obtained, as well as management companies of is open or closed-ended, different investing limits and portfolio collective investment undertakings, may perform fund management composition limits will apply. services. In any event, this is without prejudice to the application of a registration with the CMC requirement, on top of the aforementioned authorisation requirement, prior to the beginning of 1.5 What does the authorisation process involve and how the provision of management services. long does the process typically take? On the other hand, the foregoing is also without prejudice to the In a nutshell, the authorisation for the setting up of an AIF is filed possibility of an investment company (i.e. collective investment with the CMC. undertakings with legal personality) ensuring its own fund management. In requesting such authorisation, the relevant AIF’s manager must provide the CMC with the AIF’s documentation, notably

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the prospectus (if applicable) in simplified and full versions, which Furthermore, the AIF may also have, but is not legally compelled to must also include the AIF’s regulation, subscription form, and an have, distributors or entities that will market the AIF, the existence announcement on the beginning and ending of the subscription period. of such entities being more usual in the case of open-ended AIFs. In addition, the CMC must also be given copies of the agreements to be executed between the management company and (i) the 1.8 What rules apply to foreign managers or advisers depositary, (ii) the distributors or entities that will market the AIF, wishing to manage, advise, or otherwise operate and (iii) any other entities that will render services to the AIF or to funds domiciled in your jurisdiction? the AIF manager. Documents evidencing the acceptance of the rendering of the In accordance with the Banking Law, the same rules established for

relevant services by all entities involved in the AIF’s activities must national managers will apply to foreign managers. Angola also be delivered to the CMC. However, the foreign managers will need to be properly authorised Furthermore, in the case of a closed-ended AIF, if applicable, the to conduct is activities in Angola and will need to have a local authorisation application for the public placement of the units/shares establishment. shall too be provided. On the other hand, in the case of open-ended AIFs, the fund manager shall provide a copy of a bank guarantee, 1.9 What co-operation or information sharing agreements in an amount no less than 20% of the AIF’s NAV, in order to secure have been entered into with other governments or the necessary liquidity to pay potential redemption requests placed regulators? by the investors. An authorisation is given within 45 days of the receipt of either There is no specific protocol or sharing agreement signed by the CMC the application, with all necessary documentation having been with other governments or regulators in respect of AIFMs or AIFs. provided in attachment thereto, or of any additional information or However, the CMC signed a general (low-detail) understanding amendments to the documents required by the CMC. If at the end protocol with the Portuguese Securities Exchange Commission of such a period the applicants have not yet been notified of the (Comissão do Mercado de Valores Mobiliários or CMVM) on deferral of their application, the authorisation is considered to have September 2006, including some information sharing provisions. been tacitly refused. However, considering that CMC has discretion to request further information, which will halt the term for granting the authorisation 2 Fund Structures and that are few AIF being constituted in Angola, the term for completing the process may vary significantly from case to case. 2.1 What are the principal legal structures used for The CMC may refuse the authorisation, inter alia, if the applicant Alternative Investment Funds? does not submit the required documentation or if the AIF manager at stake engages in irregular management of other investment funds. An AIF may take one of two forms or structures, both subject to the After the authorisation has been granted, an AIF will be fully set up licensing procedures described in question 1.5 above: from the moment the first subscription is settled. ■ Contractual structure with no legal personality. This is the classic structure and requires that the AIF is managed by a 1.6 Are there local residence or other local qualification separate fund manager. The investors’ or participants’ interests requirements? in these funds are called units (unidades de participação). ■ Collective investment company endowed with legal personality Considering that the vast majority of AIFs in Angola are set up (sociedade de investimento). Collective investment companies under the contractual form with no legal personality, it is required which mainly invest in securities are classified as SIMs that such AIFs be managed by a separate fund manager, which needs (sociedades de investimento mobiliários), while those which to be incorporated and have its centre of main interests and effective mainly invest in real estate are classified as SIIs (sociedades de investimento imobiliário). Both SIMs and SIIs may be management located in Angola. self-managed or have appointed a third party as their manager, Furthermore, the fund manager must have in place several internal which must be a duly authorised investment fund manager. policies aimed at addressing the risk of its activity, remuneration Participants in these collective investment companies will hold issues, outsourcing, internal control and evaluation of the assets shares (ações). pertaining to the AIFs under management, all being subject to the In Angola, AIFs are usually set up under the contractual structure control of the CMC and, to a certain extent, the depository, and with no legal personality. entailing permanent record-keeping by the fund manager. In an overall assessment of the pros and cons of both structures, it Lastly, the employees of the fund manager with technical functions, is possible to verify that the contractual structure has a longer track as well as the management, shall have the proper qualification record in Angola, being the preferred choice for the setting up of and professional aptitude in accordance with high-level standards. AIFs as it offers an affordable, simple and well-known model for Pursuant to Regulation no. 4/14, it shall be assumed that persons AIFs in Angola. that have held office with similar functions within the financial sector have the necessary professional competence. Conversely, the collective investment company endowed with legal personality is clearly a more complex model that allows, however, greater control for the investors over the management of the AIF. 1.7 What service providers are required?

An AIF is legally required in Angola to have: a fund manager, except 2.2 Please describe the limited liability of investors. if it is endowed with legal personality, in which case such an AIF may perform its own management; a depository; an auditor; and, in Legally, the assets of an AIF are only liable for its debts, thus it will the case of real estate AIFs, real estate appraisal experts. not be liable for the investors, fund manager, depository, distributors or other AIFs’ debts. Likewise, investors are not personally liable

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for the AIF’s debts and will therefore not, under any circumstances, of AIF, if any, established in the UCI Law and by the obligation to be burdened by any of the AIF’s debts. conduct its activity in the best interest of the investors. As regards collective investment companies endowed with legal The UCI Law has a list of acts that a manager cannot carry out, such personality, they are also subject to the limited liability provisions as granting loans, execute certain transactions on its own account, applicable to commercial companies by special law. execute transactions relating to the assets held by the AIF with related parties, e.g., entities of its group, the depositary, etc.

2.3 What are the principal legal structures used for managers and advisers of Alternative Investment 3 Marketing Funds? Angola AIFs, which are not self-managed, will need to be managed by a: 3.1 What legislation governs the production and offering ■ fund manager (non-credit financial institution) authorised to of marketing materials? manage AIFs investing in securities and other financial assets or real estate investment funds (sociedade gestora de fundos Please refer to question 1.1 above, plus the General Marketing Law, de investimento mobiliário); or approved by Law no. 9/02 of 30 July 2002. ■ real estate fund manager (non-credit financial institution), which may only manage real estate funds (sociedade gestora de fundos de investimento imobiliário). 3.2 What are the key content requirements for marketing materials, whether due to legal requirements or customary practice? 2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers The UCI Law and Regulation no. 4/14 provide minutes that the legal in open-ended or closed-ended funds? documents of the AIF (prospectus and regulation) must abide by. In respect of marketing materials, there are no minutes available; The UCI Law is silent in respect of the ability of the fund manager however, it is customary for the fund manager and other distribution to restrict redemptions in open-ended funds, but considering that entities to provide information on the investment policy, markets such types of AIFs in general target retail investors, the CMC will targeted, main features (identification of the relevant entities, terms most certainly scrutinise this matter. In fact, such a possibility and conditions of the investment, links to the legal documents) and would need to be clearly set out in the AIF’s regulation, which is historic returns of the AIF. analysed during the authorisation procedure. Pursuant to Regulation no. 4/14 the marketing material shall contain Moreover, the minute of the AIF regulation, approved by Regulation the following warnings: no. 4/14, contains a field where the conditions set out for redemptions ■ “Reading of the prospectus and regulation of the AIF is need to be described, but only seems to refer to the applicable fees, recommended, before investing in it.” settlement dates and the criteria for the determination of which units/ shares will be redeemed. Likewise, Regulation no. 4/14 only seems ■ In cases where the marketing material discloses return figures, “past returns do not guarantee future returns” and “the disclosed to foresee conditions under which redemptions may be suspended, returns are subject to taxation”. but not restricted. ■ In cases where the figures have a reference period of less than As regards the restriction of transfers in open-ended funds, the same a year, “[t]his UCI has less than 12 (twelve) months. In order rationale described above in respect of the redemption shall apply. to analyse the performance of an UCI, it is recommended the Conversely, regarding closed-ended AIFs, mainly those targeting analysis of at least 12 (twelve) months”. professional investors, we trust that it is possible to establish in the Lastly, as a general note, in accordance with Regulation no. 4/14, the AIF’s regulation restrictions on the transfer of units from investors information contained in the marketing materials must comply with to third parties. the following principles: objectivity; identification; truthfulness; transparency; balance; timeliness; and comparability. 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? No. However, the limitations established on foreign investment, which place constraints on transfers abroad of profits or dividends Yes. All marketing materials are subject to the CMC’s prior approval. obtained in Angola, should be borne in mind. Therefore, prior to the investment in an Angolan AIF being performed, the thresholds 3.4 What restrictions are there on marketing Alternative and requirements to be met by such an investment shall be assessed, Investment Funds? on a case-by-case basis, as well as the provisions applicable to the transfer abroad of the profits or dividends obtained pursuant to the The marketing or distribution (comercialização) of AIFs under the redemption of the units/shares or liquidation of the AIF. UCI Law occurs when there is a collection of funds with the public in order to be channelled with the investment in the AIF, provided 2.6 Are there any other limitations on a manager’s ability that the activity is: (i) addressed to undetermined investors; (ii) to manage its funds (e.g. diversification requirements, preceded or followed by prospection or gathering of investment asset stripping rules)? intentions with undetermined investors; and (iii) addressed to at least 150 addressees. The ability of the manager to manage its funds will be mainly Therefore, only this kind of marketing will be caught by the regime limited by the investment policy established in the AIF’s prospectus set out in the UCI Law and Regulation no. 4/14. or regulation, as applicable, by the general investment limits by type

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Furthermore, the concept of reverse solicitation is not an official exemption from the UCI Law requirements, but rather a tolerated 4 Investments practice, which consists in the investor, on its own initiative and without any previous engagement on the part of the distributor, 4.1 Are there any restrictions on the types of activities requesting information on the AIF at stake. However, a case-by- that can be performed by Alternative Investment case assessment needs to be conducted, considering that the use of Funds? the reverse solicitation expedient may come under the scrutiny of the CMC. Yes. AIFs can only focus on investment activities and their Closed-ended AIFs shall register the performance of marketing/ management and investment shall comply with the general rules distribution activities with the CMC. applicable to the financial instruments markets. Angola Lastly, the marketing/distribution of foreign AIFs in Angola is subject to the prior authorisation of the CMC. 4.2 Are there any limitations on the types of investments that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or 3.5 Can Alternative Investment Funds be marketed to retail investors? otherwise?

Yes. However, it must be noted that special AIFs investing in Yes. The assets eligible for the portfolio of the AIF will depend on transferable securities or financial instruments (organismos its specific type. especiais de investimento coletivo em valores mobiliários) are Therefore, in general terms, an AIF investing in securities or distributed within specific segments of the market. If it is intended financial assets may have in its portfolio: (i) securities admitted for the distribution to be carried out with non-institutional investors, to trading in an Angolan regulated market; (ii) securities admitted the fund manager shall provide the CMC with a training plan of the to trading in a third country regulated market, provided that such entities in charge of such distribution. Notwithstanding, the CMC is foreseen in the law, the AIF’s legal documents or approved by may refuse to grant the authorisation for the AIF to be distributed the CMC; (iii) units/shares in other UCIs; (iv) bank deposits with within certain segments of the market, in case it considers that the a term of up to a year; (v) derivatives traded in regulated markets investors are not sufficiently protected. referred to in (i) and (ii) above; (vi) derivatives traded in OTC, provided that CMC regulations are complied with; (vii) money 3.6 What qualification requirements must be carried out market instruments, which issue or issuer is subject to regulation for in relation to prospective investors? the purposes of investors’ protection or savings schemes; and (viii) other instruments provided in the CMC’s regulations. There is no particular requirement to be fulfilled in relation to The derivatives may only be used for hedging purposes and naked investors in AIFs. short-selling is forbidden. Nonetheless, the fund manager shall ensure that the “know your As regards real estate investment funds, they may invest the customer and investment adequacy analysis” is properly carried out majority of their assets in real estate, but may also invest in shares in relation to the investor, as well as that the anti-money laundering of real estate investment companies (sociedades de investimento and terrorism financing procedures are respected. imobiliário), derivatives, mainly for hedging purposes, units/shares of other real estate investment funds and liquidity instruments. The 3.7 Are there additional restrictions on marketing to extent to which the investment in the referred assets is limited will public bodies such as government pension funds? depend on whether the AIF is closed-ended, open-ended or targeting a specific scope, i.e. real estate investment funds investing in house There are no additional restrictions. renting, agriculture, livestock, industrial exploration, etc.

3.8 Are there any restrictions on the use of intermediaries 4.3 Are there any restrictions on borrowing by the to assist in the fundraising process? Alternative Investment Fund?

No. However, the relationship established between the intermediaries Fund managers may obtain loans on behalf of AIFs under their and the AIF shall be put in a written agreement and disclosed in the management, but the loan period cannot exceed 120 days, consecutive AIF’s legal documents. or not, within a period of one year and up to the maximum of 10% Furthermore, the intermediary, when carrying out the fundraising of the AIF’s NAV. process, needs to act within its authorised scope of activities, i.e. The loan to be granted under the terms described above shall be if the fundraising process corresponds to marketing of the AIF previously authorised by the CMC and the fund manager shall ground under the UCI Law, the intermediary will need to be an authorised the reasoning for the loan, as well as provide the CMC with the loan’s institution under the applicable legal terms to carry out the contractual conditions. distribution of securities.

5 Disclosure of Information 3.9 Are there any restrictions on the participation in Alternative Investment Funds by particular types of investors, such as financial institutions (whether as 5.1 What public disclosure must the Alternative sponsors or investors)? Investment Fund or its manager make?

No. However, the holding of units/shares in AIFs may have an The AIF’s legal documents and their updates shall be available in a impact, that needs to be assessed on a case-by-case basis, on the durable means or on an internet website. Considering that the legal own funds and reserves of the credit and financial institutions. documents shall describe the fund manager’s identity, depository,

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auditor, distributors and other services providers to the AIF, the majority of the data in connection with the AIF will be made 6.2 What is the tax treatment of the principal forms of available to the public. investment manager / adviser identified in question 2.3? However, the identity of the investors in the AIF is not mandatorily subject to public disclosure. There is no special tax treatment or rules applicable in Angola for investment managers or advisers. Therefore, as Angolan-resident 5.2 What are the reporting requirements in relation to entities, they will be subject to the general taxation regime: (i) Alternative Investment Funds or their managers? 30% Industrial Tax on income obtained on a worldwide basis; and (ii) capital gains, interest and dividends are subject to Investment

Angola The fund manager must prepare and publish annual and biennial Income Tax under a withholding mechanism (rates may vary from accounts. These must be made available free of charge on request 5% up to 15%). by the investors. Dividends paid between resident companies in Angola may be Moreover, the fund manager must publish and send to the CMC: exempt from Investment Income Tax provided that a 25% stake is held for a minimum holding period of one year. ■ The annual accounts within four months after the end of the financial year. ■ The biennial accounts within two months after the end of the 6.3 Are there any establishment or transfer taxes levied relevant semester. in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the investor’s interest? 5.3 Is the use of side letters restricted? There are none. The use of side letters that set out particular terms and conditions in respect of governance, investment, etc. of the AIF is not specifically 6.4 What is the tax treatment of (a) resident, (b) non- addressed by the UCI Law. resident, and (c) pension fund investors in Alternative However, in the case of open-ended AIFs, considering that they Investment Funds? usually target retail investors and/or a broader unrestricted scope of investors, the use of side letters which alter any relevant provision Income obtained by an AIF’s resident and non-resident or pension of the legal documents shall be deemed illegal, considering that, as funds unit holders is exempt from Investment Income Tax and a general principle, fund managers need to abide by the AIF’s legal Industrial Tax on any income obtained, namely those from redemption documents during the provision of their services. or distribution of income, as well as gains from the sale of units. In closed-ended AIFs, notably in AIFs targeting only professional investors, we trust that there is a wider margin to set out, namely 6.5 Is it necessary or advisable to obtain a tax ruling from through a side letter, specific provisions in respect of certain matters. the tax or regulatory authorities prior to establishing However, in general terms, as the provisions of the UCI Law are an Alternative Investment Fund? imperative, any side letter providing for actions in breach of such legal provisions will be deemed illegal and may subject the fund Yes, it is advisable, because the tax regime is quite new and there manager to administrative offence proceedings. is still no track record or official guideline on how the Angolan Tax Authorities will enforce it. Moreover, the tax legislation is quite incipient in dealing with 6 Taxation finance-structured investments.

6.1 What is the tax treatment of the principal forms of 6.6 What steps have been or are being taken to implement Alternative Investment Funds identified in question the US Foreign Account and Tax Compliance Act 2.1? 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard? The Angolan tax regime for AIFs set up under the contractual structure with no legal personality and the collective investment On 9 November 2015, the Intergovernmental Agreement (IGA) company endowed with legal personality has been enacted by under Model I to improve international tax compliance with respect Presidential Decree no. 1/14 of 13 October 2014. to the U.S. Foreign Account Tax Compliance Act (FATCA) was signed between Angola and the USA. An AIF is subject to Corporate Income Tax (CIT or “Imposto Industrial”) on the annual profit obtained on a worldwide basis in Following the approval of the IGA, Presidential Decree no. 1/17, compliance with the accounting rules, including rents from real of 20 June, released the Regime applicable to the Tax Reporting of estate and investment income. Financial Data within the framework of the Foreign Account Tax Compliance Act. This Presidential Decree established the legal Capital gains and losses which are not realised will not be taxed. framework applicable to the disclosure of information by financial The CIT rate is 7.5% for AIFs investing in securities or financial bodies to the tax authorities. assets and 15% for AIFs investing in real estate. An AIF will be exempted from any other income tax, namely 6.7 What steps are being taken to implement the OECD’s Investment Income Tax and Urban Property Tax. An AIF is Action Plan on Base Erosion and Profit-Shifting also exempt from Stamp Duty and Consumption Tax on bank (BEPS), in particular Actions 6 and 7, insofar as they commissions, and Stamp Duty on capital increases. affect Alternative Investment Funds’ operations? Additionally, opened-ended real estate AIFs are exempt from Property Transfer Tax and Stamp Duty on acquisition of real estate. Angola is not a member of the OECD. Nonetheless, Angolan

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Representatives were present on 30 June–1 July in an OECD meeting that took place in Kyoto, Japan, with the intent to push 7 Reforms forward ongoing efforts to update international tax rules to tackle BEPS. Following this meeting, Angola joined Inclusive Framework 7.1 What reforms (if any) are proposed? on BEPS, on 7 July, as its 83rd member. At the time of writing, the Angolan legal UCI framework is in the 6.8 Are there any tax-advantaged asset classes or consolidation stage, considering that the legal documents at issue structures available? How widely are they deployed? have been recently enacted. Nevertheless, depending on the economic environment and political

There are none, since venture capital investment funds benefit from circumstances in the upcoming years, it may be necessary to update Angola the same tax regime applicable to AIFs. certain aspects of the Angolan legislation in light of developments and international experience, namely those stemming from the 6.9 Are there any other material tax issues for investors, Alternative Investment Fund Managers Directive’s implementation managers, advisers or AIFs? in EU Member States and new approaches adopted in the international AIF market. There are no other material tax issues.

6.10 Are there any meaningful tax changes anticipated in the coming 12 months?

There are none.

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Pedro Simões Coelho Carlos Filipe Couto Vieira de Almeida Vieira de Almeida Rua Dom Luís I, 28 Rua Dom Luís I, 28 Lisbon 1200-151 Lisbon 1200-151 Portugal Portugal

Tel: +351 31 311 3677 Tel: +351 31 311 3677 Email: [email protected] Email: [email protected] URL: www.vda.pt URL: www.vda.pt Angola Pedro Simões Coelho joined Vieira de Almeida & Associados in 1998 Carlos Filipe Couto joined Vieira de Almeida & Associados in 2011. He and is currently head of the firm’s investment funds practice and a is a senior associate in the Banking & Finance practice area, where he partner in the Banking & Finance Group. He is also responsible for has worked on several key transactions, notably on securities issues, the Agency & Trust practice and is a member of the firm’s aviation banking and insurance sectors. He advises several assets managers finance team. He has been actively involved in several transactions, in regulatory and legal matters, such as the setting up of collective in Portugal and abroad, mainly focused on the advising, structuring investment schemes, providing ongoing counsel to the respective fund and setting up of collective investment schemes such as mutual funds managers, as well as in respect of sale and purchase transactions and real estate investment funds, infrastructure vehicles, venture in connection with assets under management or their shareholdings capital funds and private equity structures. He has been responsible Moreover, he also provides advice to common representatives and for several transactions including non-performing loans, asset finance, trustees and has been actively involved in regulatory and contractual particularly in the aviation finance field, notably financing, leasing, sale matters in connection with banking entities, aviation finance and cross- or purchase of aircraft, and capital markets, retail banking, financial border factoring transactions. Lastly, he regularly assists insurance services and securities’ law. He has also been actively working in companies and intermediaries with regulatory matters, as well as with advising fund managers, venture capitalists, brokers, banks and other matters related to pension fund schemes and pension fund managers. investment firms on a wide range of regulatory and related matters. In Agency & Trust services, he has been actively working in several securitisations and debt issuing transactions advising several entities notably in their capacity as common representatives and issuers.

With over 40 years in the making, Vieira de Almeida (VdA) is an international leading law firm, notable for cutting-edge innovation and top-quality legal advice. A profound business know-how coupled with a highly specialised cross-sector legal practice enable the firm to effectively meet the increasingly complex challenges faced by clients, notably in the aerospace, distribution, economy of the sea, green economy, energy, finance, real estate, industry, infrastructure, healthcare, public, professional services, information technology, emerging technologies, telecoms, third, transports and tourism sectors. VdA offer robust solutions based on consistent standards of excellence, ethics and professionalism. The recognition of VdA as a leading provider of legal services is shared with our team and clients and is frequently acknowledged by the major law publications, professional organisations and research institutions. VdA has consistently and consecutively received the industry’s most prestigious awards and nominations. Through VdA Legal Partners clients have access to a team of lawyers across 12 jurisdictions, ensuring wide sectoral coverage, including all African members of the Community of Portuguese-Speaking Countries (CPLP), and several francophone African countries, as well as Timor-Leste. Angola – Cabo Verde – Chad - Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau – Mozambique – Portugal – São Tomé and Principe – Timor-Leste

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Bermuda

Taylors (in Association with Walkers) Jonathan Betts

1 Regulatory Framework 1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body? 1.1 What legislation governs the establishment and operation of Alternative Investment Funds? The Investment Business Act 2003 (the “IBA”) governs the regulation of ‘investment business’ (described below) in Bermuda. The establishment and operation of investment funds in Bermuda Managers and advisors can be organised anywhere and act as (“investment funds” or “funds”) is governed by: managers and advisors to all forms of funds. There is no requirement ■ the Companies Act 1981 (the “Companies Act”); for a manager or adviser to be licensed in Bermuda unless they have ■ the Investment Funds Act 2006 (the “IFA”); physical premises and employees in Bermuda. All managers and ■ the Fund Prospectus Rules 2007 (the “Fund Prospectus advisors of authorised and exempt funds (as described below), Rules”); and however, will be required to act in accordance with the IFA in all dealings concerning the fund. The BMA will evaluate whether the ■ the Fund Rules 2007 (collectively with the Fund Prospectus Rules, the “Fund Rules”). manager is a fit and proper person and will take into account the manager’s experience and expertise in relation to the fund. The Bermuda Monetary Authority (the “BMA”) is the principal For managers domiciled in Bermuda, there are exemptions available body responsible for the regulation of investment funds, including from the licensing regime if they fall within the scope of the those listed on the Bermuda Stock Exchange. Investment Business (Exemptions) Order 2004 (the “Exemption Investment funds in Bermuda may be structured and organised Order”) further described below. under Bermuda law in the following ways: “Investment business” services are very broadly defined and include (i) a company registered under the Companies Act and stated to dealing in investments, arranging deals in investments, managing be a mutual fund (“mutual fund company”); investments, providing investment advice and safeguarding (ii) an investment company that is a closed-ended fund (“Closed- and administering investments. To be deemed to be carrying on Ended Fund”); investment business “in or from” Bermuda, a person must carry (iii) a unit trust scheme; on investment business from a place of business maintained by (iv) a limited partnership; and such person in Bermuda with employees. Therefore, unless the (v) a limited liability company. manager maintains an office in Bermuda with employees or has an arrangement that the Minister of Finance by order determines will An investment fund is defined in the IFA to include any arrangements constitute the carrying on of business in Bermuda, the IBA will not with respect to property of any description, including money, the apply. purpose or effect of which is to enable persons taking part in the Under the Exemption Order, a person (not being a “market arrangements to participate in or receive profits or income arising intermediary” (described below)) carrying on investment business from the acquisition, holding, management or disposal of the shall be exempt from the requirement to obtain a licence under property or sums paid out of such profits or income. The IFA only the IBA where such person provides investment business services applies to those arrangements where investors are entitled to have exclusively to: their shares/units/interests redeemed in accordance with the fund’s (i) a high-income private investor: an individual who has had a constitution and prospectus at a price determined in accordance with personal income in the last two years in excess of US$200,000 such constitution and prospectus. The IFA therefore does not apply in each of the two years preceding the current year or has to Closed-Ended Funds, being funds whose investors do not have had a joint income with that person’s spouse in excess of redemption rights. US$300,000 in each of those years, and has a reasonable Mutual fund companies, unit trust funds, partnerships funds and expectation of reaching the same income in the current year; current year meaning the year in which he or she purchases LLCs in Bermuda (collectively “Open-Ended Funds”) are all an investment; governed by the IFA and the Fund Rules. The IFA and the Fund Rules are not applicable to Closed-Ended Funds. (ii) a high-net-worth private investor: an individual whose net worth or joint net worth with that person’s spouse in the year in which he or she purchases an investment exceeds US$1 million; “net worth” meaning the excess of total assets at fair market value over total liabilities;

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(iii) a sophisticated private investor: an individual who has such Open-Ended Funds knowledge of, and experience in, financial and business Open-Ended Funds are within scope of the IFA. The IFA and matters as would enable him or her to properly evaluate the the Fund Rules establish and maintain the standards and the merits and risks of a prospective purchase of an investment, and who, in respect of each investment transaction, deals in criteria applicable to the establishment and operation of the amounts of not less than US$100,000; Open-Ended Funds, with a view to protecting investors. The IFA requires that Open-Ended Funds, other than Excluded Funds (iv) collective investment schemes approved by the BMA under the IFA (or any provision of law amending or replacing the or funds which qualify as an Exempted Fund, must apply to the IFA); BMA for authorisation under the IFA under one of the classes: (i) an institutional fund; (ii) an administered fund; (iii) a specified (v) bodies corporate, each of which has total assets of not less than US$5 million where such assets are held solely by the jurisdiction fund; or (iv) a standard fund. Bermuda body corporate, or held partly by the body corporate and Authorised Funds partly by one or more members of a group of which it is a A. Institutional funds. These funds are open only to ‘qualified member; participants’ (described below) or each participant must (vi) unincorporated associations, partnerships or trusts, each of invest a minimum of US$100,000. The funds must have which has total assets of not less than US$5 million where both: such assets are held solely by such association, partnership or ■ an investment manager, fund administrator, registrar, trust or held partly by it and partly by one or more members auditor, custodian or prime broker, who may be based of a group of which it is a member; anywhere; and (vii) bodies corporate, all of whose shareholders fall within one or ■ a service provider, director or secretary with a link to more of the categories of this list, except category (iv); Bermuda. (viii) partnerships, all of whose members fall within one or more of A “qualified participant” is defined in the IFA as: the categories of this list, except category (iv); or (i) a high-income private investor – an individual who has (ix) trusts, all of whose beneficiaries fall within one or more of the had a personal income in excess of US$200,000 in each categories of this list, except category (iv). of the two years preceding the current year or has a joint A “market intermediary” is defined as “a person who engages income with that person’s spouse in excess of US$300,000 or holds himself out as engaging in the business of dealing in in each of those years, and has a reasonable expectation of investments as principal or agent on an investment exchange”. reaching the same level of income in the current year; Fund administrators are required to obtain a licence under the IFA to (ii) a high-net-worth private investor – an individual whose carry on the business of a fund administrator in or from Bermuda. It net worth or joint net worth with that person’s spouse in the year in which he purchases an investment exceeds should be noted that only certain classes of authorised funds require US$1,000,000; a Bermuda licensed fund administrator (see question 1.3). (iii) a sophisticated private investor – an individual who Incentives are currently being offered by the Bermuda Government has such knowledge of, and experience in, financial to attract asset managers to domicile in Bermuda, such as: and business matters as would enable him to properly ■ new business work permits: new companies to Bermuda will evaluate the merits and risks of a prospective purchase of receive up to five work permits for senior positions; investments; ■ no term limits (that is, restrictions on the length of time an (iv) a body corporate which has total assets of not less than employee may stay in Bermuda); US$5 million held either solely by the body corporate or ■ reduced fees on the purchase of qualified property for partly by the body corporate and partly by one or more expatriates; members of the same group of which it is a member; ■ key executive exemptions from work permit requirements (v) an unincorporated association, partnership or trust which and the opportunity for these individuals to eventually has total assets of not less than US$5 million held either receive long-term residency for themselves, their spouse and solely by such association, partnership or trust or partly by their children; and it and partly by one or more members of the same group of which it is a member; ■ payroll tax holidays for employers who hire Bermudians to new positions. (vi) a body corporate whose members fall within one or more of the above; (vii) a partnership whose members fall within one or more of 1.3 Are Alternative Investment Funds themselves the above; and required to be licensed, authorised or regulated by a (viii) a trust whose beneficiaries fall within one or more of the regulatory body? above. B. Administered funds. These funds require each participant Whether a fund is required to be authorised or regulated will depend to invest a minimum of US$50,000 or be listed on a stock on whether the fund is structured as: exchange that is recognised by the BMA. The funds must ■ an Open-Ended Fund, structured as: have both: (i) an Authorised Fund, classified as: ■ an investment manager, registrar, auditor, custodian or ■ an Institutional Fund; prime broker, who may be based anywhere; and ■ an Administered Fund; ■ an administrator licensed under the IFA. ■ a Specified Jurisdiction Fund; or C. Specified jurisdiction funds. These funds are available if both: ■ a Standard Fund; ■ the Minister by order recognises the jurisdiction, outside (ii) an Exempt Fund; or Bermuda, in which the fund operates and a particular law, (iii) an Excluded Fund; or or particular set of laws, of such jurisdiction as applicable ■ a Closed-Ended Fund. to such; and

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■ the fund satisfies the requirements set out in the fund rules Excluded Funds made by the BMA relating to that class of fund and that Excluded Funds are excluded from the requirement to register and jurisdiction. the provisions of the IFA in general. An Excluded Fund is an open- D. Standard funds. These funds are those that do not fall within ended “private fund” in which the number of participants does any other class of fund. There is no minimum investment or not exceed 20 persons and the investment fund does not promote investor qualification test but it must both: itself by communicating an invitation or inducement to the public ■ have an investment manager, registrar and auditor, all of generally. No consent or approval is required from the BMA for which can be located anywhere; and such a fund. Excluded funds must serve notice on the BMA of the ■ have a Bermuda-based administrator or custodian. fact that the fund meets the criteria set forth in the IFA and intends Exempt Funds to operate as a private fund and therefore qualifies for exclusion as

soon as practicable after the establishment of the fund. Bermuda Funds meeting certain criteria are eligible for exemption from authorisation under the IFA: Closed-Ended Funds A. Class A Exempt Funds. These funds are not subject to review Closed-Ended Funds are structured as collective investment vehicles and approval by the BMA and may commence operations which do not provide for redemption of interests at the option of upon filing of their prospectus with the BMA. To be eligible investors. The incorporation of Closed-Ended Funds in Bermuda for Class A Exempt Fund status, the Open-Ended Fund must: is governed by the Companies Act and is subject to the approval ■ only be open to qualified participants (high-income, high- of the Registrar of Companies (the “Registrar”) and the BMA. net-worth, sophisticated private investors or institutional The Registrar and the BMA have discretion to refuse to permit the investors); incorporation or the formation if the proposed beneficial owners are ■ have appointed an investment manager who: persons that the BMA considers undesirable. Close-Ended Funds under Bermuda law and fall outside the scope of regulation by the (i) is licensed under the IBA; IFA and the Funds Rules. (ii) is authorised or licensed by a foreign regulator Closed-Ended Funds which are structured as a Bermuda Company recognised by the BMA (currently only the US and the EU); or and offering shares to the public will be subject to the prospectus provisions of the Companies Act. (iii) for the purpose of the IFA, is carrying on business in or from Bermuda or in a jurisdiction recognised by the BMA, is a person who has gross assets under 1.4 Does the regulatory regime distinguish between management of not less than US$100 million or is a open-ended and closed-ended Alternative Investment member of an investment management group that has Funds (or otherwise differentiate between different consolidated gross assets under management of not types of funds or strategies (e.g. private equity v less than US$100 million; hedge)) and, if so, how? ■ have appointed an officer, trustee or representative resident in Bermuda who has authority to access the Yes. Whereas Open-Ended Funds (other than Excluded Funds) books and records of the fund; are regulated by the IFA as detailed in question 1.3, the IFA does ■ have appointed the following persons to provide services not regulate Closed-Ended Funds. The establishment of a Closed- to the fund: a fund administrator; a registrar; an auditor; Ended Fund is governed by the Companies Act relevant statute and and a custodian or prime broker; and the governing documents of the entity. Closed-Ended Funds which ■ prepare financial statements in accordance with any of the are structured as a Bermuda Company and offering shares to the following standards: International Financial Reporting public are subject to the prospectus provisions of the Companies Standards (“IFRS”); the Generally Accepted Accounting Act. As the IFA does not apply: Principles (“GAAP”) in Bermuda, Canada, the UK or the ■ there are no IFA fees or reporting requirements; US; or any other GAAP that the BMA may recognise. ■ there are no prescribed service providers; and If the Open-Ended Fund does not qualify for Class A Exempt ■ there is no requirement for a prospectus or offering document Fund status, it can submit an application for Class B Exempt unless an offer of shares in a Bermuda Company is being Fund status which is granted by the BMA following a review. made to the public as defined in the Companies Act. B. Class B Exempt Funds. These are Open-Ended Funds that The incorporation of Closed-Ended Funds in Bermuda is subject must: to the approval of the Registrar and the BMA. The Registrar and ■ only be open to qualified participants (high-income, high- the BMA have discretion to refuse to permit the incorporation or net-worth, sophisticated private investors or institutional the formation if the proposed beneficial owners are persons that the investors); BMA considers undesirable. ■ have appointed an officer, trustee or representative resident in Bermuda who has authority to access the books and records of the fund; 1.5 What does the authorisation process involve and how long does the process typically take? ■ have appointed the following persons to provide services to the fund: an investment manager; a fund administrator; The authorisation process, as detailed below, will depend on the a registrar; an auditor; and a custodian or prime broker. These persons must be, in the BMA’s view, fit and classification of the fund: proper (BMA may on application waive any of the above ■ Authorised Funds – an application is submitted to the BMA, requirements if it is satisfied that appropriate arrangements including (a) the corporate name and registered or principal are in place to safeguard the interest of investors); and office of each service provider, (b) a certificate signed by the operator confirming the fund complies (or will comply) with ■ prepare financial statements in accordance with any of the section 14 of the IFA, and (c) a copy of the fund’s prospectus following standards: IFRS; GAAP in Bermuda, Canada, containing all the information required by the prospectus the UK or the US; or any other GAAP that the BMA may rules as the BMA may reasonably require for considering the recognise. application. Authorisation is granted within 5–7 days if the investment fund meets the requirements.

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■ Class A Exempt Funds – a certification is submitted to (a) mutual fund companies – a mutual fund company is a the BMA confirming that the investment fund meets the company limited by shares and incorporated with mutual requirements for exemption prior to commencement of the fund objects for the purpose of investing the moneys of its fund’s business (including a copy of the fund’s prospectus). members for their mutual benefit and with both the company Once notification is filed, exemption is automatically granted. and the members having the power to redeem or purchase for ■ Class B Exempt Funds – an application is submitted to cancellation its shares without reducing its authorised share the BMA for exemption (including a copy of the fund’s capital and stating in its memorandum that it is a mutual fund. prospectus). Exemption is granted within 10 days if the fund The formation and operation of mutual fund companies is meets the requirements. governed by the Companies Act, as amended, and the IFA; ■ Excluded Funds – a notice is served on the BMA confirming (b) investment fund companies – an investment fund company is that the fund is a private fund and qualifies for exclusion as a company limited by shares and incorporated without mutual Bermuda soon as practicable after the establishment of the investment fund objects, where investors do not have the right to demand fund. Once notification is filed, exclusion is automatically redemption of their shares. The formation and operation of granted. investment companies is governed by the Companies Act. After the appropriate filings detailed above, Class A Exempt Funds, The IFA is not applicable; Class B Exempt Funds and Excluded Funds are required, under (c) unit trusts – a unit trust fund is a fund under which the the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist property is held on trust for participants. The formation and Financing Supervision and Enforcement) Act 2008, to register with operation of unit trust funds is governed by the trust deed by the BMA as a Non-Licensed Person. which it is established and the IFA; ■ Closed-Ended Funds are not authorised or licensed but are (d) partnership funds – a partnership fund is a fund under which required to comply with the provisions of the Companies Act. the participants contribute funds to the partnership to be held on behalf of participating partners of the partnership. The funds are managed by the manager for the benefit of the 1.6 Are there local residence or other local qualification participants. The formation and operation of partnership requirements? funds is governed by the Limited Partnership Act 1883, the Exempted Partnerships Act 1992, the IFA and the applicable Bermuda investment funds that are structured as exempted partnership agreement; and companies, limited partnership or LLCs must have: (e) limited liability companies – the Limited Liability Company ■ either a director, trustee, officer or resident representative Act 2016 was introduced in October 2016 enabling the who is ordinarily resident in Bermuda, and who has access to formation of limited liability companies (“LLCs”). LLCs are the books and records of the investment fund; and hybrid entities commonly used in the US for private-equity ■ a registered office in Bermuda with certain records relating to funds and other asset-management structures. The Bermuda the investment fund. legislation is closely modelled on Delaware law so will be very familiar to US fund managers and legal counsel.

1.7 What service providers are required? 2.2 Please describe the limited liability of investors. See question 1.3 with respect to each type of fund and the service providers required. An investor in a limited liability investment fund is liable in the amount of any unpaid capital on the investor’s shares. An investor in a limited partnership funds is liable to the amount of its capital 1.8 What rules apply to foreign managers or advisers contribution and, depending on the terms of the limited partnership wishing to manage, advise, or otherwise operate agreement, its capital commitment to the fund. funds domiciled in your jurisdiction?

See question 1.2 on the rules and relevant exemptions applicable to 2.3 What are the principal legal structures used for domiciled managers and advisors in Bermuda. managers and advisers of Alternative Investment Funds?

1.9 What co-operation or information sharing agreements Managers and advisers of investments funds are primarily structured have been entered into with other governments or regulators? as companies, limited partnerships or LLCs established in Bermuda or in other jurisdictions. To date, Bermuda has 91 treaty partners around the world, has signed 41 bilateral tax information exchange agreements (“TIEAs”) 2.4 Are there any limits on the manager’s ability to and has 87 co-signatories under the multi-lateral Convention on restrict redemptions in open-ended funds or transfers Mutual Administrative Assistance in Tax Matters. in open-ended or closed-ended funds? Bermuda has also adopted the OECD Common Reporting Standard (“CRS”) and is a Model II jurisdiction for the purposes of FATCA. Any restrictions on redemptions of investment funds would be imposed by the investment fund and provided for in its bye-laws and prospectus. 2 Fund Structures

2.5 Are there any legislative restrictions on transfers of 2.1 What are the principal legal structures used for investors’ interests in Alternative Investment Funds? Alternative Investment Funds? There is no legislative approval required for the transfer of As noted in question 1.1, investment funds in Bermuda may be investors’ interests (non-voting) in investment funds. Any transfer structured and organised under Bermuda law in four different ways: of interests in the fund with voting rights requires an application to

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the BMA unless the fund is classified under the IFA and therefore (m) a description of the bases for the determination of the issue has had a general permission granted pursuant to the Notice to the and redemption prices (including the frequency of dealings) Public of June 2005 under the Exchange Control Act 1972 and the and an indication of the places where information as to the Regulations thereunder. prices may be obtained; (n) a description of the basis and frequency of valuation of the fund’s assets; 2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, (o) particulars of any material provisions of any contract engaging asset stripping rules)? the services of any and all directors, trustees, partners, service providers, and any other third parties receiving or likely to receive fees from the fund; Any limitations on a manager’s ability to manage its funds would

(p) a description of the potential conflicts of interest between the Bermuda be imposed by the investment fund and provided for in its bye-laws fund, its directors, trustees, partners, and its service providers; and prospectus. (q) the date of the financial year end of the fund; (r) information on the nature and frequency of financial reports 3 Marketing to be distributed to participants; (s) a statement of the place where copies of the constitution and any annual or periodic report may be inspected and obtained; 3.1 What legislation governs the production and offering of marketing materials? (t) particulars relating to the main business activity of the custodian and any co-custodian; and The Companies Act, the IFA and the IBA govern the production and (u) particulars of the experience of investment managers. offering of marketing materials. The Fund Rules also contain disclaimers in favour of the BMA. The Companies Act provides that companies that are offering shares 3.2 What are the key content requirements for marketing to the public are required to publish and file a prospectus with the materials, whether due to legal requirements or Registrar (unless they fall within any of the circumstances where it is customary practice? not necessary to publish and file a prospectus under the Companies Act). The prospectus should contain information showing: The IFA provides that the prospectus is required to disclose facts (a) the names, descriptions and addresses of the promoters, which would be considered material to a prospective investor, such as: officers or proposed officers; (a) the name of the fund and the address of its registered or (b) the business or proposed business of the company; principal office in Bermuda; (c) the minimum subscription which, in the opinion of the (b) a statement as to whether the fund is registered or licensed, promoters, directors or provisional directors, must be raised; in any jurisdiction or with any supervisory or regulatory (d) any rights or restrictions on the shares that are being offered; authority, outside Bermuda; (e) all commissions payable on the sale of the shares referred (c) the date of incorporation or establishment of the fund (indicating to in the prospectus and the net amount receivable by the whether the duration is limited); company in respect of the sale; (d) where applicable, an indication of stock exchanges or markets (f) the name and address of any person who owns five per cent where the securities are, or are to be, listed or dealt in; or more of the shares of the company: provided that this (e) the names, address, and other relevant particulars of directors, paragraph shall not apply to an exempted company or a officers, resident representatives, auditors, fund administrators, permit company; custodians, registrars, promoters, legal advisers, investment managers, and other persons having significant involvement (g) any shareholding in the company of an officer of the company; in the affairs of the fund; (h) financial statements of the company prepared in such manner (f) a description of the fund’s investment objectives, including and containing such information as may be required by rules its financial objectives, investment policy and any limitations made under the Companies Act; on that investment policy and an indication of any techniques (i) a report or statement by the auditor of the company prepared and instruments, and any borrowing power; in such manner and containing such information as shall be (g) a description of the investment fund’s material risks including, required by rules made under the Act; and in relation to a mutual fund company registered under section (j) the date and time of the opening and closing of subscriptions 6 of the Segregated Accounts Companies Act 2000 or a unit lists. trust fund operating segregated accounts, a statement on any potential risks associated with the operation of segregated accounts; 3.3 Do the marketing or legal documents need to be (h) details of the capital of the fund including, where applicable, registered with or approved by the local regulator? any existing initial or founder capital; (i) details of the principal rights and restrictions attaching to At the incorporation or formation stage of a fund, the legal the units, including with respect to currency, voting rights, documents which are required to be filed with the Registrar are: circumstances of winding up or dissolution, certificates, entry ■ for mutual fund companies and investment companies – a in registers and other similar details; memorandum of association, a notice of registered office a (j) a description of the intentions with respect to the declaration register of directors and officers, certain extracts from the of dividends or distribution of profits; bye-laws and an annual declaration; and (k) the procedures and conditions for the redemption and sale ■ for limited partnerships – a certificate of limited partnership, a of interests and the circumstances in which such redemption certificate of exempted partnership and a notice of registered may be suspended; office. (l) the procedures and conditions for the issue of units; Thereafter, companies that offer shares to the public are required to publish a prospectus and file the samewith the Registrar (unless they

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fall within any of the circumstances for which it is not necessary under the Companies Act). 3.9 Are there any restrictions on the participation in Alternative Investment Funds by particular types of The IFA contains further filings requirements for Open-Ended investors, such as financial institutions (whether as Funds with the BMA at authorisation. See question 1.5. sponsors or investors)?

3.4 What restrictions are there on marketing Alternative There have been no restrictions imposed. Investment Funds?

Any person marketing funds in Bermuda is subject to the provisions 4 Investments

Bermuda of the Companies Act. There are no laws in Bermuda that restrict the marketing of shares of a foreign fund in Bermuda. However, there 4.1 Are there any restrictions on the types of activities is a general prohibition against exempted and overseas companies that can be performed by Alternative Investment “carrying on business in Bermuda” under the provisions of the Funds? Companies Act and the IBA, which restricts the marketing of shares of a foreign fund in Bermuda by an exempted Bermuda company There are no restrictions on the types of activities that can be owned by non-Bermudians or an overseas company. However, performed by investment funds, subject to the fund not engaging in there are limited means through which the marketing of a foreign activity which is: fund in Bermuda can be achieved. Where the shares are offered in (i) prohibited under the Companies Act; Bermuda on a private basis by a foreign fund that does not have a (ii) not otherwise illegal or in breach of public policy; place of business in Bermuda, that foreign fund is not required to (iii) outside the powers of the fund’s memorandum of association, obtain a licence under the Companies Act, provided the foreign fund bye-laws and prospectus; and does not market or travel to Bermuda. While there is a “travelling salesman” exception, which permits limited marketing in Bermuda, (iv) not compliant with the requirements of the IFA. reliance on this exception is not advisable as even limited contact in Bermuda may be considered to be carrying on business in Bermuda 4.2 Are there any limitations on the types of investments and inadvertently violate the IBA. that can be included in an Alternative Investment It is not easy to be specific as to the permitted marketing activities Fund’s portfolio whether for diversification reasons or otherwise? of a foreign fund, and in many cases the issue will turn on the facts and circumstances. Examples of activities that should be permitted Any limitations would form part of the investment fund’s (depending on the circumstances) include external marketing, memorandum of association, bye-laws and/or prospectus. unsolicited requests, Bermuda Stock Exchange (“BSX”) listing, permit funds, internet marketing, local brokers and foreign funds with a permit to carry on business in Bermuda. 4.3 Are there any restrictions on borrowing by the Due to an exemption available under the Companies Act, a Bermuda Alternative Investment Fund? fund is exempted from the prohibition on marketing its shares in Bermuda. Any restrictions would form part of the investment fund’s memorandum of association, bye-laws and/or prospectus.

3.5 Can Alternative Investment Funds be marketed to retail investors? 5 Disclosure of Information

Standard funds or investment companies (as detailed above in questions 1.1 and 1.3) can be marketed to retail investors. 5.1 What public disclosure must the Alternative Investment Fund or its manager make?

3.6 What qualification requirements must be carried out At the Registrar: in relation to prospective investors? ■ the certificate of incorporation and memorandum of association; See question 1.3 above. Due diligence must also be carried out ■ the address of the registered office; on prospective investors. This task is normally delegated to the administrator. ■ the register of Directors; ■ any prospectus or offer document required to be filed pursuant to the Companies Act; and 3.7 Are there additional restrictions on marketing to ■ certain other filings required pursuant to the Companies Act, public bodies such as government pension funds? including prescribed bye-laws excerpts.

There are no additional restrictions. At the Registered Office: ■ details of directors and officers. The register of directors and officers is open for inspection during business hours; and 3.8 Are there any restrictions on the use of intermediaries ■ register of members*. The register of members is open for to assist in the fundraising process? inspection by the members only in respect of its shareholding in the fund. Except as discussed in question 3.4, there are no restrictions. (*Only in respect of authorised funds.)

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5.2 What are the reporting requirements in relation to 6 Taxation Alternative Investment Funds or their managers?

6.1 What is the tax treatment of the principal forms of Exempt funds must: Alternative Investment Funds identified in question ■ file a certificate with the BMA annually (before 30 June) 2.1? certifying that the fund satisfies the requirements for exemption and will continue to satisfy them, and also file Bermuda is fiscally neutral. There are no corporation, profits, or both: capital gains taxes payable in Bermuda by an investment fund or its (i) a statement of any material changes to its prospectus; and investors. After incorporation the investment fund may apply for,

(ii) a copy of its audited financial statements for the preceding and is likely to receive, an undertaking from Government that in the Bermuda year. event of any such taxes being imposed by Bermuda in the future, Institutional and administered funds must: those taxes shall not apply to the fund until 31 March 2035 (the “Tax ■ file a report to the BMA on its operations on a quarterly basis, Assurance Certificate”). including information on the fund’s price per share, or unit, net asset value and amounts subscribed and redeemed during 6.2 What is the tax treatment of the principal forms of the quarter; investment manager / adviser identified in question ■ submit to the BMA, within six months of the financial year end, 2.3? a statement confirming that the fund has at all times during the preceding financial year been in compliance with the provisions See question 6.1. of the IFA, as well as applicable fund and prospectus rules, or setting out the particulars of any breach; and ■ prepare annual financial statements audited by an auditor that 6.3 Are there any establishment or transfer taxes levied is acceptable to the BMA. in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the Standard funds must: investor’s interest? ■ file a report to the BMA on its operations on a monthly basis, including information on a fund’s price per share (or unit), There are no establishment or transfer taxes payable in Bermuda. net asset value and amounts subscribed and redeemed during the month; ■ submit to the BMA, within six months of the financial year end, 6.4 What is the tax treatment of (a) resident, (b) non- a statement confirming that the fund has at all times during the resident, and (c) pension fund investors in Alternative preceding financial year been in compliance with the provisions Investment Funds? of the IFA, as well as applicable fund and prospectus rules, or setting out the particulars of any breach; and See question 6.1. There are no taxes payable in Bermuda in relation ■ prepare annual financial statements audited by an auditor that to such investors. is acceptable to the BMA. Specified jurisdiction funds must: 6.5 Is it necessary or advisable to obtain a tax ruling from ■ submit to the BMA, within six months of the financial year the tax or regulatory authorities prior to establishing end, a statement confirming that the fund has at all times an Alternative Investment Fund? during the preceding financial year been in compliance with the provisions of the IFA, as well as applicable fund and Upon the incorporation of an investment fund company as noted in prospectus rules, or setting out the particulars of any breach; question 6.1, an application should be submitted for a Tax Assurance and Certificate to the Registrar. This certificate, once granted, confirms ■ prepare annual financial statements audited by an auditor that that in the event Bermuda enacts legislation imposing tax computed is acceptable to the BMA. on profits, income, any capital assets, gain or appreciation, or any Closed-Ended Funds and Excluded Funds must file an annual return tax in the nature of estate duty or inheritance, such tax will not apply with the Registrar each year in accordance with the Companies House to such fund or any of its operations, securities, debentures, or other (in respect of mutual fund companies and investment companies), obligations until 31 March 2035. the Limited Partnership Act 1883 (in respect of partnership funds) and the Limited Liability Company Act 2016 (in respect of LLCs) 6.6 What steps have been or are being taken to implement confirming its amount of assessable capital. the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard? 5.3 Is the use of side letters restricted?

Bermuda is committed to being an integral part of the global There are no restrictions on the use of side letters but the ability for financial services sector and has reacted quickly to FATCA. the investment fund to enter into side letters must be disclosed in the Bermuda negotiated a Model II Inter-Governmental Agreement prospectus. The terms of the side letters must not contravene any (“IGA”) with the US Government and has also signed a similar of the provisions in the bye-laws or prospectus (where applicable). Model II IGA with the United Kingdom. Bermuda also passed amendments to its legislation in July 2015 to adopt the OECD’s Standard for Automatic Exchange of Financial Account Information (or Common Reporting Standard (“CRS”)). CRS came into effect in Bermuda on 1 January 2016.

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This collaborative effort is demonstrated by recent amendments to 6.7 What steps are being taken to implement the OECD’s Bermuda’s partnership legislation that came into effect in December Action Plan on Base Erosion and Profit-Shifting 2015 to provide for greater flexibility in how partnerships conduct (BEPS), in particular Actions 6 and 7, insofar as they business in Bermuda, with a view to strengthening the appeal of affect Alternative Investment Funds’ operations? Bermuda partnerships for use in private equity fund structures.

Bermuda continues to work on next steps for OECD standards for Base The changes included, among other things: Erosion and Profit-Shifting (“BEPS”) compliance. In 2016, Bermuda ■ safe harbour provisions: an extension of the list of “safe became an early signatory to the Multilateral Competent Authority harbour” activities that a limited partner can carry out without Agreement on the Exchange of Country-by-Country Reports, which taking part in the management of a limited partnership (and, therefore, without losing its limited liability status); puts in place an automatic exchange framework for exchanging Bermuda country-by-country reports. Bermuda’s tax information reporting ■ duty of good faith: providing that a general partner shall at portal (automatic exchange of information portal) was opened for all times act in good faith and in the interests of the limited partnership (unless there is an express provision in the accepting common reporting standard (“CRS”) and country-by- partnership agreement to the contrary) and that a limited country reporting (“CbCR”) notifications and report filings returns in partner does not owe any fiduciary duties to the limited 2017. partnership or to any other partner when exercising its rights or performing its obligations under the partnership agreement; 6.8 Are there any tax-advantaged asset classes or and structures available? How widely are they deployed? ■ board and committee members: permitting members of boards and/or committees of a limited partnership to have the See question 6.1. There are no corporation, profits, or capital gains benefit of provisions expressly contained in the partnership agreement in favour of such members (even if they are not taxes payable in Bermuda by an investment fund or its investors party to the partnership agreement) so that, for example, regardless of the asset class or structure. those members will now have the benefit of indemnity and exculpation clauses expressly contained in the partnership 6.9 Are there any other material tax issues for investors, agreement. managers, advisers or AIFs? This is also demonstrated by the BMA’s consultation paper published in April 2018 proposing amendments to the IFA requirement for The stamp duties regime applies to Bermudian residents and local insurance-linked securities (“ILS”) funds (which are classified as companies (owned and controlled by Bermudians 60/40). It does Class A Exempt funds) to appoint a custodian or prime broker. The not apply to non-residents, exempted companies or exempted consultation paper recognises that the appointment of a custodian or partnerships. prime broker may add only limited value depending on the nature of the ILS transaction. Comments from the public to the consultation paper are due in May 2018 with the BMA intending to submit the 6.10 Are there any meaningful tax changes anticipated in the coming 12 months? proposed amendments for parliamentary approval thereafter. The BMA recently published a discussion paper in March 2018 No changes anticipated. proposing certain enhancements to the IBA and IFA to better reflect international standards and expectations, including those of the International Organisation of Securities Commissions (“IOSCO”). 7 Reforms The discussion paper covers two main areas: ■ updates to reflect international standards required to be imposed on the investment business, investment business 7.1 What reforms (if any) are proposed? funds and the fund administration sectors in Bermuda – such as updates to the licensing requirements under the The Bermuda Government continues to consider various initiatives IBA, particularly Bermuda entities conducting investment as it is committed to working closely with the private sector and business outside of Bermuda; and the BMA to further develop Bermuda’s fund industry. The aim is ■ updates required to reflect current and emerging market to create an environment which is favourable for the quick, cost- expectations and trends – such as increasing the monetary effective and efficient establishment of investment enterprises to threshold values used to define “high net worth”, “high strengthen Bermuda’s position in the international funds market. income” or “sophisticated” investors under the Exemption Order. The BMA is seeking input from industry partners on the discussion paper with feedback expected before the end of 2018.

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Jonathan Betts Taylors (in Association with Walkers) Park Place, 55 Par-la-Ville Road Hamilton HM 11 Bermuda

Tel: +1 441 242 1500 Email: [email protected] URL: www.walkersglobal.com

Jonathan Betts is a Partner and head of the corporate and finance Bermuda practice at Taylors, a full-service law firm which works in exclusive association with Walkers and provides advice on all aspects of Bermuda law. He advises Bermuda-based and international clients on a broad range of corporate matters, focusing primarily on mergers and acquisitions, private equity and banking and finance transactions. He also advises in relation to the formation of investment funds and insurance matters. Jonathan has over 20 years of legal experience, having commenced his career in London with leading City law firms Clifford Chance and SJ Berwin and then practised in Bermuda since 2004. He is widely recognised as a leading corporate and commercial lawyer in Bermuda and is ranked as such by a number of the premier legal publications, including Chambers Global, The Legal 500 and IFLR 1000. Chambers Global identifies Jonathan as one of the top seven corporate and finance lawyers currently practising in Bermuda.

With a staff drawn from top international law firms, Taylors provides first-class, commercially-focused advice that is attuned to our clients’ requirements and facilitates their business. Clients include global corporations, financial institutions, capital markets participants, investment fund managers and high-net-worth individuals located throughout the world, but with a primary focus in the Americas. Taylors is a full-service commercial law office. Core practice areas are: ■■ Corporate & Private Equity. ■■ Finance. ■■ Investment Funds. ■■ Insurance. ■■ Compliance & Regulatory. ■■ Insolvency & Dispute Resolution. ■■ FinTech & Digital Assets.

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British Virgin Richard May Islands

Maples and Calder Heidi de Vries

Any person conducting investment business in, or from within, 1 Regulatory Framework the BVI must be licensed by the Commission or be an approved investment manager or advisor under the Approved Managers 1.1 What legislation governs the establishment and Regulations, unless that person is exempt from holding a licence. operation of Alternative Investment Funds? A licence may be restricted (meaning that securities investment business may only be transacted with particular clients) or The Securities and Investment Business Act, 2010, as amended unrestricted. A licence may also be issued subject to conditions or (“SIBA”) and its subsidiary legislation, including the Securities and may be unconditional. Investment Business (Incubator and Approved Funds) Regulations, Schedule 2 Part B to SIBA specifically excludes certain activities 2015, provides for the regulation of open-ended mutual funds, from the definition of investment business, although those exclusions among other matters. Responsibility for regulation under SIBA are unlikely to apply to a person conducting discretionary investment rests with the Financial Services Commission (the “Commission”) management or investment advisory activities for a mutual fund. of the British Virgin Islands (the “BVI”). Under Schedule 2 Part C to SIBA, a person carrying on investment In addition, the Mutual Fund Regulations, 2010 (the “MFR”) provide business may be excluded from the requirement to obtain a licence further detail regarding the obligations of mutual funds. Public funds or to be approved under the Approved Managers Regulations. It is are also subject to the Public Funds Code, 2010. unlikely that such exclusions would apply to a person conducting discretionary investment management or investment advisory activities for a mutual fund. 1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or An “Excluded Person” includes: regulated by a regulatory body? (a) a company carrying on investment business exclusively for one or more companies within the same group; A manager or advisor which is established or, in the case of a foreign (b) a person who is a participant in a joint enterprise and company, registered in the BVI and which conducts “investment conducts such investment business for the purposes of, or in business”, whether or not that investment business is carried on in connection with, the joint enterprise; the BVI, will fall within the scope of SIBA. Managers and advisors (c) a person who is a partner in a partnership and conducts such holding a full licence under SIBA are regulated by the Commission investment business for the purposes of, or in connection and are subject to the Regulatory Code, 2009 (the “Code”); managers with, the partnership; and and advisors approved under the Investment Business (Approved (d) a person who is a director of a company and conducts such Managers) Regulations, 2012, as supplemented by the Approved investment business for the purposes of, or in connection Managers (Amendment) Regulations, 2013 (the “Approved with, the company, Managers Regulations”), are regulated by the Commission, but are in each case, provided that the person does not otherwise carry on not subject to the Code. or hold himself out as carrying on investment business, and does “Investment business” is defined as being engaged, by way of not receive remuneration for carrying on the investment business business, in any activity which is of a kind that is specified in separate from the remuneration the person receives for acting in the Schedule 2 Part A and is not excluded by Schedule 2 Part B to relevant capacity specified. SIBA. Those activities include managing investments belonging to another person on a discretionary basis, acting as the manager 1.3 Are Alternative Investment Funds themselves or investment advisor of a mutual fund and advising in relation to required to be licensed, authorised or regulated by a investments, if the advice is given to someone in their capacity as regulatory body? investor or potential investor or in their capacity as agent for an investor or a potential investor and the advice is on the merits of Only BVI Alternative Investment Funds that fall under the that person (whether acting as principal or agent) buying, selling, definition of a “mutual fund” require to be regulated under SIBA. subscribing for or underwriting a particular security or exercising Traditional private equity and other closed-ended structures are not any right conferred by a security to buy, sell, subscribe for or regulated, although a BVI manager or advisor to such a fund would underwrite a security. “Investments” are defined in Schedule 1 to require to be regulated. SIBA defines a mutual fund as a company SIBA and include most forms of shares and stock, debt instruments, incorporated, a partnership formed, a unit trust organised or other options, futures, contracts for differences, and derivatives.

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similar body formed or organised under the laws of the BVI or the (f) the fund’s name is not undesirable or misleading; and laws of any other country which: (g) registering the fund is not against the public interest. (a) collects and pools investor funds for the purpose of collective The Incubator Fund investment; and An incubator fund is a mutual fund which is limited to having no (b) issues fund interests (defined as the rights or interests, more than 20 investors, who must each invest at least US$20,000 however described, of investors in a mutual fund with regard as an initial investment, and a net asset value of US$20 million. to the assets of the fund, but does not include a debt) that The fund is authorised to operate for an incubation period of two entitle the holder to receive on demand, or within a specified period after demand, an amount computed by reference to the years, which may be extended to three years on application, without value of a proportionate interest in the whole or in a part of the need to appoint external managers, administrators, custodians or the net assets of the company, the partnership, the unit trust or auditors. It must have an authorised representative in the BVI and other similar body, as the case may be, and includes: at least two directors, make semi-annual returns regarding its assets (i) an umbrella fund whose fund interests are split into a and number of investors and, annually, submit financial statements, number of different class funds or sub-funds; and which need not be audited, to the Commission. It is not required to have an offering document; however, it must issue written risk British Virgin Islands (ii) a fund which has a single investor which is a mutual fund not registered or recognised under SIBA. warnings to investors in a form prescribed by the implementing legislation. At the end of the incubation period, it must either: (i) There are five main categories of mutual funds under SIBA: private; convert into a different type of regulated fund; (ii) cease to be an professional; public; incubator; and approved funds. In addition, open-ended fund; or (iii) liquidate. foreign mutual funds may be registered as Recognised Foreign Funds The Approved Fund provided for under SIBA. Of the five main categories of mutual fund, the overwhelming majority are private or professional funds. An approved fund is a mutual fund which is limited to having no more than 20 investors and a net asset value of US$100 million. The The Professional Fund fund is authorised to operate for an unlimited period, without the A professional fund is a mutual fund the constitutional documents need to appoint external managers, custodians or auditors. It must of which specify that the fund interests shall only be issued to have an external administrator based in a recognised jurisdiction, professional investors and the initial investment by each investor in an authorised representative in the BVI and at least two directors. the fund, other than exempted investors, is not less than US$100,000 It must make a return regarding its assets and number of investors or its equivalent in any other currency. A “professional investor” is and submit financial statements, which need not be audited, to defined in SIBA as a person: (a) whose ordinary business involves, the Commission annually. It is not required to have an offering whether for that person’s own account or the account(s) of others, document; however, it must issue written risk warnings to investors the acquisition or disposal of property of the same kind as the in a form prescribed by the implementing legislation. property, or a substantial part of the property of the fund; or (b) who has signed a declaration that he, whether individually or jointly 1.4 Does the regulatory regime distinguish between with his spouse, has a net worth in excess of US$1,000,000 or open-ended and closed-ended Alternative Investment its equivalent in any other currency and that he consents to being Funds (or otherwise differentiate between different treated as a professional investor. Exempt investors include the types of funds or strategies (e.g. private equity v investment manager and promoter of the fund and its employees. hedge)) and, if so, how? The Private Fund Yes; closed-ended funds (such as private equity funds) are not A private fund is a mutual fund the constitutional documents of subject to regulation under SIBA, while open-ended funds that which specify either: (a) that it will have no more than 50 investors; fall within the definition of “mutual fund” under SIBA (such as or (b) that the making of an invitation to subscribe for, or purchase, most hedge funds) are subject to regulation under SIBA. The fund interests issued by the mutual fund is to be made on a private key distinction between open-ended and closed-ended funds is basis only. An invitation to subscribe for, or purchase, shares issued the ability of investors to require the redemption or repurchase of by a mutual fund on a private basis includes an invitation which some or all of their investment by reference to the net asset value is made: (i) to specified persons (however described) and is not of the interest they have prior to winding up. Where long lock- calculated to result in fund interests becoming available to other up periods, commonly in excess of five years, are part of a fund’s persons or to a large number of persons; or (ii) by reason of a private terms, BVI practitioners and the Commission generally consider or business connection between the person making the invitation such investment funds to be closed-ended funds, although this will and the investor. be fact-specific. The Public Fund

A public fund is recognised by the Commission, provided that the 1.5 What does the authorisation process involve and how Commission is satisfied with the following: long does the process typically take? (a) the fund is a BVI business company or unit trust that is governed by the trust laws of the BVI and has a trustee based (a) The authorisation process for all funds involves the submission in the BVI; of an application form, together with supporting documents (b) the fund satisfies the requirements of SIBA and, where and the requisite fee. applicable, the Public Funds Code with respect to its application; Documents required to be filed for private and professional (c) the fund will, on registration, be in compliance with SIBA funds are: and any practice directions issued by the Commission and (i) an offering memorandum; applicable to the fund; (ii) the Application Form F100 (Parts 1, 4, and 6); (d) the fund’s functionaries satisfy the Commission’s “fit and (iii) the certificate of incorporation of the fund; proper” criteria; (iv) the constitutional documents of the fund (which must (e) the fund has, or on registration will have, an independent contain the applicable fund disclosure required by SIBA); custodian; and

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(v) a written consent of each of the fund’s lawyer and the fund manager and the fund administrator. The Commission may, on fund’s auditor confirming acceptance of each of their written application made by or on behalf of a private or professional appointments by the fund. fund, exempt the fund from the requirement to appoint a custodian (b) Where an offering document is required, offering documents or a fund manager, and an application for such an exemption can be of BVI mutual funds must contain certain investment made together with the application for recognition as a BVI mutual warnings required by SIBA and such information as is fund or at any subsequent time. However, no exemption is available necessary to enable a prospective investor to make an in respect of the requirement to have an administrator. informed decision as to whether or not to invest. The subscription documents must contain an acknowledgment A public fund must at all times have a manager, an administrator by investors that each investor has been provided with an and a custodian (unless the fund is exempted by the Commission investment warning and, in the case of a professional fund, a from the requirement to appoint a custodian). Each functionary of confirmation that the investor is a “professional investor”. a public fund must be functionally independent from every other (c) Incubator and approved funds must, at a minimum, submit: functionary of the fund. (i) Form IB-A2-IAF; An incubator fund is not required to have any functionary appointed; British Virgin Islands (ii) the constitutional documents of the fund; an approved fund must have an administrator appointed at all times, but is not required to have any other functionary appointed. (iii) the offering document, inclusive of investment warning and investment strategy (optional); The Commission will recognise and accept any functionary of a (iv) an investment warning (required in the absence of an fund that is established and located in a “Recognised Jurisdiction”. offering document); and The current list of Recognised Jurisdictions is as follows: (v) a written description of investment strategy (required in Argentina France Mexico the absence of an offering document). Australia Germany Netherlands (d) Public funds require a prospectus to be approved in advance Bahamas Gibraltar New Zealand of the registration being granted. The prospectus must have Belgium Greece Norway been prepared in accordance with the Public Funds Code. Bermuda Guernsey Panama In addition, the public fund must satisfy the Commission concerning the matters identified in question 1.3 above. Brazil Hong Kong Portugal Canada Ireland Singapore (e) In terms of timing, following the filing of an application Cayman Islands Isle of Man South Africa with the Commission, (i) a private or professional fund will generally be recognised by the Commission within five Chile Italy Spain to seven business days of submission of the application, China Japan Sweden provided the requisite documentation is complete and no Curaçao Jersey Switzerland exemptions have been applied for (and a professional fund Denmark Luxembourg United Kingdom may commence business up to 21 days prior to receiving Finland Malta United States formal confirmation of recognition, provided it complies with all other requirements of SIBA and submits an application for Where a functionary of a fund is not established and located in recognition within seven days of commencing business); (ii) a recognised jurisdiction, the Commission may recognise and a public fund will generally be registered by the Commission accept the functionary if they are satisfied that the functionary’s within six to nine weeks; and (iii) incubator and approved jurisdiction of establishment and location has a system for the funds may commence trading two business days after a effective regulation of investment business. completed application is submitted to the Commission. (f) The fee payable on submitting an application for recognition Directors of a professional or private fund is US$700 and, once A private, professional, incubator and approved fund must at all recognised, there is an annual recognition fee of US$1,000 times have at least two directors, at least one of whom must be payable upon recognition and annually by 31 March until the an individual. A public fund must at all times have at least two fund’s certificate of recognition is cancelled. The application directors. Only individuals can serve as directors of public funds. fee payable by an incubator or approved fund is US$1,500 Although not required, it is becoming market practice for regulated and, once approved, there is a fee of US$1,000 payable upon funds to appoint independent directors. Directors of regulated funds approval and due annually by 31 March until the fund is no longer approved as an incubator or approved fund. are not required to be based in the BVI. Authorised representative

1.6 Are there local residence or other local qualification All entities subject to approval, recognition, registration or licensing requirements? under SIBA are required to appoint an authorised representative in the BVI in order to represent them in their dealings with the There are no local residence requirements. Each approved, Commission, save where the entity has a substantial presence in the recognised or registered mutual fund must, however, appoint an BVI. authorised representative in the BVI to represent it when dealing with the Commission. 1.8 What rules apply to foreign managers or advisers wishing to manage, advise, or otherwise operate funds domiciled in your jurisdiction? 1.7 What service providers are required?

SIBA provides that no person shall carry on, or hold out as carrying Private and professional funds must, at all times, have a fund on, investment business of any kind in or from within the BVI unless manager, a fund administrator, and a custodian (collectively he or she holds a licence authorising him or her to carry on that kind described, together with investment advisors and prime brokers, as of investment business. Accordingly, foreign managers or advisers “functionaries”). The custodian of a private fund or a professional that carry on investment business of any kind (including managing, fund must be a person who is functionally independent from the advising or operating BVI funds) in or from within the BVI will be

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required to obtain a licence for such investment business activities. between the assets and liabilities of the limited partnership and so The term “in or from within” the BVI applies to: it is common to form a special purpose vehicle to act as general ■ persons occupying premises in the BVI for the purpose of partner to a limited partnership. offering to provide a service that constitutes investment The LP is commonly used for venture capital and private equity business; or funds with a limited number of investors. ■ persons soliciting other persons in the BVI (such as a mutual The Unit Trust fund) for the purpose of offering to provide a service that constitutes investment business. The concept of a Unit Trust is that subscribers contribute funds to a trustee, who holds those funds on trust whilst they are managed Foreign managers or advisers that manage, advise or operate BVI by the investment manager for the benefit of the subscribers, known funds but do not carry out such activities in or from within the BVI as unitholders. Each unitholder is entitled to a pro rata share of the fall outside of the provisions of SIBA and are not required to obtain trust’s assets. a licence from the Commission. Unit Trusts are relatively uncommon in the BVI and are used (in

place of companies) for investors in jurisdictions where participation British Virgin Islands 1.9 What co-operation or information sharing agreements in a Unit Trust is more acceptable or attractive than owning shares in have been entered into with other governments or a company, for example, for regulatory or tax reasons. regulators?

The BVI has Tax Information Exchange Agreements (“TIEAs”) and 2.2 Please describe the limited liability of investors. similar bilateral and multilateral arrangements with 28 countries as at 24 April 2018 and is on the OECD “white list” with respect to the The limited liability of investors in a BVI investment fund depends exchange of tax information. In addition, the Commission has entered upon the nature of the vehicle used and whether the investor has into bilateral regulatory co-operation agreements pursuant to the EU agreed to contribute additional funds to that vehicle pursuant to the Directive on Alternative Investment Fund Managers (“AIFMD”) with terms of the constitutional and offering documentation. the competent authorities of 26 of the EU and EEA Member States. With BVI business companies limited by shares, the liability of the investors is limited to the amount unpaid on their shares or as 2 Fund Structures otherwise provided in the company’s constitutional documents. Limited partners of a BVI LP are not liable for the debts or obligations of the LP under the LP Act (nor are limited partners 2.1 What are the principal legal structures used for of an International Limited Partnership liable for the debts and Alternative Investment Funds? obligations of an International Limited Partnership under the Partnership Act, 1996), (a) save as provided by the terms of the Three types of vehicle are most commonly utilised by BVI applicable partnership agreement, and (b) subject to the provisions investment funds: BVI Business Companies limited by shares; of the LP Act (i) providing that a limited partner who takes part in the Limited Partnerships; and Unit Trusts. management of the LP may lose its limited liability with respect to a The BVI Business Company third party who deals with that LP and who reasonably believes such The most common vehicle for open- or closed-ended funds formed limited partner to be a general partner of such LP, and (ii) providing in the BVI is a BVI Business Company limited by shares. for clawback of capital distributions (together with interest) made to limited partners within six months of the LP becoming insolvent. Shares of the same class in a company rank equally with each other. It is also possible to create separate share classes or Investors who are unitholders of an exempted trust must look to the separate series within the same share class to distinguish between wording of the relevant declaration of trust to provide them with different fee terms, strategies or asset pools; or to calculate, for limited liability status and protection. example, performance fees payable on a “per investor basis” to Despite the limited liability nature of an equity interest purchased mirror the capital account concepts found in US funds. The BVI by an investor, it is common practice for the subscription and Business Companies Act 2004 is a flexible and modern corporate offering documents of BVI investment funds to impose payment statute, which provides a clear corporate structure ideally suited to obligations on investors over and above the obligation to pay for structuring investment funds. In addition, BVI Business Companies their investment. Such additional obligations regularly include may be formed as Segregated Portfolio Companies when used as indemnification for misrepresentations and the requirement to repay a regulated investment fund, providing separate legally protected excess redemption or withdrawal proceeds which were calculated asset and liability cells within one corporate vehicle. and paid on the basis of unaudited data. The Limited Partnership The other major form of investment vehicle available in the BVI is 2.3 What are the principal legal structures used for the Limited Partnership (the “LP”), following the recent enactment managers and advisers of Alternative Investment of the Limited Partnership Act, 2017 (the “LP Act”). Funds? The limited partnership concept is similar to that which applies in The principal structures used are BVI Business Companies. various states of the United States. A BVI LP has separate legal personality distinct from its partners unless, on the election of the general partner(s) pursuant to the LP Act, it is registered without 2.4 Are there any limits on the manager’s ability to separate legal personality. Limited partnership structures are restrict redemptions in open-ended funds or transfers popular with United States promoters and their advisors. The in open-ended or closed-ended funds? general partner of a limited partnership does not need to be a BVI company or person, nor is a non-BVI corporate entity required to Not as a general matter of BVI law; the ability to redeem or transfer be registered as a foreign company to act as general partner. Each equity interests in a fund and any restrictions on such activity will be general partner is jointly and severally liable for any shortfall governed by the constitutional, subscription and offering documents.

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(g) the net asset value calculation policy; and 2.5 Are there any legislative restrictions on transfers of (h) details of the fund’s material risks and potential conflicts of investors’ interests in Alternative Investment Funds? interest. The Public Funds Code sets out the content requirement for Public No, there are no such restrictions. Funds, which broadly codify the above details. Incubator and approved funds are not required to have an offering 2.6 Are there any other limitations on a manager’s ability document and are required only to issue the statutory risk warnings to manage its funds (e.g. diversification requirements, prescribed in the implementing legislation. Where they do issue an asset stripping rules)? offering document, the Commission would expect that document to describe the investment strategy of the fund and contain the No, there are no such restrictions. risk warning, as a minimum. In practice, it is common for such offering documents to look similar to those issued by private and professional funds.

British Virgin Islands 3 Marketing

3.3 Do the marketing or legal documents need to be 3.1 What legislation governs the production and offering registered with or approved by the local regulator? of marketing materials?

The offering document of a private or professional fund and any There is no obligation to issue an offering document for a private, offering document issued by an incubator or approved fund would professional, incubator or approved fund but, where a fund does not usually be filed with the Commission as part of the initial application, do so in the case of private and professional funds, it is required but no pre-approval is required. In the case of a public fund, the to provide to the Commission an explanation as to why it will not prospectus would be required to be approved by the Commission issue an offering document and explain, to the satisfaction of the prior to its registration as a public fund. Offering documents of a Commission, how relevant information concerning the fund and closed-ended fund do not need to be filed or approved. any invitation or offer will be provided to investors or potential investors. Where an offering document is issued, it is required to Where a filed offering document of a private, professional, incubator be filed with the application for recognition or approval, andan or approved fund is amended, the amended offering document updated offering document or supplement must be filed within 14 must be filed with the Commission within 14 days of any change days of any change being made to the filed offering document. where there is a continuing offering. Proposed amendments to the prospectus of a public fund must be submitted to the Commission at SIBA and the MFR require that a public fund have a prospectus least 21 days prior to the issue of the revised prospectus. which complies with and is updated in accordance with the terms of the Public Funds Code, 2010. Closed-ended funds are not regulated and, as such, there are no 3.4 What restrictions are there on marketing Alternative specific requirements as to the contents of any offering materials; Investment Funds? however, the issuer must ensure that its terms are not misleading and the information disclosed does not constitute a misrepresentation. Approved, recognised or registered mutual funds, including Recognised Foreign Funds, incorporated as a company are not subject to any restrictions on marketing under BVI statute other 3.2 What are the key content requirements for marketing than those required for it to qualify for recognition or registration, materials, whether due to legal requirements or as the case may be. Closed-ended funds incorporated as a company customary practice? are not currently subject to any restriction on marketing under BVI statute. LPs are restricted from being marketed to the public in the The customary minimum disclosure requirements for private and BVI. All BVI Alternative Investment Funds do, however, remain professional funds include the following: subject to any securities laws or marketing laws in the jurisdictions (a) details of the date of establishment of the fund, its registered in which they are distributed or marketed and the promoters of such office, fiscal year, and its directors (or the directors ofthe funds are subject to SIBA. general partner or trustee) together with biographies; (b) a description of the fund’s investment objectives, policy, and restrictions; 3.5 Can Alternative Investment Funds be marketed to retail investors? (c) a description of the fund’s investment manager or advisor, together with biographies of portfolio managers and information regarding remuneration, management and Yes, subject to the US$100,000 minimum investment and “professional performance fees or allocations; investor” qualification requirements for professional funds and (d) the names and addresses of the fund’s other service providers, US$20,000 minimum investment qualification for incubator funds together with details of the services to be performed and noted above. remuneration;

(e) the classes of interests available for investment or issue, 3.6 What qualification requirements must be carried out together with descriptions of any minimum investment, in relation to prospective investors? eligibility requirements, and subscription procedures; (f) details of the principal rights and restrictions attaching to the None, save for the requirement that investors in professional funds fund’s equity interests, including with respect to currency, qualify as “professional investors” as described above and that all voting, rights to participate in all or some of the assets of the fund, circumstances of winding-up or dissolution and the investors in BVI mutual funds are subject to screening in accordance procedures and conditions for repurchases, redemptions or with the BVI’s anti-money laundering regime. withdrawals of such equity interests, including suspensions;

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the fund’s financial year end, and all mutual funds are required to 3.7 Are there additional restrictions on marketing to file a Mutual Fund Annual Return (“MFAR”) within six months of public bodies such as government pension funds? the calendar year end. The MFAR provides general, operating and financial information relating to such regulated funds. For filing No, there are not. obligations of incubator and approved funds, see question 1.3 above. In addition, most Alternative Investment Funds will be required to 3.8 Are there any restrictions on the use of intermediaries report certain details regarding their investors on an annual basis to assist in the fundraising process? to the International Tax Authority of the British Virgin Islands (the “ITA”), in accordance with the provisions of legislation No, there are no such restrictions. implementing the intergovernmental agreements (known as “IGAs”) entered into between the BVI and the US to implement the US 3.9 Are there any restrictions on the participation in FATCA legislation, and the BVI and the UK to implement similar Alternative Investment Funds by particular types of obligations, as well as under the Common Reporting Standard. British Virgin Islands investors, such as financial institutions (whether as Persons holding a licence under SIBA for carrying on investment sponsors or investors)? business in or from within the BVI, such as BVI managers, are required to file, in electronic format, audited financial statements No, there are not. within six months of the licensee’s end of financial year, together with a director’s certificate, an auditor’s report and a report on 4 Investments the affairs of the licensee in respect of the relevant year. The Commission may also require a licensee to submit a Compliance Officer Report on an annual basis. 4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment Funds? 5.3 Is the use of side letters restricted?

No, there are not. No. Side letters are commonly used by BVI investment funds. However, certain considerations should be borne in mind in order to ensure that such letter agreements are compliant with BVI law and 4.2 Are there any limitations on the types of investments consistent with the constitution of the fund, a discussion of which is that can be included in an Alternative Investment outside the scope of this chapter. Fund’s portfolio whether for diversification reasons or otherwise? 6 Taxation No, there are no such limitations.

6.1 What is the tax treatment of the principal forms of 4.3 Are there any restrictions on borrowing by the Alternative Investment Funds identified in question Alternative Investment Fund? 2.1?

There are no statutory or regulatory restrictions; however, the fund’s A BVI fund and all dividends, interest, rents, royalties, constitutional and/or offering documents may restrict leverage for compensations, and other amounts paid by the fund are exempt from the fund or a class of shares, as determined appropriate. the provisions of the Income Tax Act in the BVI and any capital gains realised with respect to any shares, debt obligations, or other 5 Disclosure of Information securities of the fund are exempt from all forms of taxation in the BVI. The Payroll Taxes Act 2004 does not apply to a fund except to the extent that the fund has employees (and deemed employees) 5.1 What public disclosure must the Alternative rendering services to the fund wholly or mainly in the BVI. No Investment Fund or its manager make? estate, inheritance, succession or gift tax, rate, duty, levy, or other charge is payable with respect to any shares, debt obligation or Funds constituted as BVI Business Companies are required to file other securities of the fund. All instruments relating to transfers of their memorandum and articles of association with the Registry property to or by the fund and all instruments relating to transactions of Corporate Affairs (the “Registrar”). They are also required to in respect of the shares, debt obligations or other securities of the maintain a statutory register of members but that register is not fund and all instruments relating to other transactions relating to the required to be filed with the Registrar. In addition, they must business of the fund are exempt from the payment of stamp duty in maintain a register of directors which must be filed on a private the BVI, provided they do not concern BVI situate land. There are basis with the Registrar. Lenders can take advantage of the priority currently no withholding taxes or exchange control regulations in regime for security by making a public filing with the Registry of the BVI. any charge over assets of a company entered into by a BVI Business Company. 6.2 What is the tax treatment of the principal forms of investment manager / adviser identified in question 5.2 What are the reporting requirements in relation to 2.3? Alternative Investment Funds or their managers? The tax treatment for managers and advisors is the same as for Private, professional and public mutual funds are required to file, in funds. Please see question 6.1 above. electronic format, audited financial statements within six months of

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(iii) enrol on the BVI Financial Account Reporting System where it 6.3 Are there any establishment or transfer taxes levied identifies Reportable Accounts; and (iv) report information on such in connection with an investor’s participation in an Reportable Accounts to the BVI International Taxation Authority Alternative Investment Fund or the transfer of the (“ITA”). The BVI ITA will transmit the information reported to it to investor’s interest? the overseas fiscal authority relevant to a reportable account (i.e. the IRS in the case of a US Reportable Account, HMRC in the case of a No; see question 6.1 above. UK Reportable Account, and the relevant tax authorities in relation to CRS) annually on an automatic basis. 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative Investment Funds? 6.7 What steps are being taken to implement the OECD’s Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they There are no differences in tax treatment between the three. See affect Alternative Investment Funds’ operations?

British Virgin Islands question 6.1 above. There are currently no legislative provisions in the British Virgin 6.5 Is it necessary or advisable to obtain a tax ruling from Islands which provide for specific measures in connection with the tax or regulatory authorities prior to establishing BEPS. As a BVI fund will not be claiming access itself to a tax an Alternative Investment Fund? treaty, Action 6 is not directly relevant to it. However, a BVI fund can be set up in a variety of different legal forms, either as legally No, it is not. transparent or opaque, which facilitate cross-border fund structures, whereby either the fund investors may rely on their own treaty or through investment entities that may be able to rely on their own 6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act treaty. Further, the “Global Streamed Fund” proposal identified in 2010 (FATCA) and other similar information reporting the OECD’s Public Discussion Draft dated 24 March 2016 on the regimes such as the Common Reporting Standard? Treaty Entitlement of Non-CIV Funds, if adopted, may be of benefit to BVI funds, as the question of whether the fund had treaty access The BVI has signed two intergovernmental agreements to improve would be irrelevant. international tax compliance and the exchange of information – one with the United States and one with the United Kingdom (the “US 6.8 Are there any tax-advantaged asset classes or IGA” and the “UK IGA”, respectively). The BVI has also signed a structures available? How widely are they deployed? multilateral competent authority agreement to implement the OECD Standard for Automatic Exchange of Financial Account Information No, there are not. As noted in question 6.1, a BVI fund and all – Common Reporting Standard (the “CRS” and together with the dividends, interest, rents, royalties, compensations, and other US IGA and the UK IGA, “AEOI”). amounts paid by the fund are exempt from the provisions of the Amendments have been made to the Mutual Legal Assistance (Tax Income Tax Act in the BVI and any capital gains realised with Matters) Act 2003 and orders have been made pursuant to this act respect to any shares, debt obligations, or other securities of the fund to give effect to the terms of the US IGA, the UK IGA and CRS are exempt from all forms of taxation in the BVI. under BVI law (the “BVI AEOI legislation”). Guidance notes have been published by the government of the BVI to provide 6.9 Are there any other material tax issues for investors, practical assistance to entities and others affected by the BVI AEOI managers, advisers or AIFs? legislation. With respect to CRS, the BVI AEOI legislation makes it clear that the CRS commentary published by the Organization No, there are not as the BVI is a tax neutral jurisdiction. See for Economic Cooperation and Development is an integral part of question 6.1. the CRS and applies for the purposes of the automatic exchange of financial account information. All BVI “Financial Institutions” will be required to comply with 6.10 Are there any meaningful tax changes anticipated in the coming 12 months? the registration, due diligence and reporting requirements of the BVI AEOI legislation, except to the extent that they can rely on an exemption that allows them to become a “Non-Reporting Financial No, there are no meaningful tax changes anticipated in the coming Institution” (as defined in the relevant BVI AEOI legislation) with 12 months. respect to one or more of the AEOI regimes. The BVI AEOI legislation requires a BVI Reporting Financial 7 Reforms Institution to, amongst other things: (i) register with the IRS to obtain a Global Intermediary Identification Number (in the context of the US IGA only); (ii) conduct due diligence on its accounts to identify 7.1 What reforms (if any) are proposed? whether any such accounts are considered “Reportable Accounts”; There are no material reforms anticipated at this time.

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Richard May Heidi de Vries Maples and Calder Maples and Calder Sea Meadow House 200 Aldersgate Street, 11th Floor PO Box 173, Road Town London Tortola, VG1110 EC1A 4HD British Virgin Islands United Kingdom

Tel: +1 284 852 3027 Tel: +44 20 7466 1651 Email: [email protected] Email: [email protected] URL: www.maplesandcalder.com URL: www.maplesandcalder.com

Richard is Managing Partner of Maples and Calder’s British Virgin Heidi is a Partner in the Investment Funds group and works closely Islands office, and head of the BVI Corporate, Finance and Investment with hedge fund managers, private equity houses and their onshore Funds groups. He advises on a variety of corporate transactions counsel in the hedge fund and private equity sectors. Heidi advises including mergers and acquisitions, joint ventures, stock exchange on both Cayman Islands and British Virgin Islands law and specialises British Virgin Islands listings and corporate reorganisations. He also advises investment in the structuring, formation, ongoing maintenance and restructuring managers and private equity houses on the structuring, formation and of hedge funds and private equity funds, representing large financial financing of investment funds and private equity funds. Richard is a institutions as well as boutique and start-up managers. Her experience member of a focus group advising the Financial Services Commission includes the establishment of Cayman Islands and British Virgin on regulatory legislation in the British Virgin Islands. Islands companies and partnerships and advising on a broad range of corporate and commercial matters.

With over 50 years in the industry and over 800 staff, Maples and Calder is a leading international law firm advising global financial, institutional, business and private clients on the laws of the Cayman Islands, Ireland and the British Virgin Islands. Maples and Calder is known worldwide for the quality of its lawyers. This extensive experience, the depth of the team and a collegiate approach are main characteristics of the firm, enabling it to provide the highest quality legal advice on a wide range of transactions. Maples and Calder has locations in the British Virgin Islands, Cayman Islands, Dubai, Dublin, Hong Kong, London and Singapore. The service provided is enhanced by the strong relationships the firm has developed. For fiduciary and fund service requirements, the firm provides a seamless, “one stop shop” capability through its affiliate, MaplesFS.

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Canada Sean D. Sadler

McCarthy Tétrault LLP Nigel P.J. Johnston

■ an order or ruling can be obtained from the applicable 1 Regulatory Framework Securities Regulator which exempts a trade, a security or a person or company from the relevant requirement. 1.1 What legislation governs the establishment and Other Laws operation of Alternative Investment Funds? In contrast to securities laws, tax laws applicable to AIFs apply at both the federal and provincial levels. Securities and tax laws will Securities Laws always be engaged in the formation and operation of AIFs. It is also Canada has a federal system of government whereby the authority typical that corporation law, limited partnership law, anti-money to enact legislation is divided between Canada’s federal and its laundering law, terrorist financing law and privacy law will apply. provincial and territorial governments. The Canadian securities laws applicable to Alternative Investment Funds (“AIFs”) are currently 1.2 Are managers or advisers to Alternative Investment regulated solely by the provincial and territorial governments. As Funds required to be licensed, authorised or a result, each of Canada’s 10 provinces and three territories has its regulated by a regulatory body? own legislative scheme for regulating the formation and operations of AIFs within its own provincial or territorial jurisdiction and its The manager of an AIF is the entity responsible for administering own securities commission or regulatory authority (“Securities the day-to-day operations of the AIF and is generally considered to Regulator”) for administering and enforcing such legislation. be the “operating mind” of the AIF. In several Canadian provinces, Securities regulatory requirements therefore vary from jurisdiction to a manager of an AIF is subject to a duty of care of a fiduciary jurisdiction in Canada. In an effort to harmonise Canadian securities nature. AIF managers are subject to the Investment Fund Manager laws, the 13 Securities Regulators have, under rule-making authority Registration Requirement. granted by the provincial and territorial governments, established An entity providing portfolio management services to an AIF is numerous rules, referred to as national instruments, that operate in a subject to the Adviser Registration Requirement and is also subject substantially identical manner in each province and territory. to a fiduciary duty of care. If the advice to be provided by the adviser Canadian securities legislation generally regulates the activities of would include advice in respect of exchange-traded commodity an AIF within a province or territory by requiring: futures contracts and options, registration as an adviser under (a) those who act as an investment fund manager of an AIF commodity futures legislation may also be required, depending on to become registered as such with the relevant Securities the province in which the AIF is established. Regulator (the “Investment Fund Manager Registration An entity in the business of trading securities of the AIF to prospective Requirement”); investors is subject to the Dealer Registration Requirement. (b) those who engage in, or hold themselves out as being engaged in, the business of trading in securities of the AIF For purposes of the Dealer Registration and Prospectus to prospective investors to become registered or licensed as a Requirements of Canadian securities legislation, the term “trade” is dealer (the “Dealer Registration Requirement”); broadly defined to include any sale or disposition of a security for (c) those who engage in, or hold themselves out as being engaged valuable consideration, any receipt by a registrant of an order to buy in, the business of managing the investment portfolio of or sell a security and any act, advertisement, solicitation, conduct the AIF to become registered or licensed as an adviser (the or registration directly or indirectly in furtherance thereof. The “Adviser Registration Requirement”); and term “distribution” is defined, with reference to the term “trade”, (d) the AIF that distributes securities to investors to file a prospectus to include a trade in the securities of an issuer that have not been with, and obtain a receipt therefor from, the applicable Securities previously issued. Regulator(s) (the “Prospectus Requirement”), For AIFs that operate as private equity funds, it may be possible unless: under current law to structure the AIF in such a way that the ■ the securities legislation provides for an express statutory Investment Fund Manager Registration Requirement, Adviser exemption from the relevant requirement; or Registration Requirement and Dealer Registration Requirement do not apply to the AIF and the offering of its securities.

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If the AIF is formed outside Canada and the investment fund manager more regulated by securities laws and stock exchange requirements and adviser provide services to the AIF from outside Canada, the than open-ended funds unless the open-ended funds are also Investment Fund Manager Registration Requirement and Dealer qualified by prospectus and available to retail investors, which is Registration Requirement may be avoided by relying on exemptions not usually the case for an AIF. available to non-residents. Ordinarily, the Adviser Registration Closed-ended funds that operate as private equity funds typically do Requirement will not apply to an adviser resident outside Canada who not engage the Investment Fund Manager Registration Requirement provides portfolio management services to an AIF domiciled outside or the Adviser Registration Requirement. Canada but offered to Canadian investors. The manager of an AIF is the entity responsible for administering the day-to-day operations of the AIF and is generally considered to be the “operating mind” of the 1.5 What does the authorisation process involve and how long does the process typically take? Canada AIF. In several Canadian provinces, a manager of an AIF is subject to a duty of care of a fiduciary nature. AIF managers are subject to the Investment Fund Manager Registration Requirement. The authorisation process differs for the registration of each of the investment fund manager, adviser and dealer. However, each category of registration involves the filing of a Form 33-109F4 1.3 Are Alternative Investment Funds themselves for the firm and a Form 33-109F4 for applicable individuals. required to be licensed, authorised or regulated by a There are minimum capital, financial statement, insurance and regulatory body? proficiency requirements associated with the authorisation process. The Securities Regulator reviews the filed materials and provides The AIF is not itself licensed or registered but, as a market comments or questions on the applications for registration that participant, an AIF is regulated by the Securities Regulator. usually take between eight and 12 weeks to resolve. AIFs that distribute their securities in Canada must either qualify the distribution pursuant to a prospectus prepared and filed in 1.6 Are there local residence or other local qualification accordance with applicable Canadian securities laws or conduct the requirements? distribution in reliance upon a prospectus exemption. AIFs do not usually qualify their securities for distribution in Canada pursuant to Each of the investment fund manager, adviser and dealer categories a prospectus because the prospectus clearing process would require of registration is available to non-residents of Canada. Non-residents the AIF to adhere to rules that would materially restrict the ability are usually required to satisfy Canadian proficiency requirements to engage in numerous activities that AIFs ordinarily engage in, and will have to submit to the jurisdiction of the Securities such as short selling, leveraging and investing in illiquid positions. Regulator. Some categories of registration such as investment Accordingly, AIFs typically distribute their securities to investors dealer require (pursuant to the rules of the Investment Industry in reliance upon one of two private placement exemptions from the Regulatory Organization of Canada – the Canadian equivalent of Prospectus Requirement described below. FINRA) the applicant to be incorporated pursuant to Canadian law Canadian securities laws provide an exemption from the Prospectus but are not otherwise required to be resident in Canada. Requirement where a security is distributed to an accredited investor who acquires the AIF security as principal (the “Accredited Investor Exemption”). Accredited investors are purchasers who 1.7 What service providers are required? are considered to be sophisticated because of their status or financial well-being. Like the US version, Canadian accredited investors Most AIFs will utilise the services of an investment fund manager, include financial institutions; governments; pension funds; securities adviser, dealer or prime broker, registrar and transfer agent, fund dealers and advisers; corporations, partnerships and trusts with net accountant, custodian, auditor and lawyer. assets of $5 million; individuals who, alone or with a spouse, have net assets of at least $5 million; and individuals who meet a financial 1.8 What rules apply to foreign managers or advisers net worth test of $1 million or an income test of $200,000 in each of wishing to manage, advise, or otherwise operate the last two years (or, together with their spouse, of $300,000) and a funds domiciled in your jurisdiction? reasonable expectation of exceeding that amount in the current year. Another exemption from the Prospectus Requirement is available For investment fund managers, advisers and broker-dealers where a purchaser is not an individual and purchases an AIF located outside Canada, there are exemptions from the applicable security as principal and the AIF security has an acquisition cost registration requirements that permit these firms to do business to the purchaser (other than individuals) of not less than $150,000 with Canadian clients that qualify as “permitted clients”, which is a paid in cash at the time of the trade (the “Minimum Investment category of client that is similar to, but slightly more restricted than, Exemption”). the accredited investor category of client discussed above.

1.4 Does the regulatory regime distinguish between 1.9 What co-operation or information sharing agreements open-ended and closed-ended Alternative Investment have been entered into with other governments or Funds (or otherwise differentiate between different regulators? types of funds or strategies (e.g. private equity v hedge)) and, if so, how? The Securities Regulator has, for many years, entered into different forms of reciprocal regulatory oversight arrangements with foreign Yes, there are significant differences between the regulation of securities regulatory bodies. These arrangements, frequently open-ended and closed-ended funds. Closed-ended funds are called memoranda of understanding or “MOUs”, are intended to usually publicly offered funds that have qualified their securities by facilitate the sharing of information about firms and individuals prospectus and are traded over a stock exchange and available to under common regulatory oversight, support collaboration on retail investors. Accordingly, closed-ended funds tend to be much investigation and enforcement matters, and generally assist in the

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global integration of securities regulatory oversight. The pace of entering into, and the general interest in, MOUs has increased 2.6 Are there any other limitations on a manager’s ability considerably since the onset of the 2008 financial crises. Today, to manage its funds (e.g. diversification requirements, asset stripping rules)? the Securities Regulator has approximately 20 MOUs in place with foreign regulators including the United States Securities and Exchange Commission (“SEC”), Commodity Futures Trading If the adviser is registered in Canada or the AIF is formed in Canada, Commission (“CFTC”), Financial Industry Regulatory Authority there are several legislative restrictions that pertain to self-dealing (“FINRA”), United Kingdom Financial Conduct Authority and and conflicts of interest. If the adviser is not registered in Canada and Bank of England, European Union, International Organization of the AIF is not formed under Canadian law, there are no legislative Securities Commissions (“IOSCO”) and securities regulators in restrictions on how the manager/adviser manages the AIF. Canada Australia, China, France, Hong Kong and Italy. 3 Marketing 2 Fund Structures 3.1 What legislation governs the production and offering of marketing materials? 2.1 What are the principal legal structures used for Alternative Investment Funds? All marketing activities intended to solicit purchase orders of an AIF The principal legal structures used in the formation of AIFs are security would likely be considered an act in furtherance of a trade of limited partnerships, unit trusts and corporations. a previously unissued security under applicable securities laws, and would therefore be subject to the Prospectus Requirement and the Dealer Registration Requirement. The exemptions from the Dealer 2.2 Please describe the limited liability of investors. Registration Requirement are not generally available to intermediaries in the business of selling AIF securities. Accordingly, the marketing Investors in a corporation have liability limited to the value of their intermediary must ordinarily become registered in one of the three investment. Investors in a limited partnership also have liability dealer categories: investment dealer; exempt market dealer; or mutual limited to the value of their investment, provided they do not take fund dealer (if the AIF is an open-ended mutual fund). part in the control of the business of partnership. Investors in a trust Generally, securities law of the provinces and territories of Canada are likely to have limited liability but there may be some uncertainty does not differentiate between oral, electronic or documentary which may be addressed by providing where possible, in contracts communication. As matter of procedure, electronic and documentary of the trust, that no recourse is to be had to the personal assets of communication is to be preferred and oral communications are to be investors. Some provinces have adopted a statutory limited liability made only in a manner entirely consistent with the electronic and regime for investors in certain public trusts. documentary materials.

2.3 What are the principal legal structures used for 3.2 What are the key content requirements for marketing managers and advisers of Alternative Investment materials, whether due to legal requirements or Funds? customary practice?

Managers and advisers of Canadian AIFs are usually organised as If an offering document is to be used to solicit sales of AIF corporations but are sometimes organised as partnerships. securities that are to be distributed in Canada in reliance upon either the Accredited Investor Exemption or the Minimum Investment 2.4 Are there any limits on the manager’s ability to Exemption, the offering document will probably be considered an restrict redemptions in open-ended funds or transfers offering memorandum under Canadian securities laws. Generally in open-ended or closed-ended funds? speaking, any material prepared in connection with such a private placement, other than a “term sheet” that is limited to describing Provided the AIF is not offered by prospectus, there are usually no the terms of the securities being issued rather than describing the limits on the manager (other than, in certain cases, for tax reasons) business and affairs of the issuer, will be considered an offering to restrict redemptions in open-ended funds or transfers in closed- memorandum. Purchasers who receive an offering memorandum end funds. have a statutory right of action for rescission or damages for any misrepresentation in the offering memorandum. The statutory right of action must be described in the offering memorandum. The 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? term “misrepresentation” is broadly defined to mean: (a) an untrue statement of material fact; or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement Yes, most investors acquire AIF securities pursuant to exemptions not misleading in light of the circumstances in which it was made. from the Prospectus Requirement. Any resale of the AIF security would also have to comply with an exemption from the Prospectus Requirement such as the Accredited Investor Exemption or the 3.3 Do the marketing or legal documents need to be Minimum Investment Exemption (these exemptions are discussed registered with or approved by the local regulator? above). The offering memorandum must be delivered to the relevant Securities Regulator within 10 days of the distribution of an AIF security. If a foreign prospectus is used as an offering memorandum,

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it is common to attach a stand-alone Canadian “wrapper” to describe institutions in AIFs, like most jurisdictions around the world, the statutory rights of action and to address other related disclosure Canadian regulators have responded to the financial crisis with requirements. The Securities Regulator does not review or approve numerous macro-prudential and micro-prudential initiatives and the offering memorandum. measures designed to address various systemic risks revealed as a If the securities of an AIF are distributed into a province or territory result of the financial crisis. In particular, in Canada, we have seen a mixture of federal and provincial initiatives, that have resulted of Canada in reliance upon either the Accredited Investor Exemption in, for example, designation of domestically significant financial or the Minimum Investment Exemption, the AIF must file a institutions, new bank capital rules, higher bank capital thresholds, completed Form 45-106F1 exempt trade report with the applicable proposed requirements relating to the clearing and reporting of OTC Securities Regulator within 10 days of the distribution, and the filing derivatives, new residential mortgage insurance rules, new regulation

of the report must be accompanied by the payment of a prescribed Canada of the government mortgage insurer and proposed bail-in policies. filing fee that varies from jurisdiction to jurisdiction. Alternatively, an AIF can comply with the exempt trade reporting requirements, and filing fee requirements can be addressed by filing theForm 4 Investments 45-106F1 and the related filing fee with the Securities Regulator(s) within 30 days of the end of the AIF’s fiscal year end, in lieu of the 10-day period noted above. 4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment Funds? 3.4 What restrictions are there on marketing Alternative Investment Funds? Provided the AIF is not offered by way of prospectus and the adviser is properly licensed, there are no restrictions on the types Provided the marketing of the AIF is done pursuant to an offering of activities that can be performed by the AIF other than, in certain memorandum in accordance with the Accredited Investment cases, to comply with tax requirements. Exemption or Minimum Investment Exemption through registered dealers, there are no other material restrictions applicable to the 4.2 Are there any limitations on the types of investments marketing of AIFs. that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or otherwise? 3.5 Can Alternative Investment Funds be marketed to retail investors? Provided the AIF is not offered by way of prospectus and the adviser is properly licensed, there are no restrictions on the types of Retail offerings in Canada are usually made by way of prospectus. investments that can be included in the AIF’s investment portfolio Most AIFs are offered pursuant to exemptions from the Prospectus other than, in certain cases, to comply with tax requirements. Requirement. Some AIFs are offered to higher-net-worth retail clients in reliance upon the Accredited Investor Exemption. 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? 3.6 What qualification requirements must be carried out in relation to prospective investors? Provided the AIF is not offered by way of prospectus and the adviser is properly licensed, there are no restrictions on borrowing by the AIF. When relying on the Accredited Investor Exemption, AIFs and intermediaries should require prospective investors to certify that they are accredited investors. 5 Disclosure of Information

3.7 Are there additional restrictions on marketing to 5.1 What public disclosure must the Alternative public bodies such as government pension funds? Investment Fund or its manager make?

Some institutional investors such as regulated pension funds have Provided the AIF is not offered by way of prospectus, the only internal and statutory restrictions that restrict the level of investment public disclosure that an AIF must make is annual audited financial in, and control over, an AIF. statements and semi-annual unaudited financial statements. It is possible to obtain an exemption from the requirement to file these 3.8 Are there any restrictions on the use of intermediaries financial statements with the Securities Regulator provided that the to assist in the fundraising process? financial statements are delivered to investors. If the AIF isnot formed in Canada, there are no public disclosures other than the Form 45-106F1 discussed in question 3.3 above. Intermediaries assisting in the fundraising process will usually be subject to the Dealer Registration Requirement. 5.2 What are the reporting requirements in relation to Alternative Investment Funds or their managers? 3.9 Are there any restrictions on the participation in Alternative Investment Funds by particular types of investors, such as financial institutions (whether as Provided the AIF is not offered by way of prospectus, the key sponsors or investors)? reporting requirements in relation to AIFs are: ■ audited annual and unaudited semi-annual financial While there have not been any specific initiatives coming out of statements of the AIF as discussed above; the 2008 financial crisis intended to restrict the role of financial ■ Form 45-106F1 trade reports to the Securities Regulator by the AIF discussed in question 3.3 above;

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■ trade confirms from the dealer to the investor reporting on the An AIF that is a Canadian corporation is treated as a taxpayer and trade of the AIF security to the investor; pays tax on its taxable income. If it qualifies as a “mutual fund ■ alternative monthly reports (the “AMR System”) from corporation” for tax purposes, tax on capital gains is refundable to the adviser to the Securities Regulator where the adviser the corporation. Dividends from Canadian corporations received exercises control or direction over 10% or more of a class by a mutual fund corporation are subject to a 38⅓% tax which is of securities of a Canadian public company and subsequent refundable when the corporation pays taxable dividends to its reports when investment goes above or below 10%, 12.5%, investors. An AIF that is a Canadian corporation will generally 15% or 17.5%; be treated as a resident of Canada and beneficial owner of income ■ early warning reports (the “EWR System”) from the AIF to for the purposes of Canada’s tax treaties, subject to limitation on the Securities Regulator where the AIF acquires 10% (and on benefits provisions. Canada any 2% increases or decreases thereafter) or more of a class of securities of a Canadian public company; and Canada also imposes tax on non-residents that carry on business in Canada, that dispose of certain capital properties referred to as ■ insider reports to the Securities Regulator where the AIF acquires 10% or more of a class of securities of a Canadian “taxable Canadian property” (generally Canadian real property and public company. resource property and certain securities that derive more than 50% of their value from such properties) or that derive certain income from Canadian sources (dividends, rents, royalties, etc.)). A non-resident 5.3 Is the use of side letters restricted? AIF that engages a Canadian investment adviser with authority to trade on its behalf would be considered to carry on business in There are no prescriptive restrictions on the use of side letters, but Canada unless the requirements of a safe-harbour rule are satisfied. investment fund managers and advisers are subject to a fiduciary duty of care and side letters must be examined carefully to ensure that 6.2 What is the tax treatment of the principal forms of the arrangements contemplated thereby do not breach the fiduciary investment manager / adviser identified in question duty of care owed to all investors. The Securities Regulator has 2.3? been known to focus on the use of side letters and take action when it is evident that the fiduciary duty of care has been compromised. A manager that is a Canadian corporation is treated as a taxpayer and pays tax on its taxable income. Management fees and performance 6 Taxation fees will be treated as ordinary business income. A manager that is a partnership must calculate its income or loss as if it were a separate person resident in Canada. Management fees 6.1 What is the tax treatment of the principal forms of and performance fees will be treated as ordinary business income. Alternative Investment Funds identified in question Income or loss of the partnership is allocated in accordance with 2.1? the partnership agreement to its partners, who include or deduct the relevant amounts as if they earned them directly. Canada imposes tax on the worldwide income of persons that are resident in Canada. If the AIF is a partnership, the manager or an affiliate of the manager may be a partner of the partnership in order to be entitled to a carried Only 50% of capital gains are taxable and 50% of capital losses interest. In such case, a share of income and gains of the partnership are deductible but only against the taxable portion of capital gains. would be allocated to the manager or affiliate and the character of Dividends received from a Canadian corporation are subject to the allocated amount as ordinary income or capital gain is expected special tax treatment to reflect the fact that they are paid outof to be respected for tax purposes under current tax rules. after-tax income of the corporation. Such dividends received by a Canadian corporation are generally deductible in computing taxable income, while those received by an individual are “grossed up” and 6.3 Are there any establishment or transfer taxes levied a dividend tax credit is given. Other forms of income (interest, in connection with an investor’s participation in an income/loss from transactions in derivatives that are not considered Alternative Investment Fund or the transfer of the investor’s interest? to be hedges of capital property, etc.) are taxed at regular rates. Income or loss must generally be computed in Canadian dollars. No establishment or transfer taxes are imposed on investors. The An AIF that is a partnership is generally fiscally transparent for disposition of an investor’s interest may give rise to a capital gain Canadian tax purposes. Canadian-resident partners should be or capital loss (or to ordinary income/loss if not capital property) entitled to treaty benefits on a look-through basis. that must be taken into account in computing income. See below An AIF that is a Canadian-resident trust is treated as a taxpayer regarding the treatment of a disposition of an interest in an AIF. but, in computing its income, is generally entitled to deduct that portion of its income that is payable in the year to its investors who 6.4 What is the tax treatment of (a) resident, (b) non- are required to include such amounts in income. A special tax may resident, and (c) pension fund investors in Alternative be payable by a Canadian-resident trust (other than a “mutual fund Investment Funds? trust” for tax purposes which, among other conditions, requires that its activities be limited to investing its funds in property) if it has non- (a) A resident investor in an AIF that is treated as a partnership resident investors and “designated income” (comprised of income for Canadian tax purposes, whether established in Canada from Canadian real property, resource property and businesses or a foreign jurisdiction, must take into account its share of carried on in Canada and capital gains from the disposition of the income or loss of the partnership that is allocated to it in “taxable Canadian property” (see below)). While a trust should be accordance with the partnership agreement. The partnership treated as a resident of Canada for the purposes of Canada’s tax must calculate its income or loss as if it were a separate treaties, subject to limitation on benefits provisions, some countries person resident in Canada. The “at-risk” rules restrict the in the past have denied treaty benefits. deductibility of losses from a business or property allocated to a limited partner to the limited partner’s “at-risk amount”. In

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determining how an AIF established in a foreign jurisdiction from a business carried on in Canada and the investor’s share should be treated for Canadian tax purposes, the primary of capital gains from the disposition by the partnership of attributes of the AIF under the foreign law are determined “taxable Canadian property” (generally Canadian real property and compared with the primary attributes of a partnership, and resource property and certain securities that derive more trust or corporation under Canadian law. than 50% of their value from such properties). By reason of A resident investor in an AIF that is a Canadian-resident having a non-resident investor, the partnership will be subject corporation must include, in computing income, dividends to a 25% withholding tax on certain income from Canadian received from the corporation. If the investor is a Canadian sources (dividends, rents, royalties, etc.). Under the current corporation, such dividends are generally deductible in administrative policy of the Canada Revenue Agency (“CRA”), computing taxable income. Dividends received by an the 25% withholding tax need only be applied in respect of the non-resident partner’s share of the relevant income.

individual are “grossed up” and a dividend tax credit is given. Canada If the AIF is a “mutual fund corporation” for tax purposes, it A non-resident investor in an AIF that is a Canadian-resident may pay dividends that it elects to pay out of capital gains trust will be subject to a 25% withholding tax on distributions which are taxed as capital gains in the hands of investors. of income (including 50% of capital gains) by the trust. If A resident investor in an AIF that is a Canadian-resident trust the trust is a “mutual fund trust” for tax purposes, capital must include in its income its share of the trust’s income that gains distributed by the trust will generally not be subject to is payable in the year to the investor. The tax character of withholding tax. capital gains, dividends from Canadian corporations and A non-resident investor in an AIF that is a Canadian-resident income from foreign sources and related foreign tax credits corporation will be subject to a 25% withholding tax on will generally be preserved in the hands of the investor if dividends paid or credited to the investor by the corporation appropriate tax designations are made by the trust. (other than “capital gains dividends” paid by a mutual fund A resident investor that invests in an AIF that is, or is treated corporation). for Canadian tax purposes, as a non-resident corporation A non-resident investor may be liable to tax on the gain will be required to include dividends received in income. If arising on a disposition of an interest in the AIF held as such an AIF is treated as a “foreign affiliate” of the investor capital property if more than 50% of the value of the interest (because the investor and/or certain connected persons own at any time in the 60-month period ending at the time of the more than 10% of the shares of any class or series) and the disposition is derived from “taxable Canadian property” (see AIF is a “controlled foreign affiliate” of the investor (because above). A tax clearance certificate may be required from the the AIF is controlled by the investor and/or certain specified CRA in advance of the disposition in order that a purchaser persons with a connection to Canada), the investor must does not withhold a prescribed amount (currently 25%) from include in income, on an accrual basis, the investor’s share of the purchase price. the AIF’s “foreign accrual property income”. Canada’s ability to impose tax on a non-resident may be If this rule does not apply, it is necessary to consider whether affected by a bilateral tax treaty between Canada and the non- the resident investor’s investment in shares of the AIF is resident’s country of residence. For example, a tax treaty an “offshore investment fund property”. In general, two may reduce the withholding rate from 25% to rates between conditions must be satisfied. First, the share must reasonably 0% and 15%, depending upon the relevant income. be considered to derive its value, directly or indirectly, (c) A Canadian pension plan that is a “registered pension plan” primarily from portfolio investments of the corporation or under the ITA is generally exempt from income tax under any other non-resident entity in certain properties including the ITA on income derived from, and gains derived from the shares, indebtedness, interests in one or more corporations, disposition of an interest in, an AIF. trusts, partnerships, organisations, funds or entities and real In the case of non-resident pension investors, certain of estate or any combination thereof. Secondly, it is necessary Canada’s tax treaties provide exemptions from Canadian that it can reasonably be concluded, having regard to all withholding tax on interest and dividends. In such cases, the circumstances, that that one of the main reasons for the dividends from a Canadian AIF structured as a corporation investor acquiring, holding or having the share was to derive would not be subject to withholding tax. In the case of an AIF a benefit from portfolio investments in such assets in such a treated as a partnership, Canada would view the partnership as manner that the taxes, if any, on the income, profits and gains transparent and grant treaty benefits on a look-through basis. from such assets for any particular year are significantly less In the case of an AIF structured as a Canadian resident trust, than the tax that would have been applicable under Part I of the there would be no relief from withholding tax on distributions Income Tax Act (Canada) (the “ITA”) if the income, profits of income to a non-resident pension plan even if the income and gains had been earned directly by the investor. If so, the were derived from Canadian-source interest and dividends. investor must include a notional amount in income calculated with respect to the “designated cost” of its investment less the dividends actually received. 6.5 Is it necessary or advisable to obtain a tax ruling from Special rules apply in relation to investments by Canadian the tax or regulatory authorities prior to establishing residents in non-resident trusts. Depending on the structure an Alternative Investment Fund? of the trust, the trust could be treated as a resident of Canada for certain purposes of the ITA and liable to tax in Canada. No. Rulings are generally not sought unless there is a specific tax Alternatively, the trust could be an “exempt foreign trust” concern. in which case the interest in the trust could be an “offshore investment fund property”; if not, the investor would generally be subject to tax on the income of the trust (calculated in 6.6 What steps have been or are being taken to implement accordance with the ITA) as is payable to the investor. the US Foreign Account and Tax Compliance Act A resident investor must also take into account the gain or 2010 (FATCA) and other similar information reporting loss arising on a disposition of an interest in the AIF which, regimes such as the Common Reporting Standard? if the interest is a capital property, will be a capital gain or capital loss. Canada entered into an Intergovernmental Agreement (“IGA”) (b) A non-resident investor in an AIF that is a partnership will be with the United States relating to the implementation of FATCA liable to tax on the investor’s share of the partnership’s income which is substantially in the form of the Model 1 IGA, and the

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ITA was amended to provide for the due diligence and reporting (ii) imposing a 365-day test period for non-residents who realise regime contemplated by the IGA. The CRA has published extensive capital gains on the disposition of shares or other interests that guidance. The definition of “Canadian financial institution” in the derived their value from Canadian immovable property. ITA is narrower than that in the IGA. An AIF that is managed by Canada has amended the ITA to provide for country-by-country a Canadian financial institution will generally itself be a Canadian reporting for large multinational enterprises. The CRA is applying financial institution. Canadian financial institutions (other than those revisions to the OECD Transfer Pricing Guidelines recommended as that are treated as non-reporting Canadian financial institutions) will part of the BEPS project. report information about US account holders to the CRA, which will exchange such information with the US Internal Revenue Service (“IRS”). Withholding agents will not be required to withhold the 6.8 Are there any tax-advantaged asset classes or Canada structures available? How widely are they deployed? 30% tax on payments to reporting Canadian financial institutions (and certain “exempt beneficial owners” such as registered pension plans). A variety of registered accounts are excluded from the Generally, there are no tax-advantaged asset classes or structures definition of “financial account” and do not have to be reported on. available. The rules in FATCA relating to recalcitrant accounts are suspended. The new reporting regime came into effect starting in July 2014. 6.9 Are there any other material tax issues for investors, Information was first exchanged in 2015. managers, advisers or AIFs? Canada also signed the Organisation for Economic Co-operation and Development (“OECD”) Multilateral Competent Authority Canada imposes a 5% Goods and Services Tax, the provinces of Agreement and Common Reporting Standard (“CRS”). The ITA Ontario, Nova Scotia, New Brunswick and Newfoundland and has been amended to provide for the due diligence and reporting Labrador impose the Harmonized Sales Tax which varies from regime contemplated by the CRS and the CRA has published 8–10% and the province of Québec imposes the Québec Sales extensive guidance. The CRS was effective in Canada as of July Tax at a rate of 9.975% (essentially value-added taxes) on certain 1, 2017 with the first exchanges of financial account information supplies. Management and performance fees for services provided beginning in 2018. to a Canadian AIF will generally be subject to GST/HST/QST and no refund will be available to the AIF. An AIF that is a limited partnership may also be required to pay GST/HST/QST on the 6.7 What steps are being taken to implement the OECD’s distribution, or a portion thereof, paid to the general partner. Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? 6.10 Are there any meaningful tax changes anticipated in the coming 12 months? Canada signed the MLI in June 2017 and listed 75 of its 93 tax treaties as Covered Tax Agreements. It originally adopted only No, there are no tax changes anticipated. the minimum standard provisions and the binding mandatory arbitration provision and registered reservations on all other optional provisions. As an interim measure, it will adopt a PPT 7 Reforms rule into its Covered Tax Agreements, intending where possible to adopt an LOB provision (in addition to or in replacement of the 7.1 What reforms (if any) are proposed? PPT rule) through bilateral negotiations. The CRA has not offered any meaningful guidance with respect to the application of the PPT to an AIF or its investors. As of June 4, 2018, advisers of AIFs that are registered in Canada must ensure that the custodians (Canadian or foreign) that hold cash Domestic ratification procedures for the MLI are in process. As part and securities of an AIF hold such assets in the name of the AIF (and of such process, Canada announced that it would now adopt a number not in an omnibus account for the adviser) and that the custodian of optional provisions including (i) imposing a 365-day holding meets certain requirements. If the adviser is related to the custodian, period for shares of Canadian companies held by non-resident the custodial operations should be functionally independent from companies to access the lower treaty-based rate on dividends, and the adviser.

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Sean D. Sadler Nigel P.J. Johnston McCarthy Tétrault LLP McCarthy Tétrault LLP Suite 5300, TD Bank Tower Suite 5300, TD Bank Tower Box 48, 66 Wellington Street West Box 48, 66 Wellington Street West Toronto ON M5K 1E6 Toronto ON M5K 1E6 Canada Canada

Tel: +1 416 601 7511 Tel: +1 416 601 7923 Email: [email protected] Email: [email protected] URL: www.mccarthy.ca URL: www.mccarthy.ca Canada Sean D. Sadler B.A., J.D., LL.M. is a partner and advises Canadian Nigel P. J. Johnston B.A., LL.B. is a partner in the Tax Group of and non-resident dealers, advisers and fund managers on the offering McCarthy Tétrault LLP in Toronto. His practice focuses on corporate of their services and products in Canada and on securities law income tax issues, providing tax advice to the investment funds compliance and enforcement matters. He has assisted local counsel industry and the creation of new financial products. He is recognised in establishing or restructuring investment funds in jurisdictions outside as a leading lawyer in the area of corporate tax in the current edition Canada, including Bermuda, the British Virgin Islands, the Cayman of Who’s Who Legal: Canada. He also appears in the most recent Islands and Mauritius. He is a special lecturer in various securities editions of Chambers Global: Guide to the World’s Leading Lawyers law topics at several Canadian Universities. Sean is a co-editor for Business and Chambers Canada as a leading lawyer in the of LexisNexis’ Annotated Ontario Securities Legislation and a co- area of tax. He is a member of the Taxation Working Group of the author of LexisNexis’ Canadian Securities Regulatory Requirements Investment Funds Institute of Canada and of the Industry Regulation Applicable to Non-Resident Broker-Dealers, Advisers and Investment and Taxation Committee of the Portfolio Management Association of Fund Managers. He is a contributor to the Practising Law Institute’s Canada. He was a member of the “Informal Consultative Group on (“PLI”) Broker-Dealer Regulation and Investment Adviser Regulation. the Taxation of Collective Investment Vehicles” and of the “Pilot Group He appears in the current edition of Chambers Canada as a leading on Improving Procedures for Cross-Border Tax Claims” organised by lawyer in the area of investment funds, the current edition of The Best the OECD’s Centre for Tax Policy and Administration. He is a member Lawyers in Canada in the areas of mutual funds law, private funds of the editorial board of the Canada Tax Service. He was called to the law and securities law, in the 2014 International Who’s Who of Private Ontario Bar in 1984. Funds Lawyers, in the 2013 Who’s Who Legal: Canada in the area of private funds, in Practical Law Company’s 2011/2012 Investment Funds Handbook as a recommended lawyer in Canada, and has appeared in the Canadian Legal Lexpert Directory. He was called to the Ontario Bar in 1989.

McCarthy Tétrault is a Canadian law firm that delivers integrated business law, litigation, tax law, real property law, labour and employment law services nationally and globally through offices in Vancouver, Calgary, Toronto, Montréal and Québec City, as well as in London, UK and New York City, NY, USA.

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Cayman Islands Grant Dixon

Maples and Calder Andrew Keast

or exercising any right conferred by a security to buy, sell, subscribe 1 Regulatory Framework for or underwrite a security. “Securities” are defined to include most forms of shares and stock, debt instruments, options, futures, 1.1 What legislation governs the establishment and contracts for differences, and derivatives. operation of Alternative Investment Funds? Schedule 3 to SIBL specifically excludes certain activities from the definition of securities investment business, although those The Mutual Funds Law (2015 Revision) (the “MF Law”) provides exclusions are unlikely to apply to a person conducting discretionary for the regulation of open-ended investment funds and mutual fund investment management or investment advisory activities. administrators. Responsibility for regulation under the MF Law Any person within the scope of SIBL conducting securities investment rests with the Cayman Islands Monetary Authority (“CIMA”). business must be licensed by CIMA, unless that person is exempt from In addition, the Retail Mutual Funds (Japan) Regulations (2018 holding a licence. A licence may be restricted (meaning that securities Revision) (the “Japan Regulations”) provide a regulatory regime for investment business may only be transacted with particular clients) retail mutual funds that are marketed to the public in Japan. or unrestricted. A licence may also be issued subject to conditions or Although not Cayman Islands law, the broad scope and extra- may be unconditional. territorial effect of the EU Directive on Alternative Investment A person carrying on securities investment business may be exempt Fund Managers (“AIFMD”) will capture most types of Cayman from the requirement to obtain a licence but will still be subject to Alternative Investment Funds, regardless of whether they are open- certain provisions of SIBL. In the case of the exemptions referred ended or closed-ended and regardless of their legal structure and to below, which are the exemptions likely to apply to fund managers investment strategy, with very few exceptions, to the extent that or advisers, an “Excluded Person” is required to register with CIMA they are being marketed or managed in Europe (as such terms are by filing a declaration and paying a fee of CI$5,000 (approximately defined for the purposes of the AIFMD). The Cayman Islands has US$6,097.56), prior to carrying on securities investment business published regulations creating two new AIFMD-consistent regulatory and annually thereafter, confirming that they are entitled to rely on regimes, which will enable Cayman Islands AIFs and AIFMs to take the relevant exemption. full advantage of the AIFMD if and when the AIFMD passport is An “Excluded Person” includes: extended to the Cayman Islands. The new AIFMD regulations can (a) a company carrying on securities investment business be brought into force by way of a separate commencement order at exclusively for one or more companies within the same group; the appropriate time. (b) a person, whose registered office in the Cayman Islands is provided by a licensee under the law, carrying on securities 1.2 Are managers or advisers to Alternative Investment investment business exclusively for one or more of the Funds required to be licensed, authorised or following classes of person: regulated by a regulatory body? (i) a sophisticated person (a person regulated by CIMA or a recognised overseas regulatory authority or whose A manager or adviser which is established in or, in the case of a securities are listed on a recognised securities exchange foreign company, registered in the Cayman Islands and which or who by virtue of knowledge and experience in financial conducts “securities investment business”, whether or not that and business matters is reasonably to be regarded as capable of evaluating the merits of a proposed transaction securities investment business is carried on in the Cayman Islands, and participates in a transaction with a value or in amounts will fall within the scope of the Securities Investment Business Law of at least US$100,000 in each single transaction); or (2015 Revision) (“SIBL”). (ii) a high-net-worth person (an individual whose net worth is “Securities investment business” is defined as being engaged in the at least US$1,000,000 or any person that has any assets of course of business in any one or more of the activities set out in not less than US$5,000,000); or Schedule 2 to SIBL. Those activities include managing securities (iii) a company, partnership or trust of which the shareholders, belonging to another person on a discretionary basis and advising limited partners or unitholders are all sophisticated in relation to securities, but only if the advice is given to someone persons or high-net-worth persons; or in their capacity as investor or potential investor or in their capacity (c) a person who is regulated by a recognised overseas regulatory as agent for an investor or a potential investor and the advice is authority in the country or territory (other than the Cayman on the merits of that person (whether acting as principal or agent) Islands) in which the securities investment business is being buying, selling, subscribing for or underwriting a particular security conducted.

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A master fund is a Cayman Islands entity that issues equity interests 1.3 Are Alternative Investment Funds themselves to at least one feeder fund (either directly or through an intermediate required to be licensed, authorised or regulated by a entity established to invest in the master fund) that is itself regulated regulatory body? by CIMA under the MF Law that holds investments and conducts trading activities for the principal purpose of implementing the Subject to the section 4(4) fund exception described below, an overall investment strategy of the regulated feeder. Based on investment fund qualifies as a “mutual fund” and is required to be CIMA’s statistics, at the end of 2017, 2,816 of the 10,147 regulated regulated under the MF Law if: section 4(3) funds were registered as master funds. (a) it is a company, partnership or unit trust carrying on business There is also an exception to the need to register with CIMA for in or from the Cayman Islands; funds (other than master funds), known as “section 4(4) funds”, that (b) it issues “equity interests” to investors (i.e. shares, partnership are open-ended “mutual funds” for the purposes of the MF Law but interests or trust units that carry an entitlement to participate which have 15 or fewer investors, a majority in number of whom

in profits or gains and which may be redeemed or repurchased have the power to appoint and remove the fund’s directors, GP or Cayman Islands at the option of those investors prior to winding up); and trustee, as applicable. (c) its purpose or effect is the pooling of investor funds with the aim of spreading investment risks and enabling investors to 1.4 Does the regulatory regime distinguish between receive profits or gains from investments. open-ended and closed-ended Alternative Investment There are three categories of mutual funds: Funds (or otherwise differentiate between different types of funds or strategies (e.g. private equity v 1. a licensed fund under section 4(1)(a) of the MF Law; hedge)) and, if so, how? 2. an administered fund under section 4(1)(b) of the MF Law; and Yes; closed-ended funds are not subject to regulation under the MF 3. a registered fund under section 4(3) of the MF Law. Law. The key distinction between open-ended and closed-ended 1. A mutual fund licence will be granted if CIMA considers funds is the ability of investors to voluntarily redeem or repurchase that the promoter is of sound reputation, there exist persons some or all of their investment prior to winding up. Cayman Islands of sufficient expertise to administer the fund, who are of practitioners and CIMA generally consider that a lock-up period sound reputation, and that the business of the fund and any must be at least five years for an investment fund to be regarded as offer of equity interests will be carried out in a proper way. closed-ended at the outset. Detailed information is required concerning the directors, trustee or general partner (“GP”) of the mutual fund (as 1.5 What does the authorisation process involve and how the case may be) and the service providers. However, few long does the process typically take? investment funds are fully licensed under the MF Law, as this is generally only necessary for retail funds. From the statistics published on CIMA’s website, at the end of 2017 CIMA has established an online e-business portal, CIMAConnect, there were only 81 licensed funds. which enables the online submission of mutual fund applications and documentation. An application for a section 4(3) fund involves 2. Registration as an administered fund requires the the submission of: designation of a Cayman Islands licensed mutual (a) the fund’s offering document, other than in the case of a fund administrator as the fund’s principal office. The master fund, which will often not have an offering document administrator must satisfy itself that the fund’s promoters separate from that of its feeder fund(s); are of sound reputation, that the fund’s administration will be undertaken by persons with sufficient expertise who (b) the relevant statutory application form; are also of sound reputation and that the fund’s business (c) consent letters from the fund’s auditor and administrator; and its offering of equity interests will be carried out in (d) the relevant fee (currently US$4,268, initially and annually, a proper way. The administrator is obliged to report to other than in the case of a master fund which is currently CIMA if it has reason to believe that a mutual fund for US$3,049 initially and annually); which it provides the principal office (or any promoter, (e) an affidavit relating to the authorisation of submission of the director, trustee or GP thereof) is acting in breach of the online application; and MF Law or may be insolvent or is otherwise acting in (f) certain information regarding the fund’s operator (the a manner prejudicial to its creditors or investors. This directors, GP or trustee, as the case may be). imposes a quasi-regulatory role and an obligation to CIMA’s practice with section 4(3) funds is to make the effective date monitor compliance on the administrators themselves, and of the application the date on which all application requirements generally higher fees charged by administrators in relation have been submitted and applications must be completed prior to a to this category of investment fund. Administered funds fund launching in order to be compliant with the MF Law. have declined in popularity over recent years, from 510 in 2008 to 331 at the end of 2017. The authorisation process is more involved for licensed and administered fund applications. 3. Mutual funds registered under section 4(3) of the MF Law are divided into three sub-categories: (a) where the minimum investment per investor is at least 1.6 Are there local residence or other local qualification US$100,000; requirements? (b) where the equity interests are listed on a recognised stock exchange; or A Cayman Islands regulated mutual fund must appoint a local auditor approved by CIMA. (c) where the mutual fund is a “master fund” (as defined in the MF Law) and either: The Directors Registration and Licensing Law, 2014 (the “DRLL”) (i) the minimum investment per investor is at least requires that the directors (both natural persons and corporate directors) US$100,000; or of a corporate mutual fund regulated by CIMA under the MF Law or a certain type of “Excluded Person” registered with CIMA under SIBL (ii) the equity interests are listed on a recognised stock be either registered or licensed with CIMA. The registration process exchange. is undertaken online at the “CIMA Director Gateway”.

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limited liability companies. Whilst such vehicles may be used in 1.7 What service providers are required? fund structures, we have not seen them used extensively to date in such capacity. Every regulated mutual fund must have an approved local auditor Exempted companies are by far the most common vehicle for open- and will generally have an investment manager/adviser and an ended funds (including master funds). Based on statistics published administrator (which, for an administered mutual fund, must be a by CIMA, 92 per cent of reporting funds were exempted companies licensed mutual fund administrator). (including segregated portfolio companies) in 2016. Based on Although not required, it is becoming market practice for corporate Maples and Calder’s statistical analysis, the exempted company was regulated investment funds to appoint independent directors. Such used as the principal fund vehicle in 80 per cent of North American independent directors are not required to be based in the Cayman managed funds, 86 per cent of European managed funds and 75 per Islands but often are, due to the depth of the Cayman fiduciary cent of Asian managed funds in 2017. services industry. Based on statistical analysis conducted by Maples However, it is not common to see closed-ended funds established in Cayman Islands and Calder, 86 per cent of funds launched in 2017 by managers the Cayman Islands as exempted companies. The ELP is usually the based in North America had at least one independent director. The vehicle of choice for closed-ended or private equity funds. trend is lower for Asia-based managers, where 84 per cent had at The Cayman ELP concept is similar to that which applies in the United least one independent director. The trend is higher for funds with States and indeed the Exempted Limited Partnership Law (2018 Europe-based managers, with 100 per cent of the funds launched in Revision) (the “ELP Law”) is based substantially on the Delaware 2017 having at least one independent director. equivalent (although a Cayman Islands partnership is not a separate The statistics compiled by Maples and Calder reflect a snapshot legal person). Whilst exempted companies are extremely flexible in of the regulated funds established during the relevant period for the extent to which voting and economic rights can be mixed and which Maples and Calder acted as Cayman Islands legal counsel. matched across separate classes of shares, companies have certain Although this represents a significant sample size, it is inevitable limitations that do not apply to ELPs. Fewer statutory rules govern that these statistics would vary if they were based on all funds the approvals processes within an ELP, which makes them generally established during the relevant period. more flexible and suitable for closed-ended vehicle purposes. Unit trusts are the vehicle primarily used for investors in Japan, where 1.8 What rules apply to foreign managers or advisers the demand is driven by familiarity with the unit trust structure and wishing to manage, advise, or otherwise operate historical local tax benefits relating to trust units as opposed to other funds domiciled in your jurisdiction? forms of equity interest. Such investment funds can elect to comply with the Japan Regulations when applying for a licence under the MF Provided that the activities of a foreign manager/adviser, including Law that, under current guidelines set by the Japan Securities Dealers any transactions entered into, have not been and will not be carried Association, permit them to be marketed to the public in Japan. on through a place of business in the Cayman Islands, or the fund is not subject to the Japan Regulations, there are no additional rules. 2.2 Please describe the limited liability of investors.

1.9 What co-operation or information sharing agreements The limited liability of investors in a Cayman Islands investment have been entered into with other governments or fund depends upon the nature of the vehicle used and whether the regulators? investor has agreed to contribute additional funds to that vehicle pursuant to the terms of the governing documentation. The Cayman Islands has Tax Information Exchange Agreements and similar bilateral arrangements with 36 countries as of April 2018 With exempted companies limited by shares, the liability of the and is on the OECD “white list” with respect to the exchange of tax investors is limited to the amount unpaid on their shares pursuant information. In addition, CIMA has entered into bilateral regulatory to the constitutional documents of the company and in accordance cooperation agreements pursuant to the AIFMD with the competent with the Companies Law (2018 Revision). authorities of 27 of the EU and EEA Member States. Please also see Limited partners (“LPs”) of an ELP shall not be liable for the debts the description of FATCA/CRS under question 6.6 below. or obligations of the ELP under the ELP Law, (a) save as provided by the terms of the applicable partnership agreement, and (b) subject to the provisions of the ELP Law (i) providing that an LP who takes 2 Fund Structures part in the conduct of the business of the ELP may lose its limited liability with respect to a third party who deals with that ELP and who reasonably believes such LP to be a GP of such ELP, and 2.1 What are the principal legal structures used for Alternative Investment Funds? (ii) providing for clawback of capital distributions (together with interest) made to an LP within six months of the ELP becoming insolvent where the LP had actual knowledge of the insolvency. Three types of vehicle are most commonly utilised by Cayman Islands investment funds: exempted companies; exempted limited partnerships Investors who are unitholders of an exempted trust must look to the (“ELPs”); and exempted unit trusts. The term “exempted” in this wording of the relevant declaration of trust to provide them with context means that the vehicle is eligible to apply to the Cayman Islands limited liability status and protection. government for an undertaking (lasting 20 or 50 years depending on Despite the limited liability nature of an equity interest purchased the type of vehicle) that if any taxation is introduced in the Cayman by an investor, it is common practice for the subscription and Islands during the period to which the undertaking applies, such certain transaction documents of Cayman Islands investment funds taxation will not apply to the vehicle in question. In return, exempted to impose payment obligations on investors over and above the vehicles are not generally permitted to carry on business within the obligation to pay for their investment. Such additional obligations Cayman Islands. regularly include indemnification for misrepresentations and the In 2016 the Cayman Islands introduced limited liability companies requirement to repay excess redemption or withdrawal proceeds (“LLCs”), which broadly operate in a similar manner to Delaware which were calculated and paid on the basis of unaudited data.

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(d) the names and addresses of the fund’s other service providers, 2.3 What are the principal legal structures used for together with details of the services to be performed and managers and advisers of Alternative Investment remuneration; Funds? (e) the classes of interests available for investment or issue, together with descriptions of any minimum investment, The principal structures are exempted companies and LLCs. eligibility requirements and subscription procedures; (f) details of the principal rights and restrictions attaching to the 2.4 Are there any limits on the manager’s ability to fund’s equity interests, including with respect to currency, restrict redemptions in open-ended funds or transfers voting, circumstances of winding up or dissolution and the in open-ended or closed-ended funds? procedures and conditions for repurchases, redemptions or withdrawals of such equity interests, including suspensions; Not as a general matter of Cayman Islands law; the ability to redeem (g) the NAV calculation policy; and or transfer equity interests in a fund and any restrictions thereon will (h) details of the fund’s material risks and potential conflicts of Cayman Islands be governed by the governing documents. interest.

2.5 Are there any legislative restrictions on transfers of 3.3 Do the marketing or legal documents need to be investors’ interests in Alternative Investment Funds? registered with or approved by the local regulator?

Not as a general matter of Cayman Islands Law; subject to The offering document of a registered mutual fund must be filed with restrictions on the assignment of certain liabilities by LPs pursuant CIMA as part of the initial application; however, it is not technically to the ELP Law or the transferee meeting any minimum investment subject to approval by CIMA prior to its circulation to prospective requirements that may apply. Of course, proposed transferees investors. An amended offering document or supplement must be will need to satisfy applicable Know Your Client and Anti Money filed with CIMA within 21 days in the event of material changes, Laundering requirements. where there is a continuing offering.

2.6 Are there any other limitations on a manager’s ability 3.4 What restrictions are there on marketing Alternative to manage its funds (e.g. diversification requirements, Investment Funds? asset stripping rules)? Generally, no offer or invitation to subscribe for equity interests in Not as a general matter of Cayman Islands law (assuming that the a Cayman Islands investment fund may be made to the “public in fund is not subject to the Japan Regulations). the Cayman Islands”. The range of persons that may be considered excluded from the “public in the Cayman Islands” will depend upon the fund’s legal structure and whether or not the fund is regulated 3 Marketing under the MF Law, but it is generally likely that Cayman Islands exempted companies, ELPs and exempted trusts engaged in offshore 3.1 What legislation governs the production and offering business and foreign companies registered in the Cayman Islands of marketing materials? will not be considered part of the “public in the Cayman Islands”.

The MF Law requires that every regulated mutual fund issue an 3.5 Can Alternative Investment Funds be marketed to offering document which must describe the equity interests in all retail investors? material respects and contain such other information as is necessary to enable a prospective investor to make an informed decision Yes, in respect of section 4(1)(a)) or section 4(1)(b) funds. In respect whether or not to invest. of section 4(3) funds, yes, subject to the US$100,000 minimum To supplement this requirement, CIMA has issued a rule in relation investment or the equity interests being listed on a recognised stock to the content of offering documents for licensed funds, which is exchange. generally applied to the offering documents of all regulated funds. Japan Regulations also set out additional disclosure requirements 3.6 What qualification requirements must be carried out for the prospectus of a retail mutual fund, which are more onerous. in relation to prospective investors?

3.2 What are the key content requirements for marketing Potential investors will be subject to due diligence and sanction materials, whether due to legal requirements or checks in accordance with the Cayman Islands’ anti-money customary practice? laundering regime.

The minimum disclosure requirements for offering documents for regulated mutual funds generally include the following: 3.7 Are there additional restrictions on marketing to public bodies such as government pension funds? (a) details of the date of establishment of the fund, its registered office, fiscal year and its operator together with biographies; No, there are not. (b) a description of the fund’s investment objectives, policy, and restrictions; (c) a description of the fund’s investment manager or adviser, 3.8 Are there any restrictions on the use of intermediaries together with biographies of the portfolio managers and to assist in the fundraising process? information regarding remuneration; No, there are not.

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3.9 Are there any restrictions on the participation in 5.3 Is the use of side letters restricted? Alternative Investment Funds by particular types of investors, such as financial institutions (whether as No. Side letters are commonly used by Cayman Islands investment sponsors or investors)? funds although certain legal considerations should be borne in mind in order to ensure that such letter agreements are compliant with No, there are not. Cayman Islands law.

4 Investments 6 Taxation

4.1 Are there any restrictions on the types of activities that 6.1 What is the tax treatment of the principal forms of Cayman Islands can be performed by Alternative Investment Funds? Alternative Investment Funds identified in question 2.1? There are no such restrictions on investment strategy subject to applicable local regulatory laws. The Cayman Islands imposes no taxation on the income or capital gains of investment funds or their investors and no transfer taxes on the transfer of interests in investment funds. As discussed above, 4.2 Are there any limitations on the types of investments that can be included in an Alternative Investment “exempted” companies, limited partnerships, unit trusts and LLCs Fund’s portfolio whether for diversification reasons or can obtain undertakings from the Cayman Islands government that otherwise? if any taxation is introduced during the period of the undertaking, such taxation will not apply to the entity to which the undertaking No, there are not. is given.

4.3 Are there any restrictions on borrowing by the 6.2 What is the tax treatment of the principal forms of Alternative Investment Fund? investment manager / adviser identified in question 2.3?

No, there are no such restrictions (assuming that the fund is not Please see question 6.1 above. subject to the Japan Regulations).

6.3 Are there any establishment or transfer taxes levied 5 Disclosure of Information in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the investor’s interest? 5.1 What public disclosure must the Alternative Investment Fund or its manager make? No, there are none.

There are no public disclosure requirements for exempted companies or trusts. Although such vehicles are required to maintain statutory 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative registers and make certain filings with the Cayman Islands Registrar Investment Funds? and CIMA, those registers and filings are not available to inspection by the general public. There is no distinction from a Cayman Islands perspective – please The register of limited partnership interests of an ELP is required by see question 6.1 above. the ELP Law to be open to inspection during all business hours by all partners, subject to any express or implied term to the contrary of the limited partnership agreement, or by any other person with the 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing consent of the GP. an Alternative Investment Fund?

5.2 What are the reporting requirements in relation to No, it is not. Alternative Investment Funds or their managers?

6.6 What steps have been or are being taken to implement Regulated mutual funds are required to file, in electronic format, the US Foreign Account and Tax Compliance Act audited financial statements, an annual Key Data Elements Form 2010 (FATCA) and other similar information reporting (containing a summary of the basic information about the fund) and regimes such as the Common Reporting Standard? a Fund Annual Return (“FAR”), in each case within six months of the financial year end. The FAR provides general, operating and The Cayman Islands has signed two inter-governmental agreements financial information relating to such regulated funds. Certain to improve international tax compliance and the exchange of additional requirements apply to funds subject to the Japan information – one with the United States and one with the United Regulations. Kingdom (the “US IGA” and the “UK IGA”, respectively). The A manager registered as an “Excluded Person” pursuant to SIBL is Cayman Islands has also signed, along with over 80 other countries, a required to make an annual filing confirming its exempt status with multilateral competent authority agreement to implement the OECD CIMA but does not otherwise have any reporting requirements. Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard (the “CRS” and together with the US IGA and the UK IGA, “AEOI”).

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Cayman Islands regulations were issued on 4 July 2014 to give effect or a tax information exchange agreement is in place between the to the US IGA and the UK IGA, and on 16 October 2015 to give effect Cayman Islands and each relevant jurisdiction. The information to the CRS (collectively, the “AEOI Regulations”). Pursuant to the reported will be subject to confidentiality restrictions compliant AEOI Regulations, the Cayman Islands Tax Information Authority with the requirements of the Multilateral Convention on Mutual (the “TIA”) has published guidance notes on the application of the Administrative Assistance in Tax Matters. US and UK IGAs and the CRS. Pursuant to the CBCR Regulations, any business unit or permanent All Cayman Islands “Financial Institutions” will be required to comply establishment of an MNE Group “resident in the Cayman Islands” with the registration, due diligence and reporting requirements of that are “Constituent Entities” will have registration and/or reporting the AEOI Regulations, except to the extent that they can rely on an requirements in the Cayman Islands. An MNE Group means, exemption that allows them to become a “Non-Reporting Financial broadly, with respect to any fiscal year of the Group, a Group Institution” (as defined in the relevant AEOI Regulations) with that has two or more enterprises for which the tax residence is in respect to one or more of the AEOI regimes, in which case only the different jurisdictions or that has an enterprise that is resident for tax Cayman Islands registration requirement would apply under CRS. purposes in one jurisdiction and is subject to tax through a permanent The AEOI Regulations require funds to, amongst other things (i) establishment in another jurisdiction and, in both cases, that has a register with the Internal Revenue Service (“IRS”) to obtain a Global total consolidated group revenue of equal to or more than US$850 Intermediary Identification Number (in the context of the US IGA million during its preceding fiscal year. only), (ii) register with the TIA, and thereby notify the TIA of its status The notification and first reporting deadlines for a “Constituent as a “Reporting Financial Institution”, (iii) adopt and implement Entity” with a Cayman Islands Reporting Entity are 15 May 2018 and written policies and procedures setting out how it will address its 31 May 2018, respectively. The notification deadline for Constituent obligations under CRS, (iv) conduct due diligence on its accounts Entities whose Reporting Entity is not resident in the Cayman Islands to identify whether any such accounts are considered “Reportable is 30 September 2018. Accounts”, and (v) report information on such Reportable Accounts As a Cayman Islands fund will not be claiming access itself to a tax to the TIA. The TIA will transmit the information reported to it to the treaty, Action 6 is not directly relevant to it. However, a Cayman overseas fiscal authority relevant to a reportable account (e.g. the IRS Islands fund can be set up in a variety of different legal forms, either in the case of a US Reportable Account) annually on an automatic as legally transparent or opaque, which facilitate cross-border fund basis. structures, whereby either the fund investors may rely on their own treaty or through investment entities that may be able to rely on their 6.7 What steps are being taken to implement the OECD’s own treaty. Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? 6.8 Are there any tax-advantaged asset classes or structures available? How widely are they deployed?

As part of the Cayman Islands’ ongoing commitment to international Not applicable – please see question 6.1 above. tax transparency, the Tax Information Authority (International Tax Compliance) (Country-By-Country Reporting) Regulations, 2017 (the “CbCR Regulations”) were issued on 15 December 2017, 6.9 Are there any other material tax issues for investors, with the Department for International Tax Cooperation releasing managers, advisers or AIFs? its Guidance on the Country-by-Country Reporting (“CbCR”) requirements of entities that are resident in the Cayman Islands on No, there are not. 29 March 2018. The CbCR Regulations essentially implement in the Cayman 6.10 Are there any meaningful tax changes anticipated in Islands the model legislation published pursuant to the OECD’s the coming 12 months? Base Erosion and Profit Shifting Action 13 Report (Transfer Pricing Documentation and Country-by-Country Reporting). The CbCR No, there is not. Regulations also reflect the Cayman Islands’ obligations under the OECD Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (the “CbC MCAA”). 7 Reforms Pursuant to this initiative, qualifying multinational enterprises (“MNEs”) are required to report annually the information set out in 7.1 What reforms (if any) are proposed? the model legislation for each tax jurisdiction in which they operate. The TIA will automatically exchange such reports prepared by MNE The Cayman Islands continuously keeps its laws under review Groups in the Cayman Islands with partner jurisdiction competent to ensure that the jurisdiction remains the leading domicile for authorities in all jurisdictions that the MNE Group operates, alternative investment funds and remains responsive to stakeholder’s provided that the jurisdiction is a co-signatory to the CbC MCAA needs.

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Grant Dixon Andrew Keast Maples and Calder Maples and Calder PO Box 309, Ugland House PO Box 309, Ugland House Grand Cayman KY1-1104 Grand Cayman KY1-1104 Cayman Islands Cayman Islands

Tel: +1 345 814 5507 Tel: +1 345 814 5371 Fax: +1 345 949 8080 Fax: +1 345 949 8080 Email: [email protected] Email: [email protected] URL: www.maplesandcalder.com URL: www.maplesandcalder.com

Grant Dixon is a partner in the Investment Funds group at Maples and Andrew Keast is a partner in the Investment Funds group at Maples Calder in the Cayman Islands. He advises a global client base and and Calder in the Cayman Islands. He works with a broad range of Cayman Islands specialises in a broad range of fund products, primarily focusing on prominent institutional and start-up private equity, venture capital and venture capital, private equity and hedge funds. He also has extensive hedge fund clients. He advises on all aspects of investment fund work, experience across general corporate, financing and commercial as well as general corporate and commercial matters. Andrew also matters. advises a number of the leading sponsors and onshore counsel in the Israeli venture capital space.

With over 50 years in the industry and over 800 staff, Maples and Calder is a leading international law firm advising global financial, institutional, business and private clients on the laws of the British Virgin Islands, the Cayman Islands, Ireland and Jersey. Maples and Calder is known worldwide for the quality of its lawyers. This extensive experience, the depth of the team and a collegiate approach are main characteristics of the firm, enabling it to provide the highest quality legal advice on a wide range of transactions. Maples and Calder offices are located in the British Virgin Islands, Cayman Islands, Dubai, Dublin, Hong Kong, Jersey, London and Singapore. The service provided is enhanced by the strong relationships the firm has developed. For fiduciary and fund services requirements, the firm provides a seamless, “one stop shop” capability through its affiliate, MaplesFS.

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China

FenXun Partners Sue Liu

1 Regulatory Framework 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different 1.1 What legislation governs the establishment and types of funds or strategies (e.g. private equity v operation of Alternative Investment Funds? hedge)) and, if so, how?

An Alternative Investment Fund established in China is directly The regulatory regime governing Alternative Investment Funds governed by the Securities Investment Fund Law (as amended in distinguishes between private securities investment funds and 2015, the “Securities Fund Law”). The Securities Fund Law applies private equity investment funds. A “securities investment fund” to both privately offered funds and publicly offered funds, and the generally refers to a fund investing in publicly traded securities in discussions herein are directed at privately offered funds. the secondary market. On the other hand, an “equity investment Different aspects of the operation of an Alternative Investment Fund fund” refers to a fund investing in securities of private companies may also be governed by other legislation, such as the Securities and privately offered securities of public companies. In practice, Law (as amended in 2014), the Company Law (as amended in securities investment funds could be open-ended or closed-ended, 2014) and the Partnership Law (as amended in 2006). In addition, while equity investment funds are normally closed-ended. Both foreign investment into Alternative Investment Funds and related private securities funds and private equity funds are regulated enterprises is subject to applicable foreign investment legislation. by the CSRC, and managers of both types of funds are required to be registered with the AMAC. However, certain aspects of regulatory requirements, such as senior management qualification 1.2 Are managers or advisers to Alternative Investment requirements and reporting items, differ in respect of these two Funds required to be licensed, authorised or regulated by a regulatory body? types of Alternative Investment Funds.

Management entities of Alternative Investment Funds are regulated 1.5 What does the authorisation process involve and how by the China Securities Regulatory Commission (the “CSRC”). long does the process typically take? Alternative Investment Fund managers are required to complete registration with, and submit periodic reports to, the Asset Alternative Investment Fund management entities meeting Management Association of China (the “AMAC”), an industry self- qualification requirements prescribed by the CSRC and the AMAC regulatory body recognised by the CSRC. The AMAC is currently are required to complete registration with the AMAC as private fund in charge of administering the registration of, and reporting by, managers. Substantively, qualification requirements of private fund Alternative Investment Fund managers. managers include: (i) Establishment and business scope. An applicant shall 1.3 Are Alternative Investment Funds themselves have been duly established and validly existing in China. required to be licensed, authorised or regulated by a In addition, the applicant’s name and business scope, regulatory body? as indicated on its business licence, shall reflect that it conducts private fund investment management business. The operative terms may include “fund management”, Alternative Investment Funds are regulated by the CSRC. A fund “investment management”, “asset management”, “equity manager is required to complete and update an online filing with investment”, “venture capital investment” and other terms the AMAC for each Alternative Investment Fund it manages; in closely relating to the business of private fund management. each case, within 20 business days following the completion of In addition, an applicant shall not conduct other business that fundraising. may conflict with its fund management business. Examples of such conflicting business include private and peer-to-peer lending, crowd-funding, factoring, real estate development and internet commerce.

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(ii) Facilities and conditions for operation. An applicant shall have the necessary personnel, premises and registered capital 1.8 What rules apply to foreign managers or advisers to conduct its operation. Although no minimum registered wishing to manage, advise, or otherwise operate capital is imposed on an applicant, it should have enough funds domiciled in your jurisdiction? capital to cover its payroll, office rent and other business operation expenses for a reasonable period of time. Only Chinese resident entities can register as Alternative Investment (iii) Risk management and internal control systems. The Fund managers. Such management entities, however, can be applicant shall have established necessary risk management wholly foreign-owned enterprises or joint-venture enterprises and internal control systems in accordance with its business among Chinese and foreign equity holders. There is no generally operation, which may comprise procedures and policies applicable prohibition against foreign entities providing advisory China relating to operational risk control, disclosure obligations, and other services to China domiciled Alternative Investment Funds internal trading, insider trading, conflicts of interest, and fund if such services are provided from offshore jurisdictions. Foreign offering. entities, however, are not permitted to operate a business for profit (iv) Management qualification. In respect of a securities without establishing an onshore presence. investment fund, the senior management personnel, including the legal representative/executive partner (representative), manager, vice manager, and persons in charge of risk control 1.9 What co-operation or information sharing agreements and compliance, shall have professional fund management have been entered into with other governments or qualifications. In respect of a private equity investment regulators? fund or a venture capital investment fund, at least two senior management persons, including its legal representative/ The CSRC has entered into memorandums of understanding on executive partner (representative) and persons in charge enforcement cooperation with capital markets regulators of over 60 of risk control and compliance, shall have obtained a jurisdictions, including the U.S. and major European jurisdictions. professional fund management qualification. In addition, Alternative Investment Funds are regarded as “financial The application for registration as a private fund manager needs to institutions” that have been obligated to comply with the CRS under be accompanied by an opinion letter issued by a Chinese law firm, the AEOI framework since July 1, 2017. which should address, in addition to the qualification requirements listed above, whether the applicant and its senior management have, within the past three years, been subject to criminal penalties, 2 Fund Structures administrative penalties, AMAC sanctions, or have been negatively recorded in the national integrity file database. 2.1 What are the principal legal structures used for The procedural registration requirements of private fund managers Alternative Investment Funds? involve the submission of the required information and documentation through an online platform administered by the AMAC. The AMAC Alternative Investment Funds may be established as limited liability will process an application for registration within 20 business days companies, limited partnerships or through contracts. Foreign- following a complete submission and post on its website basic invested Alternative Investment Funds are normally established as information on such registered manager. There is, however, no foreign-invested limited partnerships and foreign-invested limited time frame imposed on assembling a complete submission. Prior to companies. accepting a complete submission, the AMAC may review application materials, request supplementary documentation and conduct on-site inspections and in-person interviews of managerial personnel to 2.2 Please describe the limited liability of investors. verify the application. The liability of a shareholder of a limited liability company is limited by the committed capital of such shareholder. Clause 36 of 1.6 Are there local residence or other local qualification requirements? the Company Law provides that the authority of a limited liability company rests with the shareholders’ meeting. Shareholders of the company are entitled to make key decisions, and select directors and Pursuant to Clause 12 of the Securities Fund Law, Alternative supervisors, for the company. Investment Fund managers should be companies or partnerships established under Chinese law. Foreign entities and natural persons The liability of a limited partner of a limited partnership is limited by are not allowed to be registered as Alternative Fund managers or its capital commitment. Clause 68 of the Partnership Law provides raise their own funds in China. On the other hand, Alternative that limited partners shall not execute partnership affairs and shall Investment Funds duly formed in China are not prohibited from not represent the partnership. retaining the service of foreign investment managers or advisers. An investor’s rights and obligations in a contractual fund would be provided for in the fund agreement. The liability of an investor would normally be limited to its invested/committed investment 1.7 What service providers are required? amount. Pursuant to Clause 88 of the Securities Fund Law, unless otherwise provided in the fund agreement, the fund’s assets should be placed 2.3 What are the principal legal structures used for in the custody of a custodian. Qualified fund custodians include managers and advisers of Alternative Investment commercial banks and securities companies approved by the Funds? CSRC. Other service providers routinely involved in the formation and operation of Alternative Investment Funds include placement Alternative Investment Fund managers and advisers are commonly agents, auditors and legal counsel. established as limited liability companies and limited partnerships.

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key investor rights, e.g. subscription, redemption and transfer rights, 2.4 Are there any limits on the manager’s ability to and the relevant restrictions, timing and requirements; (xi) major restrict redemptions in open-ended funds or transfers fees to be borne by the fund and fee rates; (xii) content, methods and in open-ended or closed-ended funds? frequency of reporting of fund information; (xiii) a clear statement that the document may not be transmitted or circulated to third There is no statutory requirement, prohibitions or restrictions in parties; and (xiv) for funds established as limited partnerships or respect of redemptions. Such restrictions can be provided for in the limited liability companies, a clear statement that the subscription constitutional documents and other agreements of the fund. agreement may not replace the limited partnership agreement or the company charter, and that the limited partnership agreement or the

2.5 Are there any legislative restrictions on transfers of company charter shall be entered into and amended in accordance China investors’ interests in Alternative Investment Funds? with the Partnership Law or the Company Law, respectively. The fund manager shall be responsible for the truthfulness, There is no express statutory restriction against the transfer of completeness and accuracy of the marketing materials. The investors’ interests. However, such transfers may be subject to marketing materials shall not provide for minimum investment other laws and regulations, such as requirements relating to investor returns or projected returns. In addition, fund marketing materials qualification, foreign investment, or the transfer of state-owned may only be provided to specific qualified investors who have assets. completed the relevant qualification questionnaire and risk evaluation. 2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, 3.3 Do the marketing or legal documents need to be asset stripping rules)? registered with or approved by the local regulator?

Various limitations may apply dependent upon the asset class of the The marketing materials and legal documents of an Alternative Fund. For example, Alternative Investment Funds are generally Investment Fund are not subject to registration or review by prohibited from conducting debt investment or extending credit to regulators. However, company charters and partnership agreements portfolio companies. will need to be filed with the applicable offices of the Administration for Industry and Commerce. 3 Marketing 3.4 What restrictions are there on marketing Alternative Investment Funds? 3.1 What legislation governs the production and offering of marketing materials? Marketing of Alternative Investment Funds may only be conducted privately by registered fund managers or registered fund placement The Securities Law and the Securities Fund Law generally govern agents, and be directed at specific qualified investors. In addition, the offering of fund interests in China. The Interim Measures for the an investor will be entitled to a cooling-off period of at least 24 Administration of Alternative Investment Funds, as promulgated by hours before its subscription to the fund interest becomes effective. the CSRC on 21 August 2014 (the “Fund Administration Measures”), During the cooling-off period, the fund manager or placement agent and the Measures for Administration of the Fundraising of Privately may not initiate contact with the investor. Offered Investment Funds, as promulgated by the AMAC on 15 April 2016 (the “Fundraising Measures”), provide more specific rules and restrictions on Alternative Investment Fund offering and 3.5 Can Alternative Investment Funds be marketed to marketing materials. The AMAC may also issue directions and retail investors? guidelines on particular offering materials. Alternative Investment Fund interests may only be marketed to specific qualified investors. Before initiating marketing efforts in respect of a 3.2 What are the key content requirements for marketing potential investor, the fund manager and placement agent shall confirm materials, whether due to legal requirements or the suitability and qualification of such potential investor. customary practice?

Pursuant to the Fund Administration Measures and the Fundraising 3.6 What qualification requirements must be carried out Measures, the content of the marketing materials for an Alternative in relation to prospective investors? Investment Fund shall include, but is not limited to, the following information: (i) the name and type of the fund; (ii) the name, Prior to directing marketing efforts to a potential investor, a registration number and fund management team of the fund questionnaire needs to be provided to such potential investor in manager; (iii) information publicly disclosed or to be publicly order to determine its identity, investment experience, risk profile disclosed on the AMAC website; (iv) custody of fund assets, other and qualification. Alternative Investment Fund interests may only service providers and retention of the investment advisor; (v) be offered to qualified investors. A qualified investor should: (i) outsourcing of fund services; (vi) the investment scope, investment have, if an entity, net assets of not less than RMB 10 million; or, if an strategies and investment restrictions of the fund; (vii) matching individual, financial assets (including bank deposits, stocks, bonds, of profits and risks; (viii) risk disclosures; (ix) fund account and fund interests and investments in asset management, insurance and account supervisor (to be differentiated from the custodian, the roll futures products) of not less than RMB 3 million or annual income of an account supervisor can be performed by commercial banks and of not less than RMB 500,000; and (ii) invest at least RMB 1 million securities companies); (x) fees to be borne by investors and fee rates, in a single fund.

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securities trading. However, Chinese banks are not in the business 3.7 Are there additional restrictions on marketing to of providing subscription credit facilities and regular commercial public bodies such as government pension funds? bank loans are not considered a viable source of financing for fund investment due to the high cost and the funds’ inability to provide Investments by government pension funds are regulated separately. security. For example, investments by the national social security fund are governed by the Interim Measures on Investment by the National Security Fund, which impose certain allocation, approval and 5 Disclosure of Information reporting requirements on its investments.

China 5.1 What public disclosure must the Alternative 3.8 Are there any restrictions on the use of intermediaries Investment Fund or its manager make? to assist in the fundraising process? Although Managers of Alternative Investment Funds are required to Fund managers may directly carry out fundraising for the funds they make substantial reports to the AMAC for itself and on behalf of the manage or retain qualified placement agents to conduct fundraising funds it manages, the AMAC makes very limited public disclosure activities. Alternative Investment Fund placement agents are of such information. Publicly disclosed information of managers required to register with the CSRC. include, among other things, the name, address, time of establishment, size, legal representative, senior management, compliance status 3.9 Are there any restrictions on the participation in and managed funds of a manager. Publicly disclosed information Alternative Investment Funds by particular types of of funds include, among other things, the name, address, time of investors, such as financial institutions (whether as establishment, denomination, manager, custodian and compliance sponsors or investors)? status of a fund. In addition to the foregoing, Alternative Investment Funds may be required to make public disclosures associated with Regulation of financial institutions in China is segmented. The main such investments, such as listed securities. market participants, such as commercial banks, trust companies, insurance companies and securities companies, participate in 5.2 What are the reporting requirements in relation to Alternative Investment Funds in accordance with respective Alternative Investment Funds or their managers? rules and regulations applicable them. It is common for financial institutions to indirectly participate in the private fund industry Fund managers are required to submit to the AMAC (i) periodical through subsidiaries or affiliates established for the purposes of reports in respect of the funds they manage on a monthly, quarterly carrying out investment and asset management operations. and annual basis, (ii) reports of significant events concerning the manager, and (iii) reports of significant events concerning the funds 4 Investments they manage.

5.3 Is the use of side letters restricted? 4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment Funds? The use of side letters is not expressly permitted or prohibited, and side letters are quite common between fund managers and The business operation of Alternative Investment Funds shall be institutional investors. conducted within the scope of business reflected in its business licence. The constitutional documents and other fund agreements may 6 Taxation also prescribe restrictions on fund activities. In addition, regulatory authorities may, from time to time, impose restrictions, such as the prohibition against debt investment and extension of loans imposed 6.1 What is the tax treatment of the principal forms of by the AMAC and other regulatory authorities in 2018. Alternative Investment Funds identified in question 2.1?

4.2 Are there any limitations on the types of investments An investment fund may be established in the form of a limited that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or liability company or a limited partnership, or through contracts. otherwise? A limited liability company is subject to entity-level value-added tax at 6% for securities trading and other taxable operations, and The types of investment which may be made by an Alternative income tax at the rate of 25% (certain types of income are taxed at Investment Fund include purchase and sale of stocks, shares, bonds, lower rates). A limited partnership is subject to entity-level value- futures, fund interests, and other investment products as agreed in its added tax at 6% for securities trading and other taxable operations. investment agreement. There are no generally applicable regulatory However, a limited partnership is not a taxable entity for income requirements on diversification. tax purposes. Instead, the partners of a limited partnership would recognise income and be subject to income tax at the partner level. Consequently, the tax exemption on dividends and other equity 4.3 Are there any restrictions on borrowing by the income between resident enterprises does not apply to limited Alternative Investment Fund? partnerships. A contractual fund does not have an entity form and is not currently taxed. There is no express regulatory restriction against borrowings by Alternative Investment Funds. Leverage is commonly utilised in

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6.2 What is the tax treatment of the principal forms of 6.7 What steps are being taken to implement the OECD’s investment manager / adviser identified in question Action Plan on Base Erosion and Profit-Shifting 2.3? (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? An investment manager/adviser is normally established in the form of either a limited liability company or a limited partnership. A The practice of the SAT, in general, conforms to the approach limited liability company is subject to entity-level value-added tax outlined in Action 6 (treaty abuse). On August 27, 2015, the SAT at 6% and income tax at the rate of 25% (certain types of income issued Announcement 60 on the Administration of Treaty Benefits are taxed at lower rates). A limited partnership is subject to entity- to Non-residents, and brought the claim and reporting procedure level value-added tax at 6%. However, a limited partnership is not more in line with international practice. The SAT had also been China a taxable entity for income tax purposes. Instead, the partners of vocal about its support for Action 7 (permanent establishment), a limited partnership would recognise income and be subject to and had been reported to be in the process of updating the relevant income tax at the partner level. tax treaties. The implementation of the OECD action plans is not, however, expected to have an immediate effect on the operation of Alternative Investment Funds in China. 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the 6.8 Are there any tax-advantaged asset classes or investor’s interest? structures available? How widely are they deployed?

There are no special establishment taxes levied on Alternative To promote economic development, municipalities in a number of Investment Funds. Income derived from transfers of fund interests autonomous regions in China offer lower income tax rates to fund will be subject to income tax. managers. Local tax rebates remain available, but elusive. The Ministry of Finance and the SAT issued the Circular on Tax 6.4 What is the tax treatment of (a) resident, (b) non- Policies for Venture Capital Enterprises and Individual Angel resident, and (c) pension fund investors in Alternative Investors on May 14, 2018 (“Circular 55”), which permits, subject Investment Funds? to prescribed conditions, venture capital investment enterprises to deduct from their taxable income derived from investments in early Resident investors are taxed based on their respective tax status. stage technology companies up to 70% of qualified investment Subject to tax treaty benefits, non-resident investors are generally amounts in such companies. subject to a 10% withholding tax on income derived from an onshore fund. Domestic pension funds are entitled to special tax treatment. 6.9 Are there any other material tax issues for investors, managers, advisers or AIFs? 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing No, there are not. an Alternative Investment Fund?

State and local-level tax authorities do not, as a general practice, 6.10 Are there any meaningful tax changes anticipated in the coming 12 months? issue advance tax rulings on Alternative Investment Funds.

No, there are none anticipated. 6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting 7 Reforms regimes such as the Common Reporting Standard?

China has signed up to the Multilateral Convention on Mutual 7.1 What reforms (if any) are proposed? Administrative Assistance in Tax Matters (as amended by the 2010 Protocol) and has started to implement the CRS under the AEOI No particular reform has been proposed with respect to alternative framework on July 1, 2017. investment funds. However, recent rule-making demonstrates a policy shift to curb debt levels in the Chinese economy, particularly in the financial sector. The private fund industry may be affected by further regulatory actions in the same general direction.

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Sue Liu FenXun Partners Suite 3501, China World Office 2 1 Jianguomenwai Ave. Beijing China

Tel: +86 10 56496060 Email: [email protected] URL: www.fenxunlaw.com China

Ms. Sue Liu has been a partner of FenXun Partners since 2010. Her practice focuses primarily on the asset management industry, advising clients on a wide spectrum of legal issues and considerations relating to the establishment and operation of onshore and offshore private investment funds. Prior to joining FenXun Partners, Ms. Liu had been practising in the U.S., focusing on private fund formation and mergers, acquisitions, equity offerings and public listings involving investment management firms. Ms. Liu has represented some of the largest international investment managers, as well as newly-established fund management houses. Ms. Liu has been consistently ranked as a Band Two Lawyer (Investment Fund, Foreign Legal Consultants (PRC Firms), China) by Chambers Asia. Ms. Liu graduated from Peking University with an LL.B. (1999) and from Columbia University Law School with a J.D. (2003).

FenXun Partners is a Chinese law firm. Well recognised since its establishment in 2009, FenXun has been consistently ranked as a leading team in the financial services sector and in cross-border transactions. In April 2015, FenXun Partners and Baker & McKenzie established a joint operation platform in the Shanghai Free Trade Zone. Baker & McKenzie FenXun (FTZ) Joint Operation Office brings together FenXun Partners’ Chinese expertise and Baker & McKenzie’s international capabilities spanning 47 countries, for the benefit of international and Chinese clients conducting cross-border business. At FenXun Partners, we understand the interplay between the legal and financial aspects of high-value investments and leverage this knowledge to deliver commercially focused advice. Our attorneys have extensive experience working with Chinese enterprises, institutions and regulators. Many of our attorneys have worked in international law firms, executing deals in the leveraged acquisition, project finance, private equity, distressed asset, pre-IPO, and restructuring spaces in the US, Europe, and other Asian countries.

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Cyprus Andreas Yiasemides

PricewaterhouseCoopers Ltd Constantinos A. Constantinou

are surpassed at the manager’s level where they apply in case of 1 Regulatory Framework external management. External management may be exercised by a management company (“UCITS Management Company”) 1.1 What legislation governs the establishment and authorised by the Open-ended Undertakings for Collective operation of Alternative Investment Funds? Investment Law 78(I)/2012, as amended (“UCI Law”), or by an investment firm authorised in accordance with Law 87(I)/2017 Alternative Investment Funds (“AIF(s)”) are governed by the regarding the provision of investment services, the exercise of Alternative Investment Funds Law 131(Ι)/2014 (“AIF Law”) and investment activities and the operation of regulated markets, as the Alternative Investment Fund Managers Law 56(I)/2013 (“AIFM amended, (“Investment Services Law”), or any UCITS management Law”), both laws as amended. The AIFM Law transposes the Company or investment firm established and duly authorised provisions of the Alternative Investment Fund Managers Directive pursuant to the legislation of another Member State which transposes 2011/61/EU (“AIFMD”). the provisions of the Directive 2009/65/EC (“UCITS Directive”) For the purposes of this chapter, references as to AIFs shall also and Directive 2014/65/EU (“MiFID II”), respectively, and to the include the AIFs addressed to a limited number of persons (less than extent subsequently amended, only if the total assets under the 75) (“AIFLNPs”) unless explicit references to AIFLNPs are made, management of such external managers are below thresholds (i) or and references to persons shall mean the investors in the AIFs/ (ii). AIFLNPs. An AIFLNP may be externally managed by: (i) the entities outlined above for AIFs (i.e. Cyprus or EU 1.2 Are managers or advisers to Alternative Investment authorised UCITS Management Company or investment firm Funds required to be licensed, authorised or excluding a Cyprus or EU authorised AIFM) or a company regulated by a regulatory body? established in a third country as long as it is authorised to provide portfolio management services and it is subject to Management of AIFs prudential regulation regarding the provision of that services, all the aforesaid entities being eligible if only the AIFLNP’s The responsible authority for the authorisation and supervision of portfolio includes financial instrument(s); or the management of AIFs is the Cyprus Securities and Exchange (ii) any company which, in accordance with its instruments of Commission (“CySEC”). incorporation, has the sole purpose of the provision of the An AIF may be managed by its board of directors (only if an AIF is portfolio management service to the specific AIFLNP and formed as a variable or fixed capital investment company, “VCIC” acquires specific authorisation by the CySEC to this end (the or “FCIC”) assuming (i) that the assets of its portfolio, including “Special Purpose Company” or “SPC”). any assets acquired through use of leverage, in total, do not exceed If the abovementioned thresholds (i) or (ii) are surpassed, such EUR 100,000,000 (or currency equivalent), or (ii) the assets of its external manager shall obtain authorisation to operate as an AIFM portfolio, where the AIF does not employ leverage and its investors and all AIFLNPs under its management shall transition to AIFs. have no redemption rights exercisable during a period of five years A self-managed AIF not operating under the AIFM Law provisions, following the date of initial investment in the AIF, do not exceed or an external manager which is not authorised as an AIFM, are EUR 500,000,000 (or currency equivalent). subject to registration in the Special Register of sub-threshold The self-managed AIF will either voluntarily or if the AIFMs maintained by the CySEC. abovementioned thresholds (i) or (ii) are surpassed, exercise internal management as per the AIFM Law. A self-managed Advisers to AIFs AIFLNP can never exceed thresholds (i) or (ii). In order for an The provision of investment services and activities (subject to AIFLNP to exercise internal management pursuant to the AIFM exceptions) within Cyprus is regulated by the Investment Services Law and/or is allowed to surpass thresholds (i) or (ii), it shall Law which transposes the provisions of MiFID II into Cyprus transition to an AIF subject to the prior approval of CySEC. law. The provision of investment advice in respect of one or An AIF may be externally managed by an Alternative Investment more transactions relating to financial instruments is subject to Fund Manager (“AIFM”) pursuant to the AIFM Law or any the Investment Services Law. Investment advice may be provided AIFM established and duly authorised pursuant to the legislation by any duly authorised person. Cyprus entities (i.e. a Cyprus of another Member State which transposes the provisions of the investment firm, a UCITS management company, an AIFM) shall AIFMD accordingly, either voluntarily or if thresholds (i) or (ii) be authorised to this end by the CySEC in accordance with the

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Investment Services Law, and non-Cyprus entities in accordance AIFM or internally managed pursuant to the AIFM Law with the respective applicable law. in accordance with section 6 (2)(a)(iii) of the AIF Law) to benefit from the passporting regime as per question 3.4 below. 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body? 1.5 What does the authorisation process involve and how long does the process typically take? AIFs themselves, whether self or externally managed, have to be licensed and authorised by the CySEC pursuant to the AIF Law as AIFs are subject to authorisation from the CySEC prior to commencing their operations pursuant to sections 12 and 13 of the Cyprus described below in question 1.5. AIF Law. The application to the CySEC for granting an authorisation to an 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment AIF must include, inter alia, information on the persons conducting Funds (or otherwise differentiate between different the business of the AIF, its organisational structure, any delegation types of funds or strategies (e.g. private equity v arrangements in place, declarations by the external manager (if hedge)) and, if so, how? appointed) and depository (if appointed), and a declaration of commitment to the payment of the prescribed initial minimum The AIF Law distinguishes between either: capital (if applicable). ■ an AIF of the open-ended type, where its investors have the The mandatory documentation, irrespective of the legal structure right to redeem or repurchase their units upon request, at any and type of management of the AIF, consists of the prospectus and time, or at regular intervals which do not exceed one year and the related constitutional documents. Additionally, the CySEC must are defined in the constitutional documents of the AIF; or be satisfied that the persons managing and controlling the AIF are ■ an AIF of the closed-end type, where its investors have the of good repute and relevant experience; hence, the requirement for right to redeem or repurchase their units upon request, at additional identification documents for each such person is also regular intervals that exceed one year, but shall not extend required. The self-managed AIF must also submit, inter alia, an for more than five years or at a specific time as defined in the internal operations manual describing its policies and procedures to constitutional documents of the AIF. be undertaken, a business plan and identification documents in respect AIFs are treated differently depending on the circumstances, for of the key officers appointed at the level of the AIF (i.e. internal example: auditor, compliance officer, risk manager and portfolio manager(s)). a) the mandatory requirement for the appointment of a local The said application must be signed by all the members of the depositary if the AIF is internally or externally managed management body of the self-managed AIF or the external manager within the AIFM Law provisions compared to an AIF (if appointed) and shall be submitted by the applicant to the CySEC, established outside the scope of the AIFM Law which can upon the payment of the prescribed application fees. appoint a depository operating in another EU Member State or third country (under conditions) or even waive the The applicant is informed of the result of the application by depository requirement (AIFLNPs being subject to specific the CySEC within three months from the date of submission of qualifications referred to in paragraph (c) below) in cases the application. The CySEC may ask the applicant to provide where its total assets are not eligible for custody (e.g. real clarifications or/and any additional information or documents which estate or private equity); may be deemed necessary for further assessment of the application. b) the reduced duties (no oversight or cash monitoring) of the Non-Cyprus AIFs established and operated outside Cyprus can appointed depositary of an AIFLNP compared to the full be registered with the CySEC and are allowed to market their scope of duties it has to perform when appointed for an AIF; units within Cyprus, either by following a prescribed notification c) the requirement for the appointment of a depositary may procedure or by seeking additional authorisation from the CySEC, be waived in cases where the AIFLNP’s (i) total assets do depending on the case. not exceed EUR 5 million (or equivalent currency) or (ii) investors are limited to five in total or (iii) total assets are not subject to custody; 1.6 Are there local residence or other local qualification d) the restriction of AIFLNPs to address more than 75 persons requirements? or market their units to retail investors compared to AIFs addressed to unlimited number of persons; The AIF Law provides for certain local qualification requirements, e) different requirements, inter alia, in respect of the including but not limited to the following: organisational structure and reporting obligations that apply ■ an AIF structured as an investment company or a limited in relation to AIFs and AIFLNPs; partnership (“LP”) must have its registered office/central f) the absence of the minimum capital requirements in respect of offices and main place of conduct of activities, respectively, an AIFLNP compared to an AIF, the latter being subject to a located in Cyprus; minimum capital requirement totalling EUR 125,000, unless ■ the external audit of an AIF must be performed by a Cyprus it is established as a self-managed AIF in accordance with based firm authorised to undertake such duties; section 6(2)(a)(iii) of the AIF Law, resulting in a minimum ■ the depositary of a self-managed AIF operating under the capital requirement of EUR 300,000; AIFM Law or of an AIF externally managed by an AIFM g) the ability of AIFs to be listed and traded on a stock market or must be Cyprus based; and multilateral trading facility (traded only if established as an ■ CySEC’s Directive 131-56-02 lays down specific rules in investment company addressed to retail investors) compared relation to the marketing of units of AIFs from and to Cyprus, to the prohibition of the same in respect to AIFLNPs; and/or as well as in respect to the organisation and the obligations of h) the restriction imposed on an AIFLNP and an AIF (which persons in the marketing network of units of AIFs which are is not externally managed by a Cyprus or EU authorised intended to be marketed within Cyprus.

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Based on ad hoc CySEC guidelines, there are also certain local Companies established in a third country are permitted only to governance qualification requirements, including but not limited to manage AIFLNPs where their portfolio(s) include one or more the following: financial instruments, as long as they are authorised to provide ■ the board of directors of a self-managed AIF, or of the portfolio management services and are subject to prudential external manager of the AIF, shall consist of at least four regulation regarding the provision of that service. A “Memorandum directors, two serving as executive and two as “independent” of Understanding and Cooperation” signed between the CySEC and non-executive directors, the majority of whom must be tax the competent authority of the third country must be in place. residents in Cyprus; Any entity established within EU or in a third country that wishes to ■ the board of directors of a self-managed AIFLNP or of its provide Investment Advisory services to a Cyprus AIF must comply SPC, shall consist of at least three directors, one serving as with the provisions of the Investment Services Law (including any executive and two as non-execute directors, the majority of Cyprus relevant secondary legislation issued by the CySEC) and/or the whom must be tax residents in Cyprus; relevant EU legislation and/or the related and equivalent legislation ■ the board of directors of an externally-managed AIF shall that the said entity is subject to in its home jurisdiction. consist of at least two directors; ■ the portfolio and risk management functions of the AIF shall be assessed by the CySEC as to their suitability to undertake 1.9 What co-operation or information sharing agreements any of the said functions, and independence between the two have been entered into with other governments or aforesaid functions must be ensured; regulators? ■ the self-managed AIF or its external manager is also required to establish a regulatory/anti-money laundering compliance The CyCEC is a signatory party in various bilateral, multilateral and programme and an independent internal audit function; and/ special agreements pursuant to section 29 of the Law 73(I)/2009, as or amended, which provides for the cooperation of the CySEC with ■ persons who perform functions relating to the AIF including competent supervisory authorities and organisations abroad. For but not limited to persons who market the AIF’s units, the example, CySEC is a signatory party in: compliance officer (anti-money laundering and/or regulatory a) a multilateral agreement with the European Securities and compliance officer), the portfolio manager and the risk Markets Authority and the International Organisation of manager shall be first certified in accordance with the Securities Commission for consultation, cooperation and CySEC’s Directive regarding the certification of persons and exchange of information purposes; and the certification registers of 2015, as amended (“Certification b) a bilateral agreement with the respective regulatory Directive”). The CySEC may also require the board of authorities of various countries, inter alia, to the Hellenic directors (in part or in whole) of the self-managed AIF or both Republic Capital Market Commission, the Australian (or either) boards of directors of the self-managed fund and Securities & Investments Commission and the Austrian their external manager (depending on the circumstances) to Securities Authority. be certified as aforesaid. The registered persons are obliged to renew their registration each calendar year and are subject In addition, pursuant to section 44 of the AIFM Law, the CySEC to compulsory continued professional training. signed various “Memoranda of Understanding and Cooperation” with various third countries (i.e. the Cayman Islands, Dubai, Hong Kong, Israel, Japan, Korea, Singapore and the USA) in order to 1.7 What service providers are required? allow fund managers based outside the EU to access EU markets or perform fund management through delegation from managers of a) Unless an exemption is granted, AIFs are required to appoint the EU. a depositary responsible for the safekeeping of the AIFs’ assets, the performance of oversight and cash monitoring. The appointed depositary of an AIFLNP shall only be 2 Fund Structures responsible for the safekeeping of the AIFLNP’s assets. Such an exemption in respect to the appointment of a depository depends on factors such as the underlying structure or 2.1 What are the principal legal structures used for management of the AIF; for example, a depository shall Alternative Investment Funds? always be appointed in relation AIFs managed by an AIFM. b) A fund administrator, even though not required, may be An AIF can be structured as (i) a common fund (“CF”), (ii) a VCIC appointed to render services including but not limited to or FCIC, or (iii) an LP. An AIFLNP can be structured in the form of book-keeping and accounting, net asset value calculation, (i) a VCIC or FCIC or (ii) an LP. reporting, filling, maintenance of the register and facilitation of investor transactions. c) A qualified professional Cyprus based auditor must be 2.2 Please describe the limited liability of investors. appointed having an obligation to perform the audit of the AIFs and report to the authorities of any irregularities which The liability of the investors varies depending on the legal structure come to their attention while performing their duties. of the AIF: d) A legal advisor must also be appointed. a) if an investment company (VCIC or FCIC), the investors’ liability is limited to the amount invested by way of shares; 1.8 What rules apply to foreign managers or advisers b) if an LP, the limited partner is only liable in respect of the wishing to manage, advise, or otherwise operate contributed amount and the value of participation interest in funds domiciled in your jurisdiction? the LP; and c) if a CF, the unitholders (being co-owners of each of the Companies established in another Member State and wishing to assets under the AIF) are liable only up to the amount of their manage AIFs must be authorised under their national law transposing contribution, which is expressed in units of the CF. either one of the following EU Directives: the AIFMD; the UCITS Directive; or MiFID II.

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entities shall prepare and circulate a prescribed three A4-paged 2.3 What are the principal legal structures used for Key Information Document (KID) in accordance with the technical managers and advisers of Alternative Investment guidelines laid out in the Delegated Regulation (EU) 2017/653 (in Funds? force since the 1st January 2018). Despite the aforesaid, an open- ended AIF (excluding AIFLNPs) marketed to retail investors must Local Managers and advisers of AIFs are structured as companies issue a key investors’ information document, the content of which limited by shares. is in accordance with Regulation No. 583/2010; however, such type of AIFs shall be subject to Regulation (EU) 1286/2014 after 31st 2.4 Are there any limits on the manager’s ability to December 2019. restrict redemptions in open-ended funds or transfers

Cyprus in open-ended or closed-ended funds? Preparation of a prospectus may instead be required pursuant to Part II of the Law 114(I)/2005, as amended (“Prospectus Law”), and the By virtue of being an open or closed-ended AIF, its investors Prospectus Regulation (EU) 2017/1129 (the “Prospectus Regulation”) have the right to redeem or repurchase their units as described in to the extent it partly repeals related provisions to the Prospectus Law st question 1.4 above. Also, CySEC’s Directive DI 131-2014-03 (until the latter comes into full force on 21 July 2019). (“Classification of AIFs of the Republic Directive”) requires for open-ended AIFs (no AIFLNPs included) with no limited liquidity 3.2 What are the key content requirements for marketing arrangements in place to facilitate redemptions or repurchases materials, whether due to legal requirements or either on a monthly (retail investors) or quarterly (non-retail customary practice? investors) basis. The board of directors of a self-managed AIF or its external manager AIFs may only be advertised after their authorisation has been may be allowed to suspend the redemption or repurchase of units communicated by the CySEC. All announcements and marketing in the AIF in exceptional cases where this is demanded by the material of an AIF need to be clear, fair and not misleading, and circumstances (which may be elaborated in the AIF’s prospectus) or shall be clearly identifiable as such. In any event, such marketing in cases provided in the rules or constitutional documents of the AIF material shall not contradict or downgrade the significance of the and in any case, if this is justified by the interest of the investors. information contained in the prospectus of the AIF as laid down in Transfers in open or closed-ended AIF shall be freely transferable section 77 of the AIF Law and the information referred to in section subject to their constitutional documents and their prospectuses. 30 of the AIFM Law (not applicable to AIFNLPs). The information The board of directors of a self-managed AIFLNP or its external to be provided to the investors includes but is not limited to: manager shall ensure that any transfer of shares or participation a) a description of the investment strategy and objectives of the interest in the AIFLNP shall not result in a breach of the prescribed AIF, a description of the types of assets in which the AIF may limit of 75 investors. invest, the techniques it may employ and all associated risks, any applicable investment restrictions, the circumstances in which the AIF may use leverage and the types and sources of 2.5 Are there any legislative restrictions on transfers of leverage permitted; investors’ interests in Alternative Investment Funds? b) the identity of the manager of the AIF (if applicable), the AIF’s depositary (if applicable), auditor and any other service Please refer to question 2.4 above. providers, a description of their duties and investors’ rights; c) a description of the AIF’s valuation procedure and of the 2.6 Are there any other limitations on a manager’s ability pricing methodology for valuing assets; and to manage its funds (e.g. diversification requirements, d) a description of all fees, charges and expenses and of the asset stripping rules)? maximum amounts thereof which are directly or indirectly borne by investors. Various investment limits, diversification rules and restrictions apply Specific disclosures in the information to be provided to the investors depending on the type of investors (professional, well informed or depending on the classification of the AIF (i.e. Feeder, Money retail investors), the strategy classification of the AIF (e.g. private Market, Funds of Funds) are also outlined in the Classification of equity; loan originating fund, etc.) and the type of structure (open- AIFs of the Republic Directive. ended or closed-ended). Such limits and restrictions are governed AIFs (which also address retail investors and excluding AIFLNPs) by the Classification of AIFs of the Republic Directive. AIFLNPs shall specify in their advertising communications where and in which are not subject to investment limits or restrictions. language their prospectus may be obtained by the investors and their respective authorisation number. Any advertising communications 3 Marketing shall include an explicit reference section that the performance of the investment in units of the AIFs is not guaranteed and the previous returns do not ensure future ones. In case of AIFs with 3.1 What legislation governs the production and offering guaranteed performance, the aforesaid reference shall be limited of marketing materials? to the fact that the past performance does not guarantee future performance. Specific guidelines are in place in relation to an AIF The production and offering of marketing materials principally which replicates a stock exchange index and in case the net asset governed by the AIF Law, the AIFM Law and Directive 131-56-02 value of AIFs may have high volatility because of the composition regarding the terms and the procedure for the marketing of the units of their portfolio or the management techniques used. of AIFs and AIFLNPs.

In addition, units in an AIF/AIFNLP may be considered as packaged 3.3 Do the marketing or legal documents need to be retail investment and insurance products (“PRIIPs”) pursuant registered with or approved by the local regulator? to the Regulation (EU) 1286/2014. To this end, AIFs/AIFLNPs themselves and persons advising on, or selling, the units of the said There is no requirement for marketing materials to be registered

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with or approved by CySEC unless they need to be reviewed and an “inducement” under the Investment Services Law. If the approved by the CySEC for the purposes of authorisation of the AIF, Distributor’s Consideration is considered to be an inducement for as well as any amendments made thereof. the purposes of the Investment Services Law, the Cyprus distributors may be required to be compliant with the provisions of section 17(3), 24 and 25 of the Investment Services Law and Part IV of the 3.4 What restrictions are there on marketing Alternative Investment Funds? CySEC’s Directive DI87-01; any non-Cyprus distributors may have to be compliant with the respective applicable legislation. The self-managed AIF or its external manager may start marketing the units of the AIF to investors within Cyprus upon obtaining 3.9 Are there any restrictions on the participation in Alternative Investment Funds by particular types of authorisation from the CySEC. If the units of the AIF are to be Cyprus marketed outside Cyprus, then a specific authorisation pursuant to investors, such as financial institutions (whether as the applicable legislation of the target jurisdiction must be required; sponsors or investors)? if so, the decision provided by the competent authority of the target jurisdiction must be communicated to the CySEC. As long as such financial institutions are eligible to invest in the AIF as described in question 3.6, there are no further restrictions. AIFs that are: (i) either internally managed under the AIFM Law provisions or externally managed by an AIFM; and (ii) are addressed to professional investors, can take advantage of the “passporting” 4 Investments regime and market their units to another Member State without the requirement of additional authorisation by the competent authority of the target member state. Such AIFs shall be subject to 4.1 Are there any restrictions on the types of activities a notification procedure submitted to the CySEC. that can be performed by Alternative Investment Funds? Persons who enter into a contract with the self-managed AIF or its external manager in order to engage in marketing activities on behalf An AIF is only granted a licence by the CySEC in respect of raising of the AIF shall be first certified in accordance with the Certification capital from a number of investors, with a view to investing it in Directive as described in question 1.6 above. accordance with a defined investment policy for the benefit of those investors. 3.5 Can Alternative Investment Funds be marketed to retail investors? 4.2 Are there any limitations on the types of investments that can be included in an Alternative Investment Only AIFs addressed to an unlimited number of persons can choose Fund’s portfolio whether for diversification reasons or to and this is designated accordingly in order to be marketed to retail otherwise? investors. A detailed analysis of the limitations on the types of investments 3.6 What qualification requirements must be carried out that can be pursued by the AIFs are outlined in the Classification of in relation to prospective investors? AIFs of the Republic Directive. Retail Investor AIFs Prospective investors in an AIF shall ensure that: The investments of AIFs addressed to retail investors shall comprise ■ they are eligible to invest depending on which investors the one or more of the following eligible assets: AIF is authorised to address its units to (professional and/or well-informed); a) Transferable Securities; ■ they are not considered as ineligible investors by any b) money market instruments; further restrictions that the AIF may have incorporated in its c) units of collective investment undertakings; prospectus; and d) financial directive instruments; ■ they have provided acceptable identification and due diligence e) deposits with credit institutions; documentations as requested by the AIF and not be regarded as involved in illegal activities pursuant to the Prevention and f) real estate and real estate related assets; Suppression of Money Laundering and Terrorist Financing g) mortgage-related securities; Law 188(I) of 2007, as amended. h) Collateralized Debt Obligations’ Securities up to 30%; i) commodities up to 20%; and/or 3.7 Are there additional restrictions on marketing to j) foreign exchange up to 20%. public bodies such as government pension funds? Examples of general restrictions in respect of AIFs (either self or externally-managed) addressed to retail investors include but are not There are no additional or specific restrictions that apply in respect limited to the following: to the marketing to public bodies. a) cannot acquire any shares carrying voting rights which would enable the AIF to exercise significant influence over the 3.8 Are there any restrictions on the use of intermediaries management of the issuing body. This restriction is waived to assist in the fundraising process? in regards to other investment funds, Private Equity AIFs and Real Estate AIFs; The self-managed AIF or its external manager may enter a contract b) cannot raise capital from investors through the issue of debt with distributors for distribution of its units, as intermediaries, securities; within Cyprus. Such distributors may receive a fee, commission or c) cannot grant loans or act as a guarantor on behalf of third any other non-monetary benefit (the “Distributor’s Consideration”) parties. This restriction does not prevent AIFs from acquiring in exchange for their services to their AIF, which may be considered transferable securities which are not fully paid; and

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d) if an AIF invests in the units of other investment funds that markets or a multilateral trading facility. AIFs incorporated as are managed, directly or by delegation, by the same external public liability companies may also be subject to public disclosures manager or by any other company with which the external in accordance with the provisions of the Companies Law Cap. 113, manager is linked by common management or control, or unless such provisions are disallowed by the AIF Law. otherwise, that management company or other company shall not change subscription or redemption fees on account of the AIF’s investment in the units of such other AIFs. 5.2 What are the reporting requirements in relation to Specific restrictions also apply to AIFs in relation to investments Alternative Investment Funds or their managers? in cash, in other investment funds, in real estate or when the AIF is engaging in financial derivative instrument transactions (whether for The self-managed AIF or its external manager shall submit to the Cyprus investment or hedging purposes) or whether the AIF is classified as a CySEC and make available to its investors in all selling points of Real Estate, Private Equity, Money Market, Capital or Performance its units: Guarantee, Funds of Funds or a Capital Protection Fund. ■ the annual report for each fiscal year; Professional or Well-Informed Investor AIFs ■ the half-yearly report for the first six months of the fiscal year; In respect of AIFs which are addressed to only well-informed and professional investors (excluding AIFLNPs), there is no restriction ■ the Key Information Document; and as to the eligible assets that shall comprise their investments. ■ a prospectus. However, these AIFs are subject to restrictions including but not Where an AIF is constituted with multiple investment compartments, limited to: the prospectus and annual and half-yearly reports shall be prepared a) Cannot raise capital from investors through the issue of debt as one single document, for all the investment compartments of the securities (subject to derogations). AIF. b) Cannot grant loans or act as a guarantor on behalf of third parties unless where granting of loans or guaranties is 5.3 Is the use of side letters restricted? permitted subject to the provisions governing the AIF’s classification as a Private Equity, Real Estate or Loan Originating Fund (subject to derogations). There are no explicit restrictions on the use of side letters. c) Cannot (neither its external manager, if applicable) acquire any shares carrying voting rights which would enable the 6 Taxation AIF to exercise significant influence over the management of an issuing body, except to investments in other investment funds, to Private Equity AIFs and to Real Estate AIFs. 6.1 What is the tax treatment of the principal forms of Specific restrictions also apply depending on whether the AIF Alternative Investment Funds identified in question which is addressed to only well-informed and professional investors 2.1? (excluding AIFLNPs) is classified as a Private Equity, Money Market, Funds of Funds, Real Estate or Loan Originating AIFs. VCICs and FCICs An AIF with a VCIC or FCIC legal form that is managed and 4.3 Are there any restrictions on borrowing by the controlled from Cyprus (i.e. Cyprus tax resident) will be subject to Alternative Investment Fund? the normal Cyprus taxation rules, including: ■ 12.5% uniform corporate income tax for each year An AIF addressed to retail investors is permitted to borrow and of assessment on all income accrued or derived from all secure such borrowing on the assets of the AIF where such activities chargeable sources both within and outside Cyprus (i.e. worldwide income basis), subject to available exemptions are permitted by its constitutional documents or fund rules. The and deductions as per the law. borrowings, at any given time, shall not exceed the 25% of its net assets. More specifically, all relevant expenses incurred wholly and exclusively for the production of (taxable) income constitute AIFs addressed to only well-informed and/or professional investors deductible expenses whereas, inter alia, dividends, capital are not subject to any borrowing restrictions apart from those that gains or profits from the disposal of “securities” constitute may be included in their constitutional documents or prospectus. tax exempt incomes (subject to conditions). Indicatively, In derogation of the aforesaid, a Loan Originating AIF addressed key characteristics of the law include the following (non- to well-informed and/or professional investors may borrow cash exhaustive): provided that such borrowings fulfils (cumulatively) certain ■ Deductible expenses: In general, expenses shall be conditions as those are listed in section 79 (f) of the Classification of deductible in computing the chargeable tax basis of AIFs of the Republic Directive. the VCIC/FCIC, provided that these are being incurred wholly & exclusively for the production of (taxable) Specific restrictions may apply depending on the classification of income, unless otherwise stated in the law. AIFs. ■ Notional Interest Deduction: Availability for Notional Interest Deduction in regards to new corporate equity of 5 Disclosure of Information the VCIC/FCIC, under conditions and capped at 80% of taxable income. ■ Exemption of profits on disposal of “securities”: The 5.1 What public disclosure must the Alternative Cyprus tax law explicitly defines the term “securities” Investment Fund or its manager make? to include shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons, There is no public disclosure that the AIF must make, except in cases incorporated in Cyprus or abroad, and rights thereon. where the AIF is listed on the stock exchange or other regulated The Cyprus tax authorities have also issued tax technical circulars by which listing (by way of a non-comprehensive

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list) the financial instruments which should be considered investors in accordance with their tax residency status and other as qualifying “securities” for the purposes of applying the relevant criteria (please refer to question 6.4 for more details). said exemption provisions. ■ Exemption of dividend incomes (except in the case of 6.2 What is the tax treatment of the principal forms of dividends which are deductible for tax purposes at the investment manager / adviser identified in question level of the payer). 2.3? ■ Exemption of trading profits from qualifying foreign permanent establishments (election to tax applies). As mentioned under question 2.3, investment managers/advisers Any foreign taxes suffered may, under conditions, be credited against of Cyprus AIFs are commonly structured as limited liability the Cyprus corporate income tax liability on the same incomes.

companies. Such fund management companies typically employ Cyprus ■ Cyprus tax resident companies are also subject to Special the fund management individuals. Defence Contribution (“SDC”), on a gross basis, on certain The fund management company, if managed and controlled from types of “passive” income. Cyprus (and, thus, tax resident in Cyprus) or if a foreign company More specifically, where applicable, SDC is assessed at the with a permanent establishment in Cyprus, will be subject to rate of 17% on dividends, subject to conditions, at the rate taxation in Cyprus generally in line with tax framework applying as of 30% on “passive” interest income (interpreted to mean for VCICs and FCICs under question 6.1 above. interest income not arising in the ordinary course of the business or closely connected thereto) and at the effective Furthermore, the provision of management, administration and rate of 2.25% on rental income. marketing services to an AIF is generally VAT exempt. ■ Dividend Income from Cyprus are exempt from SDC, The individuals that are employed by the fund management subject to certain anti-avoidance provisions. company are subject to Cyprus personal income tax at progressive ■ Dividend Income from abroad (relevant to dividends rates, up to a maximum rate of 35% for annual incomes above EUR which are not deductible for tax purposes by the paying 60,000, to the extent that they are either Cyprus tax resident, or, company. Dividends which are deductible for tax if non-Cyprus tax resident, to the extent that they exercise their purposes by the paying company are only subject to duties from Cyprus. Various additional benefits are available for corporate income tax) are also exempt from SDC subject expatriates, including a potential exemption for 50% of their income to conditions. assuming an annual salary that exceeds EUR 100,000 and certain ■ Cyprus tax resident companies are subject to 30% SDC other conditions are met. Also note, it is anticipated that in the near on a gross basis on “passive” interest income, i.e. interest future certain key/high-ranking employees of fund management income not arising in the ordinary course of the business companies may be entitled to a flat tax rate of 8% on the portion of or closely connected thereto. “Active” interest income their salary that is effectively connected to carried interest, subject is exempt from SDC (however, it is subject to corporate income tax). to conditions (legislation currently at draft stage). ■ SDC on deemed dividend distribution provisions apply only to the extent that the ultimate owners in the VCIC/ 6.3 Are there any establishment or transfer taxes levied FCIC are both Cyprus-domiciled and tax resident in connection with an investor’s participation in an individuals. Alternative Investment Fund or the transfer of the investor’s interest? ■ Capital Gains Tax (“CGT”) is imposed at the flat rate of 20% on gains arising on disposal of (a) immovable property situated in Cyprus (when the disposal is not subject to No material establishment or transfer taxes apply with respect to an corporate income tax), (b) shares in companies not listed investor’s participation in a Cyprus AIF. on any recognised stock exchange which own immovable property situated in Cyprus, and (c) shares in companies not listed on any recognised stock exchange which indirectly 6.4 What is the tax treatment of (a) resident, (b) non- own immovable property situated in Cyprus and at least 50% resident, and (c) pension fund investors in Alternative Investment Funds? of the market value of the company’s shares is derived from immovable property situated in Cyprus. The Cyprus tax treatment of income earned by investors of an AIF In case of share disposals, only that part of the gain relating to the immovable property situated in Cyprus is subject to CGT. will primarily depend upon their tax residency and domicile status, whether physical or legal persons, and the nature of the income: ■ Cyprus does not levy any withholding taxes on any payments of dividend and interest made by Cypriot companies abroad (a) Cyprus tax resident investors (corporates & individuals) are or within Cyprus, except in the cases of (a) dividend payments subject to the provisions of the Cyprus tax legislation on any to both Cyprus tax resident and Cyprus domiciled individuals income to be received from the AIF. and (b) ‘passive’ interest payments to Cyprus tax resident (b) Non-Cyprus tax resident investors (corporates & individuals) companies and Cyprus tax resident and Cyprus domiciled should not be subject to Cyprus tax provided that they do individuals. not have a PE in Cyprus. If there is a Cyprus PE, all income attributed to the PE will be subject to the provisions of the ■ There is no Cyprus stamp duty on any subscription, Cyprus tax legislation. Moreover, in the near future it is redemption, conversion or transfer of units in the AIF. anticipated that legislation will be enacted under which any ■ Moreover, in line with relevant European Court of Justice case non-Cyprus tax resident investors that invest in Cyprus AIFs law, funds are considered to carry out economic activities for which operate as a LP or CF will not be deemed to have a PE VAT purposes and thus have the status of a taxable person. in Cyprus (legislation currently at draft stage). This means that depending on the transactions they carry As regards gains from disposal of units in the AIF, Cyprus and out they may have the right or obligation to register for VAT purposes. non-Cyprus tax resident investors could be subject to Capital Gains Tax at the rate of 20% in case the AIF directly or indirectly owns LPs and CFs immovable property situated in Cyprus (as computed by reference LPs and CFs are tax transparent for Cyprus tax purposes. In this to the values of the underlying properties owned by the AIF which respect, the income of the AIF is taxed directly at the level of the are situated in Cyprus).

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6.5 Is it necessary or advisable to obtain a tax ruling from 6.8 Are there any tax-advantaged asset classes or the tax or regulatory authorities prior to establishing structures available? How widely are they deployed? an Alternative Investment Fund? As described under question 6.1, the Cyprus tax framework provides There is no requirement to obtain a tax ruling in Cyprus prior to for a number of available exemptions and/or deductions that are establishing an AIF. typically relevant also for AIFs. Nevertheless, if deemed advisable, certain elements on the tax From a structural perspective, even though there is no single specific treatment of the AIF, the fund managers and/or the investors could structure that would be considered relevant or appropriate only for be secured in advance with a tax ruling or VAT ruling through AIFs, given that Cyprus provides an overall competitive tax regime, Cyprus efficient and streamlined procedures with the relevant authorities. it is typically possible to structure AIFs in a tax efficient manner, This should be discussed with the tax advisors of the AIF in advance. taking into account the activities/investments of the AIF and other relevant criteria. 6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act 6.9 Are there any other material tax issues for investors, 2010 (FATCA) and other similar information reporting managers, advisers or AIFs? regimes such as the Common Reporting Standard?

Cyprus signed a FATCA Intergovernmental Agreement (“IGA”) with There are no additional material tax issues specific for AIFs, the U.S. Government for FATCA implementation on 5 December investors and/or the fund managers. 2014. Cyprus is also one of the signatories to the Multilateral Competent Authority Agreement concluded in October 2014 for 6.10 Are there any meaningful tax changes anticipated in CRS implementation. Furthermore, the Cyprus Government has the coming 12 months? introduced local legislation and guidance for the implementation of FATCA and CRS requirements. A number of amendments in the Cyprus tax funds regime are As such, financial institutions in Cyprus are required to enhance expected in the near future as mentioned in the preceding sections. their due diligence procedures and collect additional documentation Such amendments are currently included in draft legislation that are from their account holders, including CRS and/or FATCA self- being discussed at Cyprus Parliament level. certification forms in order to identify whether an account is The most notable amendments in the draft legislation are the “Reportable”. Cyprus financial institutions are required to report following: certain specified account information (e.g. account balance, dividend ■ Certain key/high-ranking employees of fund management income, interest income etc.) with respect to “Reportable Accounts” companies may be entitled to a flat tax rate of 8% on the to the Cyprus Tax Authorities which in turn will report such portion of their salary that is effectively connected to carried information to the tax administration of the relevant jurisdictions. interest, subject to conditions. ■ Non-Cyprus tax resident investors in Cyprus AIFs that 6.7 What steps are being taken to implement the OECD’s operate as a LP or CF will not be deemed to have a permanent Action Plan on Base Erosion and Profit-Shifting establishment in Cyprus. (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? 7 Reforms To date, Cyprus has already adopted/is in the process of adopting the minimum standards of the OECD’s Action Plan on BEPS, with 7.1 What reforms (if any) are proposed? very few exceptions. In particular as regards Action 6, Cyprus signed on 7 June 2017, the Multilateral Convention to Implement A bill is currently presented for debate before the Parliament of Tax Treaty Related Measures to Prevent Base Erosion and Profit Cyprus which aims to further modernise the legislative framework Shifting (“MLI”) and included in its provisional notifications in respect of Cyprus AIFs and it is expected to be legally in force thereto the adoption of the Action 6 minimum standards with respect within 2018. The proposed law introduces: to the Preamble of double tax treaties and the Principal Purpose Test (“PPT”). The next step is for Cyprus to ratify the MLI. ■ the ability of the general partner of an LP to elect upon its establishment for legal personality allowing for internally As regards Action 7, under Cyprus’ provisional MLI notifications managed LPs; and Cyprus did not adopt the Action 7 provisions (which are not part of ■ a regime for “registered” but not authorised AIFs (“Registered the minimum standards) although we note that certain of the Action AIFs/RAIFs”) which shall facilitate a quicker and efficient 7 recommendations are included in the recently signed new double launch at reduced cost; the setting up of a RAIF will need to tax treaty between Cyprus and the United Kingdom. be notified to the CySEC and be included in a special register In recent EU Directives on taxation, the EU in certain areas has that shall be maintained. gone beyond the minimum standards of the OECD’s Action Plan Also, additional licensing and supervision regimes are currently on BEPS. Cyprus as an EU Member State has adopted/will be drafted for: required to adopt the relevant measures by the deadlines set out in ■ the sub threshold AIFM – the so-called Mini Manager – the respective EU Directives. falling under the exemptions of the AIFMD and thus leaving its regulation purely to national law; and ■ the Fund Administration Service Provider which shall regulate independent fund administrators at a national level, offering comfort and the feeling of protection to investors.

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Andreas Yiasemides Constantinos A. Constantinou PricewaterhouseCoopers Ltd PricewaterhouseCoopers Ltd 43 Demostheni Severi Avenue 43 Demostheni Severi Avenue CY-1080 Nicosia CY-1080 Nicosia Cyprus Cyprus

Tel: +357 22 555 035 Tel: +357 22 555 516 Email: [email protected] Email: constantinos.a.constantinou@ URL: www.pwc.com.cy cy.pwc.com URL: www.pwc.com.cy Cyprus Andreas is a Partner in the Tax and Legal LoS of PwC Cyprus and Constantinos comes from a financial academic background after he is in charge of the Fund Services department. He has graduated studying Economics at the University of Cyprus. He also obtained an with a first class honours degree from the University of MSc in Finance and Investments from the University of Nottingham, with a Bachelor of Arts degree (BA (Econ)) in Accounting, Finance and which he passed with Distinction. He is a holder of the Advance Economics and obtained an MBA from the University of . He Certificate in Fund Administration (achieved with Distinction) and is a member of the Institute of Chartered Accountants in England and a member in the Public Registry of Certified persons maintained Wales (ICAEW) and of the Institute of Certified Public Accountants of by CySEC for the provision of investment and ancillary services. Cyprus (ICPAC). He is also a holder of an Audit Practicing Certificate Constantinos is also a member of the Fund Administration & Custody in Malta, as well as a founding member of the Cyprus Investment Committee of CIFA. Prior to joining PwC, he was servicing as a Senior Funds Association (CIFA). He currently serves as the Vice-President Financial Services consultant advising on the structuring, authorisation of CIFA and president of ICPAC’s Fund Administration Committee. He and ongoing administration of various complex fund structures at a has also served as the president of the Fund Administration & Custody multi-services company in Cyprus. Committee of CIFA.

PwC Cyprus, anticipating the growth of the investment funds industry and acting in a proactive manner, has established a specialised department (PwC Fund Services) with the mandate to assist in all aspects of setting up an investment fund (Alternative Investment Funds (AIFs) and Open- Ended Undertakings For Collective Investment in Transferable Securities (UCITS)) and/or a fund manager, the licensing process and the ongoing administration and compliance of the preferred investment fund/manager structure. The diversified team of PwC Fund Services consists of more than 10 professionals specialising in investment funds, including duly-qualified accountants, CySEC certified practitioners and qualified lawyers. In addition, the team is actively participating in committees oftheCyprus Investment Funds Association (CIFA), i.e. Fund Administration, UCITS, AIFs, anti-money laundering, regulatory and legal committees.

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Czech Republic

Advokátní kancelář KF Legal, s.r.o. Mgr. Jakub Joska

1 Regulatory Framework 1.6 Are there local residence or other local qualification requirements?

1.1 What legislation governs the establishment and operation of Alternative Investment Funds? No, there are not.

Act No. 240/2013 Coll., on Investment Companies and Investment 1.7 What service providers are required? Funds, as amended (hereinafter referred to as “AICIF”). Depending on the type of the investment fund, the services of an investment company and/or a legal advisor specialised in the field 1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or of investment law are required. regulated by a regulatory body? 1.8 What rules apply to foreign managers or advisers Yes, they are. wishing to manage, advise, or otherwise operate funds domiciled in your jurisdiction?

1.3 Are Alternative Investment Funds themselves Czech Alternative Investment Funds may only be managed by a person required to be licensed, authorised or regulated by a regulatory body? licensed by the Czech National Bank unless it is a foreign person that manages these funds on the basis of the so-called European passport. The non-European entities must be authorised by the Czech National Yes, they are. Bank in accordance with Sec. 481 of the AICIF. Foreign persons authorised by another EU Member State in accordance with Articles 1.4 Does the regulatory regime distinguish between 6 to 8 of the AIFMD (on the basis of the so-called European passport) open-ended and closed-ended Alternative Investment may manage Czech Alternative Investment Funds through a branch if Funds (or otherwise differentiate between different the conditions set out in Sec. 342 of the AICIF are met or directly if types of funds or strategies (e.g. private equity v the conditions set out in Sec. 343 of the AICIF are met. hedge)) and, if so, how?

The Czech legal system does not recognise the term “alternative 1.9 What co-operation or information sharing agreements have been entered into with other governments or investment fund”. Alternative investment funds are classified under regulators? other categories of investment funds according to the AICIF, i.e. qualified investors funds and special funds. A list of third-country supervisors with whom the Czech National Bank has concluded memoranda of understanding to enhance 1.5 What does the authorisation process involve and how co-operation and the exchange of information in the supervision long does the process typically take? of Alternative Investment Fund managers, persons pursuing delegated activities and depositaries are available at: https://www. It depends on whether it is an autonomous fund, a non-autonomous cnb.cz/miranda2/export/sites/www.cnb.cz/cs/dohled_financni_trh/ fund or an entity under Sec. 15 of the AICIF (“administration of legislativni_zakladna/investicni_spolecnosti_investicni_fondy/ property comparable to management”). For a non-autonomous download/seznam_org_dohl_treti_zeme_AIFMD_cz.pdf. investment fund and entity under Sec. 15 of the AICIF it is only required to be registered in the list of the Czech National Bank and 2 Fund Structures it takes ca. one to two weeks, whereas an autonomous investment fund needs to be licensed by the Czech National Bank which lasts ca. four to six months. 2.1 What are the principal legal structures used for Alternative Investment Funds?

It depends on whether it is a qualified investors fund or a special

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fund, and on what assets it invests in. Special funds may only be in the form of an (open-ended and closed-ended) unit fund or a joint 3.2 What are the key content requirements for marketing stock company (including SICAVs), whereas qualified investors materials, whether due to legal requirements or customary practice? funds may be in the form of an (open-ended and closed-ended) unit fund, a trust, a limited partnership company (including SICAR), a limited liability company, a joint-stock company (including Investment in an investment fund may only be publicly offered under the conditions laid down by the AICIF, and only if the fund SICAV), a European Company or a cooperative (including European is registered in the relevant list kept by the Czech National Bank. Cooperative Society). An investment fund investing as a money market fund or a short-term money market fund, as well as collective investment funds investing in real estate or in shareholdings in a real 3.3 Do the marketing or legal documents need to be estate company may, however, only be open-ended unit funds or registered with or approved by the local regulator? SICAVs. It should be added that a suitable legal form for private equity and venture capital funds is SICAR. Marketing documents do not need to be registered or approved Czech Republic by the local regulator but under Sec. 457 of the AICIF the fund’s administrator shall provide the Czech National Bank with the fund 2.2 Please describe the limited liability of investors. rules and inform it about every amendment to them.

It depends on the particular legal form of the fund. The shareholders are not liable for the debts in a unit fund, nor in SICAR. In the case 3.4 What restrictions are there on marketing Alternative of other legal forms, the liability regime is governed by the Act on Investment Funds? Business Corporations. Investments in a qualified investors fund may be offered in the Czech Republic publicly, however, only a qualified investor may become a 2.3 What are the principal legal structures used for unitholder, a beneficiary, a founder, a shareholder or a silent partner managers and advisers of Alternative Investment of this fund or in the case of a trust or a comparable facility a person Funds? who increases the property of this fund by a contract; this must be expressly stated in the offer. A joint-stock company.

3.5 Can Alternative Investment Funds be marketed to 2.4 Are there any limits on the manager’s ability to retail investors? restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? Yes, if the legal conditions are met.

They can be limited by the fund rules. Details are stipulated in the Government Regulation No. 243/2013 Coll., on Investment of 3.6 What qualification requirements must be carried out Investment Funds and on Techniques for Their Management, as in relation to prospective investors? amended (hereinafter referred to as the “Government Regulation No. 243/2013”. In simple terms, leaving aside institutional investors and professional customers, a person whose amount of paid-up contribution or paid-up investment in these other funds corresponds in total to the 2.5 Are there any legislative restrictions on transfers of amount of at least EUR 125,000, and who has made a declaration investors’ interests in Alternative Investment Funds? about being aware of the risks involved in the investment in this qualified investor fund, is required. General rules of the Act on Business Corporations apply depending on the particular legal form of the fund. The AICIF only stipulates that in the case of a SICAR, the transferability of investment 3.7 Are there additional restrictions on marketing to public bodies such as government pension funds? certificates may be limited but not excluded by the articles of association. There are conditions stipulated in Sec. 272 of the AICIF. In the case of pension funds, Sec. 272 (1) (d) of the AICIF states that a qualified 2.6 Are there any other limitations on a manager’s ability investors fund may only be a pension company on the account of a to manage its funds (e.g. diversification requirements, subscriber’s fund, a pension fund or a transformed fund, which it asset stripping rules)? manages.

Yes, such limitations are particularly stipulated in title II and V of the AICIF. 3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process?

3 Marketing The use of intermediaries to assist in the fundraising process is regulated by the Act No. 256/2004 Coll., on Business Activities on the Capital Market, as amended (hereinafter referred to as 3.1 What legislation governs the production and offering the “ABACM”), which stipulates limitation of the spectrum of marketing materials? of investment instruments that the investment intermediary is authorised to distribute together with a limitation of the number Act No. 240/2013 Coll., on Investment Companies and Investment of entities it is authorised to cooperate with within the distribution Funds, as amended, particularly it part 9. chain and the limitation of the range of services that the investment intermediary is authorised to provide.

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There is also a special provision for unit funds stipulating that legal 3.9 Are there any restrictions on the participation in acts whose purpose is to provide an unreasonable advantage to Alternative Investment Funds by particular types of any unitholder to the detriment of the unit fund will not be taken investors, such as financial institutions (whether as into consideration, unless the AICIF provides for otherwise, or if it sponsors or investors)? would be detrimental to third parties who relied on such legal acts in good faith. There are conditions stipulated in Sec. 272 of the AICIF.

6 Taxation 4 Investments

6.1 What is the tax treatment of the principal forms of 4.1 Are there any restrictions on the types of activities Alternative Investment Funds identified in question Czech Republic that can be performed by Alternative Investment 2.1? Funds?

Investment funds benefit from a tax advantage in the form ofa Yes, restrictions are stipulated in the Government Regulation No. reduced rate of corporate income tax of 5%. 243/2013.

6.2 What is the tax treatment of the principal forms of 4.2 Are there any limitations on the types of investments investment manager / adviser identified in question that can be included in an Alternative Investment 2.3? Fund’s portfolio whether for diversification reasons or otherwise? There is no special tax treatment of investment managers or advisors. The income tax rate is 19%. Yes, generally, in qualified investors’ funds, both financial means and things whose value can be expressed in monetary terms can be collected, whereas in special funds, only financial means can be 6.3 Are there any establishment or transfer taxes levied collected. Details are stipulated in the Government Regulation No. in connection with an investor’s participation in an 243/2013. Alternative Investment Fund or the transfer of the investor’s interest?

4.3 Are there any restrictions on borrowing by the The tax is levied on the income from the sale of securities and the Alternative Investment Fund? income from the holding of securities. The tax rate is 15%. The income from the sale of securities may, however, be exempt from Yes, restrictions are stipulated in the Government Regulation No. tax if certain conditions under Sec. 4 of the Act No. 586/1992 243/2013 on the basis of the statutory authorisation. Coll., on Income Taxes, as amended (hereinafter referred to as the “Income Taxes Act”), are met. 5 Disclosure of Information 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative 5.1 What public disclosure must the Alternative Investment Funds? Investment Fund or its manager make? Regarding income from sources in the territory of the Czech Special funds must disclose fund rules, key information under Republic, resident, non-resident, and pension fund investors are Sec. 227 of the AICIF, annual report, auditor’s report, semi-annual subject to the same tax treatment. report, information on securities of the fund under Sec. 239 of the AICIF and information for investors under Sec. 241 of the AICIF. Qualified investors funds must disclose fund rules, annual report, 6.5 Is it necessary or advisable to obtain a tax ruling from auditor’s report and information for investors under Sec. 293 of the the tax or regulatory authorities prior to establishing an Alternative Investment Fund? AICIF.

No, it is not. 5.2 What are the reporting requirements in relation to Alternative Investment Funds or their managers? 6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act Management companies submit to the Czech National Bank the 2010 (FATCA) and other similar information reporting statements, reports and other information defined in Decree No. regimes such as the Common Reporting Standard? 249/2013 Coll., on Reporting by a Manager and an Administrator of an Investment Fund or Foreign Fund to the Czech National Bank, The FATCA has been implemented in the Czech Republic by Act No. as amended. 330/2014 Coll., on Exchanging Information on Financial Accounts with the United States of America for Tax Administration, as 5.3 Is the use of side letters restricted? amended (hereinafter referred to as the “FATCA Act”). The FATCA Act contains only the necessary provisions and, in many cases, it The corporate rule of equal treatment of investors generally applies. refers to Act No. 164/2013 Coll., on International Cooperation in Tax Administration and on the Amendment of Certain Related Acts, as amended, and Act No. 280/2009 Coll., Tax Code, as amended.

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6.7 What steps are being taken to implement the OECD’s 6.10 Are there any meaningful tax changes anticipated in Action Plan on Base Erosion and Profit-Shifting the coming 12 months? (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? An amendment to the Income Taxes Act is currently being discussed by the Parliament envisaging the abolition of the 5% tax advantage Based on the Resolution of the Czech Government of 15 May 2017, for some funds. The amendment concerns investment funds whose the Czech Republic will only adopt the BEPS minimum standards. shares were admitted to trading on a European regulated market. The intention of the Czech Republic is to cover all 87 bilateral double taxation agreements in force. 7 Reforms 6.8 Are there any tax-advantaged asset classes or Czech Republic structures available? How widely are they deployed? 7.1 What reforms (if any) are proposed?

This is not applicable. As mentioned above, an amendment to the Income Taxes Act is currently being discussed by the Parliament envisaging the abolition 6.9 Are there any other material tax issues for investors, of the 5% tax advantage for some funds. The amendment concerns managers, advisers or AIFs? investment funds whose shares were admitted to trading on a European regulated market. This is not applicable.

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Mgr. Jakub Joska Advokátní kancelář KF Legal, s.r.o. Opletalova 1015/55 110 00 Prague 1 Czech Republic

Tel: +420 776 146 946 Email: [email protected] URL: www.kf-ak.cz

Jakub Joska is a graduate of the Faculty of Law of Charles University and he has been an attorney since 2004. Jakub Joska has long Czech Republic specialised in financial law, public contract law and procedural law. In the area of financial law, Jakub Joska focuses primarily on collective investment law. Since 2006, he has contributed significantly to the practical development of the sector of non-UCITS funds. Jakub Joska is one of the foremost experts in the area of qualified investor funds and their administrators. He has established eight investment companies and many different funds. Jakub Joska also has extensive experience in licensing and penalty proceedings concerning subjects of the capital market. Jakub Joska is a member of the Appeal Committee of Czech National Bank, Ethical Committee of Czech Capital Market Association and the member of the Supervisory Board for the Czech Republic for Finance.

KF Legal is a Czech law firm that offers its clients legal counselling in specialised fields, in addition to administering comprehensive legal services including business transactions, court and arbitrational proceedings. Its attorneys have many years of experience, having worked in leading law firms, and work flexibly to meet the needs of the clients. The philosophy of KF Legal is based on the needs and requests of the clients, providing direct services that react to their specific requirements, taking into account not only legal considerations, but also other factors on which the clients place particular emphasis. KF Legal focuses on conducting the cases as effectively as possible, regardless of their size. KF Legal’s good knowledge of the Czech and international legal and business environment enables it to offer its clients first-class legal services on attractive and affordable financial terms. KF Legal provide legal counselling in Czech, English, German, Spanish and French.

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England & Wales Jeremy Elmore

Travers Smith LLP Emily Clark

Alternative Investment Fund Managers Order 2014 (SI 2014/1292). 1 Regulatory Framework The majority of these implementing measures have been introduced by way of updates to the FCA Handbook. The FCA created a 1.1 What legislation governs the establishment and new investment fund sourcebook, called “FUND”, as part of its operation of Alternative Investment Funds? Handbook and this contains most of the FCA’s rules and guidance for UK AIFMs, which adds an additional component to the general The UK is regarded as one of the leading global asset management regulatory framework set out under FSMA. centres, with an investment funds industry covering both traditional The European Venture Capital Funds Regulation (VCF Regulation) and alternative asset classes. In the case of funds with alternative provides what is essentially “AIFMD Lite” for EU venture capital investment strategies such as private equity, real estate and fund managers. The regime was broadened in 2018, with the aim to infrastructure funds, both the fund manager and the fund itself tend make it more attractive following a lacklustre take up. to be domiciled in the UK.

Prior to the Alternative Investment Fund Managers Directive 1.2 Are managers or advisers to Alternative Investment (AIFMD), supplemented by its Level 2 Delegated Regulation Funds required to be licensed, authorised or (Delegated Regulation) and guidelines from the European Securities regulated by a regulatory body? Markets Authority (ESMA), the framework for Alternative Investment Funds was derived from the Financial Services and Many Alternative Investment Funds will be AIFs for the purposes of Markets Act 2000 (FSMA) and the principal regulatory authority, AIFMD. An AIF is a collective investment undertaking which raises the Financial Conduct Authority (FCA). However, AIFMD has capital from a number of investors, with a view to investing it in ushered in a new regulatory environment for many investment fund accordance with a defined investment policy for the benefit of those managers, including private equity firms and managers of hedge investors. Even if a vehicle does not fall within the definition of an funds. AIF, it may be categorised as a collective investment scheme (CIS) AIFMD offers the lofty ideal of pan-European harmonisation of under FSMA (a CIS is similar, but not identical, to the European the regulatory and supervisory framework for the non-UCITS concept of a collective investment undertaking). An example of (undertakings for collective investment in transferable securities) this is likely to be carried interest arrangements structured through fund sector, together with the associated freedom to passport a limited partnership, which are unlikely to be AIFs due to the management and marketing activities on a cross-border basis. employee participation scheme exclusion from AIFMD, but which However, no passport is ever free and for Alternative Investment are likely nevertheless to be unregulated CISs for the purposes of Fund managers (AIFMs), there will be significant costs and burdens; domestic legislation. and in common with other Directives, the creation of freedoms The FCA authorises and regulates persons carrying out specific within Europe can come at the price of newly erected barriers to “regulated activities” in the UK. Acting as the manager of an AIF truly international business. is a regulated activity, as is establishing, operating (which includes As noted above, AIFMD applies to the non-UCITS sector. Broadly managing) and winding up an unregulated collective investment speaking, UCITS funds have not been used to implement alternative scheme. A suitably authorised person must therefore be appointed investment strategies and therefore are generally outside the scope to carry out these activities on behalf of an Alternative Investment of this chapter. Some hedge fund managers may be able to launch Fund. products under the UCITS brand if the proposed investment strategy In the UK, only appropriately authorised persons can carry on a fits into the framework and the UCITS requirements will offer regulated activity by way of business. It is a criminal offence to investors greater regulatory safeguards and protections. However, breach this requirement. Any agreement entered into by a person the fact that UCITS funds are subject to mandated investment and carrying on a regulated activity in contravention of this provision borrowing powers means that they are likely to lack the investment is unenforceable against the other party and the other party is flexibility which is available to private funds. entitled to recover any money paid and to compensation for any AIFMD has been implemented in the UK by various implementing loss sustained. measures – primarily the Alternative Investment Fund Managers AIFMD contains a partial exemption for AIFMs whose total assets Regulations 2013 (SI 2013/1773), the Alternative Investment Fund under management do not exceed certain thresholds. These sub- Managers (Amendment) Regulation 2013 (SI 2013/1797) and the threshold firms will not have to comply with the full provisions of

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AIFMD, unlike those firms which are “full-scope” AIFMs. The retail schemes, the fund itself, as well as the manager, will require relevant thresholds are: (i) €500 million, provided the AIF is not FCA authorisation. Where a closed-ended investment fund is to be leveraged and investors have no redemption rights for the first launched (such as an investment trust or real estate investment trust) five years; or (ii) €100 million (including assets acquired through and its shares listed, the listing on the London Stock Exchange of leverage). The exemptions do not remove the requirement for any such fund, as well as the manager, would need to be authorised authorisation, and sub-threshold firms will need to apply to the by the FCA. FCA to become a “small authorised AIFM” or, in certain limited circumstances, a “small registered AIFM”. The latter category 1.4 Does the regulatory regime distinguish between imposes the lowest regulatory burden on firms, but is only available open-ended and closed-ended Alternative Investment for internally managed AIFs and certain types of real estate scheme. Funds (or otherwise differentiate between different Sub-threshold AIFMs can opt into AIFMD to be treated the same types of funds or strategies (e.g. private equity v as full-scope AIFMs, so as to benefit from the AIFMD passporting hedge)) and, if so, how?

England & Wales regime. A regulated entity which conducts all of its activities in its capacity The UK regulatory regime, broadly speaking, does not differentiate as the manager/operator of an Alternative Investment Fund – between open-ended and closed-ended private funds, assuming that whether an authorised AIFM or not – will be exempt from the EU the fund is domiciled within the UK, although, as noted above in the Markets in Financial Instruments Directive (MiFID). context of sub-threshold firms, the partial exemption from AIFMD will bite at a higher level for non-leveraged closed-ended funds. Historically, though, many UK resident managers or advisers of off-shore hedge funds would have been subject to MiFID as the However, the regulatory categorisation of UK fund managers manager/operator of the fund was off-shore and the UK regulated advising or managing off-shore structures may be different to that entity was merely its delegate in respect of relevant investment which would apply if the entire structure is on-shore. management services. This analysis, however, has been somewhat Other regulatory requirements which might apply to a manager muddied by the “letterbox” test imposed under AIFMD. The of Alternative Investment Funds are linked with the investment consequence of this test is that in some cases the entity which is strategy being pursued, rather than whether the fund is open-ended designated as the manager of an AIF under the fund documentation or closed-ended (although the relevant strategy might be linked with is not regarded as the AIFM for the purposes of AIFMD (because a particular type of fund). For example, further requirements of UK it is a letterbox). The exact analysis of the letterbox test applicable legislation which are particularly relevant to hedge funds include: to any situation is very fact-specific, but the risk is likely to arise rules relating to market abuse and insider dealing; disclosures of from one of the tests set out in the Delegated Regulation, which interests in shares and related derivatives above certain levels; and provides that a manager of an AIF is likely to be deemed a letterbox disclosures of net economic short exposures to certain financial- if it delegates the performance of investment management functions sector companies and companies subject to a rights issue. (i.e. investment management and risk management) to an extent that exceeds by a substantial margin the investment management 1.5 What does the authorisation process involve and how functions performed by the manager itself. The consequence of this long does the process typically take? is that an on-shore manager of a hedge fund may, depending on the exact structure and division of powers, now find itself as the AIFM An application for authorisation under FSMA involves the applicant for the purposes of the Directive even if it feeds its services into an submitting a considerable volume of information to the FCA. This off-shore manager. will include information on the proposed business activities of the applicant, its controllers and individuals who will be undertaking 1.3 Are Alternative Investment Funds themselves certain core controlled functions, its systems and controls including required to be licensed, authorised or regulated by a those relating to the manner in which the applicant monitors its regulatory body? compliance with applicable FCA Rules, its group structure and reporting lines and financial projections for the first year of trading. Generally speaking, under the current UK framework, an Alternative For those applicants applying for authorisation to manage an AIF, Investment Fund itself is not required to be authorised or licensed the FCA will require further information about the AIF itself (such by the FCA. AIFMD broadly supports the traditional position that as details of the AIF’s risk profile and its use of leverage). it is the manager (or AIFM), rather than the Alternative Investment Once a complete application has been submitted (together with Vehicle, which is subject to regulation. However, whilst historically the requisite application fee), the FCA currently has six months to there have been very few operational requirements imposed at the review the application (this is reduced to three months in the context level of the fund itself, to the extent AIFMD applies, the AIFM must of applications by AIFMs). During the review process, the FCA now ensure that certain requirements are imposed upon the fund, is likely to raise additional queries in relation to the information such as: the appointment of a depositary to have custody of certain submitted. assets and/or verify title to privately held assets; organisational controls (relating to risk management, compliance and valuation); The FCA has made available a suite of forms for use by UK AIFMs conduct-of-business rules (relating to due diligence, execution of in order to apply for the various permissions and authorisations a UK orders and reporting); and rules relating to companies in which the AIFM is required to apply for. Further applications will also need fund has a substantial stake. to be made in relation to any “material changes” to the information submitted as part of the authorisation application. This will not be the case if the fund manager is looking to implement an alternative investment strategy through a retail fund (meaning Following authorisation, a successful applicant will need to comply those which are approved by the FCA to be marketed to identified with the applicable conduct of business and prudential rules of the categories of investors, including, in the case of UCITS and non- FCA which are relevant to its business. In the context of AIFMs, UCITS retail schemes, the general public). In the case of non-UCITS particular focus is likely to be given to the capital adequacy requirements of, and remuneration principles imposed by, AIFMD.

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www.esma.europa.eu/document/aifmd-mous-signed-eu-authorities 1.6 Are there local residence or other local qualification – updated, but this includes all of the primary fund jurisdictions requirements? including the British Virgin Islands, the Cayman Islands, the Channel Islands and the United States. A fund manager applying for authorisation under FSMA (whether or not as an AIFM) must meet certain threshold conditions. One of these is that the head office of the applicant must be in the UK. 2 Fund Structures Although the FCA will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the 2.1 What are the principal legal structures used for location of its central management and control. Alternative Investment Funds? In April 2018, the Department of Business, Energy and Industries Strategy of the UK Government published a consultation on There are a wide variety of fund vehicles available in the UK. Certain proposed reforms in respect of limited partnerships (the “BEIS of these are only available for retail funds, such as the authorised England & Wales Consultation”). Although only consultations at this stage, the unit trust and the open-ended investment company. Others, such as proposals contemplate that a limited partnership should have a the investment trust company, are likely to be used for closed-ended “meaningful connection” with the UK, either by maintaining a structures implementing a traditional investment strategy. “principal place of business” in the UK for the life of the limited However, a private fund domiciled in the UK and implementing an partnership, or by having a service address in the UK. Depending alternative investment strategy will usually take one of two forms. on the outcome of the consultation and the consequent legislation Closed-ended private funds (in particular, those investing in asset following from it, it is possible the proposals will restrict flexibility classes such as private equity, real estate and infrastructure) are in fund structuring by limiting the scope to migrate UK partnerships most commonly structured as limited partnerships. This is a form into other jurisdictions. of partnership governed by statute under the Limited Partnerships Act 1907 (LP Act). In April 2017, the LP Act was the subject of 1.7 What service providers are required? extensive reform by the UK Government in respect of private funds by way of the Legislative Reform (Private Fund Limited Historically, there have been no formal requirements to appoint Partnerships) Order 2017 (PFLP Order). The reforms have been external service providers to private funds domiciled in the UK introduced with a view to simplifying the pre-existing law, reducing (although a manager may have engaged service providers as a uncertainty and administrative costs and burdens, and ensuring that matter of choice). However, this is another area of change under the UK remains an attractive and competitive location for private AIFMD. One of the most significant changes under AIFMD is the funds in comparison to other jurisdictions. The reforms apply requirement to have a depositary, who will have the responsibilities only to a limited partnership that is “designated” as a Private Fund set out under AIFMD (which include custody, cash movement Limited Partnership (PFLP). The new regime is not mandatory: it reconciliations and monitoring certain processes such as issues and is open to a limited partnership that satisfies the conditions to be a redemptions of units and valuations). Independent valuers may also PFLP to choose not to apply to be designated as a PFLP, in which be appointed pursuant to the provisions of AIFMD. case the pre-existing limited partnership will apply. In common with other jurisdictions, the limited partnership 1.8 What rules apply to foreign managers or advisers (including the PFLP) will have one or more general partners and one wishing to manage, advise, or otherwise operate or more limited partners. The general partner is responsible for the funds domiciled in your jurisdiction? management of the limited partnership (although whether it fulfils this role will largely depend on the regulatory issues described AIFMs authorised in their EEA home Member State (i.e. EEA above), but has unlimited liability for the debts and obligations of the AIFMs) should be able to exercise management and marketing partnership over and above the partnership assets. Conversely, the passport rights in the UK in relation to EEA AIFs. In order liability of a limited partner will be limited to the amount of capital to exercise these rights, the EEA AIFMs home Member State it contributes to the partnership (and, in the case of PFLPs, there is competent authority will send the relevant notification forms to the no requirement for a limited partner to make a capital contribution), Financial Conduct Authority, the UK’s competent authority for these provided such limited partner takes no part in the management of purposes. At the time of writing, however, it is unclear whether such the partnership: to the extent the limited partner does take part in passporting rights will continue to be enjoyed following Brexit. management, it will be treated as a general partner and will lose Firms based in non-EEA jurisdictions wishing to market AIFs in the protection of limited liability. The LP Act contains a white list the UK are required to comply with the National Private Placement of matters (“white list”) which limited partners of a PFLP can take Regime, as well as the UK’s financial promotion rules. part in without jeopardising their limited liability status. A limited partnership (including a PFLP) registered in England & Wales does not have any legal personality separate from its partners and is not 1.9 What co-operation or information sharing agreements a body corporate. have been entered into with other governments or regulators? One of the fundamental attractions in the UK of a limited partnership structure for private closed-ended funds is that the limited partnership is a flexible vehicle in terms of internal governance and control. One of the key determinants in the context of a non-EEA (European The constitutional document (the limited partnership agreement) Economic Area) manager’s ability to market a non-EEA fund within is a freely negotiable document between the fund manager and the Europe will be whether information exchange arrangements are investors. in place between the jurisdiction (i.e. Member State) in which the marketing takes place and the jurisdiction in which the fund manager The statutory framework in the UK requires that a limited and the fund itself are established. The information exchange partnership is registered as such. This entails providing an arrangements that the FCA has entered into can be found at https:// application for registration to the Registrar for Limited Partnerships,

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providing certain details including the name of each limited partner managers and advisers of Alternative Investment Funds. However, and the amount of capital contributed by each limited partner. the two most common structures seen in the market are the private Any changes to these details during the continuance of the limited limited company and the limited liability partnership (LLP). LLPs partnership must be similarly registered within seven days of the have been seen as the preferred structure for asset managers for relevant change. There are also formalities that must be followed on some time now, as they offer the tax transparency of a traditional assignments of limited partnership interests, such as advertising the partnership whilst giving limited liability to the members of the LLP. transfer in specific publications. In respect of the new PFLP regime, Although an LLP is a body corporate, it is inherently a more flexible either a new or an existing limited partnership may choose to apply vehicle than a limited company and therefore can be adapted to suit for PFLP status if it fulfils the criteria to qualify as a PFLP. Unlike the particular circumstances of the fund manager’s business and limited partnerships, there is no obligation to provide details of the preferred governance structure. Since April 2016, LLPs (together partnership’s general nature, capital contribution amounts or term of with UK unlisted companies) are subject to a new requirement to the partnership (or to notify of any changes to such details). maintain a register of people with significant control; such register

England & Wales It is also possible for a private closed-ended fund in the UK to be is to be available for public inspection at their registered offices. structured as a unit trust. The English law concept of a trust has Historically, each member of an LLP has been treated as being self- no equivalent in some other jurisdictions. It is a structure under employed for tax purposes. This has meant that LLPs have not which title to the fund’s assets is held by a person with legal needed to pay employer’s national insurance contributions (NICs) personality (the trustee) for the benefit of the fund’s investors (the on the remuneration of members, and it has also kept members of beneficiaries). The document constituting the trust (the Trust Deed) an LLP outside of the UK employment-related securities (ERS) governs the relationship between the trustee and the beneficiaries legislation. and, in addition, strict fiduciary duties are owed by the trustee as a Since the introduction of the “salaried member” rules in 2014, matter of law. however, the position is no longer quite so straightforward. Under As noted above, although the UK is the primary European hedge these rules, a member of an LLP will be treated as an employee if fund centre, the usual hedge fund structure will generally not they: (a) perform services for the LLP in return for a “disguised include the actual hedge fund being domiciled in the UK, because salary” (broadly, remuneration which is not dependent on the firm’s to set up the fund on-shore would lead to tax inefficiencies since profitability); (b) do not have “significant influence” over the LLP’s the fund would be treated as “trading” rather than “investing” for affairs; and (c) make a capital contribution to the LLP which is less UK tax purposes. Instead, hedge fund structures will invariably than 25% of their annual “disguised salary”. If a member meets all include a company or limited partnership established in an off-shore three conditions, they will be deemed to be an employee, the LLP jurisdiction. will need to pay employer’s NICs on their remuneration, and the member will be brought within the scope of the ERS legislation.

2.2 Please describe the limited liability of investors. In addition, employees remain outside of the scope of the new income based carried interest rules (see question 6.2), whereas self- In respect of funds structured as limited partnerships, under statute employed LLP members must consider the potential application of the liability of a limited partner for the debts and obligations of the these rules to their carried interest returns. partnership is limited to the amount of capital it contributes to the partnership, subject always to the caveat that the investor does not 2.4 Are there any limits on the manager’s ability to become involved in the management of the structure. restrict redemptions in open-ended funds or transfers This does not relieve the investor of its contractual obligation in open-ended or closed-ended funds? to advance money, and therefore Alternative Investment Funds operating “just-in-time” drawdown structures will be able to draw Generally, there are no statutory or regulatory limitations on the the full amount the investor has committed to advance to the fund, ability of managers of private funds to restrict redemptions or notwithstanding the statutory limitation on liability. The UK limited transfers in either open-ended or closed-ended funds, although partnership will generally be structured so that the commitment of contractual restrictions may be imposed. investors comprises a nominal amount of capital contribution, with the balance being advanced by way of a loan. This structure should 2.5 Are there any legislative restrictions on transfers of avoid amounts distributed to investors being subject to return in the investors’ interests in Alternative Investment Funds? event of the insolvency of the limited partnership. The other fund vehicles available will provide for the limited liability There are no legislative restrictions on the transfer of investors’ of investors, such that they will not be required to contribute more interests. However, in the case of UK limited partnerships, than the amount which they have committed to invest in the fund. certain filing requirements will need to be met, and details of the In respect of PFLPs, as there is no requirement for a limited partner transfer advertised, before it is deemed to be effective. These filing to contribute any capital, the entire funding to be contributed by a requirements do not apply to PFLPs. limited partner in a PFLP can be in the form of capital which can be contributed and repaid at any time without affecting the extent of the 2.6 Are there any other limitations on a manager’s ability liability. This removes the need for the capital/loan split described to manage its funds (e.g. diversification requirements, above. asset stripping rules)?

The AIFMD provisions relating to the asset stripping have been 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment transposed into UK legislation. The provisions covers situations Funds? where an AIF managed by an AIFM subject to full authorisation holds a significant proportion of the shares in, or acquires control There are no formal requirements as to the legal structure used for of, a private company or an issuer of traded securities, imposing requirements relating to the provision of information to the company

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or issuer, shareholders, employers and employees. The provisions can be avoided if, broadly, the minimum subscription per investor also contain restrictions on distributions, capital reductions, share is €100,000 or if the fund is offered to fewer than 150 investors redemptions and acquisitions by companies or issuers of their own per EEA state (with higher thresholds proposed by the European shares for two years after the AIF acquires control. Commission as part of the new Prospectus Regulation which is due to come into force in July 2019). The EU Prospectus Directive will also not catch open-ended vehicles, so most hedge funds, for 3 Marketing example, would not be caught in any event. The Omnibus Regulation will introduce new requirements for 3.1 What legislation governs the production and offering all marketing communications made to investors by an AIFM. of marketing materials? These Communications must: (i) be identifiable as marketing communications; (ii) be fair, clear and not misleading; and (iii) Following the implementation of AIFMD, marketing has become present risks and rewards of producing units or shares of an AIF in one of the more difficult issues a manager of Alternative Investment an equally prominent manner. England & Wales Funds has to grapple with, as managers need to consider both domestic and pan-European legislation. 3.3 Do the marketing or legal documents need to be Under FSMA, the communication of financial promotions is registered with or approved by the local regulator? restricted. Generally, financial promotions are permitted if they are made or approved by an entity authorised by the FCA. However, in Outside of AIFMD, there is no requirement to register marketing the context of unregulated collective investment schemes (which will or legal documentation with the FCA. However, an AIFM must catch most private funds), there are further restrictions which limit submit certain marketing information to the FCA (through the FCA’s AIFMD marketing notification form and/or the Management even the scope for authorised persons to make financial promotions. Passporting Forms) 20 working days prior to marketing, and must Units in unregulated collective investment schemes will, to the obtain pre-clearance for any material planned changes to the extent made by an entity which is not authorised by the FCA, information provided (the AIFM must give at least one calendar need to be marketed in accordance with the Financial Services and month’s notice of the changes). Material unplanned changes must Markets Act 2000 (Financial Promotion) Order 2005 (FPO) or, to be notified to the FCA immediately. the extent made by an entity which is authorised by the FCA, need The Omnibus Regulation will empower national regulators in EU to be marketed in accordance with either the Financial Services and Member States to require notification of marketing communications Markets Act 2000 (Promotion of Collective Investment Schemes) which: (i) UCITS managers intend to use directly or indirectly in Order 2001 or the provisions of the conduct-of-business rules their dealings with investors; and (ii) AIFMs intend to use directly contained as a component part of the FCA Rules. or indirectly in their dealings with retail investors (within the MiFID In addition to the domestic regime, additional marketing restrictions II definition). are imposed by AIFMD and the Delegated Regulation. UK AIFMs wishing to market a UK AIF or EEA AIF to retail or professional 3.4 What restrictions are there on marketing Alternative investors in the UK are required to apply to the FCA to do so. The Investment Funds? FCA permits the marketing of a private fund to a wider group of participants than the category of “professional investors” referred to For the purposes of AIFMD, marketing is a direct or indirect offering in AIFMD, provided the financial promotion rules referred to above or placement at the initiative or on behalf of the AIFM to or with are complied with throughout the entire marketing process. investors domiciled within the EU. This is a narrower concept than Additional legislation covering, inter alia, marketing, was proposed that of a financial promotion under domestic regulation, which is an by the European Commission in March 2018. These proposals offer or inducement to engage in investment activity. The FCA has include a new directive (Omnibus Directive) which will amend the provided guidance on when it considers an AIFM to be marketing in existing regimes for cross-border marketing of AIFs and UCITS, the UK. There are two situations when an AIFM may not be regarded as marketing an AIF: (i) pre-marketing; and (ii) reverse solicitation. and a new regulation (Omnibus Regulation) which will introduce The pre-marketing will be permissible where it is based on draft new standardised requirements for cross-border fund distribution in documentation and the offer document, or other information, is not the EU. sufficiently detailed to enable the recipient to make an investment decision or submit a subscription request; for example, a pathfinder 3.2 What are the key content requirements for marketing document should not amount to marketing. In addition, “marketing” materials, whether due to legal requirements or does not include general public statements, the issuance of capital customary practice? calls or secondary trading. The Omnibus Directive will, however, for the first time, introduce a new definition of “pre-marketing” into the Under domestic legislation, there are limited content requirements AIFMD. The intention of the proposal is that if a promotional activity applicable to marketing materials, although there is an overarching does not fall within the definition of “pre-marketing”, it should be obligation to ensure that marketing materials are “clear, fair and not treated as “marketing” instead. These new requirements mean that misleading”. AIFMD has changed the rules somewhat, by including the circulation of draft offering documents (e.g. draft versions of a prescribed pre-investment disclosures which must be made to limited partnership agreement) will constitute AIFMD marketing. This will be a significant change from the current approach in the UK. prospective investors. Whilst many of these disclosures (set out in Article 23 of AIFMD) are largely consistent with information that In respect of reverse solicitation, the FCA guidance states that a has historically been included in marketing materials for private confirmation from the investor that the approach was made at its funds, there are specific components of the disclosure regime which own initiative should be sufficient to rely on this approach. The were either new or enhanced the level of detail previously provided. guidance, however, also states that it must be received prior to making the offer or placement. The requirements of the EU Prospectus Directive which catch From 22 July 2014, an authorised AIFM is able to market to “offers to the public” will generally not apply to the marketing of professional investors only on the basis of the AIFMD passport. Alternative Investment Funds on the basis that the requirements

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Marketing by small AIFMs (i.e. sub-threshold firms) will be subject to a lighter-touch regime; broadly, UK small AIFMs will be able 3.7 Are there additional restrictions on marketing to to market all sub-threshold AIFs in accordance with the domestic public bodies such as government pension funds? financial promotion regime. Off-shore managers of off-shore Alternative Investment Funds may Under MiFID II, from January 2018 local government pension market into the UK on the basis of the financial promotion regime. schemes (“LGPS”) are classified as retail investors which can lead to However, they will be required to comply with the transparency and certain additional restrictions on marketing and distributing interests (if relevant) private equity disclosure requirements imposed under in such schemes. Following lobbying by the industry, however, AIFMD. LGPS are able to utilise a standardised opting-up procedure, such that retail investors can be opted-up to an elective professional Finally, the Omnibus Directive proposes to insert a new provision status in a relatively straightforward manner. into the AIFMD to clarify the circumstances where an AIFM will be considered to have ceased marketing in a Member State. There are no additional restrictions to those which otherwise apply

England & Wales under the financial promotion regime.

3.5 Can Alternative Investment Funds be marketed to retail investors? 3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process? AIFMD effectively leaves the question of marketing to retail investors to the discretion of Member States (although this is subject There are no restrictions on the use of intermediaries, although if to change, as detailed below). The UK has retained provisions the intermediary is itself carrying on regulated activities for the which allow marketing to retail investors. If an AIFM is permitted purposes of the UK regulatory regime, it will need to be authorised to market to professional investors, it can also market to certain by the FCA. types of retail investors (effectively qualifying high-net-worth or sophisticated investors), provided it does so in accordance with the 3.9 Are there any restrictions on the participation in UK financial promotion regime. The financial promotion regime has Alternative Investment Funds by particular types of changed recently with the effect that, where the promotion is being investors, such as financial institutions (whether as made in accordance with the conduct-of-business rules contained sponsors or investors)? in the FCA Rules, in addition to the investors having to fall within the terms of the exemptions themselves, the issuer of the financial Under the current legislative and regulatory regime, there are no promotion must undertake a suitability assessment to ensure that firm restrictions on the participation in Alternative Investment the investment is appropriate for the prospective investor. This Funds – however, there may be regulatory capital costs to financial suitability assessment needs to be undertaken prior to the point at institutions in respect of their investment positions. which the financial promotion is issued. Under AIFMD, AIFMs are limited in terms of the additional The Omnibus Directive will insert new requirements into the activities they are able to undertake, and therefore certain financial AIFMD where any AIFM is marketing to retail investors. The institutions may need to restructure their operations to ensure that AIFM will be required to put in place “facilities” in the relevant they are compliant with the provisions of AIFMD. Member State that must perform certain tasks. As the definition of “retail investor” is as defined in MIFID II, this will include investors such as high-net-worth individuals or local authorities who cannot 4 Investments be opted-up to MIFID professional status. From 1 January 2018, alternative investment funds being made 4.1 Are there any restrictions on the types of activities available to retail investors must also provide a standardised, short that can be performed by Alternative Investment disclosure document – a key information document (“KID”) – to Funds? investors under the PRIIPS Regulation. The KID must comply with certain detailed technical standards. Generally speaking, there are no restrictions, although the fund manager will need to ensure that the activities it is carrying out in respect of the Alternative Investment Fund are consistent with the 3.6 What qualification requirements must be carried out in relation to prospective investors? scope of permission it has to carry out regulated activities (and with the contractual investment policy of the Alternative Investment Fund). There are no “across the board” qualification requirements which However, AIFMD does impose certain restrictions relating to asset apply in relation to prospective investors, although certain of the stripping, as described at question 2.6 above. bases on which marketing is made under the financial promotion In addition, although not restrictions, there are certain deal regime (or, where applicable, AIFMD) will require an analysis of disclosure requirements under AIFMD. In this regard, an AIFM the circumstances of the prospective investor. must notify the FCA when an AIF’s voting interest in an unlisted AIFMD introduces a passport which facilitates marketing to company passes through certain thresholds. There are additional professional investors on a pan-European basis. For the purposes disclosure obligations when an AIF acquires “control” of an EU of AIFMD, a professional investor is one who could be so regarded company (the test as to control varies according to whether the under MiFID. Although most institutional investors are likely to be investee company is listed or unlisted). Investments by an AIF may professional investors per se, it may prove difficult to opt people also trigger a requirement to make certain information available into professional status (it is a higher bar than most UK managers to the FCA, the investee company and remaining shareholders are used to). Investors who are not professional investors will be (including, for unlisted companies, intentions as to the company’s retail investors. future business and the likely repercussions on employees). In the context of unlisted companies, relevant information must be passed to employee representatives (subject to limited exceptions).

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Control (“PSC”) regime. English limited partnerships are not 4.2 Are there any limitations on the types of investments affected by these changes and remain outside the scope of the PSC that can be included in an Alternative Investment regime. Fund’s portfolio whether for diversification reasons or otherwise? The BEIS Consultation published in April 2018 included a proposal for limited partnerships to file annual reports and accounts. There are no such limitations. Although, ‘qualifying partnerships’ have been subject to the requirement for some time, it has historically been possible to structure partnership based funds such that they are not qualifying 4.3 Are there any restrictions on borrowing by the partnerships. If enacted in a manner which required all partnerships Alternative Investment Fund? to file accounts, this could be a concern for the private funds sector due to the commercial sensitivity of the information being made In the context of private funds, there are currently no statutory or publicly available. regulatory limitations on borrowing, although contractual restrictions England & Wales are common. In the context of AIFs covered by AIFMD, certain of the pre-investment disclosures relate to the use of leverage. In 5.3 Is the use of side letters restricted? particular, an AIFM must disclose: the circumstances in which the AIF may use leverage; the types and sources of leverage permitted There are no firm restrictions on the use of side letters. However, and the associated risks; any restrictions on the use of leverage and AIFMD requires disclosures as to how AIFMD ensures the fair any collateral and asset re-use arrangements; and the maximum treatment of investors and, if side letters are used to provide level of leverage the AIFM is entitled to employ on behalf of the preferential treatment to investors, a description of the preferential AIF. treatment and the type of investors to whom the treatment is made available will need to be disclosed. If the AIFM operates a general most-favoured nations (“MFN”) mechanism, this is unlikely to 5 Disclosure of Information be an issue; however, if no or a limited MFN process is in place, AIFMD will need to consider its use of side letters in the light of the disclosure requirements under AIFMD. 5.1 What public disclosure must the Alternative Investment Fund or its manager make? 6 Taxation Alternative Investment Funds structured as limited partnerships will need to comply with the registration requirements under the 1907 Limited Partnerships Act. Limited partnerships designated as 6.1 What is the tax treatment of the principal forms of PFLPs need only disclose basic details (essentially the fund’s name Alternative Investment Funds identified in question 2.1? and address). There may be a requirement on the general partner of a UK limited partnership to file the partnership’s accounts on the basis of the Partnership Accounts Regulations. UK limited partnerships are not taxable entities for UK direct tax purposes and are instead fiscally transparent. This fiscal transparency means each limited partner is treated for UK tax purposes as owning 5.2 What are the reporting requirements in relation to his proportionate share of the assets of the partnership and is subject Alternative Investment Funds or their managers? to tax on the income and gains allocated to it under the limited partnership agreement (whether or not they are distributed). AIFMD and the Delegated Regulation require AIFMs to comply with a range of detailed regulatory reporting obligations. Reporting obligations also apply to non-EEA AIFMs seeking to market their 6.2 What is the tax treatment of the principal forms of investment manager / adviser identified in question funds under national private placement regimes. 2.3? Broadly, AIFMs will be required to make periodic reports to the FCA in accordance with AIFMD using a set of prescribed forms set out in The tax treatment of the manager or adviser will depend on whether the Delegated Regulation and in line with ESMA’s final guidelines. it is constituted as a company or an LLP. If a company, it will be The EMSA guidelines, published in November 2013 and finalised in subject to corporation tax on the fees paid by the fund (at 19% and August 2014, were accompanied by a number of electronic reporting due to drop to 17% from 1 April 2020). The management team templates in XML format, together with guidance on the preparation takes its remuneration in the form of salary (taxed at the highest of systems capable of generating XBRL reports. In addition to the applicable income tax rates, with national insurance contributions annual reports in respect of each managed AIF, AIFM will need to due too) and the excess profit can be extracted as dividend income. provide periodic reports relating to the AIFM itself and in respect If the manager is an LLP, it is fiscally transparent, so the profit of each AIF that it manages (including information in relation to arising from the fees paid to the manager is automatically taxed in investment strategies, main instruments traded, principal exposures, the hands of its members. As noted above, the salaried member risk profiles and (where relevant) leverage). rules will be used to ascertain whether a member should be taxed as The FCA has published various guidance papers and Q&As on a self-employed person or an employee. All of the LLP’s members, periodic reporting, setting out what information is required and how, regardless of where they are resident, must pay UK tax on their and when, it should be reported. The FCA has an online reporting share of the LLP’s profits arising from its UK trade as an investment system, GABRIEL, which assists UK AIFMs with meeting their manager/adviser. requirements. Her Majesty’s Revenue and Customs (“HMRC”) has broad powers, From July 2017, fund houses that have any Scottish limited under new anti-avoidance rules, to tax amounts arising to an partnerships in their fund structures (commonly used as feeder and individual involved in fund management as trading income, unless carry vehicles) need to make filings under the Persons of Significant such amounts are already taxed as trading income or employment

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income or fall into exceptions for carried interest or co-investments. vehicle for Alternative Investment Funds means that income and Where amounts from the fund arise to another person – such as a gains received by the fund are treated as if they had been received priority profit share/fee income arising to the general partner or by the fund’s investors directly. The taxation of the returns depends manager – these amounts can be potentially imputed to the individual on whether the fund is treated as trading or investing. fund managers and taxed in their hands if certain conditions are met. The question of whether or not a fund is carrying on a trade in the In terms of funds structured as limited partnerships, where the UK is largely a question of fact. In practice, this is determined by general partner appoints a manager to manage the partnership, the applying various criteria derived from case law – often referred to as fee payable to the manager will in principle attract value-added tax “badges of trade” – to a fund’s transactions. For example, churning (VAT). This is most often managed by ensuring that the manager investments and investing and divesting opportunistically would be and the general partner are in the same VAT group. A recent case likely to be indicative of a trading activity, whereas holding long heard in the Court of Justice of the European Union (“CJEU”) (the for income and capital would be more likely to be considered as an Fiscale Eenheid case (C-595/13)) outlined broad criteria for what investment activity.

England & Wales constitutes a “special investment fund” (“SIF”) for the purposes Private equity funds (the main users of the limited partnership structure) of the VAT exemption applicable in relation to SIF management usually intend to buy and hold securities for the medium to longer term services. It was also strongly suggested by the CJEU that AIFs in order to achieve long-term capital appreciation. Consequently, they which satisfy certain qualification criteria can be SIFs. This is a are more likely to be considered as investing rather than trading. changing area of law and it is not clear how the UK’s tax authority If the limited partnership is treated as investing then, as a result of will react to this judgment, although it is possible that its current its tax transparency, profit distributions from the limited partnership position on the VAT treatment of management services supplied to retain their character as capital gains or investment income and are AIFs, which satisfy the relevant SIF criteria, will have to change. taxed accordingly. The tax payable by a particular investor will The UK is not typically used as a domicile for hedge funds, but it is depend upon its own tax profile. For example, if the fund receives a popular location for investment managers of hedge funds, and this dividend income, this would be taxed in the hands of a UK-resident is in part because of the Investment Manager Exemption (“IME”). individual but a UK pension fund investor should not be subject to Provided certain conditions are met, the IME ensures that a UK UK tax on such investment income. Most non-resident investors investment manager managing a non-UK fund will not constitute a will only be subject to UK tax on UK-source investment income to permanent establishment of the fund in the UK. The IME enables a the extent that it is subject to withholding tax. Withholding taxes are non-UK resident fund that is trading for UK tax purposes to appoint potentially relevant to both UK interest and UK rental income (but a UK-based investment manager without the risk of that part of the not dividends), but there are reliefs from withholding. Generally, fund’s profit that is attributable to the activity of the investment non-resident investors should not be subject to UK tax on capital manager in the UK becoming subject to UK tax. gains unless: (i) they hold their interest for the purposes of a UK The UK rules on the taxation of carried interest have been subject trade; or (ii) they fall into specific rules relating to UK residential to significant change since 2015 and the general “tax transparency” property holdings (see below). principle is now overlaid with: (i) a minimum charge of 28% for If the limited partnership is treated as trading for UK tax purposes, carried interest (compared with 20% for other types of gains); and UK resident investors and non-UK resident limited partners will (ii) new rules which can recharacterise carried interest receipts as be subject to income tax (or corporation tax on trading income) trading income, taxable at the highest marginal rates, where the fund on their share of the partnership’s trading profits. This will be of in question has a short average holding period (the “income based particular concern for UK pension fund investors (who are only carried interest” rules, or “IBCI”). The IBCI rules are complex, but exempt from UK tax on investment income and gains). Non-UK broadly, where the average holding period of fund investments is resident investors will be caught because the partnership (or the less than 36 months, the carried interest returns will be treated as fund manager) will constitute a taxable presence in the UK through trading income. Where the average holding period is 40 months which the non-resident is carrying on a trade, but in many cases the or more, the returns will be treated as investment gains or income. IME may be applicable. Where the average holding period is at least 36 months and less Investors should be aware of the annual tax on enveloped dwellings than 40 months, the returns are treated as a mix of capital gains and (“ATED”) and the extension of the capital gains tax legislation to income. The new rules do not affect the taxation of the fund itself ATED-related gains. The ATED rules and the capital gains tax or external investors. rules will need to be considered carefully when a fund invests in UK residential property. In addition, the UK government has 6.3 Are there any establishment or transfer taxes levied announced its intention to subject non-residents to UK tax on the in connection with an investor’s participation in an sale of interests in UK land or interests in UK-land-rich vehicles Alternative Investment Fund or the transfer of the from April 2019. investor’s interest? Where a UK limited partnership receives income from non-UK jurisdictions that levy withholding tax, or receives capital proceeds There are no establishment taxes levied in connection with an from the sale of an asset situated in a jurisdiction which might tax that investor’s participation in an Alternative Investment Fund. Stamp gain, then limited partners may seek to rely on the terms of a double duties may be payable on the transfer of limited partnership interests tax treaty in order to obtain relief. Whether such relief is available if the partnership property includes stock or marketable securities, will depend, in part, upon whether that non-UK jurisdiction treats a although there are a number of methods of mitigating the effect UK limited partnership as fiscally transparent. of such taxes. Stamp duty land tax may be payable where the partnership property includes land. 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing 6.4 What is the tax treatment of (a) resident, (b) non- an Alternative Investment Fund? resident, and (c) pension fund investors in Alternative Investment Funds? Generally speaking, it is not necessary to obtain tax rulings prior to establishing an Alternative Investment Fund. The use of tax-transparent limited partnerships as the primary

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6.6 What steps have been or are being taken to implement 6.9 Are there any other material tax issues for investors, the US Foreign Account and Tax Compliance Act managers, advisers or AIFs? 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard? The tax position of an investor in a UK Alternative Investment Fund will inevitably depend upon its own tax profile – accordingly The UK entered into a Model 1 Intergovernmental Agreement investors should always seek independent advice on the tax (IGA) with the US in September 2012 and FATCA has now been implications of participating in the fund, and managers should implemented in the UK from 15 April 2015. Alternative Investment advise investors of this fact. Funds established in the UK will have to carry out due diligence As discussed under question 6.6, UK Alternative Investment Funds to identify US investors and non-FATCA-compliant investors, and will need to ensure that they are compliant with applicable due will then have to report information about such investors to HMRC. diligence/information reporting requirements under, for example, Compliant UK funds will not be subject to, nor will they have to FATCA and the CRS. Further to the UK’s implementation of England & Wales operate, FATCA withholding taxes. FATCA, the CRS and the DAC, UK Alternative Investment Funds The UK has also entered into IGAs with the Crown Dependencies of will also want to watch the progress of the OECD’s BEPS (Base Guernsey, the Isle of Man and Jersey and Overseas Territories (UK Erosion and Profit-Shifting) project (discussed under question 6.8 CDOT). The IGAs between the UK and the Crown Dependencies below) and its potential impact on their investment structures. and Gibraltar are “reciprocal”, which means that UK funds will have to carry out similar due diligence and reporting exercises in relation to their investors in those jurisdictions. 6.10 Are there any meaningful tax changes anticipated in the coming 12 months? In addition, the Organisation for Economic Co-operation and Development (“OECD”) Common Reporting Standard for The UK government has announced its intention to subject non- Automatic Exchange of Financial Account Information (“CRS”) residents to UK tax on the sale of interests in UK land or interests and the EU Directive on Administrative Cooperation in the Field of in UK-land-rich vehicles from April 2019, as detailed at question Taxation (“DAC”) have now also been implemented into UK law. 6.4 above. From 2018 onwards, it is expected that required reporting under UK CDOT will be made exclusively under the CRS. Accordingly, UK funds will need to consider these rules in order to ensure that they 7 Reforms are compliant.

7.1 What reforms (if any) are proposed? 6.7 What steps are being taken to implement the OECD’s Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they With the triggering of Article 50 of the Treaty on European Union affect Alternative Investment Funds’ operations? by the UK Parliament on 29 March 2017, the EU is now obliged to negotiate and conclude within two years an agreement with the Following the publication of the OECD’s final BEPS reports on UK setting out the arrangements for its withdrawal. At the end of 5 October 2015, the UK has taken the lead in the development the two-year period (plus any agreed extension), withdrawal takes and implementation of new rules relating to BEPS. For example, effect even if no agreement is reached. Until the UK leaves the EU, legislation having effect from 1 January 2017 has been introduced however, the UK remains a Member State and remains subject to in order to neutralise the effect of hybrid mismatch arrangements EU law. in accordance with the OECD’s recommendations under BEPS. In December 2017, the UK Government published an updated Legislation, to restrict the tax deductibility of corporate interest version of its strategy paper on the UK investment management also came into force from 1 April 2017. In addition, the UK has industry. This paper, “Investment Management Strategy II”, is an implemented Country-by-Country reporting. important signpost to the UK’s post-Brexit approach to financial The UK signed the multilateral instrument (MLI) in June 2017. As services. The strategy sets out a number of objectives, including expected, the UK has adopted the principal purpose test in relation to focusing on the UK’s tax and regulatory environment so that it is its covered treaties, but has not extended the definition of permanent stable and competitive, supporting the UK to secure a global leader establishment or narrowed its definition of an independent agent. in innovative investment strategies and international coordination to help the industry attract overseas firms to locate in the UK and Funds and asset managers will need to consider the possible impact promote UK firm overseas. There will be challenges ahead to of the proposed BEPS action points on their structures. reconcile this strategy with the agreed position set out in the Phase 1 Brexit negotiations, namely that the UK will maintain full alignment 6.8 Are there any tax-advantaged asset classes or with the rules of the Single Market as between Northern Ireland and structures available? How widely are they deployed? the Republic of Ireland. At the same time, the UK will also need to ensure that no new regulatory barriers develop between Northern If there is appetite to establish a listed fund, then a UK investment Ireland and the rest of the UK. trust should be considered. Provided certain conditions are met, Following the significant regulatory changes introduced by AIFMD, these listed companies are exempt from corporation tax on capital it would be comforting to think that there would now be a pause for gains, can benefit from the general corporation tax exemptions breath in terms of further changes. However, the direction of travel from dividend income and can potentially deduct dividends paid in terms of the regulatory requirements imposed on firms operating to investors which represent interest income from their interest in the Alternative Investment Funds space is clear. There is still receipts. considerable uncertainty across the UK fund management industry

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about how many of the AIFMD requirements should be interpreted As to English limited partnerships, the introduction of the PFLP in particular contexts, although broad consensus is starting to regime has been welcomed as a positive step and should allow the UK form in certain areas. At the time of writing, the timetable for the to compete with other similar vehicles offered in other jurisdictions. potential availability of passports under AIFMD for fund managers The BEIS Consultation published in April 2018 contains reform in non-EEA jurisdictions (which could include the UK, post-Brexit) proposals for limited partnerships; these included proposals designed remains unclear. to build in effective controls into the life cycle of a limited partnership AIFMD provides that the European Commission must carry out a to combat such vehicles being used for illegal activities. At the review of the application and scope of the legislation by 22 July time of writing, no draft legislation has been published (and the 2017. This review must be based on both a public consultation and consultation will remain open to responses until 23 July 2018): once discussions with relevant national regulators about their experiences it is, it will need to be examined carefully so as to ensure that there are of the application of AIFMD. Where the review indicates that it no unintended consequences for the investment funds industry. may be necessary, the Commission may propose amendments to After a postponement of a year, the PRIIPs Regulation finally came England & Wales AIFMD, with the expected resulting legislation commonly being into force on 1 January 2018. As from that date, it requires that termed “AIFMD II”. At the time of writing, the review is yet to retail investors are provided with a standardised, short disclosure be published. The potential amendment of the existing legislation document containing key information about the product (the Key presents potential opportunities to improve certain aspects of the Information Document or KID) where it is made available to them current regime, but could also result in the loss of some flexibility in the EU. There is a transitional period for UCITS until December and potentially include some developments that are considered 2019. Consequently, many manufacturers of the types of funds unfavourable by the industry. which have routinely been targeted at the professional market in the The Omnibus Directive and Omnibus Regulation will make a past are likely to have tightened up on measures designed to ensure number of direct amendments to the AIFMD regimes which are that distribution does not reach any retail investors. likely to have a significant impact on the marketing activities of The UK Government, in March 2016, also introduced legislation to AIFs, in addition to amendments to the UCITS and VCF regimes. bring all UK banks within the scope of a new senior domestic managers The proposed timeline for the entry into force of the proposals is not and certification regime (SMCR). The aims of the new regime are to yet clear. If there were a very smooth passage through the legislative ensure greater clarity about the responsibilities of senior individuals process, some parts of the Omnibus Regulation could apply as early within firms, as well as greater individual accountability. The FCA as mid-late 2019. However, the more significant provisions, and all has indicated that it intends to extend the application of the SACR to of the new provisions in the Omnibus Directive, would be unlikely include all non-bank firms, including UK fund managers, authorised to apply before mid-late 2021 at the earliest. under the Financial Services and Markets Act 2000 during 2018. MiFID has now been comprehensively revised to improve the In March 2018, the Regulation amending both the Regulation on functioning of financial markets in light of the financial crisis and European Venture Capital Funds (“EuVECA”) and the Regulation to strengthen investor protection by way of a recast directive and on European Social Entrepreneurship Funds (“EuSEF”) to came regulation, commonly referred to as “MiFID II”, which took effect into effect. There has been relatively little uptake of EuVECA and in January 2018. The UK has transposed the MiFID II rules into EuSEF funds in the UK to date. It remains to be seen whether the laws and regulations but there were numerous late clarifications on changes introduced by the amended Regulation will make these the scope and application of the MiFID II rules, some last-minute funds more attractive in the UK. concessions and also last minute finalisation of some key delegated In short, practitioners within the industry will need to ensure that acts. So, it is likely that 2018 will continue to be dominated by MiFID they keep abreast of developments and consider whether they II as affected firms carry on with their implementation and finalisation should be engaging with the industry in lobbying to try and ensure of MiFID-related changes and adjust to the new requirements. that any proposed regulatory excesses can be curbed.

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Jeremy Elmore Emily Clark Travers Smith LLP Travers Smith LLP 10 Snow Hill 10 Snow Hill London EC1A 2AL London EC1A 2AL United Kingdom United Kingdom

Tel: +44 20 7295 3453 Tel: +44 20 7295 3393 Email: [email protected] Email: [email protected] URL: www.traverssmith.com URL: www.traverssmith.com

Jeremy is an Investment Funds partner at Travers Smith specialising Emily trained at Travers Smith and is a partner in the Tax Group. She in the structuring, formation and operation of Alternative Investment specialises in the taxation of investment funds, acting for private equity

Funds (with a particular focus on private equity, debt, real estate and houses, hedge funds and real estate funds. England & Wales infrastructure funds). He also advises on secondaries transactions, She advises on fund formation and on tax-efficient structures for fund co-investment structures, carried interest and other incentivisation managers, carried interest and LLP conversions. She has particular arrangements, and works with a wide range of asset management expertise in tax structuring for non-domiciled investors and fund houses and investors on the implementation of their alternative managers. investment programmes. Emily also has extensive experience of group restructuring, Jeremy frequently advises on the structuring of investment international tax, joint ventures and real estate taxation. Emily is management businesses, both in relation to their initial formation a member of the British Property Federation’s tax committee, the and subsequent internal restructurings (covering areas such as LLP BVCA’s working group on BEPS and Invest Europe’s (formerly the conversions, general succession planning and spin-outs). EVCA) International Tax and Tax Reporting Group. She is the author of the Lexis PSL guide to the taxation of investment funds.

Travers Smith is a full-service law firm offering UK law advice out of its offices in London and Paris. We develop long-term relationships with clients, offering consistent teams of exceptional lawyers who have a genuine in-depth understanding and interest in the clients’ businesses. Our particular focus is on transactional work and clients within the financial services sector. As a result, we have one of the largest teams of private equity M&A lawyers in London; this is a team that has been helping clients to implement innovative strategies and structures for over 20 years, and we continue to be involved in many challenging and ground-breaking deals. In addition, our market-leading investment funds group brings together fund formation, regulatory, tax, corporate, real estate and finance expertise in an integrated practice encompassing transactional and advisory work for fund managers, executives and investors. The practice operates across the private, listed and retail funds sectors.

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Finland

Attorneys-at-Law Trust Mika J. Lehtimäki

A domestic AIFM must apply for an authorisation from the Finnish FSA. 1 Regulatory Framework If the AIFMA authorisation thresholds are not triggered (see question 1.1), the AIFM is obligated to register with the FSA instead. Registered 1.1 What legislation governs the establishment and AIFMs are exempt from a number of the AIFMA requirements but do operation of Alternative Investment Funds? have to follow e.g. the reporting obligations and the marketing rules. Offering to retail clients is only allowed to authorised AIFMs or if the The Finnish Mutual Funds Act (MFA) (the primary law on FSA grants an exemption from certain statutory requirements, the latter Undertakings for Collective Investments in Transferable Securities being rare. An authorised AIFM is entitled to market fund shares in a (UCITS)) classifies Alternative Investment Funds into two main Finnish AIF after having notified the FSA accordingly, and after having categories: provided the FSA with the statutorily specified fund documentation. ■ undertakings authorised to operate in an EU/EEA (later EEA) The same applies to EEA AIFs. state which, under their domestic law, fulfil the requirements A Finnish authorised AIFM may also manage a non-EEA AIF of the EU UCITS Directives (UCITS funds are not discussed provided that it follows the AIFMA, excluding the custody rules and here); and the obligation to prepare an annual report. However, there needs to ■ other funds including non-UCITS authorised within and exist a supervision co-operation agreement between Finland and the outside the EEA (AIFs) managed by Alternative Investment AIF’s home state. An authorised AIFM may market non-EEA AIFs Fund Managers (AIFMs). only to professional investors after having notified the FSA in writing The rules on AIFM implement Directive 2011/61/EC on Alternative of the marketing, together with a number of additional documents. Investment Fund Managers. The Directive and the relevant regulations An EEA (non-Finnish) AIFM may manage and market Finnish AIFs have been adopted in Finland through the Act on Alternative Investment under the same conditions as Finnish AIFMs (to professional or retail Funds (AIFMA) and the implementing regulations. The AIFMA investors) after it has completed a process under which it makes a contains a number of exceptions to the scope of its application. notification to the competent authority of its home jurisdiction, and The AIFMA authorisation obligation applies to fund managers receives a subsequent notice from the same competent authority. managing, through one or several funds not covered by the UCITS In addition, a non-EEA fund manager may offer EEA or non-EEA Directive, more than €100 million for leveraged funds or more than AIFs only to professional investors in Finland, after having notified €500 million for unleveraged funds. The latter higher threshold the FSA and after having received the FSA’s approval, which is requires also e.g. that any redemption rights are blocked for a subject to more stringent requirements. period of five years following the initial investment. AIFMs below these thresholds and any funds managed by them are subject to so- called “registration obligation”, which is somewhat less onerous a 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a procedure than applied to the fund managers requiring authorisation regulatory body? (i.e. where the thresholds are exceeded). The AIFMA applies in practice to all fund managers managing funds not covered by the The entities subject to the obligations under the AIFMA are the UCITS laws. management entities, i.e. the AIFMs. AIFs are not, as such, In addition to AIFM authorisation or registration, AIFMs may regulated. However, the AIFMA naturally sets forth a number need to take into consideration the rules regulating publication of a of filing, disclosure, notification and registration requirements in prospectus approved by the Finnish Financial Supervision Authority relation to individual AIFs. However, it is the AIFM that is obligated (FSA) in relation to the offering of securities (closed-ended funds) to fulfil the obligations under the law. under the Finnish Securities Markets Act (this may apply, in addition, to the AIFMA). 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment 1.2 Are managers or advisers to Alternative Investment Funds (or otherwise differentiate between different Funds required to be licensed, authorised or types of funds or strategies (e.g. private equity v regulated by a regulatory body? hedge)) and, if so, how?

Yes, the authorisation or registration obligations apply in practice to Different rules on the management of liquidity and asset valuation all collective investment vehicles not covered by the UCITS rules. apply, depending on whether the AIFs managed are closed-ended

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funds or open-ended funds. Closed-ended funds have more may carry out the valuation of the assets of the AIFs internally if its permissive minimum liquidity requirements and, usually, less asset valuation function is, operatively and otherwise, independent frequent valuation requirements. In addition, closed-ended funds from the portfolio management functions. If the asset valuation may be subject to obligations relating to offers of securities, such function is carried out internally, the FSA may require a separate as prospectus obligations. Therefore, closed-ended funds also need asset valuation by an external professional or an auditor. to take into consideration whether they operate within securities offering exceptions. The AIFMA applies both to private equity and 1.8 What rules apply to foreign managers or advisers hedge funds. wishing to manage, advise, or otherwise operate funds domiciled in your jurisdiction?

1.5 What does the authorisation process involve and how Finland long does the process typically take? An EEA (non-Finnish) AIFM may manage and market Finnish AIFs after having completed the notification process. Management of A domestic AIFM must be a Finnish limited company, have its head a Finnish AIF may commence on the date the foreign EEA AIFM office in Finland, and have an initial capital of at least €125,000 receives confirmation from its home country authority that the (externally managed AIF) or €300,000 (internally managed notification has been disclosed to the FSA. Marketing is allowed AIF). The AIFM must have its management and its shareholders (of a Finnish or other EEA country AIF) under the same conditions approved by the FSA. The application must include a programme as for domestic AIFMs. Marketing of fund shares to retail clients is of operations, containing a summary description of the organisation only allowed to authorised AIFMs or if the FSA grants an exemption of the AIFM and information on the managed AIFs. The content from the requirements on exceptional grounds. In relation to offers requirements are extensive. The application handling time is three to retail investors, all Finnish marketing legislation becomes directly months from the submission, which time can be extended by the applicable, requiring, e.g., preparation of a Key Investor Information FSA with an additional three-month period. The application must Document. An EEA-based non-Finnish AIFM may market fund contain information concerning e.g.: shares in non-EEA AIFs to Finnish professional investors under the ■ the ownership, management and accountants of the AIFM; same rules as Finnish AIFMs. ■ organisation of operations, salaries and compensation as well A non-EEA fund manager may offer AIFs to professional investors in as outsourcing; Finland after having received approval/confirmation from the FSA. ■ investment strategies, risk profiles and other such features; The notification must contain information detailing, inter alia, how: ■ destination countries, rules, custody arrangements; and ■ the non-EEA fund manager complies for each AIF with detailed regulatory obligations (extensive); ■ information of the AIFs to be managed and marketed. ■ Finland and the AIF host country must have in place a co- Marketing of EEA AIFs by a Finnish AIFM follows the standard operative agreement for controlling systemic market risks; notification procedure and can be carried out promptly. A ■ the AIF host country is not in the FATF (Financial Action notification by a Finnish AIFM intending to market non-EEA AIFs Task Force) High-risk and non-co-operative jurisdictions list; in Finland must contain information detailing, for example, how: ■ Finland and the AIF host country must have in place an ■ the AIFM complies with the Finnish marketing rules for agreement corresponding to the OECD Model Tax Treaty; AIFs; and ■ Finland and the AIF host country have in place a co-operative ■ the FSA is provided with information on the fund manager agreement for controlling systemic market risks; and on all AIFs marketed in Finland for purposes of the ■ the AIF host country is not in the Financial Action Task Force statutory reporting obligations. (FATF) High-risk and non-co-operative jurisdictions list; The FSA may, for an exceptionally weighty reason, grant a licence ■ Finland and the AIF host country have in place an agreement to a fund manager to offer non-EEA AIFs to retail investors. We corresponding to the OECD Model Tax Treaty; and have not seen this exception being applied. ■ the AIFM has disclosed to the FSA information on providers of certain management tasks for the AIFM. 1.9 What co-operation or information sharing agreements If the AIFM and the AIF are under a registration, instead of an have been entered into with other governments or authorisation obligation (see question 1.1), the FSA handling period regulators? has been ca. one to three months. Please see also question 1.8 concerning the management of Finnish AIFs by non-domestic AIFMs. The FSA has signed 24 regulatory co-operation agreements with national authorities (as of May 2018) of non-EEA countries in 1.6 Are there local residence or other local qualification relation to AIFMs. The European Securities and Markets Authority requirements? (ESMA) publishes a list of such signed agreements.

To obtain an AIFM authorisation in Finland, the AIFM must be a 2 Fund Structures Finnish limited liability company and have a Finnish-registered head office. However, as discussed above, the offering of Alternative Investment Funds is made possible to various EEA and non-EEA 2.1 What are the principal legal structures used for fund managers (see question 1.5). Alternative Investment Funds?

1.7 What service providers are required? The main legal structures used for AIFs in Finland are: ■ limited partnerships; and An AIFM is generally required to have a nominated depositary and ■ limited liability companies (also public limited liability a certified auditor for itself and for each AIF it manages. An AIFM companies).

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The organisation of the management of the AIFM is also affected 2.2 Please describe the limited liability of investors. by rules concerning the outsourcing of functions of the AIFM, the most strict rules applying to the outsourcing of portfolio and risk It is very common that the investors have only a limited liability in management. AIFs. In limited partnerships, the investors are silent partners whose AIFMs and AIFs investing in unlisted companies are also subject to liability is limited to the invested amount. Possible participation asset-stripping rules that apply for 24 months from the acquisition in the management does not usually have an effect on the limited of the control in the relevant company. Such investments are also liability. In relation to limited liability companies, the liability is subject to fairly extensive disclosure obligations to the authorities, likewise limited to the invested equity of a particular investor. the employees and the target company both in relation of the terms of the arrangement as well as the fund’s objectives. Finland 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment Funds? 3 Marketing

AIFMs applying for authorisation in Finland are required to 3.1 What legislation governs the production and offering be structured as private or public limited liability companies. of marketing materials? Companies retained for advisory services are also often limited liability companies. The AIFMA and the AIFM implementing regulations govern the production and offering of marketing materials of AIFs in Finland. 2.4 Are there any limits on the manager’s ability to A number of the provisions of the Finnish Investment Services Act restrict redemptions in open-ended funds or transfers (implementing e.g. the EU Markets in Financial Instruments Directive in open-ended or closed-ended funds? and regulation MiFID and MiFID II) are applied to AIFMs.

Generally, redemptions are included as a part of the contractual 3.2 What are the key content requirements for marketing provisions incorporating or regulating the AIF. Redemption materials, whether due to legal requirements or rights determine the nature of the fund (closed or open), the customary practice? categorisation of which is based on EU Commission Delegated Regulation 694/2014. According to the Regulation, an AIFM of The general content requirement is that the AIFM must keep an open-ended AIF is considered to be an AIFM managing an AIF available, in relation to each AIF it offers and markets, material the units of which are, at the request of any of its shareholders or and sufficient information about the funds as well as any changes unitholders, repurchased or redeemed prior to the commencement to such information. The key content requirements are as follows of its liquidation phase or wind-down, directly or indirectly, out (non-exhaustive): of the assets of the AIF and in accordance with the procedures ■ a description of investment strategy, objectives and risks of and frequency set out in its rules or instruments of incorporation, the AIF; prospectus or offering documents. Therefore, there are no explicit redemption time-periods, but the procedures agreed determine the ■ information about the AIF, AIFM, depositary, auditor and service providers; nature of the fund. However, if the period is over five years, the AIF is a closed-ended fund. Transfer restrictions generally depend on ■ information about any delegation of AIFM functions; the rules or instruments of incorporation of the fund. ■ a description of assets which the fund invests into, investment restrictions and related risks; ■ a description of the valuation procedures and liquidity risk 2.5 Are there any legislative restrictions on transfers of management; investors’ interests in Alternative Investment Funds? ■ fees, charges and expenses borne by the investors and the redemption procedures; Generally no. However, if units of the particular fund may only be offered to professional investors, transfer of units to retail investors ■ a description of how the AIFM ensures fair treatment of investors; is not allowed. Also, the articles and rules of the fund may naturally contain transfer restrictions and are very common. ■ leverage and the leverage policy; ■ its latest annual report; ■ a description of outsourcing arrangements and the prime 2.6 Are there any other limitations on a manager’s ability broker; and to manage its funds (e.g. diversification requirements, asset stripping rules)? ■ historical performance and latest net asset value. An AIFM marketing to non-professional investors will also have to The AIFM cannot generally carry out any other business than provide a key investor information document for each AIF unless fund management and certain ancillary investment services. The the FSA grants any exemptions. diversification requirements of a fund/AIF are usually set outin the fund documentation. The own funds of the AIFM must be 3.3 Do the marketing or legal documents need to be maintained in cash or liquid assets, not containing speculative registered with or approved by the local regulator? elements. Importantly, an AIFM must separate its risk management function from its other functions both operatively and hierarchically. Marketing of AIFs in Finland requires prior notification to the Furthermore, provisions concerning the use and disclosure of used FSA, depending on the category of investors to whom the AIF leverage in the AIFs is strictly regulated as is investing in securitised will be marketed, and the nationality of the AIF/AIFM. Please see assets – requiring the fulfilment of additional conditions. questions 5.1 and 5.2 concerning disclosure obligations and regular reporting obligations.

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EEA licence, or the company will need to have been notified under 3.4 What restrictions are there on marketing Alternative the EU financial services legislation in Finland. Investment Funds?

Marketing to retail investors is restricted. The obligation to act in 3.9 Are there any restrictions on the participation in Alternative Investment Funds by particular types of accordance with good securities markets practice, and prohibition investors, such as financial institutions (whether as from giving misleading or false information, cannot be waived sponsors or investors)? in marketing even when the reverse solicitation (professional investors) rules apply. No. Financial institutions naturally are subject to risk regulatory We describe below the general rules used in determining whether the investment restrictions and limits on risk concentrations. marketing thresholds are being triggered in Finland (i.e. Finnish law Finland applies). Generally, “marketing” in Finland triggers the registration and authorisation requirements set out in question 1.2. 4 Investments Marketing covers, e.g., advertising in mass media, direct marketing channels and specific investor presentations, distribution of 4.1 Are there any restrictions on the types of activities advertising material or brochures, and the oral presentation of that can be performed by Alternative Investment information and at meetings specifically organised for investors. Funds? Offering of AIFs is also included if the institution solicits orders from Finnish customers by means of remote sales techniques, AIFMs may carry out portfolio management and risk management advertising or visits of relationship managers soliciting “services” functions. In addition, if a part of its licence is externally managed, a or “orders”. Already, generally targeted marketing measures in licenced AIFM may offer asset management services and investment Finland relating to the offering of the AIF may trigger the licensing advisory and deposit functions for financial instruments, broker and requirements. The use of websites is not likely to be considered dealer functions. Generally, no other activities are allowed. cross-border provision of AIFs if the AIFM does not otherwise market or offer AIFs and if it does not intend to acquire customers 4.2 Are there any limitations on the types of investments resident in Finland. that can be included in an Alternative Investment Finnish investors may still be in contact with the fund manager Fund’s portfolio whether for diversification reasons or based on previous contacts or otherwise at their own initiative otherwise? without triggering the licensing requirements. If the customer initiates the initial contact itself, the licensing obligation is not likely Generally no. There is a specific type of domestic AIF (special to be triggered. The so-called reverse solicitation exception is fairly investment fund), whose structure is governed by the UCITS extensive in Finland. In such case, the investors are able to waive rules but whose management falls under the AIFMA. The special most statutory requirements that would otherwise apply. investment fund is subject to certain investment restrictions.

3.5 Can Alternative Investment Funds be marketed to 4.3 Are there any restrictions on borrowing by the retail investors? Alternative Investment Fund?

AIFs may be marketed to retail (non-professional) investors in The AIFM must disclose and approve the limits for the leverage it Finland subject to approval from the FSA. Marketing is restricted employs. In addition, the level of FSA supervision and regulatory to AIFs being managed by Finnish and EEA AIFMs. In addition, actions depends on the level and perceived leverage risk of the fund. Finnish and EEA AIFMs subject to the registration obligation may Furthermore, the AIFM has to prove upon request to the FSA that offer AIFs to retail investors subject to FSA approval. the leverage thresholds are appropriate and have not been exceeded at any time. 3.6 What qualification requirements must be carried out in relation to prospective investors? 5 Disclosure of Information

The AIFMA distinguishes between marketing to professional and retail investors. Professional investors are those who qualify as 5.1 What public disclosure must the Alternative professional investors under MiFID I and MiFID II. Retail investors Investment Fund or its manager make? are investors who do not qualify as professional investors under MiFID I and MiFID II rules. The AIFM must disclose periodically the following information to the investors in each AIF it manages:

3.7 Are there additional restrictions on marketing to ■ the percentage of the AIF’s assets which are subject to special public bodies such as government pension funds? arrangements arising from their illiquid nature; ■ any new arrangements for managing the liquidity of the AIF; No, there are no such additional restrictions. ■ the current risk profile of the AIF and the risk management systems employed by the AIFM to manage those risks; and ■ if the AIF is employing leverage, the AIFM must on a regular 3.8 Are there any restrictions on the use of intermediaries basis disclose changes to the maximum level of leverage, any to assist in the fundraising process? right of reuse of collateral or any guarantee granted under the financing arrangement, and the total amount of leverage. The intermediaries will need to have an investment services Furthermore, the AIFM must inform AIF investors and other relevant company authorisation or a banking licence in Finland, or have an parties, of potential conflicts of interest in its investment operations.

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5.2 What are the reporting requirements in relation to 6.2 What is the tax treatment of the principal forms of Alternative Investment Funds or their managers? investment manager / adviser identified in question 2.3? The AIFM must publish an annual report for each AIF it manages no later than six months following the end of the financial year. The An AIFM which is established as a limited liability company will annual report must be audited and prepared in accordance with the generally be subject to tax treatment as described in question 6.1 accounting rules and standards of the AIF’s home state. (limited liability companies). It should be noted that various forms An AIFM is also obliged to report to the FSA (as a minimum) the of AIFM compensation (carried interest, management fees and other following information for each AIF it manages: such items) need to be considered separately. Finland ■ the main markets and instruments the AIFM trades on behalf of the AIF; 6.3 Are there any establishment or transfer taxes levied ■ information the AIFM is required to disclose to its investors in connection with an investor’s participation in an (see question 5.1); Alternative Investment Fund or the transfer of the investor’s interest? ■ the main categories of assets the AIF has invested in; and ■ the results of stress tests which the AIFM is required to carry Generally no. However, transfer of shares in a limited liability out. company (unlisted) triggers a 1.6% transfer tax liability (2% for There are also additional reporting requirements in relation to share purchases in real estate holding companies). situations where an AIF acquires control over a non-listed company.

6.4 What is the tax treatment of (a) resident, (b) non- 5.3 Is the use of side letters restricted? resident, and (c) pension fund investors in Alternative Investment Funds? No, the use of side letters is not restricted and they are used often, especially by institutional investors. The tax treatment for investors depends, e.g., on the legal structure of the AIF, the assets of the AIF and whether the investment is made by a corporation or a private person. Resident investors that 6 Taxation are limited liability companies are generally taxed as described in question 6.1 to the extent the AIF is also a limited liability company. If the AIF share (limited liability company) is held by a private 6.1 What is the tax treatment of the principal forms of Alternative Investment Funds identified in question person, the income may be taxed, depending on the situation either 2.1? as income, capital income or dividend income. The classification of income (e.g. personal, corporate or capital gains income) on the Finnish AIFs are normally structured either as limited liability investor level may also depend e.g. on the net assets of the AIF, both companies or limited partnerships. if the AIF is a limited liability company or a limited partnership. Limited liability companies are taxed according to general tax rules Non-resident investors are usually subject to withholding tax applying to companies. Limited liability companies may, subject to (corporate entity 20%, private person 30%) on dividends and other exceptions, be exempted from corporate tax on dividends received profit distributions in Finland, unless otherwise provided for in an from other (portfolio) domestic limited liability companies or from applicable tax treaty with Finland and the country of residence. If capital gains received from the sale of shareholding or portfolio the recipient is resident within the EEA, the exemption method will companies (subject to specific requirements) in Finnish limited be applicable e.g. on the dividends, subject to certain provisions. liability companies or similar entities established within the EEA. Capital gains are generally not taxable in Finland if received by The same exemption may also apply in relation to share investments non-resident investors. This requires careful analysis. The overall outside the EEA area, usually provided that the company holds at tax treatment depends largely on the type of income, recipient’s least 10% of the shares and votes in the company. This usually domicile, EU law and the relevant tax treaty. Real estate-based also requires careful analysis and review of the relevant tax treaties. income is not usually exempted from Finnish tax even in relation Limited liability companies are subject, for other types of income, to tax treaty persons. to corporate tax, usually at the general rate of 20% (May 2018) (net taxable income). 6.5 Is it necessary or advisable to obtain a tax ruling from An AIF formed as a limited partnership is treated as a flow-through the tax or regulatory authorities prior to establishing entity in Finnish taxation but is treated as a single unit for tax and an Alternative Investment Fund? accounting purposes. The AIF is, as such, not subject to taxation. The profits of the AIF are taxed directly as the partners’ income and It is advisable to assess the tax consequences prior to establishing an any subsequent actual distributions are not taxed again in Finland. AIF in Finland (or investing in it), both in relation to the form of the The level of taxation of the partners may not be the same and will AIF and the types of investment assets. depend on other income of the relevant partner, its corporate form, It should be noted that the description under this section 6 with domicile and other factors of the partner (investor). respect to taxation is limited and of very general nature and contains Accrued losses (preceding 10 years) may be deducted from the only a limited number of relevant tax issues that might arise for an profit before the allocation to partners. Losses are calculated on the AIF or AIFM in Finland. It is in some cases advisable to seek an partnership level and are generally not deductible by the partners advance tax ruling for the establishment of an AIF from the Finnish themselves. tax authorities.

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the LPs, and to some extent the asset class (e.g. real estate-related 6.6 What steps have been or are being taken to implement profits may be treated differently) and whether the AIF distributes the US Foreign Account and Tax Compliance Act the income or profits annually or at the final phases of the fund. 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard? 6.10 Are there any meaningful tax changes anticipated in Finland and the US signed an agreement relating to the the coming 12 months? implementation of FATCA in 2014 and reporting has commenced as of 2015. In 2015, the Finnish tax authorities issued guidelines on According to our analysis, there are not meaningful tax changes how the FATCA treaty will be applied. anticipated in the coming 12 months that would affect Alternative

Investment Funds. Finland

6.7 What steps are being taken to implement the OECD’s Action Plan on Base Erosion and Profit-Shifting 7 Reforms (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? 7.1 What reforms (if any) are proposed? Finland signed the agreement 7 June 2017, but has not yet ratified it. Certain double tax treaties such as the Nordic income tax treaty are There are no pending reforms having a direct effect on AIFMs. excluded from its scope. Also, the BEPS does not alter the existing However, the planned debt-for-equity swaps legislation may be of provisions of, e.g., permanent establishments, because Finland has significance for operational aspects of AIFs. made a reservation concerning the matter.

6.8 Are there any tax-advantaged asset classes or Mika J. Lehtimäki structures available? How widely are they deployed? Attorneys-at-Law Trust Mikonkatu 17 A large proportion of AIFs are structured as limited partnerships, 00100 Helsinki because, unlike limited liability companies, they are treated as FInland flow-through entities in Finnish taxation (a single unit for tax and Tel: +358 40 534 2273 accounting purposes). In some cases, it is advisable to use a two-tier Email: [email protected] fund structure (with a holding entity), but these situations may relate URL: www.thetrust.fi to, in addition to tax, the investor base and the funding instruments utilised by the AIF and AIFM. Mika is one of the leading Banking and M&A lawyers in Finland. He has extensive experience on Finnish and cross-border M&A and 6.9 Are there any other material tax issues for investors, banking and financial transactions in the Nordic area and Russia. managers, advisers or AIFs? Mika has graduated from the University of Helsinki in addition to which he holds two post-graduate law degrees from the University of Oxford, The nature of tax issues that arise depends on, e.g., on the structure where he also acts as a researcher in the Law Faculty (international financial law). of the fund, the advisory and management agreements and the nature of the AIF’s business. We feel that the parties should pay Mika has, throughout his career, served especially the interests of foreign clients in complex financing and M&A transactions taking place special care to the fees under management and advisory contracts in Finland. and transaction fees, the location and permanent establishment of

TRUST is a niche law firm that focuses on M&A, Banking & Finance and Tech/IT. We advise institutional investors, funds, corporate boards and management both in domestic and cross-border transactions and ‘bet-the-company’ assignments.

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France Damien Luqué

Lacourte Raquin Tatar Martin Jarrige de la Sizeranne

■ if it is located in a third country, apply for a specific approval 1 Regulatory Framework from the AMF in order to manage French AIFs, subject to meeting the conditions as set out in French Monetary and Financial Code, the AMF General Regulation and the 1.1 What legislation governs the establishment and relevant AMF instruction. operation of Alternative Investment Funds? AIF advisers: The following legislation and regulations govern the establishment In order to be able to provide French AIFs with investment advice, and operation of French Alternative Investment Funds (“AIF”): any French entity must either: ■ The French Monetary and Financial Code (including the ■ be authorised and regulated in France by the French banking French ordinance No. 2013-676 of 25 July 2013 which authority (the “ACPR”) as an investment services provider implemented the EU Directive 2011/61/UE on alternative (either a credit institution or an investment firm), authorised investment funds managers (the “AIFMD”) into French law); to provide financial investment advice in France; ■ Delegated Regulation (EU) No. 231/2013 of the European ■ be authorised and regulated in France by the AMF as a Commission of 19 December 2012; portfolio management company authorised to provide ■ relevant legal or regulatory provisions in the French financial investment advice in France, provided that such Commercial Code and the French Insurance Code; activity is carried out on an ancillary basis; ■ the General Regulation of the Autorité des marchés financiers ■ be registered in the ORIAS register as a French financial (the “AMF” – the French financial markets regulator); investment adviser (conseiller en investissements financiers – “CIF”) and be affiliated with one of the professional ■ the following AMF Instructions and positions: 2002-01, 2003- associations authorised by the AMF; or 03, 2004-07, 2006-18, 2007-19, 2008-04, 2008-14, 2010-05, 2011-01 and 2011-02, 2011-05, 2011-10, 2011-15, 2011-19 to ■ if it is located outside France but in another Member State of -23, 2011-24, 2011-25, 2012-06, 2012-11, 2012-12, 2013-16, the EU, be authorised by its local authority as an investment 2013-22, 2014-02, 2014-03, 2014-04 and 2014-09; services provider and comply with the passporting notification procedure in accordance with the EU Directive 2014/65/UE ■ relevant ESMA’s doctrine (Guidelines, Q&A, Opinion, (the “MiFID”). Recommendations, etc.); and ■ French Tax Code (Code général des impôts – “CGI”) and administrative regulations (Official Tax Bulletin, BOFip). 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body? 1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or The French Monetary and Financial Code distinguishes between regulated by a regulatory body? three (3) categories of AIFs: ■ French AIF de jure (open to both retail and professional AIF managers: investors) which must be authorised and are regulated by the In order to be able to manage French AIFs, any manager must either: AMF; ■ if it is located in France, be authorised and regulated by the ■ French AIF de jure (eligible to professional investors AMF as a French portfolio management company authorised only) which are regulated by the AMF and whose creation, to manage AIFs; or amendment or termination must be notified to the AMF ■ if it is located outside France but in another Member State pursuant to a specific notification procedure; and of the European Union (“EU”), be authorised by its local ■ French AIF de facto, i.e. any entity which qualifies as an regulator as an AIF manager and comply with the passport AIF pursuant to the definition of AIFs in the AIFMD, which notification procedure pursuant to the AIFMD; or are not authorised by the AMF or subject to a notification procedure with the AMF. Such AIFs are submitted to general rules applicable to any AIF, in particular information requirements with the AMF.

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■ OPCI; and 1.4 Does the regulatory regime distinguish between ■ FFA. open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different ■ French AIFs opened to professional investors: types of funds or strategies (e.g. private equity v ■ FPVG; and hedge)) and, if so, how? ■ OPPCI. ■ Employee savings funds (FCPE and SICAVAS). As a matter of principle, most French AIFs de jure are open-ended vehicles. The sole closed-ended AIF is the SICAV (as defined The AMF issues an authorisation for the creation of these products below). after checking in particular (i) the compliance of the product with the regulations, and (ii) that unitholders or shareholders are properly Nevertheless, most of the French AIFs may provide for redemption France informed through the information indicated in the regulatory restrictions provisions depending on the eligible investors or documents, as well as in the letters sent to clients when there is a invested assets, e.g. liquid or illiquid assets (such as real estate material change to the strategy of the product they hold. assets, securities of unlisted companies, etc.). French AIFs are authorised and monitored by the AMF which The French Monetary and Financial Code distinguishes between the checks the information supplied in (i) the regulatory documents: following categories of AIFs de jure: the key investor information document (“KIID”) (relevant for AIFs ■ French AIFs open to retail investors: distributed to retail investors) and prospectus, to which are attached ■ generic investment funds (fonds d’investissement à the rules for an FCP or the articles of association for a SICAV, and vocation générale – “FIVG”); in (ii) the marketing materials. ■ private equity investment funds (fonds de capital In practice, an authorisation file (whose content is described in investissement – “FCPR”, “FCPI” or “FIP”); relevant AMF instructions) must be sent to the AMF through the ■ real estate investment funds (organismes de placement online platform “GECO” (if the management company is regulated collectif immobilier – “OPCI”); by the AMF). ■ closed-ended investment companies with fixed share Once a complete file is received by the AMF, the latter issues an capital (sociétés d’investissement à capital fixe – acknowledgment of receipt which mentions the authorisation “SICAF”); and deadline (one month (i.e. 23 business days) from the issuance of the ■ alternative funds of funds (fonds de fonds alternatifs – acknowledgment of receipt). “FFA”). Notification process with the AMF: ■ French AIFs opened to professional investors: ■ generic professional investment funds (fonds Certain French AIFs de jure reserved to professional investors are professionnels à vocation générale – “FPVG”); not subject to the AMF prior approval but their creation, modification or termination are subject to a notification process with the AMF. ■ professional real estate investment funds (organismes professionnels de placement collectif immobilier – Such process covers the following categories of AIFs: “OPPCI”); ■ FPCI; ■ professional private equity investment funds (fonds ■ FPS; and professionnels de capital investissement – “FPCI”); ■ SLP. ■ professional specialised investment funds (fonds professionnels spécialisés – “FPS”); and Constitution of such AIFs must be notified to the AMF within one month following the date of their constitution, through a notification ■ special limited partnerships (sociétés de libre partenariat file (whose content is described in the relevant AMF instruction). – “SLP”). ■ French employee savings funds (fonds d’épargne salariale – Once a complete file has been received by the AMF, the latter issues “FCPE” and “SICAVAS”). an acknowledgment of receipt within eight business days. ■ French financing vehicles: Authorisation process for AIF managers: ■ securitisation vehicles (which may qualify as AIFs if they French portfolio management companies shall receive the approval meet certain criteria); and of the AMF in order to be able to manage AIFs. The AMF can ■ specialised financing vehicles (organismes de financement decline its approval for several reasons, such as: spécialisé – “OFS”). ■ the management company does not fulfil the required In practice, real estate investment funds (OPCI, OPPCI); private conditions; and equity investment funds (FCPR, FCPI, FIP, FPCI); FPS and SLP (if ■ when the monitoring mission may be hindered by “the existence redemptions of their shares or units are limited) may include gates of a capital relationship or a direct/indirect control, between or other limitation of redemption requests. the requesting company and other company or individual”. As a matter of principle, any French portfolio management company must have two executives with a good reputation and 1.5 What does the authorisation process involve and how long does the process typically take? sufficient experience, one of whom is present on a full-time basis at the management company’s office. A person responsible for compliance and internal control functions must be appointed. Authorisation granted by the AMF: The minimum initial capital is EUR 125,000, which must be fully Creation or material amendments of certain French AIFs de jure are paid up. Any French portfolio management company must also subject to the prior authorisation of the AMF. comply with own fund requirements. The authorisation process covers the following categories of AIFs: The AMF grants its authorisation within three month from the receipt ■ French AIFs opened to retail investors: of a complete authorisation file. In practice, the authorisation process ■ FIVG; may be longer depending on the internal organisation of the future ■ FCPR, FCPI and FIP; management company or the additional requirements from the AMF.

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1.6 Are there local residence or other local qualification 2 Fund Structures requirements?

2.1 What are the principal legal structures used for The official headquarters of the portfolio management company and Alternative Investment Funds? its effective management shall be located in France. Any French AIF de jure may use the following legal structures: 1.7 What service providers are required? ■ a mutual fund (fonds communs de placement – “FCP”); ■ an investment company with a variable capital (sociétés

France In addition to the portfolio management company, any AIF is d’investissement à capital variable – “SICAV”) either in required to appoint, at least, the following service providers: the form of a public limited company (société anonyme – ■ a depositary, responsible for (i) safeguarding the assets of the “SA”) or a simplified limited company (société par actions AIF, and (ii) ensuring the compliance of management decisions; simplifiée – “SAS”); or ■ a statutory auditor, responsible for certifying the accounts of ■ a special limited partnerships (“SLP”) only if the French AIF the AIF; and is a professional specialised investment fund (see below). ■ for real estate investment funds (OPCI and OPPCI): two By definition, any AIF de facto may take the form of any type of external valuers of real estate assets (or only one external legal structure (civil or commercial company, trust, other contractual valuer for professional real estate investment funds (OPPCI)), forms, etc.). in addition to the abovementioned service providers.

2.2 Please describe the limited liability of investors. 1.8 What rules apply to foreign managers or advisers wishing to manage, advise, or otherwise operate For unitholders in a mutual fund (“FCP”): funds domiciled in your jurisdiction? Liability of unitholders in FCPs is limited up to the amount of their commitment. For European managers or advisers which benefit from the European passport “in” pursuant to the AIFMD or the MiFID: For unitholders in an investment company with a variable capital (“SICAV”) and limited partners in a special limited When foreign managers or advisers manage or advise French AIFs partnership (“SLP”): on a cross-border basis pursuant to the passporting regime, they are submitted to the supervision of the competent authority of their Liability of shareholders or limited partners is limited up to the home Member State. amount of their contribution. However, they have to comply with some good conduct rules For general partners in a special limited partnership (“SLP”): applicable in France (namely: rules applicable to marketing Liability of general partners is unlimited. and information to investors or potential investors; rules on marketing materials; good conduct rules on financial solicitation 2.3 What are the principal legal structures used for (“démarchage”) if relevant, etc.). managers and advisers of Alternative Investment For foreign managers located in a third country which may not Funds? benefit from the AIFMD passport regime: Foreign managers managing French AIFs must meet stringent Managers and advisers of AIFs generally use the following legal requirements in the absence of AIFMD passporting regime, structures: including the following requirements: ■ a simplified limited company (“SAS”); or ■ compliance with all provisions applicable to French portfolio ■ a public limited company (“SA”). management companies which derived from the AIFMD; ■ the AMF’s prior approval; 2.4 Are there any limits on the manager’s ability to ■ appointment of one or more third-party service providers to act restrict redemptions in open-ended funds or transfers as depositary(ies) and notify the AMF of such appointment; in open-ended or closed-ended funds? ■ there must be appropriate cooperation arrangements in compliance with the AIFMD between the AIF manager’s Yes. For French open-ended funds, redemptions may be restricted home country regulator and the AMF for systemic risk by the AIF manager only on a temporary basis, in exceptional oversight in line with international standards; and circumstances and in the unitholders’ or shareholders’ interests. ■ the home country must not be listed as a risk country pursuant Some French AIFs can include gate provisions or lock-up periods to the FATF. expressly stated in their documentation. In addition, transfers of shares of open-ended funds in the form 1.9 What co-operation or information sharing agreements of an investment company (“SICAV”) must not be subject to any have been entered into with other governments or restrictions. regulators? For SICAF (closed-ended AIF) or AIF eligible to professional investors only, there are no limits on the AIF manager’s ability to The AMF has entered into many co-operation or information restrict transfers or redemptions. Rules regarding the transfer or sharing agreements with foreign regulators or governments. The redemption of units or shares are provided for in their by-laws. list of such agreements (in English) are available at the following address: http://www.amf-france.org/en_US/L-AMF/Relations- institutionelles/Accords-et-actions-de-cooperation/Conventions- bilaterales?langSwitch=true.

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If the AIF benefits from the passporting regime pursuant to the 2.5 Are there any legislative restrictions on transfers of AIFMD, the AMF must also be provided with the legal documents investors’ interests in Alternative Investment Funds? of such AIF in the context of the notification process. Regarding marketing materials, the AMF is entitled to ask to be There is no legislative or regulatory restriction applicable to transfer provided with any marketing materials related to any AIF marketed of shares or units of AIFs opened to retail investors. in France, prior to their publication or dissemination. For AIFs opened to professional investors, any transferee must qualify as a professional investor or meet the conditions as set out in law or applicable regulations in order to be able to acquire shares or 3.4 What restrictions are there on marketing Alternative Investment Funds? units of the relevant AIF (e.g. acquire shares or units for an amount France at least equal to EUR 100,000). Marketing AIFs in France is subject to the notification process with the AMF (if the relevant AIF is marketed to professional investors) 2.6 Are there any other limitations on a manager’s ability or a prior approval by the AMF. to manage its funds (e.g. diversification requirements, asset stripping rules)? The concept of marketing adopted by the AMF is wider than the definition of marketing provided for in the AIFMD. Yes. AIF managers must comply with specific diversification The AMF defines the marketing as an “offering” or “placement” of constraints (risk-spreading ratios, control ratios, etc.) applicable to units or shares of an AIF, i.e. their presentation by different means certain French AIFs. Such requirements differ depending on the (advertising, direct marketing, advice) with a view to encouraging category of AIFs. In particular, generic investment funds (“FIVG”), investors to subscribe to or purchase them. private equity funds opened to retail investors (FCPR, FCPI and The AMF specifies in its position No. 2014-04 that certain activities FIP) or real estate investment funds (“OPCI”) are subject to strict shall not be considered as acts of marketing in France. Amongst rules regarding diversification ratios and asset stripping. them, the AMF includes the concept of “pre-marketing”, which is Certain diversification rules do not apply to certain AIFs opened to not considered as marketing shares or units of AIF in France, and professional investors. then is not subject to any authorisation or notification process with the AMF. In particular, specialised professional investment funds (“FPS”) and special limited partnerships (“SLP”) are not submitted to any The pre-marketing consists of, inter alia, contacting 50 investors at restriction in terms of diversification, asset stripping or control. most in order to estimate their level of interest before launching an AIF, provided that: (i) such practice is conducted among professional investors or retail investors whose initial subscription is greater than 3 Marketing or equal to EUR 100,000; and (ii) such practice does not involve the delivery of a subscription form and/or document presenting definitive information on the characteristics of the AIF. 3.1 What legislation governs the production and offering of marketing materials? The concept of pre-marketing will soon be harmonised within the EU, as a project of Directive amending the AIFMD includes a new Rules regarding the production and offering of marketing materials definition of pre-marketing. for AIFs marketed in France are provided for in: ■ the French Monetary and Financial Code; 3.5 Can Alternative Investment Funds be marketed to ■ the General Regulation of the AMF; and retail investors? ■ the relevant AMF instructions and guidelines applicable to the content requirements of marketing materials. Yes, if the AIF is duly authorised in France to be marketed to retail investors. Nevertheless, please note that at this stage, the AIFMD passporting route does not apply for retail investors. 3.2 What are the key content requirements for marketing materials, whether due to legal requirements or customary practice? 3.6 What qualification requirements must be carried out in relation to prospective investors? As a matter of principle, marketing materials must be accurate, clear and not misleading, irrespective of the communication medium used There is no qualification requirements applicable to prospective (including social network media). Marketing materials must be clearly investors in AIFs de jure opened to retail investors (unless the identifiable as such. AMF Position No. 2011-24 provides for details documentation of the relevant AIF provides for specific qualification regarding the AMF requirements on the content of marketing materials. requirements). For instance, the AMF requires a strict balance between risks and For AIFs de jure opened to professional investors, investor must be benefits of any AIF marketed in France. Thus, risks must beas either: visible as benefits in any marketing documentation. In addition, ■ a professional investor within the meaning of MiFID; marketing materials must mention the existence of the prospectus ■ any investor provided that the amount of its initial investment and the KIID (if relevant) of the relevant AIF. is at least equal to EUR 100,000; ■ any investor provided that the subscription or acquisition of 3.3 Do the marketing or legal documents need to be shares or units is performed in its name and on its behalf by registered with or approved by the local regulator? an investment services provider acting in the context of the service of portfolio management; Legal documents of French AIFs de jure must be approved or ■ as the case may be, any retail investors if the AIF is ELTIF notified (depending on the type of AIF) by the AMF. pursuant to the EU Regulation No. 2015/760; or

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■ for private equity professional AIFs (FPCI, FPS or SLP), For private equity investment funds (FCPR, FCPI, FIP and any member of the management team or the management FPCI): company or any person who assists the management company Such AIFs may borrow cash up to 10% of their assets. and whose initial investment is at least equal to EUR 30,000. For real estate investment funds (OPCI and OPPCI): OPCIs may borrow cash up to 10% of the value of their non-real 3.7 Are there additional restrictions on marketing to estate assets. public bodies such as government pension funds? For FIVG, FPVG, FFA: No. However, some French pension funds or retirement schemes These AIFs may not borrow cash on an ongoing basis. They are

France may be subject to specific investment constraints/policies. only allowed to borrow cash on a temporary basis and either: ■ for an amount which does not exceed 10% of their assets; or 3.8 Are there any restrictions on the use of intermediaries ■ with the objective of acquiring real estate properties which to assist in the fundraising process? are necessary to their business and for an amount which does not exceed 10% of their assets. No. However, activities carried out by the intermediaries in the The total amount of cash borrowing used pursuant to the above context of the fundraising process may qualify as investment indents does not exceed 15% of its assets. services within the meaning of the MIFID. Consequently, such For FPS and SLP: intermediaries may have to be authorised as investment services There is no legal or regulatory restrictions on borrowing by a FPS providers or duly authorised to provide such regulated services in or a SLP. Rules on cash borrowing are specified in their prospectus France (e.g. CIF). or by-laws.

3.9 Are there any restrictions on the participation in Alternative Investment Funds by particular types of 5 Disclosure of Information investors, such as financial institutions (whether as sponsors or investors)? 5.1 What public disclosure must the Alternative Investment Fund or its manager make? No, there are no restrictions. Before any investment made by a potential investor, the AIF 4 Investments manager must make available all information listed in Article 23 of the AIFMD, namely: ■ a description of the investment strategy and objectives; 4.1 Are there any restrictions on the types of activities ■ the identity of the AIFM, the AIF’s depositary, auditor and that can be performed by Alternative Investment any other service providers and a description of their duties Funds? and the investors’ rights; ■ a description of any delegated management function; Yes. By definition, an AIF cannot carry out any industrial or ■ a description of the AIF’s valuation procedure and of the commercial activities. For AIF de jure in the form of an investment pricing methodology for valuing assets; company (SICAV), the company purpose of such vehicles is limited ■ a description of the AIF’s liquidity risk management, to the management of a portfolio of securities and deposits. including the redemption rights both in normal and in There is a similar restriction for real estate funds (OPCI, OPPCI, exceptional circumstances, and the existing redemption SCPI), which are not authorised to conduct any commercial arrangements with investors; activities other than those specifically provided for by law. ■ a description of all fees, charges and expenses and of the maximum amounts thereof which are directly or indirectly borne by investors; 4.2 Are there any limitations on the types of investments ■ the latest annual report; that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or ■ the procedure and conditions for the issue and sale of units or otherwise? shares; ■ the latest net asset value of the AIF or the latest market price Yes. There are many limitations on any investments made by an of the unit or share of the AIF; AIF. For instance, cash borrowings, investment in certain types of ■ where available, the historical performance of the AIF; securities or financial derivatives, use of guarantees, short selling, ■ the AIF or its portfolio management company shall provide etc. are subject to strict limitations provided for in the French the unitholders or the shareholders with an annual report Monetary and Financial Code. including several elements: Most AIFs de jure are also subject to diversification constraints (risk ■ the annual accountings; spreading ratios), control ratios and counterparty risk ratio. ■ the annual activity report; Only specialised professional investment funds (FPS and SLP) are ■ the main changes which occurred during the year; and not submitted to such restrictions. ■ remunerations paid (all the employees or just those concerned by the AIF referred).

4.3 Are there any restrictions on borrowing by the In addition, the AIF or its portfolio management company shall provide Alternative Investment Fund? the unitholders or the shareholders with the following documents: ■ semi-annual report or quarterly report; and Cash borrowing is limited for certain French AIFs. ■ semi-annual or quarterly asset composition.

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Any French portfolio management company must also publish and/or Alternative investment funds taking the form of partnerships or make available to the investors in the AIFs it manages information on: co-ownerships of assets: ■ its policy on complaints handling; Investment funds existing as SLPs (sociétés de libre partenariat) ■ its voting policy; or FCPs (fonds communs de placement) are tax transparent. As a ■ the way it takes into account environmental, social and result, profits and gains they realise are not taxed at the level of the governance criteria in its management policies (on its website fund but at the level of partners/unitholders (see question 6.4). This and/or in its annual report); mainly concerns the following forms of funds: ■ its internal remuneration policy (for instance through an ■ FCPs; independent remuneration policy statement, a periodic ■ FCPRs (FCPRs are specific types of FPCIs) and SLPs (SLPs

disclosure in the annual report or any other form); and envoy the exact same tax regime as FCPRs); France ■ its policy on execution of orders. ■ FCPIs and FIPs (FCPIs and FIPs also are specific types of FCPRs); 5.2 What are the reporting requirements in relation to ■ FCTs (securitisation vehicles); and Alternative Investment Funds or their managers? ■ OFS (if incorporated as mutual funds).

In addition to the reporting obligation or the public disclosure 6.2 What is the tax treatment of the principal forms of as referred to in question 5.1, any French AIF manager must investment manager / adviser identified in question regularly report to the AMF, for each AIF it manages, the following 2.3? information: ■ the percentage of the AIF’s assets which are subject to special Fees invoiced by management companies are generally fully subject arrangements arising from their illiquid nature; to CIT under standard rules. Subject to certain exceptions, such fees ■ any new arrangements for managing the liquidity of the AIF; are generally exempt from VAT. ■ the current risk profile of the AIF and the risk management French law provides for a favourable tax regime with respect to systems employed by the AIF manager to manage the market distributions paid and gains realised on sales of carried interest risk, liquidity risk, counterparty risk and other risks including shares by carried interest shareholders, under certain conditions. operational risk; This tax regime applies to: ■ information on the main categories of assets in which the AIF ■ carried interest units issued by FCPR or FPCIs as from 30 is invested; and June 2009 or by equivalent European venture capital funds; ■ the results of the stress tests. and AMF instruction 2014-09 describes the process to file such reports. ■ carried interest shares issued by SCRs as of 30 June 2009 or by equivalent European venture capital.

5.3 Is the use of side letters restricted? Under this regime, gains on carried interest shares or units are first deemed to be a tax exempt reimbursement of equity subscriptions No. However, entering into side letters with one or more investors (to the extent of such equity subscription) and are thereafter treated would qualify as granting preferential treatment with such investors, as a capital gains on securities for individual tax purposes (subject within the meaning of the AIFMD. Preferential treatments granted to a flat taxation at the rate of 30%, see question 6.4). to investors are not restricted, provided that they do not result in an When the above regime is not applicable, distributions to which overall disadvantage to other investors. carried interest shares or units entitle and net capital gains on the Information on preferential treatment must be disclosed within the sale or redemption of carried interest shares are subject to individual prospectus of the relevant AIF and the investors in the relevant AIF income tax as salaries, and are also are subject to social contributions. must be informed that preferential treatments have been granted to one or more other investors. 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the 6 Taxation investor’s interest?

Subject to the exceptions referred to below, no transfer taxes are 6.1 What is the tax treatment of the principal forms of generally due in relation to the sale or the redemption of units/shares Alternative Investment Funds identified in question 2.1? in mutual funds or SLPs. However, a 5% transfer tax applies to sales or redemptions of Alternative investment funds taking the form of corporations: shares/units in SPPICAVs and FPIs where the purchaser (i) if an As a rule, corporations are subject to corporate income tax (“CIT”) individual, owns or will own more than 10% of the shares/units after in respect of all the profits and capital gains they realise. However, the transfer, and (ii) if a legal person or a fund, owns or will own specific provisions of the French Tax Code provide for aCIT more than 20% of the shares/units after the transfer. exemption on the profits realised by certain forms of investment Also, standard transfer tax rules apply to sales or redemptions of funds with respect to the profits and capital gains derived from the shares in funds existing as corporations (i.e. SICAVs and SCRs). As operations they realise in accordance with their corporate purposes. a result, (i) a 0.1% transfer tax applies to sales of shares in SICAVs This concerns SICAVs, SCRs and SPPICAVs. or SCRs (existing as stock corporations) provided that they do not Other funds existing as corporations are generally subject to CIT qualify as property companies for French transfer tax purposes and under standards rules. (ii) a 5% transfer tax applies to sales of their shares if they do.

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However, most of the international tax treaties concluded 6.4 What is the tax treatment of (a) resident, (b) non- by France provide for withholding tax rates that vary resident, and (c) pension fund investors in Alternative from 0% to 15%, depending on the tax jurisdiction of the Investment Funds? investor (being however specified that investment funds do not enjoy the benefits of all double tax treaties entered A distinction should be made between domestic and foreign into by France). investors: No taxation generally applies in France on distribution 1) French tax residents reflecting the interest income received by the fund from i) Individuals French companies. When they invest in funds existing as corporations (e.g. a Except when they are distributed by FPIs (for which they France SICAV), individuals are generally subject to income tax are subject) or SPPICAVs (for which they are fully subject on the distributions paid by such funds. In respect of such to dividend withholding tax), no taxation generally distributions, individuals are treated as if they had directly applies in France on distributions reflecting capital gains derived the underlying profits (distributed capital gains realised by the fund from the disposal of shares in a are treated as capital gains and redistributed dividends are French company unless the unit holder, his/her spouse and treated as dividends for tax purposes). At the level of the their relatives in the ascending and descending line, hold, investors, dividends and capital gains are then treated in directly or indirectly, more than 25% of the rights in such the same manner for individual tax purposes. Both are underlying company. subject to a flat tax at the rate of 30% (12.9% income tax ii) Taxation of capital gains made upon disposal of the + 17.8% of social levies). Capital gains derived from the fund units or shares disposal of units are subject to the same taxation regime. Subject to the exceptions below regarding SPPICAVs/ When they invest in funds existing as mutual funds FPIs and to specific exceptions, no taxation generally (FCPs), individual are technically deemed to directly applies in France in respect of capital gains derived from derive the income realised by such funds on the year in the disposal of a fund’s units, unless the unitholder, his/her which they are effectively distributed (tax transparency spouse and their relatives in the ascending and descending regime). line, hold, directly or indirectly, more than 25% of the But it is important to note that notwithstanding the above, rights in one of the French companies of its portfolio (or provided that they commit to retain their shares/units for in the fund). French regulations do not make a distinction at least five years and subject to (i) the concerned funds between pension fund investors and other investors. respecting certain investment ratios (notably to invest Notwithstanding the above, capital gains derived by non- 50% of their assets in securities issued by certain non- residents from sales of shares in (i) SPPICAVs in which listed European companies, see question 6.8), and (ii) the they hold 10% or more of the shares and (ii) FPIs are concerned individuals not holding more than 25% of the generally taxable in France: share capital of the companies in which the concerned funds have invested, individuals may enjoy an individual ■ at a rate of 34.43% for legal persons; or income tax exemption on the dividends and gains derived ■ at a rate of 19% for individuals (and social contributions). from units or shares they hold in FCPRs, SCRs and SLPs. ii) Companies subject to corporate income tax 6.5 Is it necessary or advisable to obtain a tax ruling from According to a so-called “mark-to-market” rule, the tax or regulatory authorities prior to establishing companies that are subject to French CIT and that hold an Alternative Investment Fund? units in a fund are generally subject to CIT in respect of any change in the liquidation value of the units they hold in a French fund. This holds true whatever the legal form No, it is not. of the fund (mutual fund or corporation) and whatever its location. Also, any distributions or capital gains realised 6.6 What steps have been or are being taken to implement upon disposal of the fund units and that has not been the US Foreign Account and Tax Compliance Act already subject to CIT under the mark-to-market rule are 2010 (FATCA) and other similar information reporting subject to corporate tax at the ordinary rate. regimes such as the Common Reporting Standard? However, it is important to note that FCPRs, SCRs, SLPs, SPPICAVs, FPIs and certain FCPs (investing at least 90% of FATCA has been implemented in France insofar as France and their assets in shares) are not subject to this mark-to-market the United States entered into an intergovernmental agreement rule. Corporate investors are rather taxed according to a tax transparency regime upon any redistribution of profits and regarding FATCA on 14 November 2013. gains by these funds. Corporate investors may notably benefit Regarding Common Reporting Standard (CRS), France has issued a from the French participation-exemption regime in respect of complete set of guidance for French reporting financial institutions. capital gains distributed by FCPRs, SCRs and SLPs i.e. 88% On 8 September 2017, France transmitted the CRS returns for the CIT exemption on capital gains, subject to the underlying reporting year 2016. shares being eligible to such participation-exemption regime (which is not the case for shares in property companies). Implementation of FATCA and CRS is still ongoing in France. For 2) Non-French tax residents instance, Article 56 of France’s Amending Finance Bill for 2017 includes provisions related to the obligations of financial institutions i) Taxation of income received by the fund and distributed to the investors in relation to the FATCA, CRS and the European Directive on Administration Cooperation in Taxation provisions related to Distributions paid to European individuals or corporate investors generally are subject to a withholding tax at financial accounts, notably regarding carrying and archiving the the rate of 12.8% for individual investors who are EEA audit trail of their client due diligences, as well as their supervision tax residents or 30% for any other investor (i.e. 28% by the French financial regulator (in addition to the tax authority). from 2020, 26.5% from 2021 and 25% from 2022) if the The draft mentions also new penalties for financial institutions and distribution reflects dividends received by the fund from clients in case of failure to meet some requirements. French companies.

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FCPIs and FIPs must invest up to a certain percentage of their assets 6.7 What steps are being taken to implement the OECD’s within a period of twelve months following their last closing date Action Plan on Base Erosion and Profit-Shifting and are allowed to invest on a limited basis in listed companies and/ (BEPS), in particular Actions 6 and 7, insofar as they or holding companies. affect Alternative Investment Funds’ operations?

Action 6 (to prevent treaty abuse): France already has anti-abuse 6.9 Are there any other material tax issues for investors, clauses in some tax treaties. It is expected that more will be added managers, advisers or AIFs? either through bilateral treaties or the multilateral instrument (“MLI”). France has announced its intention to implement a Not to our knowledge. purpose principal test, which means that the provisions of a tax treaty France would not be granted automatically. In this respect, justification of 6.10 Are there any meaningful tax changes anticipated in the presence of the Alternative Investment Fund in a jurisdiction, the coming 12 months? as well as arguments that the structure does not mainly intend to minimise French taxes, may be required. The Directive of the Council of the European Union dated 20 June Action 7 (permanent establishment status) is likely to be 2016 (ATAD Directive) should be transposed into French tax law implemented as part of the MLI. as of 1 January 2019. It mainly addresses interest limitations and hybrid mismatches. Most of its provisions are more or less covered 6.8 Are there any tax-advantaged asset classes or by existing French interest limitations. However, Article 4 provides structures available? How widely are they deployed? for a new limitation on deduction of exceeding borrowing costs (i.e. net financial income) to 30% of the taxpayer’s earnings before Investors in SCRs, FCPRs (as well as FPCIs, and FIPs) and SLPs interest tax, depreciation and amortisation (“EBITDA”), subject may benefit from a favourable tax regime, which depends notably to a possibility for Member States to adopt a group safe harbour on the composition of the fund’s asset (see question 6.4). rule. Member States may also allow a full deduction of exceeding borrowing costs of up to EUR 3 million. We do not know yet how In order to benefit from this regime, SCRs and FCPRs must invest this rule will be transposed into French legislation and whether in 50% of their assets in eligible investments issued by commercial doing so, French parliament will soften existing interest limitation companies organised in France and/or the EU (limited exemptions rules. are available for investments made in holding companies and/ or investment funds organised in the European Economic Area (“EEA”) where appropriate tax treaties are in place). FPCIs must 7 Reforms invest at least 50% of their assets in equity, equity related securities or securities giving access to capital issued by non-listed companies (eligible investments). 7.1 What reforms (if any) are proposed? However: ■ Following the transposition of MIFID II into French law ■ FCPIs must, in addition, invest up to 70% of their assets and the separation between investment firms and portfolio in eligible investments issued by innovative companies management companies, many AMF instructions and organised in France, the EU or (where appropriate tax treaties guidelines have yet to be updated and adapted to the new exist) the EEA. regime. ■ FIPs must, in addition, invest up to 70% of their assets in ■ A regime applicable to the new securitisation vehicles and the eligible investments issued by SMEs organised in a specific OFS (the French decree describing the new regime applicable geographic areas of France, the EU or (where appropriate tax to these vehicles to be published). treaties exist) the EEA, and up to 20% of this quota must be invested in newly formed companies. ■ At the EU level, a directive and a regulation on facilitating the cross-border distribution of collective investment funds.

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Damien Luqué Martin Jarrige de la Sizeranne Lacourte Raquin Tatar Lacourte Raquin Tatar 36 rue Beaujon 36 rue Beaujon 75008 Paris 75008 Paris France France

Tel: +33 1 58 54 40 70 Tel: +33 1 58 54 40 00 Email: [email protected] Email: [email protected] URL: www.lacourte.com URL: www.lacourte.com France Damien Luqué is an experienced financial and regulatory lawyer, Martin Jarrige has been an associate in Lacourte Raquin Tatar since focusing his practice on Investment Funds & Asset Management. March 2018. He specialises in financial law and he regularly assists investment services providers, French or foreign MiFID firms and asset He works closely with credit institutions, management companies management companies on asset management matters, investment and institutional investors in the structuring of investment vehicles fund formation, various financial and banking regulatory aspects and in the form of AIF, other AIFs, UCITS and other collective investment compliance matters. products. Previously, Martin Jarrige was an associate within the Financial Damien Luqué joined Lacourte Raquin Tatar as a partner in January Services team of CMS Francis Lefebvre from January 2016. 2018. He was previously part of the Banking and Finance team at CMS-Francis Lefebvre. From 2008 to December 2014, Damien He speaks French and English. developed his practice in the Financial Market department at the Allen & Overy LLP Paris Office. On this occasion, he was seconded as an associate in the AXA REIM SGP legal team (2012), as well as in the equity division team at the Paris Office of Goldman Sachs (2010). He speaks French and English.

With more than 50 qualified lawyers and legal practitioners, of which 16 are partners, the firm is organised around three major areas of expertise: mergers & acquisitions; real property transactions; and tax, assisted by recognised experts in the field of financing, regulatory, public business law and litigation. The firm has developed a strong expertise in property finance, banking and financial regulation. We act on behalf of arrangers, lenders, debt funds, insurers and mezzanine funds in setting up a full range of loans and financial products. We also assist industrial groups, institutional investors and investment funds in structuring and setting up financing arrangements. In addition, we are involved in asset management (in particular, in structuring and marketing collective investment schemes) and in financial regulatory matters (banking regulation, investment services, crowd-funding, insurance) on behalf of credit institutions, investment firms, crowd- funding platforms, management companies and French and international institutional investors. The partners’ strong involvement, in-depth knowledge of the clients and their business sector, as well as the ability to address the most complex issues are the guarantees of high added-value support. Year after year, the firm’s success has been reckoned throughout the loyalty and development of its client base, which primarily consists of major groups and professionals with the highest of expectations. Lacourte Raquin Tatar advise on domestic and international deals for French and foreign clients.

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Germany

Flick Gocke Schaumburg Christian Schatz

sophisticated investors with a minimum commitment of EUR 1 Regulatory Framework 200,000 (different threshold of EUR 100,000 under European Venture Capital Fund Regulation). 1.1 What legislation governs the establishment and operation of Alternative Investment Funds? 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment The establishment and operation of alternative investment funds Funds (or otherwise differentiate between different is governed by the Kapitalanlagegesetzbuch – KAGB, which is types of funds or strategies (e.g. private equity v the Alternative Investment Fund Manager Directive – AIFMD hedge)) and, if so, how? transposition legislation in Germany introduced in 2013. The KAGB contains substantial distinctions. The definitions open-/ Certain activities in connection with a fund, like solicitation closed-ended follow European regulations. services, are regulated in the MiFID transposition legislation (Kreditwesengesetz, Wertpapierhandelsgesetz) or additional Before the KAGB, the distinction open-ended/closed-ended was domestic law like the Gewerbeordnung. decisive on the regulation, as the management of open-ended fund was subject to regulation, whereas closed-ended funds could be In addition, the European legislation like the European Venture managed without regulation. Capital Fund Regulation and the European Long-Term Investment Fund (ELTIF) regulation apply. Nowadays, the distinction matters as it decides: Before the introduction of the KAGB, it was possible to establish (1) which regulatory regime the AIFM can be subject to. The small AIFM regime is only available to managers of closed- and operate closed-ended AIFs without triggering regulation in ended funds. All other funds trigger a AIFM licence under Germany. the KAGB; and (2) the KAGB provides for fund-related product regulation on 1.2 Are managers or advisers to Alternative Investment open-ended funds generally, but only for closed-ended funds Funds required to be licensed, authorised or addressing also retail investors, whereas closed-ended funds regulated by a regulatory body? addressing semi-professional and professional investors are minimally regulated if not providing debt. Following the AIFMD, it is required to register or license an alternative investment fund manager. Germany provides for a 1.5 What does the authorisation process involve and how small-AIFM regime with stricter requirements than the AIFMD. long does the process typically take? Advisors do not per se fall under the KAGB as long as no outsourcing occurs, but investment advisory services may fall under The authorisation process on AIFM follows the AIFMD. Although the Kreditwesengesetz transposing the MiFID rule on such advice the AIFMD deadline of three months applies, prospective fund into German law. managers should consider a duration of the BaFin process of more The supervisory body is in both cases Bundesanstalt für than three months. Finanzdienstleistungsaufsicht – BaFin. The approval times on AIFs vary as well. The KAGB provides for various deadlines; due to additional demands by and discussions with BaFin, often these deadlines are not met. 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body? 1.6 Are there local residence or other local qualification requirements? AIFs which address also retail investors need several approvals from BaFin to be marketable in Germany. The local residency requirements under German follow the AIFMD. If the AIFs only address so-called semi-professional and professional investors to qualify as a Spezial-AIF, technically no further steps 1.7 What service providers are required? are required, but BaFin requests a(n) (informal) notification on their raising. Professional investors are defined under the AIFMD. German law does not provide for additional service providers to Semi-professional investors are defined under domestic law as the AIFMD. A depositary and an external valuer may be required

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beside an auditor, dependent on the regulatory regime to be applied Open-ended funds generally provide for a regular redemption right (exemptions for small AIFMs). which can only be suspended in limited cases defined in the fund agreement and provided applicable minimal capital requirements are met. Interests in open-ended funds are generally transferable, 1.8 What rules apply to foreign managers or advisers wishing to manage, advise, or otherwise operate but certain restrictions can be implemented. funds domiciled in your jurisdiction? 2.5 Are there any legislative restrictions on transfers of Funds domiciled in Germany can be managed from abroad following investors’ interests in Alternative Investment Funds? the AIFMD cross-border rules. Germany has transposed these generally following the AIFMD. The regulatory requirements are Yes, the two main restrictions are: Germany therefore on a level playing field with domestic fund managers. Please ■ If a fund qualifies as a Spezial-AIF, the fund agreement needs note that in practice these structures are rare due to deficiencies of the to contain a transfer restriction to semi-professional and German tax system (mainly management fee may be subject to VAT). professional investors. The advice to funds domiciled in Germany can be subject to ■ If a fund qualifies for tax purposes as aSpezialinvestmentfonds , regulation as investment advice (see above). a restriction on transfers to individuals needs to be implemented and the number of investors needs to be limited to 100. 1.9 What co-operation or information sharing agreements have been entered into with other governments or regulators? 2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, Germany has historically a widespread network of regulatory asset stripping rules)? co-operation or information sharing agreements with most of the relevant jurisdictions. In the course of the AIFMD transposition, also The KAGB provides for various requirements on assets to be AIFMD agreements were entered into. With some jurisdiction like invested is dependent on the type of the funds which can be Mauritius no agreements exist. For further information see https:// categorised as follows: www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Merkblatt/ ■ Funds addressing also retail investors are subject to detailed WA/mb_130722_internat_koopvereinbarungen_kagb_en.html. asset rules excluding also certain investments. ■ The asset allocation rules on open-ended funds focus on ensuring the liquidity of the fund assets and therefore focus 2 Fund Structures on fungible assets and limit other assets. Dependent on the investor and fund status (Spezial-AIF) releases can be agreed. ■ Closed-ended Spezial-AIFs are generally flexible on assets 2.1 What are the principal legal structures used for beside rules on debt investments. Alternative Investment Funds? ■ Germany introduced detail rules on loan origination which distinguish between open-and closed ended funds and The fund structures vary on open-/closed-ended funds: whether shareholder loans, loan notes or plain loans are (1) Open-ended funds are traditionally arranged as issued. Reliefs are granted on secondary loan acquisitions. Sondervermögen (contractual funds), but can also arranged ■ Closed-ended one-asset funds are generally possible, but as investment stock corporations. open-ended funds need to comply with diversification rules. (2) Closed-ended funds are due to tax reasons most often The KAGB transposed the AIFMD asset stripping rules with the structured as limited partnerships. Since 2018, corporate forms are also tax efficient and may be used in future more intention of a 1:1 transposition. often. 3 Marketing 2.2 Please describe the limited liability of investors.

3.1 What legislation governs the production and offering The limited liability is generally ensured by the legal form of the of marketing materials? AIFs.

The production and offering of marketing materials by the AIFM 2.3 What are the principal legal structures used for is governed by the KAGB which transposes the AIFMD concept managers and advisers of Alternative Investment on AIFs focused on semi-professional and professional investors. Funds? Detailed domestic rules apply on funds which also address retail investors. Traditionally, most firms are established as corporations. Regulatory law also allows the use of limited partnerships which are used sometimes also for tax planning reasons. 3.2 What are the key content requirements for marketing materials, whether due to legal requirements or customary practice? 2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers On funds addressing retail investors also, detailed rules on fund in open-ended or closed-ended funds? terms, as well as on the disclosure of the investment strategy and assets, exist. BaFin has issued certain guidance which needs to be The closed-ended fund concept also allows a restriction on transfers adhered to in order to receive approval. (redemptions are typically not foreseen).

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On Spezial-AIF, the rules are more liberal. Regarding open-ended funds, the documentation follows standards agreed with the fund 3.9 Are there any restrictions on the participation in industry, whereas on closed-ended funds, a large variety of offering Alternative Investment Funds by particular types of investors, such as financial institutions (whether as documents can be found in the market. The focus is on disclosure sponsors or investors)? to reduce liability issues.

Banks are subject to the European banking supervisory rules. 3.3 Do the marketing or legal documents need to be Germany provides for additional separation rules which in most registered with or approved by the local regulator? cases do not apply. Insurance companies are to asset-related requirements under Documents on funds addressing retail investors also need to be

German insurance regulations and Solvency II. Germany approved for marketing. On other domestic funds with domestic Many pensions schemes are subject to asset-related requirements managers, no such approval is required. under German domestic law (Anlageverordnung). Please note that cross-border marketing approvals do not require technically a registration or approval of documents, but the documents are to be provided in the marketing approval application. 4 Investments

3.4 What restrictions are there on marketing Alternative 4.1 Are there any restrictions on the types of activities Investment Funds? that can be performed by Alternative Investment Funds? The restrictions vary depending on the home jurisdiction and the investors to be addressed. To summarise briefly, the main Generally, AIFs need to restrict their activities to investing. Other restrictions are: AIFs than Spezial-AIF are subject to detailed product regulation. ■ Retail investors: marketing is allowed, but only by licensed Debt fund activity is subject to regulation. AIFMs and it is subject to compliance with the detail retail fund rules. 4.2 Are there any limitations on the types of investments ■ Semi-professional and professional investors: Marketing that can be included in an Alternative Investment is generally allowed, but full AIFMD compliance may be Fund’s portfolio whether for diversification reasons or required on funds addressing semi-professional investors. otherwise? ■ Small AIFMs: No relief for third country AIFMs. EU AIFMs can be approved if their home jurisdiction also allows Open-ended funds are subject to diversification rules and also marketing by small German AIFMs. limitations on eligible investments. Closed-ended funds can generally be operated as single asset funds. Retail closed-ended 3.5 Can Alternative Investment Funds be marketed to funds are subject to restrictions on eligible assets. Specific rules retail investors? apply on loan origination.

Yes, but this is subject to restrictions (see above). 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? 3.6 What qualification requirements must be carried out in relation to prospective investors? The KAGB does not provide for a general leverage limit, but special types of funds like retail closed-ended funds are subject to leverage Semi-professional and professional investors need to be identified caps. Also the regulatory status of AIFs and loan originating funds and documents whereby semi-professional investors also require a varies in case of leverage. constitutive confirmation by the AIFM. 5 Disclosure of Information 3.7 Are there additional restrictions on marketing to public bodies such as government pension funds? 5.1 What public disclosure must the Alternative No. Please note that public bodies may not qualify as professional Investment Fund or its manager make? investors and therefore trigger additional requirements. AIFMs and the AIFs are subject to the AIFMD reporting and public disclosure requirements. 3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process? 5.2 What are the reporting requirements in relation to Besides outsourcing cases, intermediaries should consider whether Alternative Investment Funds or their managers? there services are subject to financial market regulation. Solicitation is generally regulated in Germany. German AIFMs and AIFs are subject to the AIFMD reporting and public disclosure requirements. In addition, a reporting to Bundesbank needs to be made on a monthly basis. Foreign AIFMs and AIFs are subject to the AIFMD reporting requirements.

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5.3 Is the use of side letters restricted? 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing Within the limits of the AIFMD, the use of side letters is not an Alternative Investment Fund? restricted. The German authorities are issuing rulings, but are restrictive on certain questions. 6 Taxation 6.6 What steps have been or are being taken to implement 6.1 What is the tax treatment of the principal forms of the US Foreign Account and Tax Compliance Act

Germany Alternative Investment Funds identified in question 2010 (FATCA) and other similar information reporting 2.1? regimes such as the Common Reporting Standard?

The treatment depends on the legal form of the AIF: Germany has concluded a model 1 intergovernmental agreement with the US. CRS was implemented in Germany in 2017. ■ Partnerships are taxed under the ordinary partnership taxation rules; the fund is generally transparent, but can be subject to trade tax if the fund is seen as being trading. 6.7 What steps are being taken to implement the OECD’s ■ All other AIFs fall under the Investment Tax Act assuming Action Plan on Base Erosion and Profit-Shifting an opaque treatment of the AIF. The AIF is taxable, but (BEPS), in particular Actions 6 and 7, insofar as they only with a limited number of income items (e.g. German affect Alternative Investment Funds’ operations? dividends, German real estate-related income). The income is subject to corporate income tax of 15% and under certain Germany is currently revising its tax rules in this respect further, conditions also to trade tax. but has already introduced domestic and treaty bases additional tests (BEPS Action 6) and limitations on avoiding permanent 6.2 What is the tax treatment of the principal forms of establishment and profit attributions (BEPS Action 7). investment manager / adviser identified in question 2.3? 6.8 Are there any tax-advantaged asset classes or structures available? How widely are they deployed? A corporation as management or advisory entity is subject to German corporate and trade tax (tax burden up to 33%). Investors should consider a higher likelihood of becoming taxable with real estate-related income, in particular, as plans exist to tax also 6.3 Are there any establishment or transfer taxes levied gains realised by a disposal of foreign property holding companies. in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the investor’s interest? 6.9 Are there any other material tax issues for investors, managers, advisers or AIFs? No, there are not. The main advantage for managers is that management services are not per se VAT-exempt. Investors are liable to pay withholding 6.4 What is the tax treatment of (a) resident, (b) non- taxes. resident, and (c) pension fund investors in Alternative Investment Funds? 6.10 Are there any meaningful tax changes anticipated in the coming 12 months? Funds falling under the Investment Tax Act: ■ Resident investors: private individuals are subject to the flat tax on investment income (25% plus solidarity surcharge plus The German government may tighten the rules for the taxation of church taxes, all other investors are fully taxable); investors investment income and may also limit the German participation need to figure in minimum tax base (Vorabpauschale) and exemption further. taxation on gross amount of distribution. ■ Non-resident investors: not subject to taxation. 7 Reforms ■ Pension funds: mostly tax exempt. Partnerships: 7.1 What reforms (if any) are proposed? ■ Resident investors: subject to taxation with income realised from the fund, but tax exemption on capital gains and dividends potentially achievable. No significant reforms are expected. The Investment Tax Act was ■ Non-resident investors: in case of a trading activity taxed like reformed with effect from 2018. German investors; in case on non-trading, German taxation only in limited cases, also subject to treaty protection. ■ Pension funds: in case of a trading activity taxed like German investors; in case on non-trading, German taxation only in limited cases, also subject to treaty protection.

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Christian Schatz Flick Gocke Schaumburg Brienner Straße 29 80333 München Germany

Tel: +49 89 80 00 16 0 Email: [email protected] URL: www.fgs.de

Christian Schatz has advised for more than 17 years (before Flick Germany Gocke Schaumburg at SJ Berwin LLP/King & Wood Mallesons LLP) initiators and investors on tax and regulatory aspects of private equity, venture capital, infrastructure, real estate and debt funds. For many years, Christian acted as board member of the German Venture Capital Association – Bundesverband deutscher Kapitalbeteiligungsgesellschaften e. V. lobbying the AIFMD and Solvency II transposition, as well as many tax projects. He is a member of the tax and regulatory board of Invest Europe.

Flick Gocke Schaumburg stands for tax-focused legal advice. We combine outstanding expertise in German and international tax law with specialist know-how in other areas of business law particularly relevant to our clients. By concentrating on tax and tax-related fields and thus working in a selection of specialist areas of business law for over 40 years, we have gained a degree of expertise which enables us to provide our clients with expert and comprehensive advice. Our interdisciplinary teams of corporate lawyers and tax lawyers advise both initiators and investors on all legal, tax and regulatory aspects of private equity, venture capital, infrastructure, real estate and debt funds.

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Hong Kong Vivien Teu

Vivien Teu & Co LLP Sarah He

AIFs offered by way of private placements only (and hence not 1 Regulatory Framework authorised by the SFC) are not directly subject to specific legislation that governs their establishment and operation, but as mentioned 1.1 What legislation governs the establishment and above, intermediaries that offer AIFs or the managers or advisers of operation of Alternative Investment Funds? such AIFs are subject to licensing and regulation. The Securities and Futures (Amendment) Ordinance gazetted in 2016 Investment Funds that are offered in Hong Kong are primarily provides the framework for open-ended investment funds structured subject to the Securities and Futures Ordinance (SFO) regarding in corporate form, and it would soon be possible to establish Hong offers of securities (including forms of collective investment Kong domiciled open-ended AIFs in the form of an open-ended fund schemes as widely defined), including requirements for funds company structure with variable capital. The detailed rules and code to be offered to the public to be authorised by the Securities and for open-ended fund companies promulgated by the SFC (OFC Rules Futures Commission (SFC), and also applicable provisions relating and Code) are undergoing legislative process, and are expected to to private placement offers including to “Professional Investors” as be effective soon so that the structure can become available before defined in the SFO. the end of 2018. Once effective, the establishment of retail or non- The conduct of business in regulated activities relating to retail AIFs in the form of a Hong Kong domiciled open-ended fund securities and the futures market is subject to potential licensing company structure would be subject to the OFC Rules and Code. requirements under the SFO. Persons engaged in the business of offering Alternative Investment Funds (AIFs) are required to be 1.2 Are managers or advisers to Alternative Investment licensed by the SFC to carry on the Type 1 regulated activity of Funds required to be licensed, authorised or dealing in securities, unless any relevant exemption applies. Hong regulated by a regulatory body? Kong managers of AIFs are required to be licensed by the SFC to conduct Type 9 regulated activity of asset management, and are As noted in question 1.1, Hong Kong managers of AIFs are required thereby subject to regulation by the SFC in conducting its business to be licensed by the SFC to conduct Type 9 regulated activity of of managing the AIFs, including applicable requirements under the asset management, and are thereby subject to regulation by the SFC in SFC Code of Conduct for Persons Licensed by or Registered with conducting its business of managing AIFs. AIFs that are not managed the Securities and Futures Commission (Code of Conduct) and the in Hong Kong are not subject to specific requirements by the SFC, SFC Fund Manager Code of Conduct (FMCC). other than the securities offering restrictions and the requirements for AIFs that are marketed or offered to the public in Hong Kong must persons engaged in the marketing of the AIFs to hold a licence by be authorised by and are subject to the applicable requirements of the the SFC to conduct Type 1 regulated activity of dealing in securities. SFC, including under the SFC Code on Unit Trusts and Mutual Funds Hong Kong advisers to AIFs are required to be licensed by the SFC (UT Code). AIFs may be authorised for public offer under the UT to carry on business in the Type 4 regulated activity of advising on Code as “specialised schemes”, expressed to cover any scheme whose securities unless any relevant exemption applies, subject to applicable primary objective is not investment in equities and/or bonds, or any conditions. A Hong Kong adviser may provide the relevant advisory scheme falling within one of the specified categories or which does services solely to its group company under a group company not meet the general core requirements of the UT Code on investment exemption. Besides, a company that advises on or manages a portfolio limitations and prohibitions. The specified categories that may be of “private equity” or “venture capital” which does not involve authorised as specialised schemes under the UT Code are such as securities (the definition of which excludes shares or debentures of futures and options funds, hedge funds, fund of hedge funds, structured a company that is a private company within the meaning of section funds or funds that invest in financial derivative instruments, and also 11 of the Companies Ordinance (Cap.622)) may not by itself attract a index funds (applicable to exchange-traded funds). licensing requirement. Retail AIFs are prohibited under the UT Code from investing in any type of real estate (including buildings) or interests in real estate 1.3 Are Alternative Investment Funds themselves (including options or rights, but excluding shares in real estate required to be licensed, authorised or regulated by a companies or real estate investment trusts (REITs)). On the other regulatory body? hand, the establishment and operation of REITs in Hong Kong are subject to authorisation by the SFC pursuant and subject to the AIFs are not themselves required to be licensed or authorised unless requirements under the SFC Code on REITs. they are marketed or offered to the public in Hong Kong. AIFs

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that are marketed or offered to the public in Hong Kong must be to form or establish local investment funds, and the SFO does not authorised by the SFC, such as falling within one of the categories differentiate between local funds or offshore funds in the conduct of specialised schemes to be authorised in accordance with and of regulated activities of licensed persons or offers of securities subject to the applicable requirements of the UT Code, as mentioned (which may hence cover collective investment schemes or AIFs of in question 1.1. any jurisdiction). Upon the issue of the final OFC Rules and Code as mentioned in Non-retail AIFs may be formed as a Hong Kong domiciled unit trust question 1.1, AIFs established in the form of Hong Kong open- and it will soon be possible to establish a Hong Kong domiciled ended fund companies would be subject to registration with and open-ended fund company. However, AIFs are not restricted regulation by the SFC thereunder. to Hong Kong domiciled funds and may be domiciled in other jurisdictions by adopting legal vehicles available in the relevant jurisdiction. Hong Kong managers of AIFs quite commonly adopt Hong Kong 1.4 Does the regulatory regime distinguish between fund vehicles in the form of an open-ended or closed-ended fund open-ended and closed-ended Alternative Investment company or limited partnership structure in an offshore tax neutral Funds (or otherwise differentiate between different types of funds or strategies (e.g. private equity v jurisdiction. hedge)) and, if so, how? This is also the case for retail AIFs where the regulations do not prescribe whether the funds are Hong Kong domiciled or foreign The regulatory regime in Hong Kong does not distinguish between funds to be authorised by the SFC for offers to the public in Hong open-ended and closed-ended AIFs or otherwise differentiate Kong. For example, Cayman domiciled funds may and have been between different types of funds or strategies, except that AIFs established and authorised by the SFC as retail funds offered to that are to be offered to the public in Hong Kong would need to be the public in Hong Kong, subject to the SFC authorisation process authorised by the SFC and comply with relevant requirements of the and complying with the requirements of the UT Code. Foreign SFC which may be specific to the type of funds or strategies. funds may also be authorised in Hong Kong, broadly speaking under two available schemes: (1) schemes established in recognised As mentioned in question 1.1, the Securities and Futures jurisdictions (the “Recognised Jurisdiction Schemes” (RJS) (the (Amendment) Ordinance gazetted in 2016 specifically provides the majority of which are UCITS funds domiciled in Luxembourg, framework for open-ended investment funds structured in corporate Ireland and the United Kingdom)); and (2) schemes to be authorised form, and AIFs to be established in the form of Hong Kong under the mutual recognition of funds (MRF) arrangements domiciled open-ended fund company structure shall be subject to currently with jurisdictions including Mainland China, France and prescribed requirements under the OFC Rules and Code. Switzerland. AIFs to be offered to the public in Hong Kong (subject to SFC 1.5 What does the authorisation process involve and how authorisation) or AIFs that may be offered on a private placement long does the process typically take? basis by intermediaries in Hong Kong are similarly not subject to any local domicile or local qualification requirements. Under the As noted in question 1.3, AIFs that are not marketed or offered to the UT Code, the management company of a retail AIF can be based public in Hong Kong are not required to be licensed or authorised by outside Hong Kong in one of the acceptable inspection regimes the SFC. The authorisation process for AIFs (e.g. hedge funds) that published by the SFC. However, a non-Hong Kong based retail AIF are offered to the public in Hong Kong involves the review by the is required to appoint a Hong Kong representative. SFC of the funds themselves and the offering documents in respect Upon the OFC Rules and Code becoming effective, an AIF that of the funds, as well as the key operators of the funds pursuant to the adopts the structure of a Hong Kong domiciled open-ended fund requirements set out in the UT Code. company must appoint at least one Hong Kong licensed manager A new fund application for the authorisation of SFCs is generally (see question 1.7). expected to take one to three months from the date the application is taken up by the SFC, depending on factors such as whether the fund 1.7 What service providers are required? under application is a sub-fund under an existing SFC-authorised umbrella fund, whether the fund is managed by existing approved The service providers that are typically required for AIFs would managers managing other existing SFC-authorised funds with good include the fund manager, the investment manager or investment regulatory records, the extent of the fund’s use of derivatives and any advisor (if distinct from the fund manager), the trustee (if established material issues or policy implications relating to the application. The as a unit trust structure)/custodian (in the case of mutual fund application will be subject to a six-month period from the SFC take- corporations), fund administrator, valuation agent (if distinct from up date, at the expiry of which the application will in general lapse. the fund administrator), auditor, prime broker (in the case of hedge For establishing non-retail AIFs in the form of Hong Kong domiciled funds) and marketing agent/distributor. open-ended fund companies when the framework becomes Having said that, Hong Kong law and regulations do not specifically effective, an application for registration would first need to be made prescribe requirements for having specific service providers or the to the SFC with a specified form and provide prescribed information qualifications of service providers of AIFs, unless the AIFs are to (including the instrument of incorporation and the profile of key be offered to the public in Hong Kong which would then be subject operators) to be submitted to the SFC, and upon the SFC approval to the requirements under the UT Code applicable to the service on the registration, the incorporation can then be made with the providers, including on the fund manager, investment manager, Companies Registry. The offering document of the fund shall be trustee/custodian and auditor. Besides this, under the proposed filed as soon as practicable with the SFC upon issuance. OFC Rules and Code, there shall be specific requirements on the board of directors of open-ended fund companies, on the investment 1.6 Are there local residence or other local qualification manager (at least one investment manager licensed or registered requirements? to conduct Type 9 regulated activity of asset management must be appointed), and also on the custodian and auditor of open-ended Hong Kong managers are not restricted under any local requirements fund companies.

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Co-operation or information sharing agreements for tax purposes 1.8 What rules apply to foreign managers or advisers including with respect to the Common Reporting Standard are wishing to manage, advise, or otherwise operate discussed in Section 6 on taxation. funds domiciled in your jurisdiction?

The SFO governs funds offered in Hong Kong or targeted to the 2 Fund Structures Hong Kong public, or the conduct of businesses relating to regulated activities in securities or futures that are carried out in Hong Kong or the active marketing to the public in Hong Kong (whether in Hong 2.1 What are the principal legal structures used for Alternative Investment Funds? Kong or from a place outside Hong Kong), of any services which would constitute a regulated activity if provided in Hong Kong.

Hong Kong Foreign managers or advisers that engage in any activity falling AIFs in Hong Kong may be formed as a Hong Kong domiciled within the aforesaid may be subject to licensing requirements and unit trust constituted under a trust deed governed by Hong Kong would need to be properly licensed by the SFC if required for the law. The Securities and Futures (Amendment) Ordinance gazetted conduct of relevant regulated activities. in 2016 provides the framework for open-ended investment funds structured in corporate form, and it would soon be possible to Foreign managers or advisers wishing to manage, advise or establish Hong Kong domiciled open-ended AIFs in the form of an otherwise operate AIFs for public offer in Hong Kong would be open-ended fund company structure. The detailed OFC Rules and subject to the applicable requirements of the SFC, such as under the Code promulgated by the SFC are undergoing legislative process UT Code regarding the management company (or its delegates) of and are expected to be effective soon so that the structure can SFC authorised funds. become available before the end of 2018. Foreign managers or advisers that may consider to manage, advise However, AIFs are not restricted to Hong Kong domiciled funds or or otherwise operate retail or non-retail AIFs to be established in the specific forms and may be, and quite commonly are, established by form of a Hong Kong domiciled open-ended fund company should adopting legal vehicles domiciled in other jurisdictions, subject to note that the proposed OFC Rules and Code require that there must considering ease and costs of establishing and operating, applicable be at least one investment manager licensed or registered for Type legal and regulatory requirements in the jurisdiction of the fund 9 regulated activity. domicile, familiarity to investors and other factors such as tax implications. 1.9 What co-operation or information sharing agreements have been entered into with other governments or regulators? 2.2 Please describe the limited liability of investors.

Over the years, the SFC has signed a number of bilateral or The limitation of liability of investors or any exception thereto must multilateral agreements with local, Mainland China and overseas be clearly provided for in the constitutive document of the AIFs regulatory bodies. and disclosed to investors in the offering document. An investor generally shall not be liable to make any further payment after the To ensure a consistent regulatory approach, the SFC has entered into investor has paid the monies agreed to be paid by such investor in memoranda of understanding (MOU) with local regulatory bodies respect of the units, shares or interests held by such investor and such as the Hong Kong Monetary Authority, Insurance Authority, no further liability can be imposed on the investor in respect of the Mandatory Provident Fund Schemes Authority, Hong Kong Exchanges units, shares or interests held by such investor. and Clearing Limited, the Stock Exchange of Hong Kong Limited, etc. The SFC has signed agreements with the regulators of Mainland China including the China Securities Regulatory Commission 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment (CSRC), Administration and Supervision Department of the State Funds? Administration of Foreign Exchange, China Banking Regulatory Commission, China Insurance Regulatory Commission (now Hong Kong fund managers and advisers tend to be companies part of the China Banking & Insurance Regulatory Commission), incorporated in Hong Kong with limited liability and are subject to People’s Bank of China, Shanghai Stock Exchange, Shenzhen be licensed by the SFC to conduct the relevant regulated activities Stock Exchange, setting out co-operative frameworks, including (usually at a minimum Type 9 regulated activity in asset management investigatory assistance, exchange of information, and market or and/or Type 4 regulated activity in advising on securities). product-related arrangements. As it is quite common for Hong Kong fund managers or fund The SFC has also entered into cooperative arrangements for promoters to establish AIFs that are domiciled in an offshore investigatory assistance, exchange of information, and market jurisdiction, when doing so, such as when establishing an offshore or product-related arrangements in the form of memoranda of (e.g. Cayman) limited partnership fund, a Hong Kong manager or understanding, confidentiality undertakings, memoranda regarding adviser (or its parent company) may establish an offshore company administrative arrangements and memoranda of regulatory as the general partner of the limited partnership fund. Depending cooperation, and the IOSCO Multilateral Memorandum of on the management and operational arrangement of the particular Understanding (MMOU) (which was the first global information- fund management group, as well as the investment strategies or sharing arrangement among securities regulators) with overseas investment process, the parent company or subsidiary of the Hong regulators such as the UK Financial Conduct Authority. Kong managers or advisers may also form or be formed as an offshore In the context of authorised funds, the SFC has also entered into manager or as an investment adviser in the particular jurisdiction(s) mutual recognition of funds arrangements with jurisdictions such as where a fund shall invest. Such manager or investment adviser Mainland China, France and Switzerland, which have established would need to comply with any requirements including registration framework for retail funds in one jurisdiction to seek authorisation or licensing that may apply in the relevant jurisdiction where it is to be offered as retail funds in the other jurisdiction. established or operates.

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the investment and borrowing parameters. Non-retail AIFs are not 2.4 Are there any limits on the manager’s ability to subject to specific investment limits or restrictions. restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? 3 Marketing For hedge funds (or funds of hedge funds) or other AIFs that are authorised by the SFC for offer to the public in Hong Kong, according to the UT Code, there must be at least one regular dealing 3.1 What legislation governs the production and offering of marketing materials? day per month. The maximum interval between the lodgement of a properly documented redemption request for redemption of units/ shares (whether a notice period is required or not) and the payment The SFO governs the offers of securities (including collective of redemption money to the holder may not exceed 90 calendar investment schemes as widely defined) in Hong Kong including Hong Kong days. The manager may restrict redemptions in open-ended funds the production and issue of marketing materials relating to offers of or transfers in open-ended or closed-ended funds only in certain funds. The Companies (Winding Up and Miscellaneous Provisions) circumstances, such as during massive redemption, and there Ordinance (CWUMPO) governs the offer of shares in the Hong should be full disclosure in the offering documents on permitted Kong corporate structure. circumstances. For retail AIFs, the SFC Advertising Guidelines Applicable to For non-retail AIFs, there are no specific limits or restrictions Collective Investment Schemes Authorised under the Product Codes on redemptions under Hong Kong law or regulations. However, (Advertising Guidelines) are applicable to all forms of product under new requirements of the revised FMCC to be effective from advertisements for SFC-authorised collective investment schemes. November 2018, Hong Kong managers who are responsible for the overall operation of a fund would need to adopt appropriate 3.2 What are the key content requirements for marketing liquidity management measures including the redemption policy of materials, whether due to legal requirements or the fund; the liquidity risks of the fund, the liquidity management customary practice? policies and an explanation of any tools or exceptional measure that could affect redemption rights would also need to be disclosed The key content requirements for marketing materials for SFC- to fund investors. These requirements are relevant to open-ended authorised funds are set out in the Advertising Guidelines. The funds as well as closed-ended funds. general principles that govern the content of advertisements for Under the revised FMCC to be effective from November 2018, there SFC-authorised funds are that the advertisements should (1) not be are also specific provisions relating to the use of any side pocket false, biased, misleading or deceptive, (2) be clear, fair and present by a Hong Kong fund manager who is responsible for the overall a balanced picture of the fund with adequate risk disclosures, (3) operation of a fund, and to provide clear disclosure to fund investors contain information that is timely and consistent with its offering on the creation, features and implications of a side pocket including document, and that the advertisements may not refer to unauthorised the impact or lock-up on redemption for a side pocket. funds except as otherwise permitted. Detailed requirements are set out in the Advertising Guidelines on the content of advertisements including language and graphics, performance information, warning 2.5 Are there any legislative restrictions on transfers of statements, etc. investors’ interests in Alternative Investment Funds? The Advertising Guidelines do not apply to marketing materials for non-retail funds. However, the FMCC provides that where Transfers of investors’ interests in AIFs are not specifically regulated the advertisements and marketing materials are not required to be under Hong Kong law or regulations. Therefore, transfers of authorised by the SFC (which is the case for non-retail funds), a investors’ interests in AIFs would be subject to the specific provisions fund manager should nonetheless ensure that marketing materials in the constitutive document, and would be subject to such process are accurate and not misleading and that any performance claims as prescribed in the constitutive document (typically transferable by can be verified. the appropriate instrument of transfer signed by the transferor and the transferee and registered in the register of members of the fund), subject to the applicable anti-money laundering laws and policies, 3.3 Do the marketing or legal documents need to be and may be subject to consent or approval requirement (if any) of registered with or approved by the local regulator? the relevant fund governance body. The marketing or legal documents relating to offers of SFC-authorised retail funds are subject to the prior approval or authorisation of 2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, the SFC before they can be issued; although advertisements or asset stripping rules)? marketing materials issued by intermediaries licensed by the SFC to conduct Type 1 regulated activity of dealing in securities, Type There are certain investment restrictions that apply under the UT Code 4 regulated activity of advising on securities, and Type 6 regulated on retail AIFs, covering spread of investments and diversification activity of advising on corporate finance are exempted from prior limits, restrictions on certain types of instruments or assets, and limits authorisation by the SFC. However, if the marketing documents on short selling and borrowing. The fund should have a set of clearly relate to certain funds, such as mandatory provident fund schemes defined investment and borrowing parameters in its constitutive and their constituent funds, occupational retirement schemes and and offering documents. The offering document should clearly insurance contracts, then the prior vetting of SFCs is still required. explain the types of investments or financial instruments in which The marketing or legal documents relating to the offer of non-retail the fund will invest; the extent of diversification or concentration of funds that are offered in Hong Kong on a private placement basis investments or strategies; the extent and basis of leverage (including will not need to be approved by or registered with the SFC, such the maximum level of leverage); and the related risk implications of as AIFs that are primarily offered to “Professional Investors” as defined under the SFO.

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A licensed person may be exempted from certain requirements of 3.4 What restrictions are there on marketing Alternative the Code of Conduct including the suitability requirements, when Investment Funds? dealing with (1) “Corporate Professional Investors” as defined in the Code of Conduct who have satisfied the relevant assessment criteria Non-retail AIFs do not need to be authorised in order to be marketed as set out in the Code of Conduct in relation to relevant products in Hong Kong. However, persons engaged in the business of and/or markets, and (2) “Institutional Professional Investors”. offering investment funds whether retail funds or non-retail funds are required to be licensed by the SFC to conduct Type 1 regulated activity of dealing in securities, unless any relevant exemption 3.7 Are there additional restrictions on marketing to public bodies such as government pension funds? applies. Retail AIFs must be authorised by the SFC pursuant to the

Hong Kong As noted in question 3.3, if the marketing documents relate to requirements under the UT Code before they can be marketed to certain funds, such as mandatory provident fund schemes and their the public in Hong Kong. Non-retail funds should not be offered constituent funds, occupational retirement schemes and insurance to the public in Hong Kong, and under Hong Kong securities contracts, then SFC’s prior vetting is still required even where the offering laws, an offer to a section of the public may constitute marketing documents are issued by intermediaries licensed by the an offer to the public; but an offer is not a public offer where the SFC to conduct Type 1 regulated activity of dealing in securities, offer is made to “Professional Investors” as defined in the SFO only Type 4 regulated activity of advising on securities, and Type 6 (unlimited in number) and/or no more than 50 people by way of regulated activity of advising on corporate finance. These apply private placement, among other circumstances that may be relevant in the context of the marketing of retail provident fund schemes or to be exempted or excluded as a public offer. For non-retail funds pension fund schemes to individual members who are participants in Hong Kong corporate form, another exemption is where an offer in such schemes. involves a minimum investment of at least HK$500,000 per investor or not exceeding a specific overall size of HK$5 million. On the other hand, among the categories of financial institutions and intermediaries that are specified in the definition of “Professional When a licensed person is engaged in the offer of any investment Investor” in the SFO, any registered mandatory provident fund funds whether retail funds or non-retail funds, the licensed person scheme or its constituent fund (or an approved trustee, service needs to satisfy applicable suitability requirements and other know- provider or investment manager of such scheme or constituent your-customer requirements as set out in the Code of Conduct in the fund), any occupational retirement schemes, as well as any offering of funds. In particular, the offering of funds that may be government or institution which performs the functions of a considered a derivatives product would require specific assessment central bank all fall to be categorised as “Institutional Professional of suitability including derivatives knowledge of the investor. Investors”. Accordingly, funds may be marketed to such bodies on a private placement basis, and in respect of which a licensed person is 3.5 Can Alternative Investment Funds be marketed to exempted from the suitability requirement and certain other investor retail investors? protection requirements under the Code of Conduct.

An AIF (e.g. a hedge fund) can be marketed to retail investors 3.8 Are there any restrictions on the use of intermediaries in Hong Kong provided that they are authorised by the SFC in to assist in the fundraising process? accordance with the UT Code, although AIFs are usually offered in Hong Kong on a private placement basis, primarily to “Professional There are no specific restrictions on the use of intermediaries to Investors” as defined in the SFO. assist in the fundraising as long as the intermediary is properly licensed by the SFC (unless any relevant exemption applies). 3.6 What qualification requirements must be carried out Under the revised FMCC which shall be effective from November in relation to prospective investors? 2018, Hong Kong licensed managers will be subject to additional specific requirements where the Hong Kong manager is responsible As noted in question 3.4, a licensed person engaged in the offering for the overall operation of the fund. In respect of marketing/ of funds to prospective investors should satisfy applicable suitability fundraising activities, a fund manager should ensure that any requirements and other know-your-customer requirements in representations made by it or its representatives to a client are relation to prospective investors, pursuant to the Code of Conduct. accurate and not misleading, and that all advertisements and When offering to “Professional Investors” as defined in the SFO, the marketing materials are accurate and not misleading where such licensed person would need to put in place procedures to limit offers materials are not required to be authorised by the SFC. This should to “Professional Investors” only and to verify the qualification of apply even where the fund manager has appointed intermediaries to “Professional Investors”. The licensed person should also comply assist in the fundraising. with the relevant know-your-customer and suitability requirements under the Code of Conduct, to the extent such requirements apply, 3.9 Are there any restrictions on the participation in depending on the category of the “Professional Investors”. Alternative Investment Funds by particular types of Broadly speaking, “Individual Professional Investors” or investors, such as financial institutions (whether as “Corporate Professional Investors” mean individuals or corporates, sponsors or investors)? respectively, that meet the relevant minimum-net-worth or net assets requirements (broadly speaking, individuals with a portfolio There are no specific restrictions on the participation in AIFs by of at least HK$8 million, or a trust corporation, corporation or particular types of investors such as financial institutions (whether partnership with a portfolio of at least HK$8 million or net assets of as sponsors or investors). The fund manager or operator and other HK$40 million), while “Institutional Professional Investors” refer service providers are not restricted from participating in the funds, to financial institutions and specific bodies as prescribed in the SFO. however any conflict of interests should be properly disclosed in the offering document.

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document containing the required information as listed in the 4 Investments UT Code and a product key facts statement (KFS) which shall be deemed to form part of the offering document and serve as a 4.1 Are there any restrictions on the types of activities summary of key fund features and risks. The offering document that can be performed by Alternative Investment must be accompanied by the retail fund’s most recent audited annual Funds? report and accounts together with its semi-annual report if published after the annual report. The UT Code contains the core requirements and restrictions There are no specific legal or regulatory requirements on the applicable to SFC-authorised retail funds covering areas such as disclosure to be made by non-retail funds that are offered in Hong limits on short selling, borrowing, making loans, and acquiring Kong on a private placement basis. assets that involve the assumption of unlimited liability. Hong Kong There are no specific restrictions on the types of activities that can be 5.2 What are the reporting requirements in relation to performed by non-retail funds. However, under the revised FMCC Alternative Investment Funds or their managers? which shall be effective from November 2018, Hong Kong licensed managers of non-retail funds will be subject to additional specific SFC-authorised retail funds must publish at least two financial requirements where the Hong Kong manager is responsible for the reports each financial year, being the annual reports and accounts overall operation of the fund, specifically covering several areas that published and distributed to holders within four months of the end are considered risk areas and for managing systemic risks, such as of the fund’s financial year, and the interim reports within two in relation to securities lending and repurchase agreements, use and months of the period they cover. These reports will need to be filed disclosure of leverage, liquidity management, risk management, use with the SFC. For retail hedge funds, the SFC has published the of side pockets, and managing conflicts of interest. Guidelines on Hedge Funds Reporting Requirements (Appendix H to the UT Code) setting out the minimum amount of information that 4.2 Are there any limitations on the types of investments is required to be disclosed in regular reporting to investors. Retail that can be included in an Alternative Investment hedge funds are required to publish quarterly reports in addition to Fund’s portfolio whether for diversification reasons or the annual reports and semi-annual reports. otherwise? There are no specific legal or regulatory requirements on the reporting to be made by non-retail funds that are offered in Hong The UT Code sets out certain investment restrictions that apply to Kong on a private placement basis. However, under the revised SFC-authorised retail funds depending on the type of retail funds. FMCC which shall be effective from November 2018, Hong Kong Certain core requirements primarily apply to plain vanilla (equity licensed managers of non-retail funds will be subject to additional or bond) funds, covering spread of investments and diversification specific requirements where the Hong Kong manager is responsible limits, while certain requirements and restrictions on certain types for the overall operation of the fund. Requirements include having of instruments or assets apply to specialised schemes such as hedge appropriate policies and procedures for the valuation of fund funds, funds of hedge funds and structured funds as provided in the assets and calculation of net asset value, independent review of the UT Code. For retail hedge funds, the UT Code requires that the valuation policies, procedures and process, and also a requirement to fund must have a set of clearly defined investment parameters in its ensure an independent auditor is engaged to perform an audit of the constitutive and offering documents. financial statements of the fund in order to prepare an audited report There are no specific limits on the types of investments that can be at least annually, which should be made available to fund investors included in a non-retail fund’s portfolio whether for diversification upon request. Where the fund engages in securities lending, repo reasons or otherwise. However, under the revised FMCC which or reverse repo transactions, the Hong Kong fund manager who is shall be effective from November 2018, Hong Kong licensed responsible for the overall operation of the fund is also required to managers of non-retail funds will be subject to additional specific provide to the fund investors, at least on an annual basis, certain requirements where the Hong Kong manager is responsible for the prescribed minimum information on the fund’s securities lending, overall operation of the fund, specifically covering several areas that repo and reverse repo transactions. are considered risk areas and for managing systemic risks. A Hong Kong fund manager is required to appoint an independent auditor to perform an audit of the financial statements of the fund 4.3 Are there any restrictions on borrowing by the manager, and the audited accounts should be filed in accordance Alternative Investment Fund? with applicable statutory requirements and be made available to the fund upon request. There are also reporting obligations to the SFC, The UT Code contains certain borrowing restrictions that apply to and specifically, from November 2018 when the revised FMCC SFC-authorised retail funds. The maximum borrowing of an SFC- becomes effective, a Hong Kong fund manager would be subject authorised retail fund generally may not exceed 25% of its total to requirements to provide appropriate information to the SFC upon net asset value (back-to-back loans do not count as borrowing), request such as on fund assets, leverage, liquidity, securities lending, although this restriction does not apply to retail hedge funds. repo and reverse repo transactions, and to respond to requests and There are no specific restrictions on borrowing by non-retail funds. enquiries from the SFC promptly and in an open and co-operative manner.

5 Disclosure of Information 5.3 Is the use of side letters restricted?

5.1 What public disclosure must the Alternative There is no restriction on the use of side letters by non-retail funds Investment Fund or its manager make? or their fund managers/operators. Therefore, Hong Kong managers are able to use side letters to supplement or modify the terms of SFC-authorised retail funds must issue an up-to-date offering a fund’s offering document, subscription agreement or constitutive

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document for the purpose of granting strategic investors certain preferential treatment; however, a relevant disclosure should be 6.4 What is the tax treatment of (a) resident, (b) non- made in the fund’s offering document that side letters may be entered resident, and (c) pension fund investors in Alternative Investment Funds? into and that certain investors may be given preferential terms. In a circular previously issued by the SFC and addressed to managers There is no Hong Kong withholding tax on any dividends or of hedge funds, the SFC indicated that to ensure fair treatment of distributions to be made to fund investors, regardless of the category investors, it is good practice to disclose material terms to all existing of investors. Where the dividends or distributions or other gains and potential investors, and highlight where applicable that side from the AIFs fall within income or profits derived by an investor letters have been entered into only with investors with significant in any business, trade or profession carried out in Hong Kong, the shareholding or interest. (Further, the revised FMCC which shall investor may be subject to profits tax on such income or profits. be effective from November 2018 contains a general requirement Hong Kong that where a fund manager is responsible for the overall operation of a fund, it should make adequate disclosure of information (as 6.5 Is it necessary or advisable to obtain a tax ruling from well as any material changes to the information) on the fund which the tax or regulatory authorities prior to establishing is necessary for fund investors to be able to make an informed an Alternative Investment Fund? judgment about their investment into it). As the Hong Kong tax framework is relatively straightforward, it is usually not necessary to obtain a tax ruling from the tax authority in 6 Taxation Hong Kong prior to establishing an AIF. For AIFs investing in private equity, venture capital, real estate or in unusual structure or instruments, it is advisable to obtain specific tax 6.1 What is the tax treatment of the principal forms of Alternative Investment Funds identified in question advice on the potential tax implications. 2.1? Where considered necessary such as in circumstances involving transfer pricing between associated companies, it is possible to seek Under Hong Kong’s tax framework, profits derived from the advanced pricing arrangement with the Hong Kong Inland Revenue carrying on of business, trade or profession in Hong Kong would be Department. subject to Hong Kong profits tax at the rate of 16.5%. Profits sourced outside Hong Kong are not chargeable to tax in Hong Kong, and 6.6 What steps have been or are being taken to implement Hong Kong does not levy tax on the basis of remittance or receipt in the US Foreign Account and Tax Compliance Act Hong Kong or apply worldwide taxation on foreign-sourced profits 2010 (FATCA) and other similar information reporting or income of Hong Kong tax residents. A non-resident or overseas regimes such as the Common Reporting Standard? company is potentially liable to Hong Kong profits tax if it carries on a trade, profession or business in Hong Kong and has profits Hong Kong has signed Model II IGA for FATCA, which is derived from Hong Kong from such trade, profession or business. supplemented by an agreement with the United States for exchange Accordingly, where an AIF derives Hong Kong sourced profits from of information relating to taxes; this forms the necessary basis carrying on a business in Hong Kong (in its investment activities), it for Hong Kong to provide for the exchange of information upon may be subject to Hong Kong profits tax. requests made in relation to the information reported by financial Certain types of AIFs may be exempted from Hong Kong profits tax, institutions in Hong Kong to the US under FATCA. as outlined in question 6.8. Hong Kong has implemented the Common Reporting Standard (CRS) and the automatic exchange of financial account information 6.2 What is the tax treatment of the principal forms of in tax matters (AEOI) on a reciprocal basis with appropriate partners, investment manager / adviser identified in question with the first exchanges expected by the end of 2018. The legal 2.3? framework has been put in place for CRS reporting in respect of a list of 75 reportable jurisdictions; however, Hong Kong would only A Hong Kong investment manager or adviser would be subject to exchange information with a reportable jurisdiction where there is Hong Kong profits tax at the rate of 16.5% on its profits derived an arrangement in place with such jurisdiction that forms the basis from carrying on its business, trade or profession in Hong Kong. for exchange. Currently, Hong Kong has signed comprehensive avoidance of double taxation agreements with 39 jurisdictions and tax information exchange agreements with seven countries. 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the 6.7 What steps are being taken to implement the OECD’s investor’s interest? Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they The transfer of interests in an AIF domiciled in Hong Kong is affect Alternative Investment Funds’ operations? subject to Hong Kong stamp duty, unless exempted. Stamp duty is chargeable at the rate of 0.1% of the consideration or value of the In June 2016, Hong Kong accepted the invitation of the OECD instrument of transfer of Hong Kong stock (the definition of which to join the inclusive framework for global implementation of the covers shares of Hong Kong companies, also units in unit trusts) or Base Erosion and Profit Shifting (BEPS) measures, and in June in certain circumstances at a nominal fixed duty. 2017, China signed the “Multi-lateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing” (MLI) on behalf of Hong Kong, although with rights reserved with respect to most articles of the MLI.

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Hong Kong has expressed its commitment to the implementation or adviser would be subject to Hong Kong profits tax on its profits of the four minimum standards of the OECD’s BEPS Action derived from carrying on its business, trade or profession in Hong Plan, namely: (i) countering harmful tax practices (Action 5); (ii) Kong. There may be a transfer pricing issue between associated preventing treaty abuse (Action 6); (iii) imposing country-by- companies within the group of companies of the fund promoter, country reporting (Action 13); and (iv) improving the cross-border fund manager or adviser, for the management or advisory fees dispute resolution regime (Action 14). On 29 December 2017, the receivable by the Hong Kong manager or adviser to be charged on Inland Revenue (Amendment) (No.6) Bill 2017 was published in an arm’s length basis. the Gazette to implement aforesaid BEPS Actions. The Amendment Another key issue is the manner or form in which managers of Bill is seen as probably the largest tax amendment bill of Hong AIFs may receive a performance fee or carried interest from the Kong with broad implications, and is a significant tax development fund, and whether subject to profits tax, and also as regards the in Hong Kong. It is now undergoing the Hong Kong legislative remuneration of fund executives, this may be subject to salaries Hong Kong process. Proposed codification of OECD transfer pricing rules, and tax. The Hong Kong Inland Revenue Department has indicated that in this connection, the proposed changes such as the definitions general anti-avoidance provisions may be applied on distributions of permanent establishment and provisions between associated of a management fee or carried interest to fund executives from persons, would have potential implications for AIFs and operators a general partner limited partnership, or carried interest limited of AIFs. partnership if the distributions are not genuine investment returns. Hong Kong has also taken into account considerations of ring- fencing and potential harmful tax practices when adopting the OFC 6.10 Are there any meaningful tax changes anticipated in profits tax exemption, and is in the process of reviewing the offshore the coming 12 months? funds profits tax exemption and other concerns of any ring-fencing features in the present Hong Kong tax regimes for funds. As mentioned in question 6.7, China has signed the “Multi-lateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing” (MLI) on behalf of Hong Kong, 6.8 Are there any tax-advantaged asset classes or structures available? How widely are they deployed? although with rights reserved with respect to most articles of the MLI. On 29 December 2017, the Inland Revenue (Amendment) (No.6) Bill 2017 was published in the Gazette to implement SFC-authorised retail funds are exempted from Hong Kong profits OECD BEPS Actions. The Amendment Bill contains substantial tax. Profits tax exemption may also apply to a mutual fund, unit trust amendments with broad implications, and would be a significant tax or investment scheme which is a bona fide widely held investment development in Hong Kong. scheme, and which complies with the requirements of a supervisory authority within an acceptable regulatory regime. The Amendment Bill covers proposed changes including a statutory codification of OECD transfer pricing rules, introduce statutory For non-retail funds, under the relevant provisions of the Inland provisions for unilateral, bilateral and multilateral advanced Revenue Ordinance (IRO), where a fund is not tax resident in Hong pricing arrangement, the definitions of permanent establishment Kong (i.e. its central management and control are exercised outside and provisions between associated persons, provisions on double Hong Kong), subject to satisfying the prescribed conditions, the taxation relief and also a dispute resolution mechanism, among fund can be exempted from profits tax (referred to as the “offshore others. It is now undergoing the Hong Kong legislative process. funds profits tax exemption”). Profits tax exemption may also apply to open-ended fund companies that meet relevant conditions (referred to as the “OFC profits tax 7 Reforms exemption”). In order to avail the tax exemption, the open-ended fund company must be tax resident in Hong Kong (i.e. its central 7.1 What reforms (if any) are proposed? management and control exercised in Hong Kong) and meet other conditions including that it must be “non-closely held”, as As mentioned above, the FMCC will be modified and enhanced, specifically defined. effective from November 2018. Key areas include additional The offshore funds profits tax exemption and the OFC profits tax requirements in respect of securities lending and repurchase exemption each require that the qualifying transactions for the agreements, custody of fund assets, liquidity risk management, and tax exemption are carried out through or arranged by a “specified disclosure of leverage. person”, meaning a corporation licensed or registered for carrying There are also enhancements to the Code of Conduct aimed to out specified regulated activity under the SFO and which would address conflicts of interest in the sale of investment products include Hong Kong licensed managers. Qualifying transactions and enhance disclosure at the point of sale by: (i) restricting an are transactions in specified asset classes including securities, intermediary from representing itself as ‘independent’ or using any future contracts, foreign exchange contracts, bank deposits, foreign terms with a similar inference, when distributing an investment currencies, certificates of deposits and OTC derivative products. product if the intermediary receives commission or other monetary For the purposes of the said profits tax exemptions, the definition benefits in relation to distributing such investment product, orit of “securities” has been expanded to cover investments in private receives any non-monetary benefits from any party or has close companies (including through offshore or Hong Kong special links or other legal or economic relationships with product issuers purpose vehicles or interposed special purpose vehicles). Hence which are likely to impair its independence; and (ii) requiring an subject to meeting relevant conditions and falling within the intermediary to disclose the maximum percentage of any monetary prescribed scope, private equity funds may also avail the exemption. benefits received or receivable that are not quantifiable prior to or at the point of sale. The enhancements to the Code of Conduct will 6.9 Are there any other material tax issues for investors, take effect in mid-August 2018. In considering these requirements, managers, advisers or AIFs? the SFC stopped short of restricting intermediaries from receiving commission payments on fund sales, with Hong Kong regarded as As mentioned in question 6.2, a Hong Kong investment manager not yet ready to adopt a strictly pay-for-advice model.

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The availability of the new Hong Kong open-ended fund company also include new fund types such as active ETFs and closed-ended structure from 2018 would also be an important development in the listed funds. The consultation period ended in March 2018. The Hong Kong funds market. changes that would be put in place would be subject to the final form Besides these, the SFC has issued consultation drafts of proposed of the amended UT Code to be issued by the SFC in due course with amendments to the UT Code. Key proposals include strengthening the consultation conclusions. In any case, it is anticipated to be a requirements for the key operators (management companies, welcomed modernisation with updates that would further broaden trustees and custodians), providing greater flexibility and enhanced and deepen the range of fund products available in Hong Kong, safeguards for funds’ investment activities (particularly in relation while aligning with international standards as recommended by the to allowing a broader use, and introduce specific provisions on Financial Stability Board, the IOSCO and also existing practices in securities lending, repo and reverse repo transactions). The proposals other international funds jurisdictions. Hong Kong

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Vivien Teu Sarah He Vivien Teu & Co LLP Vivien Teu & Co LLP 27/F Henley Building 27/F Henley Building 5 Queen’s Road Central, Central 5 Queen’s Road Central, Central Hong Kong Hong Kong

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Vivien Teu is the founding and managing partner of Vivien Teu & Sarah He is an associate at Vivien Teu & Co LLP in the asset Hong Kong Co LLP. She has extensive and in-depth experience as a corporate management and financial services practice group. She has and commercial lawyer specialising in the financial services sector, diversified experience in the areas of investment funds, financial funds and wealth management. Vivien carries diverse legal practice regulatory, structured finance, corporate trusts, wealth management background with top-tier and Magic Circle firms in the areas of tax, and corporate and commercial matters. trusts, banking and financial services, investment funds, securities, Sarah currently specialises in asset management and financial regulatory and financial institutions set-up as well as mergers & services, focusing on the structuring, formation and operation of acquisitions. Along with a significant in-house counsel experience at private investment funds, including hedge funds, private equity funds a global investment firm, Vivien brings unique insights and practical and real estate funds, and regulatory matters relating to funds and commercial approaches in her practice, and with a particular China fund managers. focus. Sarah’s experience also covers the SFC’s authorisation of retail funds Vivien’s experience in the areas of asset management covers diverse in Hong Kong, in particular, the SFC’s authorisation of Mainland retail forms of investment funds include Hong Kong SFC authorisation of funds under the Mainland-Hong Kong Mutual Recognition of Funds retail funds (including UCITS funds and domestic HK fund series), (MRF) arrangement and the post-authorisation compliance issues of Mainland-Hong Kong Mutual Recognition of Funds, China-theme SFC-authorised retail funds. Sarah has also advised on acquisitions investment funds including QFII and RQFII China A Share Funds, of SFC-licensed corporations including applications for the approval of RMB Fixed Income Funds, Stock Connect, accessing the China- SFCs to become a substantial shareholder of licensed corporations. Interbank Bond Market, and advising in relation to ETFs and REITs. Vivien also regularly advises on China QDII matters and outbound Sarah also advises on the structuring and issuance of debt securities investments; structured finance and securitisation; SFC licensing under securitisation transactions, and represents China QDII investors and regulatory matters; Hong Kong securities compliance advice; in making cross-border investments through such transactions. and assisting clients of diverse background with establishing private investment funds including hedge funds, private equity funds, real estate funds, institutional segregated account mandates and other investment arrangements; advising on fund distribution matters, custody structure, investment and trading matters. Vivien’s experience also includes joint ventures or mergers & acquisitions of financial institutions or asset management firms, advising on shareholders’ agreements, corporate governance, general corporate and commercial advice, private and corporate trusts, tax issues and tax structuring.

Vivien Teu & Co LLP is a Hong Kong law practice established with the philosophy of a boutique law firm focusing on the areas of corporate, securities, asset management and financial services. The lawyers at Vivien Teu & Co LLP carry in-depth Hong Kong and international legal practice experience, combined with deep and broad knowledge of China and regional markets. The legal practice areas at Vivien Teu & Co LLP encompass corporate and commercial law advice, as well as securities law and financial regulatory advice in local and international transactions, and a go-to firm for corporate transactions, funds formation and clients seeking legal and regulatory advice involving Mainland China and Hong Kong elements. With an association with the reputable China law firm, Llinks Law Offices, Vivien Teu & Co LLP is successful in offering seamless support on Mainland China and Hong Kong matters relating to asset management, investment funds, cross-border securities and investments, in-bound and out-bound mergers & acquisitions, China market entry strategies, as well as corporate finance and Hong Kong listings. The asset management practice of Vivien Teu & Co LLP serves local and international clients who are establishing or operating asset management platforms in Hong Kong, or otherwise accessing investors or investment opportunities in the Greater China region and beyond. Our lawyers are experienced in advising clients in understanding and navigating the business, legal and regulatory environment in Hong Kong for asset management, assisting with incorporation and structuring of investment management or advisory services entities, advising and assisting clients in obtaining necessary licenses or registrations with financial regulatory authorities and compliance requirements, and on establishing varied forms of investment funds and investment arrangements. The firm also boasts dedicated trusts, succession and estate planning expertise, increasingly serving private clients and high-net worth entrepreneurs, in its wider financial services and wealth management practice.

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Ireland Brian Kelliher

Dillon Eustace Sean Murray

Although non-EU AIFMs currently have no passporting rights 1 Regulatory Framework under the AIFM Directive and will not have such rights until such time as they are extended to non-EU AIFMs by the European 1.1 What legislation governs the establishment and Commission, non-EU AIFMs may avail of transition benefits operation of Alternative Investment Funds? allowed by the Central Bank for such entities and consequently may manage an Irish QIAIF provided they are designated by the QIAIF Irish Funds Legislation that governs the establishment and operation as the AIFM and certain rules as set out in question 1.8 are complied of Irish AIFs authorised by the Central Bank of Ireland (the “Central with. However, in such circumstances, the non-EU AIFM must be Bank”) is set out in question 1.3. Additionally, Irish AIFs structured approved by the Central Bank to act as an investment manager of as European long-term investment funds (“ELTIFs”) are impacted Irish authorised collective investment schemes (see below). operationally by Regulation (EU) No 2015/760 (the “European An Irish AIF constituting a collective investment scheme authorised Long-term Investment Funds Regulation”). and supervised by the Central Bank under Irish Funds Legislation The governing legislation of Irish AIFs not subject to authorisation and marketed to retail investors (a “RIAIF”) must have an authorised by the Central Bank depends on the legal form of those AIFs, e.g. the AIFM. Consequently, a non-EU AIFM cannot avail itself of the Companies Act, 2014 will apply to corporate AIFs not established as transition benefits allowed by the Central Bank as referred to above investment companies with variable capital. and manage a RIAIF on the basis that it is designated by the RIAIF as the non-EU AIFM. All Irish AIFs are impacted operationally by: ■ the European Communities (Alternative Investment Fund Non-AIFM Irish Management Companies/General Partners Managers) Regulations 2013 (S.I. 257 of 2013) (the “Irish RIAIFs and QIAIFs, depending on their legal form, may be required AIFM Regulations”), which transposed Directive 2011/61/ to appoint a management company/general partner to carry out the EU (the “AIFM Directive”) into Irish law; and management of those AIFs. Where such a management company/ ■ Commission Delegated Regulations and Commission general partner is not the AIFM, it must be approved by the Central Implementing Regulations adopted by the EU Commission Bank and meet the requirements relating to such entities as set out in specified areas in order to ensure that the AIFM Directive in the Central Bank’s AIF Rulebook (the “AIF Rulebook”), e.g.: is implemented consistently across the EU, the principal one ■ a minimum capital requirement of at least EUR 125,000 or of which is the Commission Delegated Regulation (EU) No one quarter of its total expenditure taken from the most recent 231/2013 supplementing the AIFM Directive with regard audited accounts (whichever is higher); to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (the “Commission ■ organisational requirements such as the appointment of a Delegated Regulation”). compliance officer who must be located in the State, policies and systems to identify, control and monitor risk, accounting policies and procedures, maintenance of records, etc.; and 1.2 Are managers or advisers to Alternative Investment ■ adequate management resources. Funds required to be licensed, authorised or regulated by a regulatory body? Investment Managers Investment managers or sub-investment managers which are one of AIFMs the following entities will not usually be subject to an additional Irish AIFMs managing Irish AIFs established under Irish Funds regulatory review process by the Central Bank: Legislation are required to be authorised under the Irish AIFM ■ UCITS management companies; Regulations. However, an Irish registered AIFM may manage an ■ MiFID investment firms; Irish AIF marketed to qualifying investors (a “QIAIF”) for a two- ■ EU credit institutions; and year start-up period during which the Central Bank will not require ■ externally appointed AIFMs. that it have an authorised AIFM. After the start-up period, an authorised AIFM must be appointed. Investment managers which are not one of the entities listed above may only be appointed where (i) a Memorandum of Understanding Non-Irish EU AIFMs managing Irish AIFs are required to be (“MoU”) is in place between the Central Bank and the competent authorised in their home jurisdiction and to have availed of the authority in the home jurisdiction of the investment manager, and (ii) passporting provisions pursuant to Article 33 of the AIFM Directive. the Central Bank has approved the investment manager following receipt of a completed Investment Manager Clearance Form.

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Investment Advisors which does not facilitate the redemption of units at the request of the The Central Bank does not apply an approval process to investment unitholders during the life of the AIF. advisors in order for such entities to provide investment advice in relation to a RIAIF/QIAIF, provided that the managers/directors of 1.5 What does the authorisation process involve and how the RIAIF/QIAIF confirm that the advisors in question will act in an long does the process typically take? advisory capacity only and will have no discretionary powers over any of the assets of the RIAIF/QIAIF. RIAIFs/QIAIFs The application for authorisation of a RIAIF/QIAIF must be made 1.3 Are Alternative Investment Funds themselves by (i) the AIFM, together with (ii) the corporate AIF or management

required to be licensed, authorised or regulated by a company/general partner in the case of a non-corporate AIF, and (iii) Ireland regulatory body? the depositary, in the case of a unit trust or CCF. All parties to a RIAIF/QIAIF must have been authorised or otherwise Irish AIFs authorised under “Irish Funds Legislation” as detailed deemed acceptable to the Central Bank prior to the application for below are required to be authorised by the Central Bank which has authorisation (e.g. the management company, general partner, AIFM, the power to impose conditions on them. The current conditions directors in the case of a corporate AIF, depositary, other service which the Central Bank imposes are contained in an AIF Rulebook: providers such as the fund administrator, investment manager, etc.). ■ unit trusts under the Unit Trusts Act 1990; The directors of any entity authorised by the Central Bank ■ investment companies under Part 24 of the Companies Act (including, inter alia, the directors of a corporate RIAIF/QIAIF) are 2014; required to meet certain standards of fitness and probity. As part of ■ investment limited partnerships (“ILPs”) under the the Central Bank’s fitness and probity requirements, any director Investment Limited Partnerships Act 1994; proposed to be appointed must be pre-approved by the Central ■ common contractual funds (“CCFs”) under the Investment Bank. In this regard, an individual online questionnaire must be Funds, Companies and Miscellaneous Provisions Act 2005; completed by the proposed director and validated and submitted on and behalf of the appointing entity by a certain time period in advance of ■ Irish collective asset-management vehicles (“ICAVs”) under the proposed authorisation date for the RIAIF/QIAIF (i.e. at least 20 the Irish Collective Asset-management Vehicles Act 2015, working days in the case of a RIAIF and at least five working days (collectively referred to as the “Irish Funds Legislation”). in the case of a QIAIF). In addition, Irish AIFs structured as ELTIFs must be authorised by A RIAIF/QIAIF is not subject to any minimum capital requirements the Central Bank pursuant to the European Long-term Investment unless it is internally managed and constitutes the AIFM. Funds Regulation. In relation to the authorisation of QIAIFs, there is no prior filing of QIAIF documentation for review by the Central Bank. Instead, there 1.4 Does the regulatory regime distinguish between is a self-certification regime (i.e. certification has to be given that open-ended and closed-ended Alternative Investment the Central Bank’s disclosure requirements relating to the QIAIF Funds (or otherwise differentiate between different documentation are met). Because there is no prior review by the types of funds or strategies (e.g. private equity v Central Bank, the timeframe for authorisation of a QIAIF is within hedge)) and, if so, how? the control of the relevant parties based on the length of time it takes to negotiate and agree the QIAIF documents (subject to the pre- The Central Bank allows RIAIFs/QIAIFs to be structured as follows: clearance of any persons or parties required by the Central Bank). Open-Ended Once the documentation is filed online by 5pm on the business day An AIF is considered open-ended by the Central Bank where it: prior to the date for which authorisation is sought, a QIAIF will be ■ provides redemption facilities on at least a (i) monthly basis authorised on the requested date without a prior review. The Central in the case of a RIAIF, and (ii) quarterly basis in the case of a Bank may carry out a “spot check” post-authorisation review. QIAIF; This contrasts with the authorisation process for RIAIFs, as the ■ redeems, when requested, at least (i) 10% of net assets in Central Bank requires certain documents (e.g. the prospectus, the case of a RIAIF/QIAIF that redeems on a monthly basis risk management process, and agreement/deed appointing the or more frequently, or (ii) 25% in the case of a QIAIF that depositary) to be submitted for review and cleared of comment by the redeems on a quarterly basis; and Central Bank in advance of the formal application for authorisation ■ does not impose a redemption fee in excess of (i) 3% of the being submitted. As a result, a RIAIF with an externally appointed net asset value per unit in the case of a RIAIF, or (ii) 5% in AIFM can take approximately eight weeks to be authorised by the the case of a QIAIF. Central Bank from the date of submission of applicable documents An AIF, which provides for a period of greater than 30 days in the for review. case of a RIAIF and 90 days in the case of a QIAIF between the Internally Managed RIAIF/QIAIF Constituting the AIFM dealing deadline and the payment of redemption proceeds, will not be subject to the above requirements provided it classifies itself as Where it is proposed that a RIAIF or QIAIF will be internally open-ended with limited liquidity. managed and constitute the AIFM, a separate application for authorisation of an AIFM must be submitted to the Central Bank Open-Ended with Limited Liquidity (together with other supporting documentation, including, inter alia, A RIAIF/QIAIF is classified as open-ended with limited liquidity if a programme of activity) and such authorisation must be obtained it does not meet one or more of the requirements for an open-ended before formal application for authorisation of the RIAIF/QIAIF may AIF but does permit the redemption of units throughout the life of be submitted to the Central Bank. the AIF. Any such RIAIF/QIAIF is required to meet the minimum capital Closed-Ended requirements of an AIFM as set out in Regulation 10 of the Irish The Central Bank considers a closed-ended RIAIF/QIAIF to be one AIFM Regulations (equivalent to Article 9 of the AIFM Directive).

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The Central Bank is obliged to inform the AIFM in writing as to whether or not authorisation has been granted, within three months 1.7 What service providers are required? of a complete application. However, the Central Bank may extend this period for another three months where it considers it necessary The service providers involved in a RIAIF/QIAIF will depend on: because of the specific circumstances of the case. ■ the legal structure of the AIF as detailed in question 1.3 (e.g. a management company/general partner will be required to be appointed in the case of a non-corporate AIF); 1.6 Are there local residence or other local qualification requirements? ■ whether an external valuer, distributor and/or prime broker will be appointed; and ■ whether a fund administrator authorised by the Central Bank Ireland Directors will be appointed (as is customary) to calculate the net asset A minimum of two directors in a corporate RIAIF/QIAIF, or in any value of the AIF and to provide fund accounting and transfer entity which is authorised by the Central Bank and provides non- agency services. AIFM fund services to such an AIF (e.g. non-AIFM management The appointment of a depositary is required under the Irish AIFM company, general partner, fund administrator or depositary), must Regulations. be Irish-resident. In the case of a RIAIF/QIAIF, an Irish resident is a person present in Ireland for the whole of 110 business days A RIAIF/QIAIF must appoint auditors and a money laundering per year. reporting officer and, if a corporate AIF, will need to appoint a secretary. In addition, if it is intended to list the units of the AIF In the case of an Irish AIFM authorised by the Central Bank which on the Irish Stock Exchange, it will be necessary to appoint an Irish has a Central Bank PRISM impact rating of Medium Low or above, listing sponsor. It is also customary for Irish legal advisers to be the AIFM must have at least: appointed. ■ three directors resident in Ireland or, at least, two directors resident in Ireland and one designated person (i.e. a person designated by the board to carry out one or more managerial 1.8 What rules apply to foreign managers or advisers functions) resident in Ireland; wishing to manage, advise, or otherwise operate funds domiciled in your jurisdiction? ■ half of its directors resident in the European Economic Area (“EEA”); and ■ half of its managerial functions performed by at least two AIFMs designated persons resident in the EEA. The rules applying to non-Irish AIFMs depend primarily on whether In the case of an Irish AIFM authorised by the Central Bank which they are EU or non-EU (third country) based. has a PRISM impact rating of Low, the AIFM must have at least: Non-Irish EU AIFMs managing Irish RIAIFs/QIAIFs are not subject ■ two directors resident in Ireland; to any additional rules imposed by the Central Bank. ■ half of its directors resident in the EEA; and As stated in question 1.2, non-EU AIFMs may currently avail of the ■ half of its managerial functions performed by at least two transition benefits allowed by the Central Bank for such entities and designated persons resident in the EEA. act as AIFM of QIAIFs. However, the non-EU AIFM and the QIAIF it manages must comply with the provisions of the Central Bank’s As part of the Central Bank’s fitness and probity requirements, a AIF Rulebook that apply in the case of QIAIFs with registered proposed director/designated person is required to confirm (via AIFMs, e.g. certain provisions of the AIFM Directive relating to the individual questionnaire as referred to in question 1.5) his/her delegation, liquidity management, valuation and transparency time commitment in days that will be provided per year in respect obligations. of that directorship or role as designated person. In addition, the appointing entity, in validating the questionnaire, is required to Investment Managers confirm its expectation regarding the proposed director’s/designated Non-Irish investment managers approved by the Central Bank person’s time commitment per year. to act as an investment manager of RIAIFs/QIAIFs, the process Fund Governance Code for which is detailed in question 1.2, are not subject to any rules imposed by the Central Bank. However any proposed change in the Corporate RIAIFs/QIAIFs or the management companies/general legal/regulatory status or name of the investment manager must be partners of non-corporate RIAIFs/QIAIFs are recommended to advised to the Central Bank. adhere to a voluntary corporate governance code for funds put in place by the Irish Funds Industry Association at the request of the Investment Advisers Central Bank. Such code provides, inter alia, for a majority of Non-Irish investment advisers providing advice in relation to a non-executive directors and at least one independent non-executive RIAIF/QIAIF are not subject to any rules imposed by the Central director. Bank. Fund Service Providers’ Governance Code Irish fund service providers such as fund administrators and 1.9 What co-operation or information sharing agreements depositaries are recommended to adhere to a voluntary corporate have been entered into with other governments or governance code put in place by the Irish Funds Industry Association regulators? at the request of the Central Bank. Such code provides, inter alia, for at least one independent non-executive director. The Central Bank has entered into numerous national, bilateral Non-Irish Parties and international memoranda of understanding. In particular, the Central Bank has entered into 40 memoranda of understanding as Local requirements regarding the appointment of a non-Irish AIFM, part of the implementation of the AIFM Directive. investment manager or investment advisor are detailed in question 1.2 above. Separately, Ireland has signed comprehensive Double Taxation Agreements with 74 countries, 73 of which are in effect. Ireland has

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also concluded a total of 26 tax information exchange agreements with non-EU countries, 25 of which are in effect. 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment Funds? 2 Fund Structures The principal legal structure used for managers and advisers of RIAIFs/QIAIFs is a private company incorporated with limited 2.1 What are the principal legal structures used for liability. Alternative Investment Funds?

2.4 Are there any limits on the manager’s ability to The principal legal structures of RIAIFs/QIAIFs are set out in Ireland question 1.3, the main features of which are set out below: restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? ■ unit trusts are contractual arrangements created under a trust deed made between a management company and a depositary. Unit trusts do not have their own legal personality Although RIAIFs/QIAIFs may apply redemption gates if provided and contracts are entered into by the management company for in the applicable fund documentation, the Central Bank currently and, in certain cases, by the trustee. A unit represents an imposes limits on an AIF’s ability to restrict redemptions on any one undivided beneficial interest in the assets of the unit trust; dealing day in the context of open-ended funds. These limits are ■ investment companies are public limited liability companies detailed in question 1.4. incorporated with variable capital, i.e. the actual value of the paid-up share capital is equal at all times to the value of the 2.5 Are there any legislative restrictions on transfers of net asset value of the company. Shares issued do not represent investors’ interests in Alternative Investment Funds? a legal or beneficial interest in the company’s assets; ■ ILPs are partnerships between one or more general partners There are no legislative restrictions on transfers of investors’ and one or more limited partners, constituted by written interests in RIAIFs/QIAIFs other than in ILPs. A limited partner agreements between the parties known as partnership agreements. A general partner is personally liable for the may only assign his partnership interest subject to the consent of all debts and obligations of the partnership and a limited partner general partners to the assignee being admitted to the partnership as contributes or undertakes to contribute a stated amount to the a limited partner. capital of the partnership; ■ CCFs are funds constituted under contract law by means of 2.6 Are there any other limitations on a manager’s ability a deed of constitution executed under seal by a management to manage its funds (e.g. diversification requirements, company. The CCF is an unincorporated body and does not asset stripping rules)? have a legal personality and therefore may act only through the management company. Participants in the CCF hold Other than the investment restrictions and limitations imposed by their participation as co-owners and each participant holds an undivided co-ownership interest as a “tenant in common” the Central Bank on RIAFs/ QIAIFs as referred to in question 4 with other participants; and and the limitations imposed under the AIFM Directive (e.g. relating to asset striping), there are no limitations on an AIFM’s ability to ■ ICAVs are corporate bodies with limited liability where the actual value of the paid-up share capital is at all times equal manage RIAIFs/QIAIFs. to the net asset value of the ICAV and the share capital is divided into a specified number of shares without assigning any nominal value to them. The assets of the ICAV belong 3 Marketing exclusively to the ICAV and no shareholder has any interest in the assets of the ICAV. 3.1 What legislation governs the production and offering Each of the above-referenced AIFs may be established as an of marketing materials? umbrella fund with separate sub-funds. It is also possible to have unauthorised AIFs (i.e. AIFs that are not The Irish Funds Legislation and AIF Rulebook govern the production authorised by the Central Bank under Irish Funds Legislation), the and offering of a prospectus by a RIAIF/QIAIF. Regulation (EU) principal legal structures of which are companies, trusts and limited No. 1286/2014 (the “PRIIPS Regulation”) governs the production partnerships. and offering of the key information document (“KID”) by a RIAIF/ QIAIF where units are to be offered to retail investors in the EU.

2.2 Please describe the limited liability of investors. 3.2 What are the key content requirements for marketing In investment companies and ICAVs, the liability of the shareholders materials, whether due to legal requirements or customary practice? is limited to the amount, if any, unpaid on the shares held by them. In unit trusts, the limited liability of the unitholders under the trust There are prescriptive requirements relating to the content of a deed will depend on the contractual provisions in the trust deed. prospectus and where applicable KID issued by or on behalf of a In ILPs, the liability of the limited partners is limited to the stated RIAIF/QIAIF. These are set out in the AIF Rulebook and PRIPS amount of capital they have contributed or undertaken to contribute Regulation, respectively. and, except in limited circumstances set down in the Investment The prospectus of a closed-ended AIF must comply with the content Limited Partnerships Act 1994, does not extend to the debts of the requirements in the Irish Prospectus Directive Regulations (where partnership beyond the amount contributed. applicable). In CCFs, the liability of a unitholder is limited to the amount agreed The European Communities (Markets in Financial Instruments) to be contributed for the subscription of units. Regulations 2017 (the “Irish MiFID Regulations”), which

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transposed the MiFID II Directive into Irish law, require authorised Non-Irish-registered EU AIFMs (as opposed to non-Irish-authorised “investment firms” providing “investment services” (including, EU AIFMs that can avail of the passport pursuant to Article 33 of inter alia, investment advice and certain distribution services) to the AIFM Directive) cannot market AIFs that they manage to ensure that information provided to potential clients about, inter professional investors in Ireland. alia, “financial instruments” (such as units in an AIF) meets certain prescribed requirements. 3.5 Can Alternative Investment Funds be marketed to retail investors? 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? RIAIFs/QIAIFs

Ireland QIAIFs may be only be marketed to qualifying investors as detailed In relation to a QIAIF, a dated prospectus, constitutional document in question 3.6. However, RIAIFs may be marketed to retail and material contracts must be submitted to the Central Bank for investors. noting in advance of the date of authorisation. In relation to a RIAIF, Non-Irish AIFs the prospectus and certain other documents must be submitted for review and clearance by the Central Bank in advance of seeking the Non-Irish AIFs which propose to market their units in Ireland to authorisation of the RIAIF from the Central Bank. retail investors must be authorised by a supervisory authority set up in order to ensure the protection of unitholders and which, in The prospectus of a closed-ended AIF must be submitted to the the opinion of the Central Bank, provides an equivalent level of Central Bank for approval in accordance with the Irish Prospectus investor protection to that provided under Irish laws, regulations and Directive Regulations (where applicable). conditions governing RIAIFs. The Central Bank does not currently require a KID to be filed with A non-Irish AIF which proposes to market its units in Ireland to it. retail investors must make an application to the Central Bank in writing, enclosing certain prescribed information. 3.4 What restrictions are there on marketing Alternative AIFs established in: Investment Funds? ■ Guernsey and authorised as Class A schemes; Marketing in Ireland to Retail Investors ■ Jersey and authorised as recognised funds; and ■ the Isle of Man as authorised schemes, A non-Irish AIF which has been approved by the Central Bank to market in Ireland to retail investors (see question 3.5 below) must will receive approval to market their units in Ireland to retail comply with the Consumer Protection Code of the Central Bank. investors on completion of the information and documentation In addition, certain wording prescribed by the Central Bank must requirements. Other AIFs must demonstrate an equivalent level of be included in the AIF’s prospectus and in any marketing material investor protection to that provided under Irish laws, regulations and distributed in Ireland for the purposes of promoting the AIF to retail conditions governing RIAIFs. investors. The marketing of units in Ireland to retail investors is subject to the Marketing in Ireland to Professional Investors requirements set out in question 3.4 above and may not take place until the AIF has received a letter of approval from the Central Bank. Notification to the Central Bank pursuant to the Irish AIFM Regulations is required in advance of any marketing in Ireland to The fact that Central Bank pre-approval is required and that professional investors of: consumer protection regulation is applicable renders marketing to ■ EU AIFs by Irish AIFMs; retail investors more cumbersome than in the case of marketing to professional investors. ■ non-EU AIFs by EU AIFMs; and ■ AIFs by non-EU AIFMs. 3.6 What qualification requirements must be carried out Marketing may only commence once the Central Bank has informed in relation to prospective investors? the AIFM that it may commence marketing and is conditional on the applicable requirements set out in the AIFM Directive having been RIAIFs complied with. For example, a non-EU AIFM must comply with the substantive transparency and other requirements set out under A RIAIF has no regulatory minimum subscription requirement and Articles 22, 23, 24 and, for private equity funds, 26–30, of the AIFM no investor qualification requirements. Directive: QIAIFs ■ Article 22: each AIF must be audited in accordance with the A QIAIF may only be sold to qualifying investors and a minimum prescribed standards. subscription of EUR 100,000 applies. A qualifying investor is: ■ Article 23: sets out disclosure requirements such as disclosing ■ an investor who is a professional client within the meaning of to investors the current risk profile of the AIF. MiFID; ■ Article 24: provides requirements to “regularly” report to ■ an investor who receives an appraisal from an EU credit each Member State in which the AIF is marketed. Member institution, a MiFID firm or a UCITS management company States may require more information on a periodic as well as to the effect that the investor has the appropriate expertise, an ad hoc basis. experience and knowledge to adequately understand the ■ Articles 26–30: set out detailed rules applicable to private investment in the QIAIF; or equity funds only on the acquisition of control, including ■ an investor who certifies that they are an informed investor by rules regarding asset stripping. providing the following: Non-Irish EU AIFMs marketing EU AIFs to professional investors ■ confirmation (in writing) that the investor has such in Ireland must only comply with their local rules. knowledge of, and experience in, financial and business matters as would enable the investor to properly evaluate the merits and risks of the prospective investment; or

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■ confirmation (in writing) that the investor’s business not undertake (a) short selling of assets; (b) taking direct or indirect involves, whether for its own account or the account exposure to commodities; (c) entering into securities lending, of others, the management, acquisition or disposal of securities borrowing, repurchase transactions, etc. if more than property of the same kind as the property of the QIAIF. 10% of the assets of the ELTIF are affected; and (d) using financial Qualifying investors must self-certify in writing to the QIAIF that derivative instruments, except where the use of such instruments they: (i) meet the minimum initial investment per investor and solely serves the purpose of hedging the risks inherent to other appropriate expertise/understanding tests; and (ii) are aware of the investments of the ELTIF. risk involved in the proposed investment and of the fact that inherent A RIAIF/QIAIF may not acquire any shares carrying voting rights in such investments is the potential to lose all of the sum invested. which would enable it to exercise significant influence over the management of an issuing body. This requirement does not apply to Ireland 3.7 Are there additional restrictions on marketing to investments in other investment funds or where the AIF is a venture public bodies such as government pension funds? capital, development capital or private equity AIF, provided its prospectus indicates its intention regarding the exercise of legal and There are no additional restrictions. management control over underlying investments.

3.8 Are there any restrictions on the use of intermediaries 4.2 Are there any limitations on the types of investments to assist in the fundraising process? that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or otherwise? No, there are no such restrictions. However, any intermediaries used to fundraise in Ireland must be regulated where required pursuant to Although the RIAIF is a higher-risk option than an Irish UCITS Irish laws. This will depend on the specific activity been carried out fund authorised by the Central Bank, and although concentration by the intermediary in Ireland. limits are imposed by the Central Bank on RIAIFs (e.g. 20% of the net asset value (“NAV”) issuer limit, 30% of the NAV limit on 3.9 Are there any restrictions on the participation in deposits with an acceptable credit institution, 30% of the NAV limit Alternative Investment Funds by particular types of in any one open-ended fund, etc.), such limits are generally more investors, such as financial institutions (whether as flexible than those applicable to UCITS funds. sponsors or investors)? In relation to QIAIFs, the Central Bank does not impose any limits on the investment objectives, the investment policies or the degree There are none in the context of RIAIFs/QIAIFs. of leverage which may be employed. However, for money market QIAIFs and QIAIFs that invest more 4 Investments than 50% of NAV in another fund, the Central Bank does impose certain requirements in relation to the underlying assets.

4.1 Are there any restrictions on the types of activities A loan originating QIAIF must ensure the adequate diversification that can be performed by Alternative Investment of its credit positions with regard to its target market and overall Funds? strategy. A risk diversification strategy must be included in its prospectus which must limit exposure over a specific timeframe Pursuant to the AIF Rulebook, RIAIFs/QIAIFs may not raise capital to any one issuer or group to 25% of net assets. If the risk from the public through the issue of debt securities. However, this diversification strategy is not met within the disclosed timeframe, restriction does not operate to prevent the issue of notes by QIAIFs, unitholders must give approval to continue to operate otherwise the on a private basis, to a lending institution to facilitate financing QIAIF must be terminated. arrangements. An Irish AIF structured as an ELTIF may only invest in certain RIAIFs/QIAIFs may not grant loans (except for loan originating eligible investments as prescribed in the European Long-term QIAIFs) or act as a guarantor on behalf of third parties. This is Investment Funds Regulation. Furthermore it is subject to portfolio without prejudice to the right of the AIF to acquire debt securities composition and diversification limits as set out in the European and it does not prevent AIFs from acquiring securities which are not Long-term Investment Funds Regulation. fully paid. It will also not prevent a QIAIF in certain circumstances Finally, in relation to investment companies authorised as QIAIFs, from entering into bridge financing arrangements. there is a statutory requirement to spread investment risk. The operations of a loan originating QIAIF (other than instruments which are held for treasury, cash management and hedging) are 4.3 Are there any restrictions on borrowing by the limited to the business of issuing loans, participating in loans, Alternative Investment Fund? investment in debt/credit instruments, participations in lending and to operations relating thereto, including investing in equity A RIAIF may not borrow in excess of 25% of its net assets at any securities of entities or groups to which the loan originating QIAIF time. QIAIFs are not subject to any regulatory borrowing limits. lends. Such QIAIFs may not originate loans to natural persons, other collective investment schemes, the AIFM or depositary of the QIAIF or delegates or group companies of these, financial 5 Disclosure of Information institutions or related companies except in the case where there is a bone fide treasury management purpose which is ancillary to the primary objective of the loan originating QIAIF, and persons 5.1 What public disclosure must the Alternative Investment Fund or its manager make? intending to invest in equities or other traded investments or commodities. Except as set out below, RIAIFs/QIAIFs are not required to make Pursuant to the European Long-term Investment Funds Regulation, public their annual reports or the identity of their investors: an ELTIF (which may be structured as a RIAIF or a QIAIF) may

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■ certain documents in relation to ILPs required to be filed (b) AIFMs/Non-AIFM Management Companies/Administrators/ and maintained with the Central Bank are a matter of public Depositaries record (e.g. the partnership agreement and annual report); Where an AIFM, a non-AIFM management company, ■ where the securities of a closed-ended RIAIF or QIAIF administrator or depositary is authorised by the Central are admitted to listing on a regulated market, the AIF is Bank, such entity must file with the Central Bank a minimum required to make its annual and half-yearly reports public capital requirement report when filing its half-yearly and in accordance with the EU Transparency Directive. Such annual reports. an AIF must also make public other information, including, Other Reports inter alia, any change in the rights attaching to the various classes of shares; and (a) RIAIFs/QIAIFs A RIAIF/QIAIF may be obliged to file reports on a periodic Ireland ■ corporate RIAFs/ QIAIFs incorporated under the Companies Act 2014 are required to file their annual financial statements, basis with the Central Bank depending on the composition directors’ report and auditors’ report with the Companies of its portfolio, e.g. where the AIF has side pocket assets, Registration Office in Ireland within 11 months of their year- an annual report is required confirming whether or not the end and as a result such documents will be a matter of public Central Bank’s parameters continue to be respected and the record. prospects and/or plans for the side pocket assets must be outlined. (b) Depositary 5.2 What are the reporting requirements in relation to A depositary of a RIAIF/QIAIF must enquire into the conduct Alternative Investment Funds or their managers? of the AIFM and the management company, investment company, ICAV or general partner in each annual accounting Annual and Half-Yearly Reports period and report thereon to the unitholders via a depositary (a) RIAIFs/QIAIFs report included in the annual report of the AIF. ■ A newly established RIAIF/QIAIF must submit to the (c) Irish AIFMs/Non-EU AIFMs Marketing in Ireland Central Bank a set of accounts (whether an interim report A non-EU AIFM marketing an AIF in Ireland without a or an annual report) within a certain period of the launch passport and an Irish-authorised AIFM are required to file date (i.e. within nine months for a RIAIF and 12 months reports with the Central Bank in accordance with Regulation for a QIAIF) and publish it within two months if it is an 25 of the Irish AIFM Regulations, e.g. reports on the principal interim report or six months if it is an annual report. The markets and instruments in which they trade on behalf of the first annual reports must be made up to a date within 18 AIFs they manage, etc. months of incorporation/establishment and published within six months. ■ On an ongoing basis, a RIAIF/QIAIF must publish an 5.3 Is the use of side letters restricted? annual report within six months of the end of the financial year. In addition, a QIAIF (established as a unit trust or There is no express statutory or regulatory restriction on the use of CCF) and a RIAIF must publish, within two months of the side letters. However, a RIAIF/QIAIF is required, subject to certain reporting period, a half-yearly report covering the first six exceptions as set out in the AIF Rulebook, to treat all unitholders in months of the financial year. the same class equally and all unitholders in different classes fairly. (b) AIFMs/Non-AIFM Management Companies/Administrators/ Furthermore, an AIFM is subject to certain operating conditions, Depositaries including, inter alia, an obligation to treat all AIF unitholders fairly ■ Where an AIFM, a non-AIFM management company, and to ensure that no unitholder in an AIF obtains preferential administrator or depositary is authorised by the Central treatment unless such preferential treatment is disclosed in the Bank, such entity must publish and file with the Central relevant AIF’s constitutional document. Bank (i) an annual report within four months of the end of the financial year, and (ii) a half-yearly report, covering the first six months of the financial year, within two months of the reporting period. 6 Taxation ■ However, where an AIFM is an internally managed RIAIF/ QIAIF, the annual audited accounts must be published 6.1 What is the tax treatment of the principal forms of within six months (as opposed to four months) of the year Alternative Investment Funds identified in question end. Furthermore, internally managed corporate QIAIFs 2.1? are not required to produce half-yearly financial accounts. Prudential Reports RIAIFs/QIAIFs are not subject to any taxes on their income (profits) (a) RIAIFs/QIAIFs or gains arising on their underlying investments. While dividends, A RIAIF/QIAIF is obliged to file the following prudential interest and capital gains that an AIF receives with respect to its reports with the Central Bank: investments may be subject to taxes, including withholding taxes, in ■ a monthly return setting out prescriptive information the countries in which the issuers of investments are located, these relating to the AIF; foreign withholding taxes may, nevertheless, be reduced or eliminated ■ a quarterly Survey of Collective Investment Undertakings under Ireland’s network of tax treaties to the extent applicable. return within 10 working days of the end-quarter to which it refers; and 6.2 What is the tax treatment of the principal forms of ■ a Funds Annual Survey of Liabilities return filed with the investment manager / adviser identified in question latter return. 2.3? A RIAIF or a QIAIF structured as a money market fund that meets the definition of a “monetary financial institution” Compensation paid to Irish managers and advisors (such as in the Regulation of the European Central Bank (EU) No management/advisory fees, as well as performance fees) of RIAIFs/ 883/2011 is also obliged to file statistical information on a QIAIFs is generally subject to corporation tax at the trading rate monthly and quarterly basis with the European Central Bank. (i.e. 12.5%).

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With regard to carried interest, aside from a regime introduced in the income and gains arising or accruing to the AIF are treated as 2009 for certain venture fund managers in respect of qualifying arising or accruing to its unitholders in proportion to the value of the venture capital funds (which must be structured as partnerships and units beneficially owned by them as if such income and gains did which are quite limited in their activities), Ireland does not have not pass through the hands of the CCF or ILP. Consequently, for tax specific legislation dealing with carried interest. Nevertheless, purposes, the profits that arise to this type of AIF are treated as being generally speaking it should be possible to structure funds such that profits that arise to the unitholders themselves. Currently, natural carried interest could be treated for Irish tax purposes as a capital persons cannot invest in a CCF without negatively affecting its Irish gains tax receipt subject to tax at the standard rate (currently 33%) in tax transparent status. This may change in the future. the hands of an individual manager. The recently introduced venture Irish Real Estate Funds fund managers regime (where applicable) reduces the capital gains tax rates even further to 15% (as opposed to 33%) for an individual In 2017, Ireland introduced a new withholding tax regime in respect Ireland and 12.5% (as opposed to an effective 33% rate) for a company. of certain Irish property-related distributions and redemptions made by Irish real estate funds (“IREFs”) to certain unit holders. An IREF is a non-UCITS authorised fund where (i) 25% or more of the market 6.3 Are there any establishment or transfer taxes levied value of its assets is derived from certain types of Irish real estate in connection with an investor’s participation in an related assets (“IREF Assets”), or (ii) it would be reasonable to Alternative Investment Fund or the transfer of the investor’s interest? consider that the fund’s main purpose (or one of its main purposes) was to acquire IREF Assets or carry on an IREF business (that is, activities involving IREF assets the profit or gains of which would, There are no such establishment taxes. Furthermore, there are no transfer taxes payable in Ireland on the issue, transfer, repurchase but for the general tax exemptions applied to funds, be within the or redemption of units in a RIAIF/QIAIF (aside for possibly units scope of Irish taxation). Where a fund is an umbrella fund, the new in an IREF, see question 6.4 below). Where any subscription for or rules will be applied at the sub-fund level. In summary, subject redemption of units is satisfied by thein specie transfer of securities, to certain exceptions, a 20% withholding tax will be imposed on property or other types of assets, Irish stamp duty may arise on the distributions and redemptions made out of IREF profits, which are transfer of such assets. essentially the accounting profits of the IREF with certain exclusions (e.g. distributions/dividends made by unquoted companies which derive the greater part of their value from Irish relevant assets). 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative Investment Funds? 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing RIAIFs/QIAIFs are not subject to any taxes on their income (profits) an Alternative Investment Fund? or gains arising on their underlying investments. No. Once a RIAIF/QIAIF has received its authorisation from the RIAIFs/QIAIFs (other than CCFs & ILPs) Central Bank and for so long as such authorisation remains in place, Non-Residents the taxation treatment detailed above applies. There are no Irish withholding taxes in respect of a distribution of payments by such AIFs to investors or in relation to any 6.6 What steps have been or are being taken to implement encashment, redemption, cancellation or transfer of units in respect the US Foreign Account and Tax Compliance Act of investors who are neither Irish-resident nor ordinarily resident 2010 (FATCA) and other similar information reporting in Ireland, provided the AIF has satisfied and availed of certain regimes such as the Common Reporting Standard? equivalent measures or the investors have provided the AIF with the appropriate relevant declaration of non-Irish residence. Foreign Account Tax Compliance Act (“FATCA”) – The Irish and Irish Residents US Governments signed a Model 1 intergovernmental agreement Exempt Investors (which includes pension funds) – Again, no Irish (“Irish IGA”) on 21 December 2012 and provisions were included withholding taxes apply in respect of a distribution of payments by in the Irish Finance Act 2013 for the implementation of the the AIF to such investors (which would include approved pension Irish IGA and also to permit regulations to be made by the Irish schemes, charities, other investment funds, etc.) or any encashment, Revenue Commissioners with regard to registration and reporting redemption, cancellation or transfer of units in respect of investors requirements arising from the Irish IGA. Subsequently, the Irish that have provided the AIF with the appropriate relevant declaration. Revenue Commissioners (in conjunction with the Department Non-Exempt Investors – If an investor is an Irish resident and not of Finance) issued Regulations S.I. No 292 of 2014 which were an exempt Irish investor, tax at the rate of 41% (25% where the effective from 1 July 2014. Supporting Guidance Notes (which unitholder is a company and an appropriate declaration is in place) is will be updated on an ad hoc basis) were first issued by the Irish required to be deducted by the AIF on distributions (where payments Revenue Commissioners on 1 October 2014 with the most recent are made annually or at more frequent intervals). Similarly, tax at version being issued in May 2016. RIAIFs/QIAIFs established the rate of 41% (25% where the unitholder is a company and an in Ireland will have to carry out due diligence to identify US appropriate declaration is in place) will have to be deducted by the investors and non-FATCA-compliant investors, and will then have AIF on any other distribution or gain arising to the investor on an to report information about such investors to the Irish Revenue encashment, redemption, etc. of units by an investor who is Irish- Commissioners. Compliant RIAIFs/QIAIFs will not be subject to, resident or an ordinary resident in Ireland. While this tax will be a nor will they have to operate, FATCA withholding taxes. tax liability of the AIF, it is effectively incurred by investors out of Intergovernmental Agreements – Aside from the Irish IGA, Ireland their investment proceeds. has not entered into any other IGAs. RIAIFs/QIAIFs (established as CCFs or ILPs) Common Reporting Standards (“CRS”) – As Ireland was one For Irish tax purposes, a CCF and an ILP (authorised on or after 13 of the early adopter countries, the legislation to implement February 2013) are treated as “tax transparent”, which means that the CRS in Ireland was introduced in the Finance Act 2014 by

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inserting Section 891F of the Taxes Consolidation Act 1997, and Regulations (Statutory Instrument 583 of 2015) came into effect on 6.9 Are there any other material tax issues for investors, 31 December 2015. The legislation to implement the Revised EU managers, advisers or AIFs? Directive on Administrative Cooperation in the Field of Taxation (DAC2 – which essentially imports the CRS into EU legislation) in Management fees are generally subject to VAT at the current rate Ireland was introduced in the Finance Act 2015 by inserting Section of 23%. However, under the harmonised VAT legislation, an 891G of the Taxes Consolidation Act 1997. Section 891F will not exemption applies to the management of investment funds as defined apply where Section 891G applies. RIAIFs/QIAIFs established in by the EU Member States which, in Ireland, includes all authorised Ireland will have to carry out due diligence to identify various non- investment funds. Therefore, the VAT exemptions are wide-ranging Irish investors and will then have to report information about such with regard to the provision of services to funds (for example, fund Ireland investors to the Irish Revenue Commissioners. administration, transfer agency, investment management, etc.). Organisation for Economic Co-operation and Development RIAIFs/QIAIFs must adhere to the relevant rules on due diligence (“OECD”) – Base Erosion and Profit-Shifting (“BEPS”) project – and information reporting under the CRS and FATCA, for instance. see question 6.7 below. Furthermore, RIAIFs/QIAIFs will also need to monitor the OECD BEPS project and its possible effects on their investment structures (see question 6.7 above). 6.7 What steps are being taken to implement the OECD’s Action Plan on Base Erosion and Profit-Shifting A tax concern which may arise is whether Irish AIFs managed by (BEPS), in particular Actions 6 and 7, insofar as they a non-Irish AIFMs lose their Irish tax residency due to the AIFM affect Alternative Investment Funds’ operations? being established abroad and are thus taxed according to the laws of the seat of the AIFM. This, however, depends on the content of the The Irish Government has been very active in the area of BEPS, laws of the jurisdiction of the AIFM. On the other hand, Irish tax having launched a consultation in May 2014 and published a detailed law has provided that a non-Irish AIFM will not be liable to tax in paper in 2014 (“OECD BASE EROSION AND PROFIT SHIFTING Ireland by reason only of having an Irish AIFM. PROJECT IN AN IRISH CONTEXT – Part of the Economic Impact Assessment of Ireland’s Corporation Tax Policy”), where they 6.10 Are there any meaningful tax changes anticipated in explored the potential impacts of this project that is currently being the coming 12 months? undertaken by the OECD. Following the publication of the OECD’s final BEPS reports on 5 No, but continual monitoring of BEPS and BEPS-related legislation October 2015, Ireland introduced Country-by-Country Reporting is a necessity. legislation in the Finance Act 2015, followed by accompanying regulations published on 23 December 2015. The legislation applies for accounting periods commencing on or after 1 January 2016. 7 Reforms The Irish Government is in ongoing discussions with various interested parties (including the Irish Funds Industry) in relation 7.1 What reforms (if any) are proposed? to the various “Actions” provided for under BEPS (to include Actions 6 and 7). Although it is unclear how Ireland will react to In July 2017, the Irish Government approved the drafting of the BEPS, asset managers and RIAIFs/QIAIFs should bear in mind the Investment Limited Partnership (Amendment) Bill 2017. potential impact of these suggested Actions on their structures. The ILP has become a favoured legal vehicle to international asset managers for the establishment of private equity funds. The 6.8 Are there any tax-advantaged asset classes or regulated ILP structure has been available in Ireland since the structures available? How widely are they deployed? Investment Limited Partnerships Act 1994; however, the current legislation is not considered to be up to date with the standards of Whether a tax advantage exists for a particular asset class or global investment managers. structure depends on numerous factors, some of which will be non- The Amendment Bill is aimed at enhancing the existing regime to Irish factors and so in order to obtain the optimum structure for a bring it into line with international standards and promote Ireland particular asset type, counsel advices should be sought on a case-by- as a favoured jurisdiction for the establishment of ILPs and private case basis. That said, there are a few strategies/structures available equity funds. It will also bring the legislation up to date with the in Ireland that may assist in obtaining an optimum result. requirements of the AIFM Directive.

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Brian Kelliher Sean Murray Dillon Eustace Dillon Eustace 33 Sir John Rogerson’s Quay 33 Sir John Rogerson’s Quay Dublin 2 Dublin 2 Ireland Ireland

Tel: +353 1 673 1721 Tel: +353 1 673 1764 Email: [email protected] Email: [email protected] URL: www.dilloneustace.ie URL: www.dilloneustace.ie Ireland Brian is a partner in Dillon Eustace Asset Management and Investment Sean is a tax partner in Dillon Eustace and advises on financial funds practice. He is a highly experienced adviser on Irish financial services tax matters, including investment management, structured services law focusing on asset management and investment funds, finance, real estate, banking, capital markets and private equity. His derivatives, foreign fund registrations, investment services, and clients include many of the world’s leading financial institutions and regulatory and compliance. asset management companies. His investment funds practice covers all fund product types – from Sean is a Fellow of the Institute of Chartered Accountants in Ireland, traditional UCITS, ETFs, money market funds and alternative UCITS an Associate of the Irish Tax Institute, a member of the Irish Funds to the full spectrum of Alternative Investment Funds (AIFs). He advises Domestic Tax Committee and a member of the Irish Debt Securities on product design, authorisation, contract negotiation, marketing, Association Tax Committee. migration and all applicable regulatory and compliance matters. Brian advises on Irish-regulated investment services, including establishment and authorisation and ongoing regulatory and compliance matters. His clients include leading worldwide asset managers and credit institutions, UCITS, UCITS management companies, AIFs, AIFMs, ETFs, administrators, depositories, investment managers, investment advisers, brokers/intermediaries and other financial services firms.

Dillon Eustace is one of Ireland’s leading law firms, focusing on financial services, banking and capital markets, corporate and M&A, litigation and dispute resolution, real estate and taxation. Headquartered in Dublin, Ireland, the firm’s international practice has seen it establish offices in Tokyo (2000), New York (2009) and Cayman Islands (2012) where the firm advises on Cayman law matters. In tandem with Ireland’s development as a leading international financial services centre, Dillon Eustace has developed a dynamic team of lawyers representing international and domestic asset managers, investment fund promoters, insurers, banks, corporates, TPAs and custodians, prime brokers, government and supranational bodies, as well as newspapers, aviation and maritime industry participants and real estate investors and developers. Dillon Eustace has been the leading Irish legal advisor to Irish domiciled funds for over 20 years as confirmed by Monterey. The Dillon Eustace financial services team is recognised internationally by legal directories IFLR 1000, The Legal 500 and Chambers as a top-tier firm in asset management and investment funds.

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Italy Francesco Di Carlo

5Lex Camilla Fornasaro

1 Regulatory Framework 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body? 1.1 What legislation governs the establishment and operation of Alternative Investment Funds? As a preliminary remark one must note that Italian AIFs are established as either: The general rules governing the activity of Alternative Investment Funds (“AIF”) and Alternative Investment Fund Managers ■ a contractual fund: which comprises a separate pool of assets managed by an AIFM; (“AIFM”s) are provided by: ■ a corporate fund vehicle: a legal separate entity that, in ■ the Italian Consolidated Financial Law (“CFL”), Legislative accordance with the Italian regulatory framework, may be Decree of 24 February 1998, no. 58; established in the form of a: ■ the Decree of the Minister of the Economy and Finance of (a) variable capital investment company (“SICAV”): open- 5 March 2015, no. 30 (Ministerial Decree no. 30/2015), ended UCI constituted in the form of a joint stock company Regulation implementing Article 39 of the CFL on the with variable capital with its registered office and general determination of the general criteria to be met by Italian management in Italy, with the exclusive purpose of the collective investment schemes; collective investment of the assets obtained by the offer of ■ the Bank of Italy’s Regulation on collective asset its own shares; or management of 19 January 2015, as amended by the Bank (b) fixed capital investment company (“SICAF”): closed- of Italy’s Measure of 23 December 2016 (Collective Asset ended UCI constituted in the form of a joint stock Management Regulation); company with fixed capital with its registered office and ■ Consob’s Regulation no. 11971 of 14 May 1999, implementing general management in Italy, with the exclusive purpose the provisions on issuers of Legislative Decree 58 of 24 of the collective investment of the assets obtained by the February 1998 (as lastly amended by Consob resolution no. offer of its own shares and other financial instruments of 20250 of 28 December 2018) (Issuer Regulation); and equity held by the same. ■ Bank of Italy and Consob Joint Regulation of 29 October Having clarified the above, one must note that: 2007, on the organisation and intermediary procedures ■ contractual funds rules or by-laws are subject to the approval providing investment services or collective investment procedure described hereunder under question 3.3; and management services (as lastly amended by the joint Bank of Italy/Consob act of 27 April 2017). ■ corporate fund vehicles (SICAVs/SICAFs) are subject, in addition to the approval procedure under question 3.3, to the authorisation procedure for the establishment of the relevant 1.2 Are managers or advisers to Alternative Investment corporate fund vehicle (please refer to the information Funds required to be licensed, authorised or provided under question 1.5 hereunder). regulated by a regulatory body?

1.4 Does the regulatory regime distinguish between The professional practice of collective asset management of AIFs open-ended and closed-ended Alternative Investment is reserved to Italian Asset Managers (Società di gestione del Funds (or otherwise differentiate between different risparmio (SGR), SICAV and SICAFs) and EU AIFMs. As for the types of funds or strategies (e.g. private equity v authorisation procedure of asset managers, please consider that a hedge)) and, if so, how? manager must be authorised as an AIFM in compliance with what is provided under the AIFMD (please refer to the information provided In accordance with Ministerial Decree no. 30/2015, the Italian under question 1.5 hereunder). regulatory framework provides for the establishment of open-ended As for the position of advisor, to be understood as an entity providing or closed-ended AIFs (such AIFs may be established as either advisory or management services (depending on the scope of the a contractual fund or as a corporate fund vehicle; please refer to Advisory Mandate), the same has to be licensed as either an entity question 1.3). authorised to perform advisory services or portfolio/collective asset Please consider that the incorporation/authorisation procedure management services (please refer to the information provided described under question 1.5 does not differentiate between closed- under question 1.7 regarding the delegation of AIFM functions). ended or open-ended AIFs.

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In addition, Ministerial Decree no. 30/2015 sets an additional type 1) Authorisation procedure – Self-managed SICAVs/SICAFs of fund, Italian Reserved AIFs: an AIF reserved to professional and sub-threshold AIFMs investors which may be set up as closed-ended or open-ended AIFs. Under Italian laws, the Bank of Italy, after consulting Consob, In particular, Article 14(2) Ministerial Decree no. 30/2015 provides authorises self-managed SICAVs/SICAFs and sub-threshold that Italian Reserved AIF’s rules or by-laws may provide for the AIFMs to provide collective asset management services, participation of non-professional investors (see question 3.6 below within 90 days from the date of receipt of the complete application, where the following conditions are fulfilled: for more details). (a) the legal form adopted is that of an Italian Joint Stock Furthermore, please consider that the category of closed-ended Italian Company (società per azioni – S.p.A.). Please note that the AIFs encompasses real-estate and credit funds. With regards to the establishment of the S.p.A. is made by way of execution Italy latter, it is necessary to specify that in accordance with the Italian legal of a deed of incorporation before an Italian notary framework (i.e. Article 4 (1) let. e) of Ministerial Decree no. 30/2015), public. The deed of incorporation (Atto Costitutivo) also the following funds fall within the scope of definition of ‘credit funds’ incorporates the by-laws (Statuto) of the company; relevant for the provisions under Article 46-ter of the CFL: (b) the registered office and the head office of the company ■ AIFs that directly provide loans out of the assets of the fund are in Italy; (‘direct lending funds’); and (c) the paid-up capital is not less than that established on a ■ AIFs, operating on the secondary credit market, by general basis by the Bank of Italy: investing in receivables or debt certificates (crediti e titoli di ■ for self-managed Italian AIFMS, €1 million (€500,000 rappresentativi di crediti), already existing and disbursed by for SGRs which intend to manage exclusively close- third parties. ended Reserved AIFs or for Reserved SICAFs); and In addition, and in compliance with EU rules implementing the ■ for sub-threshold AIFMs, €50,000; AIFMD, the Italian framework provides for the establishment of (d) the representatives of the company (board of directors, AIFs falling within the scope of: general manager, statutory auditors) fulfil the requirements ■ Regulation (EU) no. 345/2013 (EuVECA Regulation); (to be declined in terms of integrity, professionalism and independence) set by applicable laws (i.e. Article 13 of ■ Regulation (EU) no. 346/2013 (EuSEF Regulation); and the CFL). Responsibility for verifying the fulfilment of ■ Regulation (EU) no. 2015/760 (ELTIF Regulation). such requirements and the probative completeness of supporting documentation falls within the competence of the company’s Board of Directors. In such case, a 1.5 What does the authorisation process involve and how certified copy of the minutes of the Board’s meeting long does the process typically take? during which the integrity requirements have been verified shall be annexed to the application together with As anticipated under question 1.3, and recalling what is stated all the documentation grounding such evaluation; therein, corporate fund vehicles (SICAVs/SICAFs) are subject to (e) the qualified shareholders fulfil the requirements (to be the following authorisation procedure. On this point, one should declined in terms of integrity, competence and fairness) emphasise that the Italian regulatory framework allows, in addition and meet the criteria laid down by Article 14 of the CFL; to traditional self-managed funds (SICAVs/SICAFs): (f) the structure of the group of which the company is part is not prejudicial to the effective supervision of the entity; (a) Externally managed SICAVs/SICAFs: The difference and compared to the traditional ‘self-managed’ model, resides in the fact that the management of SICAVs/SICAFs’s (g) a programme of initial operations and a description of portfolio does not constitute a mere delegation of portfolio the organisational structure have been submitted together management services as provided by Article 78 and following with the instrument of incorporation and the articles of of Commission Delegated Regulation (EU) no. 231/2013 association. (Regulation no. 231/2013), but incorporates a true statutory Please note that the described authorisation procedure is designation. Indeed, SICAVs/SICAVs’s by-laws must entrust also applicable for the establishment of an Italian SGR the management of the entire (and not part of) their assets (società di gestione del risparmio). to an external manager. Such manager must be authorised 2) Authorisation procedure – Externally managed SICAVs/ to provide asset management services (i.e. an Italian SGR SICAFs (società di gestione del risparmio), an EU AIFM) and shall The Bank of Italy, after consultation with Consob, authorises comply with capital, organisational and control requirements the establishment of externally managed SICAVs and SICAFs ordinarily set for self-managed asset managers; within 90 days. The authorisation shall be granted where the (b) Sub-threshold SICAVs/SICAFs (subthreshold AIFMs): conditions under points (a), (b), (d) and (e) of paragraph 1) Provisions on sub-threshold AIFMs apply to asset managers are fulfilled and: which exclusively carry out collective asset management (a) the paid-up capital is not less than €50,000; services with regard to Reserved AIFs having AUM below the following thresholds: (b) the articles of association contemplate: ■ below €100 million, including any assets acquired through ■ for SICAVs, the exclusive purpose is collective the use of leverage; and investment of the capital obtained by the offer of its own shares to the public; for SICAFs, the exclusive ■ below €500 million where the relevant portfolio of AIFs purpose is the collective investment of the capital are unleveraged and have no redemption rights exercisable obtained by the offer to the public of its own shares during a period of five years following the day of initial and of the financial instruments of its equity holdings investment in each AIF. indicated in the said articles; and Sub-threshold AIFMs may also be established as AIFs falling within ■ the entire assets are entrusted to an external asset the scope of Regulations (EU) no. 345/2013 (EuVECA Regulation) manager and the designated management company is and no. 346/2013 (EuSEF Regulation). identified; Below is a summary of the main peculiarities of the relevant (c) the stipulation of an agreement between the manager, authorisation procedures: if other than an SGR, and the custodian, which ensures

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this latter access to the information necessary for the ■ investment firms authorised under Directive 2014/65/UE performance of its duties, as contemplated by Article 41- (“MIFID II”) to perform portfolio management; bis (2-bis) of the CFL. ■ credit institutions authorised under Directive 2006/48/EC As for both the authorisation procedures under the previous having the authorisation to perform portfolio management paragraphs, please note that the 90-day term is not mandatory and under MiFID II; that Italian Authorities, during the procedure, may request further ■ external AIFMs authorised under AIFMD; and information to the applicant company, at any time, thus extending ■ third country entities authorised or registered for the purpose the duration of the procedure. In our experience, the Bank of Italy of asset management and effectively supervised by a authorises the applicant company after five/six months from the competent authority in those countries (if certain conditions

Italy filing of the application. are met, please refer to Article 78 (2) of Regulation no. 231/2013). The authorisation shall be denied where verification of the conditions Please consider that the provision under Section 8 of Chapter III indicated above shows that sound and prudent management is not of Regulation no. 231/2013 applies to all delegations of AIFM ensured. functions (in any case, the AIFM shall supervise the outsourced functions, the relevant outsourcing agreement shall comply with the 1.6 Are there local residence or other local qualification requirements set by the aforesaid Regulation and outsources shall be requirements? subject to the Italian regulatory Authorities supervision). In accordance with Article 47 of the CFL, the custodian mandate Considering the applicability of the European passport provided may be conferred on authorised banks in Italy, Italian branches of EU by the AIFMD, EU AIFMs may perform the same collective asset banks, investment companies and Italian branches of EU investment management services in Italy for which they have been authorised in companies. The custodian fulfils the obligations of custody of the their home member state of origin on a freedom to provide services entrusted financial instruments, verification of ownership, and also basis or by way of establishment (see Article 41ter of the CFL). the obligation to keep registers of other assets. Unless entrusted In this regard, EU AIFMs which intend to manage Italian AIFs: to other subjects, it also holds the available liquidity of the AIFs. The custodian may carry out other activities for the asset manager ■ must be authorised in the home state for the management of funds with the same characteristics as those they intend to set without prejudice to the application of the provisions on outsourcing up and manage in Italy; and pursuant to Regulation (EU) no. 231/2013. ■ must have stipulated an agreement with the custodian which Italian Asset Managers are subject to the regulatory provisions ensures the latter access to the information necessary for the regarding the statutory auditing of accounts established for ‘entities performance of its duties. subject to an interim regime’ (enti sottoposti a regime intermedio) pursuant to Article 19-bis of Legislative Decree no. 39 of 27 January In accordance with the AIFMD, EU AIFMs shall follow the relevant 2010. In particular, pursuant to such rules, statutory auditing of passporting procedure, according to which the Bank of Italy must accounts may not be entrusted to the board of statutory auditors and be notified by the competent authority of the EU Member State must be assigned to a statutory auditor or auditing firm enrolled in of the EU AIFM (see Title VI, Chapter IV, of the Collective Asset the dedicated register. Management Regulation). The statutory audit assignment lasts nine years for audit firms and As for non-EU asset managers, please consider that Italian legislation seven for statutory auditors and may not be renewed or reissued substantially forecloses the ability of non-EEA AIFMs to operate in unless at least four years have elapsed since the date of termination Italy (the regime is pending the entry into force of Commission’s of the previous assignment. Delegated Act referred to under Article 67 (6) of the AIFMD, which will establish the passport for non-EEA AIFMs, please refer to the information provided under question 3.4 hereunder). 1.8 What rules apply to foreign managers or advisers wishing to manage, advise, or otherwise operate As for the management of Italian AIFs offered to retail investors by funds domiciled in your jurisdiction? EU AIFMs, please consider that Italian Authorities may condition such activity to a condition of reciprocity. Notwithstanding the condition of reciprocity informally requested For the sake of completeness, Italian laws do not set “residence” by Italian Authorities as described under question 1.6, as a general requirements on the asset manager’s personnel. remark please note that in compliance with the principle of home country control, EU AIFMs are subject to the national rules implementing the AIFMD of their home Member State of origin. 1.7 What service providers are required? As for the conditions for managing Italian AIFs, if the EU AIFM intends to manage an Italian AIF the same shall follow the relevant Italian AIFs must have: passporting procedure implementing Article 33 of the AIFMD ■ an AIFM; (please refer to Chapter IV, Title VI of the Collective Asset ■ a custodian authorised in the country of origin of the UCI to Management Regulation). In addition, the EU AIFM shall enter undertake mandate as custodian; and into an agreement with the depositary of the AIF that it intends to ■ a statutory auditor or auditing firm enrolled in the dedicated manage in Italy with the content foreseen by the Article 83 of the register. Delegated Regulation (EU) no. 231/2013. As for the position of the AIFM, and notwithstanding the condition In the management of an Italian AIF, the EU AIFM shall comply of reciprocity informally requested by Italian Authorities, please with the provisions set by: consider that the same may – in compliance with what is provided ■ Article 6 (1) (c) of the CFL, relating to the rules applicable to under Article 75 and following of Regulation no. 231/2013 – UCIs and related implementing measures; delegate portfolio or risk management to: ■ Part II, Title III, Chapter II, of the CFL, concerning the ■ management companies authorised under Directive 2009/65/ regulation of investment funds and related implementing EC; measures; and

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■ Part IV, Title II, Sections II and III, of the CFL, relating to the units/shares may be suspended in the interest of the investors. In the public offering of the EU AIFs and the related implementing case of redemptions, these events are generally referred to situations measures. in which the reimbursement requests (for their size) would require The Bank of Italy and Consob ensure compliance with these disinvestments that, taking into account the market situation, could provisions. It is left to the supervisory authority of the home cause prejudice to the investors’ interests. Member State of origin the assessment of the adequacy of the Conversely, for closed-end funds (which by definition provide for organisational measures adopted by the EU AIFM. limits on divestments), the fund rules/by-laws may provide, before the term of the fund: 1.9 What co-operation or information sharing agreements (a) partial pro-quota redemptions against disinvestments; and Italy have been entered into with other governments or (b) early redemptions against new issuances of units/shares, regulators? specifying the criteria on the basis of which the requests are satisfied in case of redemptions exceeding new subscriptions. There are no co-operation or information sharing agreements In addition, please consider that the fund rules/by-laws must provide specifically related to the AIFMD. the timeframes in which the rights under a) and b) may be exercised As for other legal frameworks (MiFID, CRD IV/CRR), the list of by the investors. agreements and cooperation actions entered into by Italian Authorities A case-by-case assessment must be carried out with regards to soft with EU and non-EU Supervisory Authorities is available on: and hard lock-ups for open-ended funds. (a) Consob’s website (http://www.consob.it/web/area-pubblica/ cooperazione-internazionale). 2.5 Are there any legislative restrictions on transfers of (b) Bank of Italy’s website (http://www.bancaditalia.it/compiti/ investors’ interests in Alternative Investment Funds? sispaga-mercati/accordi-cooperazione/index.html).

Under Italian laws Reserved Italian AIFs may be marketed to 2 Fund Structures professional investors within the meaning of Annex II of Directive 2014/65/EU (“MiFID II”) and to the categories of non-professional clients identified by Article 14 of Ministerial Decree no. 30/2015 2.1 What are the principal legal structures used for (please refer to the information provided under question 3.6). Alternative Investment Funds? Consequently, investor’s interest may be transferred only in between the aforementioned subjects (professional investors and non- Please refer to the answers provided under question 1.3 and 1.4. professional clients identified by Ministerial Decree no. 30/2015. Further limitations could be established in the funds rules or by- 2.2 Please describe the limited liability of investors. laws.

In compliance with what is provided under Article 36 (4) of the 2.6 Are there any other limitations on a manager’s ability CFL, each mutual investment fund or each sub-fund represents an to manage its funds (e.g. diversification requirements, independent capital, separate to all effects from that of the asset asset stripping rules)? management company and from that of each investor, as well as from any other assets managed by the same company; with regard to the Notwithstanding what is provided under the European framework obligations undertaken on behalf of the fund, the asset management as for asset composition of AIFs compliant, respectively, with the company answers only with the assets of that fund. Claims on such EuVECA, EuSEF and ELTIF Regulations, please consider that assets on the part of the creditors of the asset management company Ministerial Decree no. 30/2015 provides that: or in the interests of the same, or on the part of the creditors of the custodian or sub-custodian or in the interests of the same are not ■ Open-ended Italian AIFs: may invest their assets, subject to the prudential provisions for risk containment and fractioning admitted. Claims of creditors of a single investor are admitted only by the Bank of Italy, in: on the units held by said investor. Under no circumstances may the ■ financial instruments traded on a regulated market; asset management company use the assets of the funds managed in its own interests or those of third parties. ■ unlisted financial instruments for a maximum of 20% of their assets (units/shares of unlisted open-ended UCITS are not calculated in the 20% threshold); and 2.3 What are the principal legal structures used for ■ bank deposits of money. managers and advisers of Alternative Investment Funds? ■ Closed-ended Italian AIFs: may invest their assets (in addition to the eligible assets for open-ended Italian AIFs) in: An Italian AIFM must be incorporated in the form of a joint stock ■ unlisted financial instruments (the 20% threshold does not apply); company (società per azioni, S.p.A.). Please consider that Italian investment companies (SIMs, which could act as advisors) must be ■ real estate property, real estate rights, including those also incorporated as a joint stock company. derived from leasing real estate contracts with translatable nature and from concessionary relationships, and shareholdings in real estate companies, units/shares of 2.4 Are there any limits on the manager’s ability to other real estate AIFs, including foreign real-estate AIFs; restrict redemptions in open-ended funds or transfers ■ receivables and debt securities, including engaging in direct in open-ended or closed-ended funds? lending activities towards commercial borrowers; and ■ other goods for which there is a market, having a value As for open-ended funds, the fund rules or by-laws must indicate the which may be determined with a periodicity of at least six cases, of an exceptional nature, in which redemptions or issuance of months.

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In addition, it should be noted that such rules are further declined As for legal documents, please consider the following approval by the provisions set by Chapter III of Title V of Collective Asset procedure: Management Regulation which provide for criteria and prohibitions Fund rules of AIFs (except Italian Reserved AIFs, as defined under on investment activity, risk containment and fractioning/ question 1.4 herein) are subject to an approval procedure to be diversification. carried out before the Bank of Italy. In particular, the establishment As for Italian Reserved AIFs, Italian laws place no restriction on of new funds and the approval of their rules/by-laws are within the Italian Reserved AIF’s investments. The only restrictions are those competence of the administrative body of the Italian Asset Manager. imposed in the fund rules or by-laws. Once internally approved, the fund rules are transmitted to the Bank With regards to asset stripping, please consider that Italian legislation of Italy for approval. This procedure can follow two main schemes: Italy (Article 28-quaterdecies, “Ban on the unbundling of assets” of (1) ‘In general’ approval (approvazione in via generale): A Consob’s Issuer Regulation) is aligned to the provision under peculiarity of the domestic market. The following fund rules Article 30 of the AIFMD; hence an AIFM that acquires, individually are not subject to specific approval by the Bank of Italy as or jointly, control of a non-listed company or of an issuer, in they fall within the cases where approval is generally granted: the following 24 months, as regards distribution transactions, (a) open-ended (un-reserved) AIFs rules drawn up in including the payment of dividends and interest to shareholders, or accordance with the simplified regulation scheme (see transactions for the reduction of capital, the redemption of shares Title V, Chapter I, Section II, paragraph 1 of the Collective Asset Management Regulation); and or shareholdings, or the acquisition of own shares by the investee company: (b) fund rules that differ from rules of other existing funds set-up by the same asset manager only for aspects relating ■ shall refrain from facilitating, supporting or initiating them; to subject, investment policy and expenditure regime, ■ shall not express a favourable vote on the same on behalf of in the understanding that the general criteria and rules the AIF in the investee company; and established by the Bank of Italy for such matters are ■ shall strive to prevent the same. observed (see Title V, Chapter I, Section II, paragraphs 3.1 and 3.3 of the Collective Asset Management Regulation). Asset managers wishing to make use of this simplified 3 Marketing procedure shall communicate to the Bank of Italy (in December of each year) the characteristics of the funds they intend to set up in the following year, thereby indicating any 3.1 What legislation governs the production and offering impact on the organisational structure. The asset manager may of marketing materials? generally approve during the year funds with characteristics other than those indicated in the annual communication. In Please refer to question 1.1. such case, the same must inform the Bank of Italy in advance, supplementing the annual communication already sent. (2) Ordinary approval: The Bank of Italy must approve fund rules 3.2 What are the key content requirements for marketing of AIFs other than those of Italian Reserved AIFs (as well as materials, whether due to legal requirements or related amendments) where the fund rules do not meet the customary practice? requirements set out above. This approval procedure requires 60 days (30 days for Italian AIFs managed by an EU AIFM). As a general remark, please consider that marketing materials must In addition, as for the amendments to the by-laws of SICAVs/SICAFs be accurate, clear and not misleading. To this end, we emphasise (except Italian Reserved AIFs, as defined under question 1.4 herein) that Consob’s Communication no. DIN/1031371 of 26 April 2001 please consider that, in compliance with what is provided under Article provides for guidelines on the drafting of advertisements relating to 35-septies of the CFL, the Bank of Italy approves amendments to by- Italian and foreign UCIs. laws of SICAVs/SICAFs (the approval procedure requires 90 days). In addition, and for the sake of completeness, please note that in 3.3 Do the marketing or legal documents need to be public offerings, fund prospectus rules apply. registered with or approved by the local regulator?

As mentioned under question 3.2 above, marketing materials do not 3.4 What restrictions are there on marketing Alternative require prior approval by Italian Authorities. Investment Funds? As for public offerings, please consider that Article 34-decies of Please consider that the AIFMD disciplines on the marketing of: (i) Consob’s Issuer Regulation states that before publication of the non-EU AIFs by an EU AIFM/non-EU AIFM, and (ii) EU AIFs by a prospectuses, the bidder, the issuer and the party responsible for the non-EU AIFM have not been implemented in the Italian regulatory placement may proceed, directly or indirectly, with the divulgation framework. of information, the performance of market surveys and the collation of purchase intentions pertaining to the public offering, provided Legislative Decree no. 44/2014 (the Decree), introduced a that: transitional period with respect to laws regulating the marketing (a) the information divulged is consistent with that contained in of non-EU AIFs and non-EU AIFMs operativity in Italy, which the prospectuses; is pending the entry into force of a delegated act of the European Commission referred to in Article 67(6) of the AIFMD, which will (b) the related documentation is transmitted to Consob at the same time as its divulgation; establish the passport for non-EU AIFs and non-EU AIFMs. (c) express reference is made to the circumstance that the In this regard, and notwithstanding the possibility of subscription prospectuses will be published and to the location where the of units/shares under a reverse solicitation scenario, it is worth public can procure a copy of the same; and noting that non-EU AIFs and non-EU AIFMs operativity in Italy is (d) it is stated that the purchase intentions collated do not substantially foreclosed, pending the entry into force of the aforesaid represent purchase proposals. Commission’s Delegated Act.

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Finally, one should emphasise that AIFs qualify as complex products the Italian legal regulatory framework provides for the following and hence the distribution activity is subject to additional rules/ categories of clients: measures prescribed by Consob’s Communication no. 0097996 (a) professional clients (Annex II, Part I of MiFID II – categories of 22 December 2014 (e.g. informative obligations, remuneration of client who are considered to be professionals); requirements, and specific suitability assessment). (b) opted-up professional clients (Annex II, Part II of MiFID II – Please also consider the answer to question 3.5 below. clients who may be treated as professionals on request); and (c) retail clients. 3.5 Can Alternative Investment Funds be marketed to Notwithstanding the above, Ministerial Decree no. 30/2015 retail investors? provides that Italian Reserved AIF’s rules or by-laws may provide Italy for the participation of the following non-professional investors (i.e. EU AIFs can be marketed in Italy to professional investors in retail clients): accordance with the passporting procedure provided by Article (a) non-professional investors subscribing units/shares of the 32 of the AIFMD. Please consider that the passporting procedure relevant AIF for a total amount of not less than €500,000 provided by the AIFMD may be followed for marketing to: (Article 14(2) of Ministerial Decree no. 30/2015); and ■ professional investors (as defined by Annex II of Directive (b) members of the administrative body and employees of the 2014/65/EU (“MiFID II”); and asset manager subscribing shares/units of Italian Reserved ■ to non-professional investors included among the categories Italian AIFs managed by them, for an amount below the of investors to which Italian Reserved AIFs can be marketed €500,000 threshold (i.e. Article 14(4) Ministerial Decree no. (see question 3.6). 30/2015). Notwithstanding what is provided under question 3.4 regarding the In addition, in accordance with Article 14(3) of Ministerial Decree complexity of AIFs (and relevant implications), please consider that no. 30/2015, Italian Reserved Real-Estate AIFs can be marketed when an EU AIFM intends to market its AIFs to retail investors, to public entities that do not meet the requirements to be classified in addition to the passporting procedure implementing Article 32 as public professional clients under Ministerial Decree no. 236 of of the AIFMD, the EU AIFM shall directly apply for authorisation 11 November 2011, where their participation estate is effected before Consob, thereby indicating the following: through the direct granting of real-estate property and rights, (a) the applicant’s company name, registered head office and the including concession relationships, for value enhancement of public general management; assets pursuant to Article 33 of Decree Law no. 98 of 6 July 2011, (b) the name of the AIF or the sub-fund, the units of shares of converted into Law no. 111 of 15 July 2011. which are to be sold in Italy; (c) the name of the subject appointed for the payments, the 3.7 Are there additional restrictions on marketing to subject appointed to place the units or shares in Italy and public bodies such as government pension funds? of the subject, if other than the subject appointed for the payments, who deals with the offer in Italy; (d) the full details and legal qualification of the person who Notwithstanding what provided under question 3.6 in relation to underwrites the units or shares; and Reserved Real Estate AIFs, Italian laws and regulations do not impose further restrictions. (e) the list of the attached documents. As for the documentation requested under (e) above, please note that the document set slight changes in relation to the nature of the 3.8 Are there any restrictions on the use of intermediaries relevant AIF (closed-ended versus open-ended AIF) and that the to assist in the fundraising process? relevant documentation, if drafted in a foreign language, shall be translated in Italian and shall be filed together with a certification of Italian laws and regulations do not impose restriction on the use conformity to the original issued by the AIFM’s legal representative. of intermediaries for marketing the shares/units of AIFs. Please Consob, in accordance with the Bank of Italy, authorises the note that such intermediaries require a licence/authorisation to marketing if certain conditions are met within: conduct marketing of the shares/units of the funds. In particular, intermediaries must be authorised to perform the investment service ■ 60 days for open-ended AIFs, following the filing of the authorisation application. of placing financial instruments without a firm commitment basis under Article 1 (5) lett. c-bis of the CFL in order to market the unit/ ■ 20 days for closed-ended AIFs, following the filing of the authorisation application. shares of the AIF in the Italian territory. For the sake of completeness, one must additionally emphasise that Consob seems to have assumed a stricter approach with respect to 3.9 Are there any restrictions on the participation in marketing to retail clients. In particular, as a result of the practices Alternative Investment Funds by particular types of undertaken by other EU supervisory authorities, the Authority could investors, such as financial institutions (whether as subject marketing to retail clients to a condition of reciprocity. In sponsors or investors)? addition, it is worth noting that Article 44 of the CFL (marketing of non-reserved AIFs) states that shares/units of the AIF have to be Notwithstanding sectoral rules with regards to the acquisition and actually sold to retail investors in the home member state of origin holding of participations in both the financial and non-financial in order to be marketed to retail investors in Italy. sector, Italian laws do not set specific restrictions on the participation by particular types of investors, such as financial institutions.

3.6 What qualification requirements must be carried out In any case, investment limits regarding direct and indirect holdings in relation to prospective investors? imposed by banking/insurance/financial sectoral rules shall apply (e.g. Directive 2009/138/EC (“Solvency II” applies to investments The implementation of the AIFMD did not introduce a specific in funds by insurance companies)). category of perspective investors AIFs can be marketed to; thereby

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■ periodically (in a period at least equal to the issuance of units/ 4 Investments shares), the manager has to draft a report of the NAV of each fund and its units/shares. 4.1 Are there any restrictions on the types of activities Additional rules are set with regards to real-estate AIFs. that can be performed by Alternative Investment Funds? 5.2 What are the reporting requirements in relation to Alternative Investment Funds or their managers? Please refer to question 2.6. National implementing laws of the AIFMD require AIFMs to Italy 4.2 Are there any limitations on the types of investments comply with a range of detailed regulatory reporting obligations. that can be included in an Alternative Investment More specifically, Italian AIFMs shall, inter alia, provide to: Fund’s portfolio whether for diversification reasons or ■ Consob, the reporting obligations set by Consob’s Resolution otherwise? 17297 of 28 April 2010, provisions relating to authorised intermediaries’ requirements on the communication of In addition to what is provided under question 2.6, please consider data and information and the transmission of records and that Chapter III of Title V of Collective Asset Management documents; and Regulation sets, for non-reserved UCIs, criteria and prohibitions on ■ the Bank of Italy, the communications and reporting investment activity, risk containment and fractioning/diversification. obligations provided by Section II and III of Chapter III of Further on, for Italian Reserved AIFs, the Bank of Italy may provide Title IV of the Collective Asset Management Regulation. for the application of leverage limits and prudential rules to ensure the stability and integrity of the financial market. 5.3 Is the use of side letters restricted?

4.3 Are there any restrictions on borrowing by the The use of side letters is not expressly dealt with by Italian laws. Alternative Investment Fund? On this point, please consider that Article 12 (1) (f) of the AIFMD, as implemented by Article 35-decies of the CFL, states the obligation For open-ended AIFs borrowing is restricted to short-term credit to treat all investors fairly and to not give preferential treatment (maximum six months) up to 10% of the NAV; the borrowing must to any investor. In the case of Italian reserved AIFs, preferential be aimed at facing, in relation to the investment or disinvestment treatment to one or more investors or investor categories is allowed needs of the fund’s assets, temporary mismatches in the management insofar as it is disclosed in the relevant AIF’s rules or by-laws. of the treasury. Please consider that even before the entry into force of the AIFMD, Italian Authorities have adopted a conservative approach aimed at Closed-ended AIFs may borrow up to 10% of the NAV (for credit avoiding discrimination between investors. funds the limit is brought up to 30% of the NAV); borrowing is not limited to short-term credit and is not (necessarily) aimed at facing temporary mismatches in treasury management. 6 Taxation The borrowing for Italian reserved AIFs is generally not restricted but the fund rules/by-laws will have to set a maximum level of 6.1 What is the tax treatment of the principal forms of leverage consistent and appropriate with the fund’s characteristics Alternative Investment Funds identified in question and investment strategies. As anticipated under question 4.2, the 2.1? Bank of Italy may restrict the level of the fund’s leverage for the stability and integrity of the financial market. Domestic Alternative Investment Funds (other than real estate funds) are subject to the same tax regime set forth for any other 5 Disclosure of Information type of investment fund, regardless of whether they are established under the legal form of “fund” or under the form of “closed- ended investment joint-stock company” (“SICAF”). Under article 5.1 What public disclosure must the Alternative 73(5-quinquies) of Presidential Decree 917/1986 and Article 3(2) Investment Fund or its manager make? of Legislative Decree 446/1997, alternative investment funds are neither subject to corporate income tax nor to regional business tax. In accordance with Article 3 of Ministerial Decree no. 30/2015, fund In addition, most of the profits realised by the fund are not subject accounts are maintained by the Italian AIFMs. For each fund managed to any Italian withholding tax, with certain exceptions, amongst (in addition to the ordinary accounting obligations), the AIFM must: which, for instance: the 26% withholding tax on income from “atypical” securities (i.e. securities that neither qualify as “shares” ■ keep day-to-day accounts for the fund, including details of or “securities similar to shares” nor as “bonds” or “securities similar portfolio acquisitions and sales, and all issues and redemption to bonds” for Italian income tax purposes); the 26% withholding of fund units; tax on income from foreign bank accounts, deposits and certificates ■ within six months from the end of each financial year (or in of deposit; and the 26% withholding tax on income from banker the shortest period in which proceeds are distributed), the acceptances (“accettazioni bancarie”). manager has to draft the annual investment management report, and the company’s board of directors has to prepare a report on the management of the activity performed; 6.2 What is the tax treatment of the principal forms of ■ within two months from the end of each semester, the investment manager / adviser identified in question manager has to draft a report on the management activity 2.3? carried out during the semester; and In relation to carried interest schemes, Article 60 of Law Decree no. 50 of 24 April 2017 has recently provided a new legislation

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according to which, subject to certain conditions, the carried interest If the relevant unitholders qualify as individuals carrying out embedded into units of undertakings for collective investments commercial activities for units held as business assets, the above- (“UCIs”) qualifies by operation of law as financial income rather mentioned 26% withholding tax is applied as an account income tax than income from employment. In particular, the following and the proceeds arising from the investment in the fund must be conditions need to be met: included in the investor’s relevant annual income tax return and are (i) the commitment of all the relevant managers of the Fund must therefore subject to general Italian income taxation. Otherwise, if be at least equal to 1% of the overall investments actually the individual does not act in the context of a business activity, the made by the Fund; 26% withholding tax applies as a final withholding tax. (ii) payment of the carried interest shall only be made once Distributions of amounts paid from capital contribution are not the other investors have received sums at least equal to the subject to any income taxation at the level of the investor but Italy overall investment plus a pre-determined return (the “hurdle reduce the tax basis of the units for a corresponding amount. The rate”) to be set in the Fund’s regulations; and relevant management company of the distributing fund should (iii) the units, shares or financial instruments must be held by the inform the investor (as well as intermediaries with whom the units manager (or, in case of demise, by the heirs) for a minimum period of at least five years or, if earlier, until the change of are deposited) about the tax nature of the amount being distributed. control or the substitution of the management company. In such respect, the Italian tax administration clarified that as to the tax qualification of the distributed amount, reference shall be If the relevant conditions are not met, the tax qualification of the made to the qualification given by the management company under carried interest is subject to interpretation. Based on the clarifications a regulatory perspective: accordingly, there is no presumption provided by Italian tax authorities the following elements must then according to which profits are deemed firstly distributed. be taken into account to determine whether the relevant arrangement is capable of generating financial income rather than income from With regards to non-resident investors (that do not act through a employment: (i) the magnitude of the investment is significant permanent establishment in Italy to which the units are effectively enough, also in an absolute amount, to align the interest of the connected), the proceeds distributed to them by an Italian investment managers to those of the other shareholders and to determine for the fund (and those included in the positive difference between the manager an actual exposure to the risk of a loss; (ii) the absence of redemption, liquidation and transfer value of the fund’s units and any agreement aiming at neutralising the risk of a loss such as put their weighted average subscription or acquisition price) are subject options at cost price; (iii) the absence of any leavership clause; (iv) to a 26% final withholding tax. However, no withholding taxis the compensation of the manager is adequate (without considering applicable provided that the investor: the carried interest); and (v) the units or shares entitling to the ■ is the beneficial owner of the proceeds; and carried interest return are also offered to third parties. ■ is resident, for income tax purposes, in a “white list” state. Finally, distributions of profits to Italian pension fund investors 6.3 Are there any establishment or transfer taxes levied made by Italian Alternative Investment Funds to Italian pension in connection with an investor’s participation in an funds are included in the results of the portfolio ordinarily subject Alternative Investment Fund or the transfer of the to the 20% substitutive tax regime. Distributions are made to UE investor’s interest? pension. No establishment or transfer taxes apply in Italy. 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing 6.4 What is the tax treatment of (a) resident, (b) non- an Alternative Investment Fund? resident, and (c) pension fund investors in Alternative Investment Funds? In principle a tax ruling is not required prior to establish an Alternative Investment Fund. It might be advisable to request for As for Resident investors, according to provisions set forth by Article a tax ruling only in case there are specific elements of uncertainty 26-quinquies of Presidential Decree 600/1973, a 26% withholding regarding the application of tax provisions to the relevant case. tax is applied on (i) the proceeds distributed by the fund and (ii) the proceeds included in the positive difference between the redemption, liquidation and transfer value of the fund’s units and their average 6.6 What steps have been or are being taken to implement subscription or acquisition price. The proceeds arising from the the US Foreign Account and Tax Compliance Act investment of the fund in bonds issued by the Republic of Italy or 2010 (FATCA) and other similar information reporting by other states, considered as “white list” states (i.e. states which regimes such as the Common Reporting Standard? recognise the Italian tax authorities’ right to an adequate exchange of information as listed in the Ministerial Decree of 4 September 1996, Both the FATCA and CRS legislations have been implemented by as subsequently amended and supplemented), shall be subject to the Italian law and therefore Alternative Investment Funds operating the above-mentioned 26% withholding tax only for 48.08% of their in Italy are fully subject to the application of such legislations. relevant amount (the actual taxation is equal to 12.5%). The 26% withholding tax is withheld: 6.7 What steps are being taken to implement the OECD’s a) by the management company; or Action Plan on Base Erosion and Profit-Shifting b) in case the units are deposited with a centralised custodian of (BEPS), in particular Actions 6 and 7, insofar as they financial instruments, authorised in accordance with article affect Alternative Investment Funds’ operations? 80 of Legislative Decree 58/1998, or with a non-resident entity which has an account with a centralised clearance and In principle, no specific steps have been implemented with particular settlement system (which has a direct link with the Italian regard to Alternative Investment Funds’ operations. However, all Ministry of Economy and Finance), by the above-mentioned the international Alternative Investment Funds operating in Italy financial intermediaries that will intervene, in any way, in the are required to comply with the Italian tax legislation that has been collection of the proceeds of units. amended on the base of OECD’s Action Plan on Base Erosion and

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Profit-Shifting (“BEPS”). In particular, foreign funds carrying Units of collective investment vehicles (including Alternative out certain activities in Italy need to pay a particular attention to Investment Funds) established in Italy or in EU/EEA Member the application of the dependent agent permanent establishment States are also considered as “qualified investments” provided that provisions (“DAPE”) that have been enlarged in their scope by such vehicles meet the same asset allocation requirements described the outcome of the Final Report on BEPS Action 7. A DAPE in above. Italy could for instance arise in case employees of the foreign fund manager are involved in negotiations and sales activities that lead to 6.9 Are there any other material tax issues for investors, the conclusion of contracts in Italy in the name of the foreign fund managers, advisers or AIFs? manager. Italy There are no other material tax issues to be highlighted. 6.8 Are there any tax-advantaged asset classes or structures available? How widely are they deployed? 6.10 Are there any meaningful tax changes anticipated in the coming 12 months? The Law no. 232 of 11 December 2016 has introduced a number of tax incentives applicable to investments made by both pension No relevant tax changes regarding Alternative Investment Funds are funds and Italian resident individuals and carried out through the expected in the coming 12 months. special scheme of “Individual Long-Term Saving Plans” (“Piani Individuali di Risparmio a Lungo Termine”, “PIRs”). In particular, under certain circumstances, the new regime exempts 7 Reforms from taxes any income from financial investments included in PIRs (in addition, investments in the PIR are also exempt from 7.1 What reforms (if any) are proposed? inheritance tax). Each individual cannot set up more than one PIR and contributions into the PIR cannot exceed €30,000 per year with a total cap of €150,000 during their lifetime. No major amendments to domestic laws are expected in the near future with regards to investment funds. Assets contributed into PIRs must be invested as follows: Please consider that future amendments are directly attributable to ■ at least 70% of their total value in financial instruments, irrespective of whether listed or unlisted, issued by companies changes in EU legislation. In this respect we emphasise that Italian (other than real estate companies) resident in Italy for tax legislation may be affected by the Commission’s proposals of March purposes. Companies resident in EU or EEA Member States 2018, which, inter alia, aim to introduce a specific harmonisation in are also eligible provided that they maintain a permanent the EU on pre-marketing: establishment in Italy; ■ the Directive amending Directive 2009/65/EC (“UCITS”) ■ 30% of such 70% amount (i.e. 21% of the total) in financial and AIFMD with regard to cross-border distribution of instruments issued by qualified companies that are not listed collective investment funds; and in the “FTSE MIB” index of the Italian Stock Exchange – ■ the Regulation on facilitating cross-border distribution of the primary benchmark index for the Italian equity markets, collective investment funds and amending Regulations (EU) measuring the performance of the 40 Italian most capitalised no. 345/2013 and (EU) no. 346/2013. equities – or in similar indices of other regulated stock exchanges; and ■ the remaining 30% on any type of investment with the sole Acknowledgment exception of instruments issued by persons established in The authors would like to acknowledge the assistance of Ludovici non-cooperative States (i.e. those States that do not allow an Piccone & Partners in the preparation of this chapter. adequate exchange of information). PIRs cannot be invested for more than 10% of their value in instruments issued by the same company or by companies belonging to the same group of companies or in deposits and current accounts.

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Francesco Di Carlo Camilla Fornasaro 5Lex 5Lex Via degli Omenoni 2 Via degli Omenoni 2 20121 20121 Italy Italy

Tel: +39 02 304 1331 Tel: +39 02 304 1331 Email: [email protected] Email: [email protected] URL: www.5lex.it URL: www.5lex.it Italy

One of the founding partners of Craca Di Carlo Guffanti Pisapia Camilla Fornasaro’s areas of practice mainly include banking, Tatozzi, Francesco Di Carlo has a longstanding experience in advising finance, commercial and insurance advice. Mrs. Fornasaro also financial institutions and Italian and foreign funds on banking, financial, advises Italian and European asset managers and investment funds insurance and company law matters. His expertise is mainly focused on aspects of Italian financial services regulatory issues, including on the incorporation and authorisation of financial industry players and structuring, establishment, management, cross-border marketing funds, M&As and Italian and international corporate reorganisations, (both via authorisation or passporting) and operation of investment the provision of cross-border reserved transactions, the structuring funds (UCITS and alternative investment funds). Mrs. Fornasaro also of financial products and assistance to intermediaries with the advises on regulatory and general compliance issues affecting clients administrative stage of the penalty proceedings initiated by Supervisory throughout the financial sector (including MiFID II). Authorities. He has also developed significant experience with the regulatory supervision of listed companies, with particular regard to the protection of minority shareholders, corporate governance, related- party transactions, reporting obligations and market abuse. He has assisted major international institutional investors in the management of their shareholdings in listed companies at the various stages of their investment, including with respect to governance issues and damages claims. He is often involved in innovative projects related to legislative changes in his areas of practice and has been working for years with the major Italian and international Authorities. In 2016, 2017 and 2018 he has been named by Who’s Who Legal: Private Funds as “one of the leading advisers in the Italian funds industry, assisting asset managers and investment funds”, “well known for his international expertise in investment funds and his dynamism on matters of structuring and management”. In 2016 and 2017, he was included among the 50 Italian advisers who have left their mark in business advisory, according to Legalcommunity.it. In 2018, he received the Professional of the Year award in the Finance Regulatory category from the Legalcommunity Finance Awards.

The Firm has consolidated experience in the structuring and implementation of collective investment management schemes (including in the area of real estate investment funds) and in the setting up and offering of units of Italian and foreign funds, also relying on collaboration with a worldwide network of foreign firms. In addition to comprehensive theoretical and practical knowledge of UCITS legislation, the Partners have considerable and recognised expertise in providing legal advice with respect to alternative collective investment undertakings, since their introduction to the Italian legal system. Our Partners assisted the first mutual funds specialised in mini-bonds as well as collective investment schemes focused on the credit industry. The Firm assists Italian and foreign clients with cross-border transactions.

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Luxembourg Jeannette Vaude-Perrin

Bonn & Schmitt Amélie Thévenart

Securitisation vehicles, which are governed by the Luxembourg law 1 Regulatory Framework of 22 March 2004 on securitisation vehicles, as amended, should normally be out of the scope of the AIFM Law unless given its 1.1 What legislation governs the establishment and features it would fall within its scope. operation of Alternative Investment Funds? 1.2 Are managers or advisers to Alternative Investment In Luxembourg, an Alternative Investment Fund (“AIF”) within Funds required to be licensed, authorised or the meaning of the law of 12 July 2013 relating to managers of regulated by a regulatory body? alternative investment funds (the “AIFM Law” and an “AIFM”), will usually take the form of: (i) a fund authorised under Part II All Luxembourg entities that manage AIFs (based in Luxembourg, of the Luxembourg law of 17 December 2010 on undertakings for in another EU country or outside the European Union) are subject to collective investment, as amended (“Part II Fund” and “2010 the AIFM Law and, must be (i) regulated and supervised by, or (ii) Law”, respectively); (ii) a specialised investment fund (“SIF”) at least registered with, the CSSF. Investment managers managing under the law of 13 February 2007 relating to specialised investment the portfolio of an AIF may be located abroad. funds, as amended (the “SIF Law”); (iii) a “SICAR” (société For Regulated Funds, the appointment of a manager is subject d’investissement à capital risque), being an investment company to CSSF approval. If unknown to the CSSF but supervised by a in risk capital, subject to the Luxembourg law of 15 June 2004 on recognised financial supervisory authority, the CSSF will proceed companies investing in risk capital, as amended (the “SICAR Law”); to a due diligence on available information. If the manager is or (iv) a reserved alternative investment fund (“RAIF”) under the unregulated, the CSSF will carry out a due diligence on its expertise, law of 23 July 2016 on reserved alternative investment funds (the track record, financial standing and reputation. “RAIF Law” and together with the SIF Law, the 2010 Law and the SICAR Law the “Product Laws” and each a “Product Law”, and Luxembourg based advisers to AIFs (or their AIFM) are (i) either Part II Funds, SIF and SICAR together “Regulated Funds”). An regulated by the CSSF and must be licensed pursuant to the law AIF may also be set up as a non-Product Law structure (typically of 5 April 1993 on the financial sector, as amended (the “1993 referred to as SOPARFI (société de participations financières), Law”), subject to exemptions, or (ii) may be subject to the law subject to the law of 10 August 1915 on commercial companies as of 2 September 2011 regulating the access to the professions of amended (a “Corporate AIF” and the “1915 Law”, respectively) craftsman, merchant, industrial as well as certain liberal professions, and may opt between the range of available corporate structures. as amended (the “2011 Law”) and submit an application for a business licence as economic advisor (conseiller économique) to Part II Funds, SIF and SICAR are regulated by the Luxembourg the Minister of Economy, subject to exemptions. (Also please refer financial supervisory authority (Commission de Surveillance du to question 1.8 for foreign advisors.) Secteur Financier – “CSSF”). The implementation of European Directive 2011/61/EU of the 1.3 Are Alternative Investment Funds themselves European Parliament in relation to the supervision of managers of required to be licensed, authorised or regulated by a alternative investment funds (“AIFMD”) has changed the regulatory regulatory body? environment for managers of AIFs and for AIFs. Luxembourg was one of the first EU Member States to successfully transpose the Regulated Funds are subject to prior CSSF authorisation and AIFMD into national law. ongoing supervision. All AIFs established in Luxembourg must be managed by an AIFM, responsible for ensuring compliance with the AIFM Law. The AIFM will be subject to either the simplified registration regime or the 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment full-scope authorisation regime, depending on (i) the assets under Funds (or otherwise differentiate between different management, and (ii) whether the AIFM will market the shares types of funds or strategies (e.g. private equity v on a cross-border basis to investors located outside Luxembourg. hedge)) and, if so, how? Moreover, the AIFM can be (a) an externally appointed entity, or (b) where the legal form of the AIF permits internal management, Luxembourg AIFs subject to a Product Law can be open or closed- the AIF itself. ended and such information must be disclosed in the offering document.

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Only SICAR are subject to strategy limitation (exclusive investment ■ Auditor: audit of financial statements by Luxembourg in risk capital within the meaning of Circular CSSF 06/241 of 05 independent approved statutory auditor with appropriate April 2006 relating to the concept of risk capital under the SICAR professional experience. Law (“Circular 06/241”)). The 2010 Law, the SIF Law and the RAIF Law provide for two 1.8 What rules apply to foreign managers or advisers different fund types: (i) contractual vehicles without legal personality wishing to manage, advise, or otherwise operate (fonds commun de placement – “FCP”); or (ii) investment company, funds domiciled in your jurisdiction? (a) with variable capital (société d’investissement à capital variable – “SICAV”), or (b) with fixed capital (société d’investissement à For foreign advisors, there is no regulation requirement, provided capital fixe – “SICAF”). that the CSSF views it favourably when an advisor opts into There is also a distinction between funds subject to a Product Law regulation where possible. Luxembourg or to the 1915 Law only, and between regulated and non-regulated For foreign managers, evidence of supervision is required, or failing funds. due diligence by CSSF (see question 1.2).

1.5 What does the authorisation process involve and how 1.9 What co-operation or information sharing agreements long does the process typically take? have been entered into with other governments or regulators? For Regulated Funds notably, the following draft documents and information must be submitted to the CSSF: articles of incorporation/ The CSSF has signed: LPA; offering document; service provider agreements; information the Memorandum of Understanding (“MoU”) on Cooperation on initiator; advisor; CSSF questionnaires; and director documents. between the Financial Supervisory Authorities, Central Banks and On average the procedure takes three to four months. Finance Ministries of the EU on Cross-Border Financial Stability, For an authorised AIFM, the application must contain i.a.: CSSF dated 1 June 2008. The text of the MoU, including the list of questionnaire (CSSF website); draft articles of incorporation; signatories, is available on the CSSF website, (http://www.cssf.lu/ information concerning shareholders (qualifying holdings); governing fileadmin/files/Documents_internationaux/MoU_2008_Final_1_ bodies; senior managers; drafts of policies and procedures; service June_2008.pdf). provider agreements; and draft constitutional documents of the AIF MoUs with a number of supervisory authorities of the financial to be managed. sector, laying down the principles and terms relating to cooperation The CSSF has three months from the date of acknowledging receipt between authorities on issues relating to prudential supervision. The of the file to complete its examination process, during which the list of signatories is available on the CSSF website (http://www.cssf. clock may be stopped where additional information is requested. lu/en/eu-international/subnav/col3/memoranda-of-understanding/). Once approved, the AIFM is entered on the CSSF’s Official List of Pursuant to the AIFM Law and further to ESMA’s approval of AIFMs, tantamount to formal authorisation. cooperation arrangements between EU securities regulators and their global counterparts, as of February 2015, the cooperation 1.6 Are there local residence or other local qualification agreements with 44 non-EU authorities. ESMA has published requirements? a list of the AIFMD MoUs signed between EU regulators (including the CSSF) (http://www.cssf.lu/fileadmin/files/AIFM/ Registered office and central administration of the AIF/AIFM must ESMA_34_32_418_AIFMD_MoU.pdf). be located in Luxembourg to qualify as a Luxembourg-based AIF/ In addition, the CSSF is a member of the European System of AIFM. The depositary must be located in Luxembourg, the AIFM Financial Supervision (“ESFS”), created with effect from 1 January must have at least two Luxembourg resident conducting officers. A 2011, and participates in each of the following entities comprising number of local resident directors is advisable. the ESFS: ■ the European Banking Authority (“EBA”); 1.7 What service providers are required? ■ the European Securities and Markets Authority (“ESMA”); and If not internally managed, a Luxembourg AIF’s appointed external ■ the European Insurance and Occupational Pensions Authority AIFM is entrusted with portfolio and risk management, and (“EIOPA”). potentially administration and marketing. An AIF established in the Their purpose is to contribute to establishing common regulatory and form of an FCP must appoint an external AIFM, in the absence of supervisory standards and practices and ensuring that the Member own legal personality. States’ supervisory authorities apply a single set of harmonised rules For AIFs set up under a Product Law, the following service providers and consistent supervisory practices. are required: In addition to the above, Luxembourg currently has around 77 ■ Depositary: Luxembourg credit institution or PSF licensed double taxation treaties (“DTT”) in force. The 46 DTTs entered under the 1993 Law, responsible for the safekeeping and supervision of the assets of the AIF. into between Luxembourg and a third country include the provisions of Article 26 §5 on exchange of information of the Organisation for ■ Paying Agent: a Paying Agent will be required in Luxembourg and in each country where the AIF is distributed (typically via Economic Co-operation and Development (“OECD”) Model Tax the depositary (and its network)). Convention on Income and on Capital, so that an effective exchange ■ Administration/Domiciliation/Registrar and Transfer Agent: of information in tax matters is ensured. either performed by the authorised AIFM (or regulated Luxembourg signed the OECD Multilateral Convention on Mutual management company), potential sub-delegation to third Administrative Assistance in Tax Matters (the “Convention”) on 29 party (credit institution or professional of the financial sector May 2013, ratified in Luxembourg by the Law dated 26 May 2014 (“PSF”)) or direct appointment by AIF. and entered into force on 1 November 2014.

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2 Fund Structures 2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, asset stripping rules)? 2.1 What are the principal legal structures used for Alternative Investment Funds? AIFs subject to the 2010, SIF and RAIF Law are subject to risk diversification provisions. SICARs are limited as regards their Stand-alone structures and umbrella funds with one or several investments (see questions 2.4 and 4.1). All AIFs managed by compartments are feasible under the Product Laws as well as several authorised AIFMs are subject to asset stripping rules. forms of investment vehicles (notably FCP, SICAV, SICAF) (see question 1.4 above). Investment companies may be set up as: public limited liability 3 Marketing Luxembourg company (société anonyme – “SA”); private limited company (société à responsabilité limitée – “SARL”); partnership limited 3.1 What legislation governs the production and offering by shares (société en commandite par actions – “SCA”); corporate of marketing materials? limited partnership (société en commandite simple – “SCS”); or special limited partnership (société en commandite speciale – Post-authorisation marketing of AIFs is governed by the Product “SCSp”). The SCSp has no legal personality and mirrors the Anglo- Laws, the AIFM Law, CSSF circulars and/or CSSF regulations. Saxon limited partnership. It is a very flexible corporate structure and a success story with over 2,000 SCPs launched since 2013. The limited partnership structures are the most used structures. 3.2 What are the key content requirements for marketing materials, whether due to legal requirements or customary practice? 2.2 Please describe the limited liability of investors. The offering document of any AIF must include the information Liability of the limited partner/ordinary investor is generally limited necessary for investors to be able to make an informed judgment of to the amount committed/paid in to the fund. General partners’ the proposed investment, in particular, of the risks attached thereto. liability is unlimited but manageable if set up as a corporate entity. Further content include: NAV computation; costs; expenses; subscription; redemption; conversation mechanisms; and AIFM Law requirements. 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment Funds? 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? The principal legal structures used for investment managers and advisers in Luxembourg are the SA and the SARL, subject to the Core fund documents of regulated AIFs must be CSSF approved 1915 Law, the AIFM Law and/or the 2011 Law. (offering document, articles of incorporation, etc.). Presentations, flyers, similar short-form marketing documentation need not be approved. 2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? 3.4 What restrictions are there on marketing Alternative Investment Funds? No legal provisions limit a manager’s ability to restrict redemptions. SIFs, SICARs and RAIFs are reserved for well-informed investors It is, however, market practice to provide for rules for occasional only (see question 3.6). No restrictions apply to Part II Funds and suspension of the net asset value (“NAV”) calculation and hence of Corporate AIFs, which may be offered to retail investors, unless the subscription, conversion and redemption, in certain prescribed and there is specific legal prohibition. disclosed circumstances (e.g. a breakdown of communication devices/ political instability/emergency). Suspensions must be communicated AIFs subject to the 2010 Law, SIF, SICAR or RAIF Law are to investors by the AIFM in an appropriate manner. There is no automatically authorised for marketing in Luxembourg. The marketing of Luxembourg non-regulated AIFs is limited to distinction between open- and closed-ended AIFs in this regard. professional investors. Transfer of shares/units by investors to another investor are usually The AIFM Law contains detailed provisions applicable to not restricted, except in commitment-based AIFs or in case of marketing/distributing of units/shares of Luxembourg AIFs or non- investor eligibility requirements (e.g. well-informed investors). Luxembourg AIFs by Luxembourg AIFMs and non-Luxembourg In corporate AIFs (other than SCS and SCSp), redemption at the AIFMs in Luxembourg and abroad, respectively. Only authorised request of investors is not possible. AIFMs benefit from the marketing passport, in order to market EU AIFs in Luxembourg, the AIFMs established in another Member 2.5 Are there any legislative restrictions on transfers of State must be authorised under the AIFMD. investors’ interests in Alternative Investment Funds? “Marketing”, under Luxembourg regulatory rules, means a direct or indirect offering or placement, at the initiative of the AIFM or on There are no legislative restrictions on transfers other than those behalf of the AIFM of units/shares of an AIF it manages, to or with resulting from the well-informed investor requirement (see question investors domiciled or with a registered office in the EU. Hence, 3.6) in the SIF, SICAR and RAIF environment. (Also refer to any active marketing activities are covered by the term. Reverse question 2.4.) solicitation, i.e. placement of AIF units/shares at the initiative of an investor, is not “marketing” and does not trigger AIFMD requirements.

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For Part II Funds, SIFs, RAIF (except risk capital RAIF) and 3.5 Can Alternative Investment Funds be marketed to corporate AIFs, the eligible assets are unrestricted. retail investors?

Only Part II Funds can be marketed to retail investors in Luxembourg 4.2 Are there any limitations on the types of investments (see above). Marketing of non-regulated EU AIFs is limited to that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or professional investors. otherwise? EU AIFMs authorised in another EU Member State can market units/ shares of EU AIFs they manage to retail investors in Luxembourg, Luxembourg AIFs are not restricted in terms of types of investments provided (i) the EU AIF is subject to permanent supervision, and (except the SICARs – see above). (ii) the EU AIF is furthermore subject in its home Member State to

Diversification requirements apply to: Luxembourg regulations offering a level of protection for investors, as well as to a prudential supervision considered by the CSSF as equivalent to that ■ SIFs and RAIFs (maximum 30% of their net assets or provided for in Luxembourg legislation. commitments in the same type of security issued by the same issuer); and The 2010 Law imposes additional conditions on the marketing of ■ Part II Funds (maximum exposure 20% of net assets). non-Luxembourg AIFs, including the appointment of a Luxembourg paying agent and prior authorisation by the CSSF. 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? 3.6 What qualification requirements must be carried out in relation to prospective investors? Luxembourg laws do not provide for any restrictions. However, AIFs must mention the level of borrowing and leverage in the Investment in a SIF, SICAR or RAIF is reserved to “well-informed offering document. investors”, i.e: (i) institutional; (ii) professional; or (iii) other investors who confirm in writing that they adhere to the status of “well-informed” investors and who either: (a) invest a minimum 5 Disclosure of Information of EUR 125,000; or (b) have been assessed by a credit institution, an investment firm or a management company which certifies the investors’ ability to understand the risks associated with investing 5.1 What public disclosure must the Alternative in the product. Investment Fund or its manager make?

AIFs subject to Product Laws are required to produce and make 3.7 Are there additional restrictions on marketing to public bodies such as government pension funds? available to investors an annual report. Part II Funds must publish an unaudited semi-annual report. Luxembourg laws do not provide any specific restrictions. If mentioned in the documentation, the AIFM must publish the net asset value (or make it available to investors). Any other publication must be made in compliance with the offering document. 3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process? Luxembourg AIFMs are subject to transparency requirements towards investors and the CSSF, pursuant to the AIFM Law (e.g. Luxembourg or foreign intermediaries may act as distributors, information on conflicts of interest, liquidity risk, leverage, and provided the latter are authorised by competent authorities to act as remuneration policy). distributors of a Luxembourg AIF. The use of nominees who act as intermediaries between investors 5.2 What are the reporting requirements in relation to and the AIF is possible. Alternative Investment Funds or their managers?

AIFs must communicate their annual reports to the CSSF and are 3.9 Are there any restrictions on the participation in Alternative Investment Funds by particular types of subject to reporting requirements. AIFMs are subject to requirements investors, such as financial institutions (whether as towards the CSSF, notably on principal instruments, markets, exposures sponsors or investors)? and concentrations in which they trade on behalf of the AIFs managed, details on the assets of the AIFs, including risk profiles, liquidity Luxembourg law does not provide for any specific restrictions. arrangements, overall level of leverage per AIF and acquisition by AIF of important holdings in non-listed companies. 4 Investments The CSSF may require further information on an ad hoc basis if it is considered necessary to ensure the effective monitoring of systemic risk. 4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment 5.3 Is the use of side letters restricted? Funds?

SICARs are restricted to direct and/or indirect investment in The use is not restricted but subject to disclosure to investors via securities that represent risk capital, i.e. mainly high-risk investments the AIF’s rules or incorporation documents to ensure fair treatment. made in view of their launch, development or listing on the stock exchange in various forms.

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b) Registration tax 6 Taxation Incorporated SIFs and RAIFs are subject to a non- recurring registration duty of EUR 75 at the time of their 6.1 What is the tax treatment of the principal forms of incorporation and at the time of any other corporate event Alternative Investment Funds identified in question (e.g. amendments of articles). 2.1? c) Direct taxes Luxembourg SIFs and RAIFs (other than risk capital 1. Part II Funds RAIFs – see below) are exempt from Luxembourg direct a) Subscription tax taxes. ■ annual subscription tax of 0.05%, calculated and Risk capital RAIFs may opt for a special tax regime similar payable quarterly on aggregate net assets valued to the SICARs. Hence RAIFs investing exclusively in Luxembourg on the last day of each quarter. The value of units risk capital, opting for this special tax regime, are fully representing assets held by an undertaking in other subject to corporate income tax and municipal business Part II Funds, having already paid the subscription tax, tax but benefit from an exemption on any income from is exempt therefrom; and transferable securities, their transfer, contribution or ■ reduced rate of 0.01% applies to undertakings liquidation, and are exempt from net wealth tax (except the exclusive object of which is (i) the collective for the minimum net wealth tax of in principle EUR investment in money-market instruments, and (ii) the 4,815). placing of deposits with credit institutions. d) VAT b) Registration tax Regarding VAT, please refer to developments for Part II ■ upon their incorporation and upon any further corporate Funds. events (amendment of articles of incorporation or transfer of seat): fixed registration duty of EUR 75 6.2 What is the tax treatment of the principal forms of (regardless of the number of compartments); and investment manager / adviser identified in question ■ none for Part II Funds organised as FCPs (since FCPs 2.3? are contractual agreements without legal personality). c) Direct taxes Investment management companies established in Luxembourg are Part II Funds are exempt from any Luxembourg income, subject to Luxembourg corporate income tax, municipal business withholding, capital gains or net wealth taxes. tax and net wealth tax at standard rates. Their taxable base may, d) Value-added tax (“VAT”) however, be reduced by various deductions. Fund management services supplied in Luxembourg are in principle exempt from VAT Pursuant to Circular no 723 of 29 December 2006, the Luxembourg tax authorities have expressly recognised (see VAT rules in the context of Part II Funds). that all investment funds are VAT-taxable persons (in the Private portfolio managers and investment advisers are professionals case of an FCP the management company is the VAT- and fall under the rules of individual taxation for independent taxable person). Consequently, Luxembourg VAT will be activities. applicable under the reverse charge mechanism whereby a Luxembourg-based fund (or, in case of an FCP, the A withholding tax of 20% is levied on the gross amount of the management company) receives services from suppliers director fees, creditable against the director’s Luxembourg tax. located in other EU Member States. Such withholding tax should be final for a non-resident director A VAT exemption (article 44 (1) (d) of the Luxembourg provided that the director fees do not exceed EUR 100,000 per year VAT law) is available to portfolio management services, and constitute the only Luxembourg professional source income. investment advisory services and certain administrative It should be noted that with application from 1 January 2017, services, while mere technical services, supervision and individuals who supply directorship services for consideration control services supplied by a depositary are not exempt have the status of taxable persons for VAT purposes. However, services. The VAT exemption on administrative and such services might fall under the VAT exemption subject to certain management services is also available to outsourced conditions. Hence, a Luxembourg-resident independent director services, provided that these services, strictly recharged, might be obliged to register for Luxembourg VAT and to file VAT form a distinct whole and are essential functions to the returns reporting their supplies of directorship services. exempt management services, thus leaving isolated technical supplies outside of the VAT exemption scope. The AIFM Law allows, under certain conditions (like the tax Given the breadth of exemptions available, investment residency of the employee or the full return of committed capital funds and their management companies will, in most to investors prior to payment to employees), the taxation of cases, derive an almost 100% exempt turnover. For carried interest realised by certain employees of the AIF or the that reason, Circular no 723 denies them the possibility AIFM as “speculative income”, with an applicable tax rate of to deduct the input VAT they might have borne on non- 25% of the average tax rate applicable to the adjusted income, i.e. exempt services. a marginal income tax rate of 11.44% (including the employment 2. SIFs and RAIFs fund contribution) as from 2017. The AIFM Law defines “carried a) Subscription tax interest” as a share in the profits of the AIF accrued to the AIFM as compensation for the management of the AIF and excluding any SIFs and RAIFs (other than RAIFs investing exclusively in risk capital – see below): annual subscription tax share in the profits of the AIF accrued to the AIFM as a return on any of 0.01%, calculated and payable quarterly on their investment by the AIFM into the AIF. aggregate net asset value at the end of the relevant quarter. The minimum corporate tax introduced for certain holding Exemptions available to certain institutional cash funds, companies as of 1 January 2011 (further amended as of 1 January pension pooling funds and microfinance funds as well 2013) has been replaced by a minimum net wealth tax as of 1 January as funds investing in other funds already subject to the 2016, which may apply to management and advisory companies in subscription tax. certain circumstances. Depending on the assets of the management

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and advisory company, the minimum net wealth tax is either a fixed rate of in principle EUR 4,815 or a progressive rate ranging from 6.6 What steps have been or are being taken to implement EUR 535 to 32,100. the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard? 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an Luxembourg and the USA signed the Intergovernmental Agreement Alternative Investment Fund or the transfer of the Model 1 on 28 March 2014, amended by an exchange of notes investor’s interest? signed on 31 March 2015 and 1 April 2015, ratified by the law of 24 July 2015. The first reporting obligations concerned the 2014 There are none. calendar year, which the Foreign Financial Institutions had to meet by 31 August 2015. The reporting for the 2015 calendar year and Luxembourg 6.4 What is the tax treatment of (a) resident, (b) non- all following calendar years needs to be realised before 30 June of resident, and (c) pension fund investors in Alternative each following year. Investment Funds? As per the Common Reporting Standards (“CRS”), Luxembourg signed the OECD Multilateral Convention on Mutual Administrative No withholding tax is levied on distributions made by a regulated Assistance in Tax Matters, which provides a legal basis for the Luxembourg AIF to resident, non-resident or pension fund automatic exchange of tax information and which was approved investors. Distributions made by an unregulated Luxembourg by the law of 26 May 2014. Luxembourg is part of the 53 “early AIF to resident, non-resident or pension fund investors should be adopters” of the OECD’s Common Reporting Standards. The subject to a 15% withholding tax on the gross amount of dividends reporting for the 2017 calendar year and all following calendar years (unless availability of reduced rate or exemption under a DDT or the needs to be realised before 30 June of each following year. participation exemption regime). The CRS have been implemented at EU level by Directive 2014/107/ Income distributed by the Luxembourg AIF should be taxed in the EU, transposed by the law of 18 December 2015. The reporting country of residence of the non-resident or pension fund investor. starting from the 2016 calendar year needs to be realised before 30 Capital gains realised by non-residents may only be taxed in June of each following year. Luxembourg (i) in case of unregulated AIFs, (ii) where no DDT is available, and (iii) under certain specific circumstances. 6.7 What steps are being taken to implement the OECD’s Luxembourg-resident individual or corporate investors have to Action Plan on Base Erosion and Profit-Shifting declare their income in their annual tax return. (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? Dividends distributed by and capital gains realised on a regulated AIF should be subject to corporate taxation at the level of the Luxembourg is actively implementing all of the OECD’s BEPS Luxembourg corporate investor, whereas such dividends and capital Action Plans through various domestic measures. gains from an unregulated AIF may benefit from the participation exemption regime at the level of the Luxembourg corporate investor, BEPS Action Plan 1 regarding VAT on business-to-consumer digital under certain conditions. services was implemented in domestic law on 1 January 2015. Dividends distributed by an AIF to a resident individual investor Luxembourg implemented BEPS Action Plan 2 on hybrid are subject to the progressive tax rates depending on the investor’s mismatches by transposing Directive 2014/86/EU on the prevention annual income and matrimonial situation, the marginal income tax of double non-taxation deriving from hybrid loan arrangements. rate being 45.78% (including the employment fund contribution). BEPS Action Plans 3 and 4 on CFCs and interest deductions are Capital gains arising from the sale of AIF shares or units, other than subject to an EU anti-tax avoidance directive adopted in July 2016, speculative gains (realised within six months after acquisition), to be transposed by 31 December 2018. are exempt from taxation in the hands of a Luxembourg-resident BEPS Action Plan 5 on harmful tax practices led to the repeal of individual investor, except if the investor holds more than 10% the previous IP Box regime in Luxembourg on 1 July 2016. A of the capital of the SICAV or SICAF, the 10% threshold being bill of law introducing a new IP Box regime was submitted to the determined on the umbrella fund. Parliament on 4 August 2017. As of today the bill of law has not AIFs set up as FCPs are tax-transparent for direct tax purposes and been approved. investors are treated as directly holding the underlying investments With regard to (i) BEPS Action Plan 6 on treaty abuse, Luxembourg and directly receiving the corresponding income and capital gains. introduced a general anti-abuse rule when it transposed Directive 2015/121 amending the EU Parent-Subsidiary Directive, and (ii) BEPS Action Plan 7 on the prevention of artificial avoidance 6.5 Is it necessary or advisable to obtain a tax ruling from of permanent establishment status and BEPS Action Plan 14 on the tax or regulatory authorities prior to establishing an Alternative Investment Fund? dispute resolution, Luxembourg implemented the new standards by signing the OECD’s multilateral instrument, which should enter into force three months after five countries have ratified, accepted and There is no requirement to obtain a tax ruling in Luxembourg approved it. prior to establishing an AIF. However, depending on complexity of the structure (e.g. the use of specific financial instruments BEPS Action Plans 8 to 10 on transfer pricing and Action Plan 13 or nonstandard structuring), it might be advisable to secure the on transfer pricing documentation and country-by-country reporting structure with the Luxembourg tax authorities through a tax ruling. have been implemented through the amendment of Luxembourg The tax ruling procedure is subject to an administrative fee ranging transfer pricing regulation (in particular, by determining clearly from EUR 3,000 to 10,000 depending on the complexity of the case. the arm’s length remuneration between related parties) as from 1 January 2017 and through the non-public country-by-country reporting obligations applicable as from the financial year 2016.

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6.8 Are there any tax-advantaged asset classes or 6.10 Are there any meaningful tax changes anticipated in structures available? How widely are they deployed? the coming 12 months?

Tax advantages related to any asset class or structure depend on a The Council of the European Union on 13 March 2018 reached wide variety of factors, such as the underlying investments, holding political agreement on a Council Directive introducing mandatory period as well as investor’s status and residency. disclosure rules for intermediaries such as lawyers, accountants It is therefore essential to seek counsel for using the optimal asset and tax advisers. Intermediaries must report potentially aggressive class and structure for each individual case. cross-border tax planning arrangements and arrangements designed to circumvent reporting requirements like CRS and ultimate beneficial ownership reporting. EU Member States’ tax authorities 6.9 Are there any other material tax issues for investors, Luxembourg will exchange the information automatically within the EU through managers, advisers or AIFs? a centralised database. The Council Directive must be transposed by 31 December 2019 and Under Council Directive 2003/48/EC on the taxation of savings apply as from 1 July 2020. However, it will have retroactive effect, income (the “Savings Directive”), Luxembourg had elected for which means that starting in summer 2018, intermediaries and their the withholding tax system instead of the exchange of information clients should already monitor all tax advice provided with a cross- system. However, by virtue of the law of 25 November 2014, border dimension and all advice concerning reporting requirements entered into force on 1 January 2015, Luxembourg abolished this to ensure that a future obligation to report can be properly fulfilled. withholding tax system and introduced an automatic exchange of information. The Savings Directive was repealed by Directive 2015/2060/EU on 10 November 2015 and will no longer be 7 Reforms applicable once all reporting obligations have been complied with. A tax issue which may arise is whether Luxembourg AIFs managed by a non-Luxembourg AIFM lose their Luxembourg tax residency 7.1 What reforms (if any) are proposed? due to the AIFM being established abroad and are thus taxed according to the laws of the seat of the AIFM. This, however, No major reforms are currently proposed to impact directly AIFMs depends on the content of the laws of the jurisdiction of the AIFM. in 2018. In the opposite sense, i.e. having a non-Luxembourg AIF and a Luxembourg-based AIFM, the Luxembourg AIFM Law makes clear Acknowledgment that the non-Luxembourg AIF will not be subject to Luxembourg taxation. The authors would like to thank Alex Schmitt for his invaluable contribution to this chapter. Me Schmitt is a Founding Partner at Bonn & Schmitt and is specialised in banking and finance and investment funds. Tel: +352 27 855 / Email: [email protected]

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Jeannette Vaude-Perrin Amélie Thévenart Bonn & Schmitt Bonn & Schmitt 148, Avenue de la Faïencerie 148, Avenue de la Faïencerie L-1511 Luxembourg L-1511 Luxembourg Luxembourg Luxembourg

Tel: +352 27855 Tel: +352 27 855 Email: [email protected] Email: [email protected] URL: www.bonnschmitt.net URL: www.bonnschmitt.net

Jeannette Vaude-Perrin is a Partner at Bonn & Schmitt, with almost Amélie Thévenart is a Counsel at Bonn & Schmitt, specialised in 20 years of experience in investment funds with a focus on private investment funds. She has 10 years of experience in Luxembourg Luxembourg equity, real estate, debt, infrastructure and UCITS. She specialises in investment funds law, both in-house at regulated Luxembourg the formation and accompanying of regulated and non-regulated funds management companies, and at the law firm Bonn & Schmitt. She (partnerships, RAIF, SIF, SICAR) and on related operational aspects. assists in the setting up, merger and liquidation of different Luxembourg She is actively involved with the Association of the Luxembourg Fund funds (UCITS/SIF/SICAR/Part II/non-regulated AIFs). Amélie has also Industry (“ALFI”) and a regular lecturer on fund-related topics for acquired solid experience in the drafting and reviewing of different training institutes. types of fund-related agreements (e.g. depositary agreements, investment management agreements, distribution agreements and Prior to joining Bonn & Schmitt in 2018, Jeannette worked with other management company agreements). top-tier law firms in Luxembourg and also practised in-house ata leading depositary bank in Luxembourg as a member of management of the RePe Business Line. She is admitted to the Luxembourg Bar.

Bonn & Schmitt is a leading, independent, full-service Luxembourg law firm. The firm assists asset managers, banks, institutional investors and private equity houses in the setting up of Luxembourg investment fund vehicles and their ongoing legal and regulatory administration.

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Mozambique Pedro Simões Coelho

Vieira de Almeida Carlos Filipe Couto

1 Regulatory Framework 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different 1.1 What legislation governs the establishment and types of funds or strategies (e.g. private equity v operation of Alternative Investment Funds? hedge)) and, if so, how?

Activity involving the management, investment and marketing of Yes. In general terms, the UCI Law distinguishes between AIFs Alternative Investment Funds (AIFs) is mainly regulated by: the investing in (i) securities or financial assets, and (ii) real estate (real Undertakings for Collective Investment Law, enacted by Decree no. estate investment funds). Both AIF types may be open or closed- 54/99 of 8 September 1999 and amended by Decree no. 36/2005 of ended. 29 August (the UCI Law), which sets out most of the rules relating In general terms, open-ended AIFs target the retail market and to AIFs; Law no. 15/2009 of 1 November 1999, amended from time closed-ended AIFs target high-net-worth or professional investors; to time, which implemented the Credit and Financial Institutions thus in open-ended AIFs, scrutiny by the BoM tends to be tighter. Regime (Banking Law); Decree no. 56/2004 of 10 December 2004, as amended by Decree no. 31/2006 of 30 August, which implemented the Regulation on Credit and Financial Institutions (Banking Law); 1.5 What does the authorisation process involve and how long does the process typically take? Decree-Law no. 4/2009 of 24 July 2009 (Mozambique Securities Market Code); and Ministerial Ordinance no. 10/99 of 24 February In a nutshell, the authorisation request for setting up AIFs is filed 1999 (Financial Intermediation Activities Regulation). with the BoM and the relevant AIF’s manager must provide the BoM The Bank of Mozambique (BoM) is the relevant supervisory authority. with the relevant AIF’s documentation, notably the regulation and a copy of the agreement to be executed between the fund manager and 1.2 Are managers or advisers to Alternative Investment the depositary. Funds required to be licensed, authorised or Furthermore, the BoM may request further information from the regulated by a regulatory body? fund manager. If applicable, authorisation should be given within 45 days of Yes. Fund managers, as financial institutions, are subject to the receipt of either the relevant documentation or any supplementary BoM’s supervision; accordingly, the relevant authorisation procedure information or amendments to the documents required by the BoM. shall be filed with the BoM. If at the end of such period the applicants have not been notified of The UCI Law does not foresee any de minimis exception or fast-track the authorisation, this means it has been tacitly refused. authorisation procedure, therefore all fund managers, regardless However, considering that BoM has discretion to request further of the type of assets under management, will need to comply, in information, which will halt the term for granting the authorisation general terms, with the same requirements. and that are few AIF being constituted in Mozambique, the term for completing the process may vary significantly from case to case. 1.3 Are Alternative Investment Funds themselves The marketing of the AIF’s units shall start within 90 days of the required to be licensed, authorised or regulated by a granting of the relevant authorisation. regulatory body?

1.6 Are there local residence or other local qualification Yes. The setting up of AIFs is subject to authorisation with the requirements? BoM, which is the competent regulator to conduct the supervision of AIF management activity and ancillary service providers as well as No, there are not. distribution and compliance with the general rules applying to AIFs, notably in connection with the protection of investors’ interests. 1.7 What service providers are required?

In Mozambique, an AIF is legally required to have a fund manager, a depositary, an auditor and, in the case of real estate AIFs, real estate appraisers.

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It should be noted that the UCI Law does not expressly foresee the existence of an auditor and, in the case of real estate AIFs, real estate 2.4 Are there any limits on the manager’s ability to appraisers; however, the existence of such two entities in the case restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? of real estate assets is fundamental in light of the fact that the AIF itself will need to be assessed and is subject to accounting control. The UCI Law is silent in respect of the fund manager’s ability to limit Furthermore, the AIF may also have, but is not legally compelled to redemptions in open-ended funds, but considering that such type of have, distributors or entities that will market its units, although such AIFs is, in general, targeted towards retail investors, the BoM will entities are more common in open-ended AIFs. most certainly scrutinise this matter. In fact, such possibility would need to be clearly set out in the AIF’s regulation, which is analysed 1.8 What rules apply to foreign managers or advisers throughout the authorisation procedure. wishing to manage, advise, or otherwise operate

Moreover, the draft AIF regulation, approved by the UCI Law, Mozambique funds domiciled in your jurisdiction? includes a field where conditions set out for redemptions must be described, but only refers to applicable fees, settlement dates and In accordance with the Banking Law, the same rules established for the criteria for the determination of which units will be redeemed. national managers will apply to foreign managers. The fund manager may suspend the units’ redemption, in the case However, the foreign managers will need to be properly authorised of an abnormal situation that may impact the usual running of the to conduct their activities in Mozambique and will need to have a market or jeopardise the interests of the unitholders, provided the local establishment. BoM is immediately informed of said suspension. As far as restriction of transfers in open-ended funds is concerned, 1.9 What co-operation or information sharing agreements the same rationale as described above in respect of redemptions is have been entered into with other governments or applicable. regulators? Conversely, in the case of closed-ended AIFs – mainly those targeting professional investors – it should be considered that it We are not aware of any specific protocol or sharing agreement is possible to establish, in the AIF’s regulation, restrictions on the having been signed by the BoM with other governments or regulators transfer of the units from investors to third parties. in respect of the Alternative Investment Fund Managers Directive (AIFMD) or AIFs. 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? 2 Fund Structures No. However, it is important to bear in mind the limitations established on foreign investment, which place constraints on 2.1 What are the principal legal structures used for transfers abroad of profits or dividends obtained in Mozambique. Alternative Investment Funds? Therefore, prior to an investment in a Mozambique AIF being performed, the thresholds and requirements to be met by such an Under the UCI Law and subject to the licensing procedures described investment shall be assessed, on a case-by-case basis, as well as in question 1.5 above, an AIF may only adopt the contractual the provisions applicable to the transfer abroad of the profits or structure with no legal personality. This is the classic structure and dividends obtained pursuant to the redemption of the units/shares or requires that the AIF be managed by a separate fund manager. The liquidation of the AIF. investors’ or unitholders’ interests in such funds are called units (unidades de participação). 2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, asset stripping rules)? 2.2 Please describe the limited liability of investors. The ability of the manager to manage its funds will be mainly The assets of an AIF are only liable for its debts. Accordingly, the limited by the investment policy established in the AIF’s prospectus AIF will not bear liability for the debts of investors, fund managers, or regulation, as applicable, by the general investment limits by type depositaries, distributors or other AIFs. Likewise, the investors are of AIF, if any, established in the UCI Law and by the obligation to not personally liable for the debts of the AIF. conduct its activity in the best interest of the investors. The statement of the preceding paragraph does not stem expressly The UCI Law has a list of acts that a manager cannot carry out, such from the UCI Law, but rather from general legal principles applicable as granting loans, execute certain transactions on its own account, to investment in AIFs. execute transactions relating to the assets held by the AIF with related parties, e.g., entities of its group, the depositary, etc. 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment Funds? 3 Marketing

An AIF needs to be managed, depending on its scope, by a: 3.1 What legislation governs the production and offering ■ fund manager (financial institution), which may only manage of marketing materials? AIFs investing in securities and other financial assets; ■ real estate fund manager (financial institution), which may Please refer to question 1.1 above, as well as to the Consumer only manage AIFs investing in real estate funds; or Law, approved by Law no. 22/2009 of 28 September 2009, and the ■ commercial or investment bank, but only in the case of Advertising Code, approved by Decree no. 65/2004 of 31 December closed-ended AIFs. 2004.

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Nonetheless, the fund manager shall ensure that the “know your 3.2 What are the key content requirements for marketing customer” and investment adequacy analyses are properly carried materials, whether due to legal requirements or out in relation to the investor, and that the procedures against money customary practice? laundering and the financing of terrorism are closely respected.

There are no drafts available; neither does the UCI Law set out express provisions addressing marketing materials. However, 3.7 Are there additional restrictions on marketing to providing information on the investment policy, markets targeted, public bodies such as government pension funds? main features (identification of the relevant entities, terms and conditions of the investment, links to the legal documents) and No, there are no additional restrictions. historic returns of the AIF is perceived as common practice for fund

Mozambique managers and other distribution entities. 3.8 Are there any restrictions on the use of intermediaries Lastly, on a general note, the information contained in the marketing to assist in the fundraising process? materials must comply with the following principles: legality; truthfulness; objectivity; adequacy; opportunity; and clarity. No. However, the relationship established between the intermediaries and the AIF shall be laid down in a written agreement and disclosed in the AIF’s legal documents. 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? Furthermore, the intermediary, when carrying out the fundraising process, needs to act within the scope of activities that it is Yes. AIFs’ prospectuses, as well as their amendments, are subject to authorised to conduct; i.e. if the fundraising process corresponds prior BoM authorisation. to AIF marketing, the intermediary will need to be an authorised institution under the applicable legal terms in order to carry out the Furthermore, all marketing actions in respect of an AIF shall inform distribution of securities. the addressee of the existence of the prospectus and the place where it may be consulted. 3.9 Are there any restrictions on the participation in Alternative Investment Funds by particular types of 3.4 What restrictions are there on marketing Alternative investors, such as financial institutions (whether as Investment Funds? sponsors or investors)?

The concept of marketing or distribution of AIFs is not defined in No. However, the holding of AIFs’ units may have an impact on the UCI Law. Nevertheless, it should be construed as comprising credit institutions’ and financial institutions’ own funds, which all activity directed towards investors with a view to promoting or needs to be assessed on a case-by-case basis. proposing the subscription of the relevant AIF’s units, regardless of the means of communication used. Nonetheless, the general principles laid down in question 3.2 above 4 Investments in respect of marketing will be equally applicable to all marketing activities and materials. 4.1 Are there any restrictions on the types of activities Furthermore, attention is drawn to the fact that the reverse solicitation that can be performed by Alternative Investment is not officially recognised or defined under Mozambican law and it Funds? is thus not an official exemption expressly foreseen in the applicable legal framework, but rather a tolerated practice. Such practice Yes. AIFs may only focus on investment activities and their consists of an investor, on its own initiative and without having been investments must comply with the general rules applicable to engaged for such purpose by the distributor, requesting information financial instruments markets. on a specific AIF. However, a case-by-case assessment needs to be conducted, considering that the use of the reverse solicitation 4.2 Are there any limitations on the types of investments exemption may come under the BoM’s scrutiny. that can be included in an Alternative Investment Lastly, the requirements and principles laid down in the Consumer Fund’s portfolio whether for diversification reasons or Law and Advertising Code in respect of investors, which are deemed otherwise? as consumers, shall also be observed. Yes. The assets eligible for the portfolio of an AIF will depend on its specific type. 3.5 Can Alternative Investment Funds be marketed to retail investors? In general terms, an AIF cannot hold in its portfolio: (i) units from a UCI managed by the same fund manager; (ii) assets encumbered with Yes, they can. in rem security, liens or precautionary proceedings; (iii) securities issued or held by its fund manager; (iv) securities issued or held by entities that hold more than 10% of the fund manager share capital; 3.6 What qualification requirements must be carried out (v) securities issued or held by entities 20% or more of whose share in relation to prospective investors? capital is held by the fund manager; (vi) securities issued or held by entities that are members of the management body of the fund There is no particular requirement to be fulfilled in relation to manager; (vii) securities issued or held by entities 20% or more of investors in AIFs. However, every marketing material must make whose share capital is held by members of the management body of reference to the existence of the AIF’s prospectus and the place the fund manager; (viii) securities issued or held by entities whose where it may be consulted by the investor. management bodies are comprised of one or more directors of the

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fund manager; (ix) securities issued or held by entities, pursuant to The annual and biannual accounts shall be made available to a placement agreement, by the fund manager, depositary or entities investors, as they become ready, in the premises of the fund manager, which hold 10% or more of the share capital of the fund manager, the depositary and, if applicable, the distributor. save for public subscription offers targeting securities envisaged to Additionally, with regard to such data, the fund manager shall be admitted to trading in a stock exchange; and (x) real estate assets publish a report containing the activities carried out during the last in co-ownership. term, which shall comprise information on the units, transactions, The prohibitions laid down in points (iv) to (viii) do not apply if the portfolio evaluation and evolution, etc. securities at stake are admitted to trading in the Mozambique stock In the case that the marketing entity of the AIF is also a bank of exchange. which the investor is a client, it can provide the above information Moreover, in general terms, an AIF investing in securities or together with the investor’s bank statement. financial assets may have on its portfolio securities as defined in

The fund manager shall publish in the Mozambique Stock Mozambique the Mozambique Securities Code, which comprise shares, bonds, Exchange’s official journal, on a monthly basis with reference to participation titles in public funds, units and any other similar the last day of the immediately preceding month, an inventory of instruments, as well as instruments stemming from rights detached the AIF’s asset portfolio, its global net value and the number of from the previous securities, provided that they are exchangeable in units currently in circulation. The fund manager shall remit this a secondary market. information to the BoM within three days after its publication. An AIF investing in real estate may hold in its portfolio real estate Lastly, the fund manager shall submit to the BoM its monthly trail assets registered in the Land Registry Office as pertaining to an balances, by the 15th day of the following month. investment fund, and holdings of 50% or more in companies listed in a stock exchange and whose scope consists in acquiring, selling, renting and exploring real estate assets. 5.3 Is the use of side letters restricted?

The use of side letters that set out particular terms and conditions in 4.3 Are there any restrictions on borrowing by the respect of governance, investment, etc. of an AIF is not specifically Alternative Investment Fund? addressed by the UCI Law.

Fund managers may obtain loans on behalf of AIFs under their However, in the case of open-ended AIFs, considering that they management, but the loan period cannot exceed 120 days, usually target retail investors and/or a broader unrestricted scope of consecutive or not, within a period of one year and up to a maximum investors, the use of side letters which alter any relevant provision of 10% of the AIF’s global value. of the legal documents shall be deemed illegal, considering that as a general principle fund managers need to abide by the AIF’s legal Moreover, the assets of the AIF can only be encumbered, in any way documents during the provision of its activity. whatsoever, in order to obtain loans within the conditions referred to in the preceding paragraph. In closed-ended AIFs, notably in AIFs targeting only professional investors, we trust that there is a wider margin to set out, namely through a side letter, specific provisions in respect of certain matters. 5 Disclosure of Information However, in general terms, as the provisions of the UCI Law are imperative, any side letter providing for actions in breach of such legal provisions will be deemed illegal and may subject the fund 5.1 What public disclosure must the Alternative manager to administrative offence proceedings. Investment Fund or its manager make?

AIFs’ legal documents and their updates shall be made available to 6 Taxation investors, in the premises of the fund manager, the depositary and, if applicable, the distributor. 6.1 What is the tax treatment of the principal forms of Considering that legal documents must describe the identity of Alternative Investment Funds identified in question the fund manager, depositary, auditor, distributors and other AIF 2.1? services providers, the majority of data in connection with the AIF will be made available to the public. Considering there is no special tax regime applicable to Collective However, the identity of the investors in the AIF is not mandatorily Investment Vehicles, the general tax regime applies, under which subject to public disclosure. Mozambican-resident entities are subject to corporate income tax at the rate of 32% (Imposto sobre o Rendimento das Pessoas Coletivas – IRPC) to be levied on taxable profits obtained on a worldwide 5.2 What are the reporting requirements in relation to Alternative Investment Funds or their managers? basis (including income obtained abroad).

Fund managers must prepare annual accounts of the AIFs under 6.2 What is the tax treatment of the principal forms of management by 31 December of each year. In the following four investment manager / adviser identified in question months, the fund manager shall publish the balance sheets and profit 2.3? and loss accounts. The fund manager shall also prepare biannual accounts after the end There is no special tax treatment or rules applicable in Mozambique of the relevant semester. for investment managers or advisers. Therefore, as Mozambican- resident entities, they will also be subject to the general taxation regime referred to above (32% IRPC rate to be levied on taxable profits obtained on a worldwide basis).

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respect, since there is no specific tax regime for investment funds, 6.3 Are there any establishment or transfer taxes levied we would recommend that they request a tax ruling in order to in connection with an investor’s participation in an obtain more regulatory and tax certainty. This results from the fact Alternative Investment Fund or the transfer of the that, after the ruling is issued, the decision obtained by the taxpayer investor’s interest? (which it may request previously to a potential transaction or the setting up of a fund) is binding on the tax authorities and could only No establishment or transfer taxes are applicable. be amended or changed by a court decision.

6.4 What is the tax treatment of (a) resident, (b) non- 6.6 What steps have been or are being taken to implement resident, and (c) pension fund investors in Alternative the US Foreign Account and Tax Compliance Act Investment Funds? 2010 (FATCA) and other similar information reporting

Mozambique regimes such as the Common Reporting Standard? For tax purposes, income deriving from a fund’s units is qualified as investment income, while income deriving from the sale of said Mozambique has not entered into any treaty or adhered in any units is qualified as capital gains. way to any mechanism in order to implement either FATCA or the Resident investors Common Reporting Standard and, to the best of our knowledge, Personal Income Tax (Imposto sobre o Rendimento das Pessoas no initiative has been undertaken by the Mozambique authorities Singulares – IRPS): investment income earned by resident regarding this matter. beneficiaries is subject to final withholding tax at a 20% rate. The positive difference between capital gains and capital losses 6.7 What steps are being taken to implement the OECD’s assessed by resident beneficiaries on the sale of fund units is Action Plan on Base Erosion and Profit-Shifting included in the taxable income of the beneficiary and subject to (BEPS), in particular Actions 6 and 7, insofar as they taxation at progressive income rates (currently between 10% and affect Alternative Investment Funds’ operations? 32%). Such balance may be partially exempt according to the fund units’ holding period. Mozambique is not an OECD Member State and we are not aware of any initiative by the Mozambican tax authorities regarding this IRPC: investment income payments to a resident entity are subject subject. to withholding tax at a rate of 20% (to be paid on account of the final CIT bill). Such income will subsequently be included in the entity’s However, the OECD’s Commissioners General and Heads of final IRPC tax result. Delegations of the Revenue Authorities of Botswana, Lesotho, Mozambique, Namibia, South Africa, Swaziland and Zambia Capital gains earned on the sale of fund units are also included in the gathered in Pretoria, South Africa on 16 July 2015 in order to final IRPC tax result of the resident entity and are subject to IRPC discuss BEPS, among other matters. at a 32% rate. Non-resident investors 6.8 Are there any tax-advantaged asset classes or IRPS: investment income earned by non-resident beneficiaries is structures available? How widely are they deployed? subject to a final withholding tax at the rate of 20%. As a rule, capital gains taxation on the sale of fund units is similar No, there are not. to that which is set out above for resident individuals. Nevertheless, capital gains obtained by non-resident investors do not benefit from partial exemption according to the fund units’ holding period and 6.9 Are there any other material tax issues for investors, managers, advisers or AIFs? are fully taxed.

IRPC: investment income paid to a non-resident entity is subject to No, there are not. a 20% final withholding tax rate. As a rule, capital gains taxation on the sale of fund units is similar to 6.10 Are there any meaningful tax changes anticipated in that which is set out above for resident corporate beneficiaries, with the coming 12 months? the exception that capital gains obtained by non-resident investors do not benefit from partial exemption according to the fund units’ No, there are not. holding period and are fully taxed. Pension funds Pension funds established and operating according to the 7 Reforms Mozambique laws are subject to a similar tax treatment to that mentioned above for resident investors under the IRPC. 7.1 What reforms (if any) are proposed? Pension funds established and operating according to the laws of a foreign jurisdiction are subject to a similar tax treatment to that The Mozambique capital markets framework has been subject to mentioned above for non-resident investors under the IRPC. several updates in recent years. However, at the present date, the UCI Law remains in urgent need of a complete revamp in order to 6.5 Is it necessary or advisable to obtain a tax ruling from address its shortfalls and the increasing market needs, particularly as the tax or regulatory authorities prior to establishing far as real estate AIFs are concerned. an Alternative Investment Fund? Nonetheless, we are not aware of any legislative initiatives aimed at amending or updating the UCI Law currently in effect. Mozambique legislation provides for a tax ruling system in which tax authorities may provide a binding ruling by request. In this

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Pedro Simões Coelho Carlos Filipe Couto Vieira de Almeida VdA Vieira de Almeida Rua Dom Luís I, 28 Rua Dom Luís I, 28 Lisbon 1200-151 Lisbon 1200-151 Portugal Portugal

Tel: +351 31 311 3677 Tel: +351 31 311 3677 Email: [email protected] Email: [email protected] URL: www.vda.pt URL: www.vda.pt

Pedro Simões Coelho joined Vieira de Almeida & Associados in 1998 Carlos Filipe Couto joined Vieira de Almeida & Associados in 2011. He

and is currently head of the firm’s investment funds practice and a is a senior associate in the Banking & Finance practice area, where he Mozambique partner in the Banking & Finance Group. He is also responsible for has worked on several key transactions, notably on securities issues, the Agency & Trust practice and is a member of the firm’s aviation banking and insurance sectors. He advises several assets managers finance team. He has been actively involved in several transactions, in regulatory and legal matters, such as the setting up of collective in Portugal and abroad, mainly focused on the advising, structuring investment schemes, providing ongoing counsel to the respective fund and setting up of collective investment schemes such as mutual funds managers, as well as in respect of sale and purchase transactions and real estate investment funds, infrastructure vehicles, venture in connection with assets under management or their shareholdings. capital funds and private equity structures. He has been responsible Moreover, he also provides advice to common representatives and for several transactions including non-performing loans, asset finance, trustees and has been actively involved in regulatory and contractual particularly in the aviation finance field, notably financing, leasing, sale matters in connection with banking entities, aviation finance and cross- or purchase of aircraft, and capital markets, retail banking, financial border factoring transactions. Lastly, he regularly assists insurance services and securities’ law. He has also been actively working in companies and intermediaries with regulatory matters, as well as with advising fund managers, venture capitalists, brokers, banks and other matters related to pension fund schemes and pension fund managers. investment firms on a wide range of regulatory and related matters. In Agency & Trust services, he has been actively working in several securitisations and debt issuing transactions advising several entities notably in their capacity as common representatives and issuers.

With over 40 years in the making, Vieira de Almeida (VdA) is an international leading law firm, notable for cutting-edge innovation and top-quality legal advice. A profound business know-how coupled with a highly specialised cross-sector legal practice enable the firm to effectively meet the increasingly complex challenges faced by clients, notably in the aerospace, distribution, economy of the sea, green economy, energy, finance, real estate, industry, infrastructure, healthcare, public, professional services, information technology, emerging technologies, telecoms, third, transports and tourism sectors. VdA offer robust solutions based on consistent standards of excellence, ethics and professionalism. The recognition of VdA as a leading provider of legal services is shared with our team and clients and is frequently acknowledged by the major law publications, professional organisations and research institutions. VdA has consistently and consecutively received the industry’s most prestigious awards and nominations. Through VdA Legal Partners clients have access to a team of lawyers across 12 jurisdictions, ensuring wide sectoral coverage, including all African members of the Community of Portuguese-Speaking Countries (CPLP), and several francophone African countries, as well as Timor-Leste. Angola – Cabo Verde – Chad - Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau – Mozambique – Portugal – São Tomé and Principe – Timor-Leste

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Norway Christoffer Bergene

Wikborg Rein Advokatfirma AS Jens Fredrik Bøen

1 Regulatory Framework 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body? 1.1 What legislation governs the establishment and operation of Alternative Investment Funds? Alternative Investment Funds that meet the IFA’s definition of an investment fund may only be established if a specific authorisation The establishment and operation of Alternative Investment Funds to establish such fund is granted by the Norwegian FSA. are governed by the Investment Funds Act 2011 (the “IFA”) and the Alternative Investment Funds Act 2014 (the “AIF Act”). Alternative Investment Funds that are not investment funds within the meaning of the IFA may be established by an appropriately The IFA provides for regulation of three subsets of investment licensed/authorised manager of Alternative Investment Funds funds (i.e. a legally independent/separate asset pool, arisen through without obtaining any specific authorisation by the Norwegian FSA. capital contributions from an undefined range of persons against However, a marketing authorisation must be obtained before any the issuance of units in said asset pool, substantially comprised of such funds are marketed to investors. financial instruments and/or deposits in credit institutions), namely UCITS, domestic funds and special funds. Domestic funds and special funds are types of funds that do not fall within the definition 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment of a UCITS (in accordance with Directive 2009/65/EC). As UCITS Funds (or otherwise differentiate between different are not alternative investment funds (within the meaning of AIFMD types of funds or strategies (e.g. private equity v and the Norwegian AIF Act), any reference to investment funds hedge)) and, if so, how? in this memo shall be construed as a reference to domestic funds and special funds only. The IFA regulates both the managers of Yes. As alluded to above, the Norwegian regulatory regime investment funds and the investment funds themselves (product distinguishes between open-ended and closed-ended funds, albeit regulation). not in a particularly clear manner. The AIF Act provides overarching regulation for managers of all Investment funds (within the meaning of the IFA) cannot be non-UCITS funds, including private equity, infrastructure and real closed-ended. While investment funds must be open-ended, the estate funds, as well as investment funds as described above. requirements as to the frequency of redemptions, etc. vary greatly between the three subsets of investment funds. 1.2 Are managers or advisers to Alternative Investment Other Alternative Investment Funds (non-investment funds) Funds required to be licensed, authorised or are normally organised as limited liability companies or limited regulated by a regulatory body? partnerships, and can theoretically be structured to allow for an open- ended structure. However, Norwegian law does not cater well for Generally, yes. open-ended structures, as the concept of variable capital for limited Managers of Alternative Investment Funds will have to be licensed companies is not recognised. Accordingly, open-ended structures are or registered as managers under the AIF Act. Additionally, if the usually reserved for funds organised as investment funds. Alternative Investment Funds under their management are non- Open-ended structures are predominantly organised as investment UCITS investment funds, the manager will have to be appropriately funds, whereas closed-ended structures are predominantly organised licensed under the IFA as well. as limited liability companies or partnerships. Advisers to Alternative Investment Funds must be licensed in accordance with the relevant services they intend to offer to an 1.5 What does the authorisation process involve and how Alternative Investment Fund. We would normally expect such long does the process typically take? advisers to hold appropriate licences under MiFID II implementing measures. In order to set up a licensed manager of Alternative Investment EEA domiciled managers and advisers (duly authorised under Funds, an application must be filed with the NFSA. The application AIFMD and/or MiFID II implementing measures (as appropriate)) must i.a. include a business plan and demonstrate that the applicant may manage or advise Norwegian domiciled AIFs by virtue of their satisfies relevant statutory criteria for fund managers under the AIF home state licence. Act (and potentially also the IFA).

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For applications under the AIF Act, the statutory case handling period is normally three months (which can be extended to six 1.9 What co-operation or information sharing agreements months), whereas the statutory process under the IFA is six months have been entered into with other governments or regulators? (only relevant if the manager intends to manage investment funds).

Norwegian authorities have entered into various co-operation and 1.6 Are there local residence or other local qualification information sharing agreements with other governments/regulators requirements? in respect of entities operating within the asset management industry. The AIFMD (including its Norwegian implementing measures) For a Norwegian licensed investment fund manager, there are provides for co-operation and exchange of information between

no regulatory requirements in terms of residence. However, as Norway supervisory authorities in respect of relevant entities within the asset discussed elsewhere in this questionnaire, licensed fund managers management industry. The AIF Act chapter 10 and the IFA chapter must be organised as a limited liability company. The relevant acts 12 contains detailed provisions on arrangements for co-operation on limited liability companies stipulate that a company’s general and exchange of information between Norwegian and foreign manager and no less than 50% of the board’s directors must be supervisory authorities. resident in Norway. The residence requirement does, however, not apply in respect of EEA nationals that are resident in an EEA state. However, a licensed company must meet certain requirements as 2 Fund Structures regards its organisation and risk management. These requirements may require that a company has sufficient employees and that these employees are sufficiently involved in the operations of the company, 2.1 What are the principal legal structures used for which may imply that they (or some of them) are resident in Norway. Alternative Investment Funds? As for qualification requirements, members of a Norwegian fund manager’s board of directors and key members of its management Alternative Investment Funds in Norway are predominantly must meet certain requirements concerning their qualification, as structured as either (i) private limited liability companies, (ii) public well as fitness and propriety. limited liability companies, and (iii) limited partnerships (usually with a private limited liability company as its general partner). In addition to the above, Alternative Investment Funds that meet 1.7 What service providers are required? the definition of an investment fund (as described above), may take the legal form of a “investment fund”, a special type of legal entity A Norwegian manager of Alternative Investment Funds (or the subject to special regulation in the IFA. Investment funds have Alternative Investment Fund itself) will be required to appoint a legal personality, but no corporate bodies (apart from a unit-holder depositary and an auditor for its Alternative Investment Funds. meeting) and are controlled by their management company, who act on their behalf. 1.8 What rules apply to foreign managers or advisers wishing to manage, advise, or otherwise operate 2.2 Please describe the limited liability of investors. funds domiciled in your jurisdiction?

Where an Alternative Investment Fund is structured as a limited Foreign managers and advisers wishing to manage, advise, or liability company (whether public or private), the liability of its otherwise operate funds domiciled in Norway must generally be shareholders is generally limited to the equity contributions they licensed to perform such activities. have made in the company. In order for a foreign manager to be able to manage a Norwegian Where an Alternative Investment Fund is structured as a limited Alternative Investment Fund on a cross-border basis (whether on a partnership, the partners’ liability is determined by the limited freedom of services or freedom of establishment basis), the manager partnership agreement. Customarily, the limited partners’ are liable must be an EEA based entity licensed under AIFMD implementing for their committed capital (less any paid in capital) in accordance rules in its home state. Such entities can provide fund management with the limited partnership agreement. services to Norwegian Alternative Investment Funds by virtue of their passporting rights under AIFMD. Investors may, however, under general insolvency and bankruptcy law, be required to repay any distributions they have received. In order to advise a Norwegian Alternative Investment Fund (whether on a cross-border or branch establishment basis), an adviser may, depending on its regulatory status, provide services on the basis 2.3 What are the principal legal structures used for of it (i) being an EEA based adviser duly licensed to provide the managers and advisers of Alternative Investment relevant advisory services under AIFMD or MiFID II implementing Funds? rules and offer its services by virtue of its passporting rights, or (ii) be a non-EEA based adviser (licensed/authorised (or similar) in its Managers and advisers of Alternative Investment Funds are always home state and subject to appropriate supervision from its home structured as limited liability companies (public or private), as the state authorities) having obtained a specific licence in Norway to IFA, the AIF Act and the Securities Trading Act 2007 (the “STA”, establish a branch or to provide services on a cross-border basis. which i.a. governs the licensing requirements for i.a. MiFID II While it is theoretically possible to obtain a licence as a non-EEA investment firms in Norway) require managers and advisers (to the based entity, obtaining such licence will be very burdensome. Such extent that the advisers offer MiFID II investment services) to take licence has not been granted to any entities to date. such legal form.

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2.4 Are there any limits on the manager’s ability to 3 Marketing restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? 3.1 What legislation governs the production and offering of marketing materials? The manager is, to some extent, able to restrict redemptions in open- ended funds of the types of investment funds. The primary legislative acts (including underlying regulations) As a starting point, an investment fund must permit investors to governing the production and offering of marketing materials for redeem their units twice-monthly. Alternative Investment Funds are the IFA (in respect of investment Domestic funds may apply to the NFSA for exemptions from this funds) and the AIF Act (in respect of all Alternative Investment Norway starting point. Funds). Special funds may, in their articles of association, limit investors’ For Alternative Investment Funds distributed through MiFID II right to redeem their shares (compared to the bi-monthly standard investment firms, additional requirements concerning the production requirement). However, the special fund must permit investors to and offering of Alternative Investment Funds will apply. redeem their shares at least once a year. Subject to obtaining the NFSA’s consent, a special fund may limit investors’ redemption 3.2 What are the key content requirements for marketing right beyond a yearly redemption. materials, whether due to legal requirements or The manager is, at least to some extent, able to restrict transfers customary practice? in both open-ended funds and closed-ended funds, by including provisions to that effect in, e.g. a fund’s articles of associations, Managers are, for investment funds under their management, partnership agreement and shareholder agreements (as relevant). required to prepare a prospectus and a key investor information document. The IFA contains detailed requirements for prospectuses and key investor information documents. Generally speaking, a 2.5 Are there any legislative restrictions on transfers of prospectus must contain the information required in order to make an investors’ interests in Alternative Investment Funds? informed judgment of the investment fund and the risks associated with such investment. Moreover, the prospectus shall contain a Alternative Investment Funds organised as investment funds: clear and easily understandable explanation of the investment fund’s Absent any restrictions in the articles of associations of such entities, risk profile. investors may freely transfer their interests in such Alternative Investment Funds. Alternative Investment Funds organised as limited liability 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? companies: Limited liability companies may be subject to statutory transfer restrictions. Companies may opt in or opt out (as relevant) of the various transfer restrictions in their articles of association. Managers of Alternative Investment Funds must submit their The statutory starting point is, however, that transfers of shares in investor documentation to the NFSA when submitting marketing private companies are subject to restrictions, whereas transfers of applications under chapter 6 of the AIF Act. Managers of shares in public companies are not subject to such restrictions. investment funds must register the prospectus with the NFSA prior to the commencement of marketing activities. Alternative Investment Funds organised as limited partnerships: Absent any provisions to the contrary in the partnership agreement Investment funds may only be established subject to obtaining the of said partnership, transfer of interests requires the consent of all NFSA’s consent. The NFSA expects managers to carry out the partners. fund establishment, marketing applications and filing of investor documentation to take place simultaneously.

2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, 3.4 What restrictions are there on marketing Alternative asset stripping rules)? Investment Funds?

Investment funds, whether domestic funds or special funds, are Alternative Investment Funds, whether local or foreign, must subject to the requirements of the IFA. The manager must observe obtain a marketing permission prior to any marketing initiatives these requirements, including requirements as to, e.g. subscriptions, taking place. Investment funds established pursuant to the IFA redemptions and diversification. will normally obtain such permissions in connection with the establishment of the Fund. Managers of Alternative Investment Funds are subject to asset stripping rules. Non-investment funds will generally not be subject to any statutory limitations on which investments they can include 3.5 Can Alternative Investment Funds be marketed to in their portfolios, save for securitisation positions, where managers retail investors? of Alternative Investment Funds are only allowed to assume such exposure if certain entities retain, on an ongoing basis, a material Investment funds taking the form of so-called domestic funds net economic interest, which in any event shall not be less than 5%. may be marketed to retail investors without obtaining any specific permission (other than the specific authorisation to establish the fund). However, the permission to establish a domestic fund may contain conditions limiting marketing of such funds to professional investors only.

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Investment funds taking the form of so-called special funds, as well as all other Alternative Investment Funds (except for domestic 4 Investments funds, see above), may only be marketed to retail investors subject to obtaining a specific permission to do so. 4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment Funds? 3.6 What qualification requirements must be carried out in relation to prospective investors? Investment funds are subject to the requirements of the IFA. The Fund managers (or their intermediaries) must establish the status key requirements in terms of the investment funds’ activities are the investment restrictions provided for in chapter 6, including in

of each potential investor (e.g. whether retail or professional) prior Norway to marketing and/or offering of interests in Alternative Investment respect of which instruments may be held by the investment fund, Funds to such prospective investors. diversification requirements, liquidity requirements, limitations on borrowing/financial leverage and requirements as to which portfolio Managers or advisors offering MiFID II investment services may management techniques may be employed. be required to carry out suitability and appropriateness testing of prospective investors. In addition to the above, managers of In addition to the above, managers of Alternative Investment Funds Alternative Investment Funds marketing non-investment funds to are subject to restrictions on their activities (other activities than retail investors will be required to comply with Norwegian rules fund management and other regulated services covered by their implementing MiFID II suitability testing. licence).

3.7 Are there additional restrictions on marketing to 4.2 Are there any limitations on the types of investments public bodies such as government pension funds? that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or otherwise? There are no particular additional restrictions that must be observed when marketing to public bodies such as a government pension Alternative Investment Funds that are regulated as investment funds funds. must comply with the investment requirements of the IFA that apply to the respective type of investment fund. 3.8 Are there any restrictions on the use of intermediaries Alternative investment Funds not falling within the IFA will generally to assist in the fundraising process? not be subject to any statutory limitations on which investments they can include in their portfolios, save for securitisation positions, Yes. where managers of Alternative Investment Funds are only allowed Norwegian investment funds may only be marketed/sold by fund to assume such exposure if certain entities retain, on an ongoing management companies (including third-party fund management basis, a material net economic interest, which in any event shall not companies and representation/marketing offices of the fund’s be less than 5%. manager), credit institutions, insurance companies and appropriately licensed investment firms that are licensed in or otherwise authorised 4.3 Are there any restrictions on borrowing by the to operate in Norway. Alternative Investment Fund? Other Alternative Investment Funds may only be sold by their managers and appropriately licensed or authorised investment firms Investment funds are generally banned from borrowing, granting of (including banks and third-party fund management companies/ guarantees and posting of collateral, etc. However, an investment AIFMs holding appropriate MiFID II top-up licences). fund is permitted to borrow on a temporary basis, provided that Intermediaries, particularly intermediaries subject to MiFID II, the borrowing may only equal up to 10% of its assets, as well as may be required to prepare and/or produce information that a fund posting its assets as collateral for its obligations under derivative manager is not required to prepare in connection with marketing of contracts and contracts entered into to achieve effective portfolio Alternative Investment Funds in Norway. management. Special funds are, however, permitted to borrow funds and post 3.9 Are there any restrictions on the participation in collateral. Alternative Investment Funds by particular types of investors, such as financial institutions (whether as sponsors or investors)? 5 Disclosure of Information

There are no particular restrictions from an Alternative Investment 5.1 What public disclosure must the Alternative Fund’s point of view. Various investors, in particular regulated Investment Fund or its manager make? entities within the financial services sector and public sector entities, are, however, subject to restrictions to i.a. their asset management and The annual accounts and the annual report of a Norwegian limited permitted activities. This may i.a. include limitations on borrowing/ liability company are open to anyone through the Brønnøysund financial leverage, permitted investments, etc. and, therefore, in turn Register Centre (Norway’s public register for information related limitations on investments in Alternative Investment Funds. to companies and other legal entities). Managers and Alternative Investment Funds organised as limited liability companies will thus have their annual accounts and annual reports made public through the abovementioned public register.

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Accordingly, managers and Alternative Investment Funds organised The current (2018) corporate income tax (“CIT”) rate is 23% on net as limited liability companies will have accounts and yearly reports taxable income. that are open to the public. Dividends and gains on shares earned by the Alternative Investment Managers of investment funds are required to disclose the market Fund are taxable at the Norwegian CIT rate, unless they qualify for price of units in the fund at least weekly (subject to any provisions the Norwegian exemption method, in which case only 3% of the in the articles of associations stipulating more frequent disclosure), dividends are taxable. as well as yearly accounts, half-yearly reports and the fund’s prospectus in accordance with the IFA. 6.2 What is the tax treatment of the principal forms of investment manager / adviser identified in question 2.3?

Norway 5.2 What are the reporting requirements in relation to Alternative Investment Funds or their managers? The investment manager/advisor is taxable at the prevailing CIT rate Regulatory reporting is generally restricted to only the managers of for any income earned, unless the income is classified as dividends Alternative Investment Funds. or gains that qualify for the Norwegian exemption method, which Managers of Alternative Investment Funds are subject to the will only be the case if the investment manager has a return on following reporting requirements: invested capital and not service income. ■ yearly accounts; ■ half-yearly reports; and 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an ■ annex IV-reporting. Alternative Investment Fund or the transfer of the Managers of investment funds are, in addition to the above, subject investor’s interest? to the following reporting requirements: ■ Quarterly reports for its investment funds. There are no establishment taxes, but a transfer of the investor’s ■ Complaints reporting. interest may result in taxation of a gain realised. Further reporting requirements apply in respect of managers of Alternative Investment Funds holding a top-up licence for the 6.4 What is the tax treatment of (a) resident, (b) non- MiFID II investment service portfolio management. resident, and (c) pension fund investors in Alternative Investment Funds?

5.3 Is the use of side letters restricted? The tax treatment of an investor depends on whether the investor is an individual or a corporate shareholder, resident or non-resident, Side letters may be used. It is, however, fundamental that such and whether the Alternative Investment Fund is organised as a instruments are utilised in accordance with statutory requirements, private or public limited company, or as a transparent entity like a in particular as regards requirements related to sound business limited partnership. practice. In accordance with the AIF Act, managers of Alternative Alternative Investment Funds organised as a private or public Investment Funds must act in the best interests of investors, the limited company: AIFs they manage and the integrity of the market. In doing so, they must act honestly, with due skill, care and diligence and fairly a) Resident: in conducting their activities. They must also treat investors fairly. Individuals are subject to tax at 23% on dividends and gains, but the If certain investors are/will be granted preferential treatment, the income is grossed up by a factor of 1.33, resulting in an effective tax manager must disclose any such preferential treatment in accordance rate of 30.59%. A risk-free interest element deduction is allowed. with the statutory requirements of the AIF Act, in particular the Individuals are subject to net wealth tax in Norway and the interest disclosures contemplated by AIFMD art. 23 (as relevant). in an Alternative Investment Fund is included in the basis for net wealth tax. In a recent NFSA precedent, where preferential treatment in the form of discounted subscriptions is discussed, it is stated that any Corporate shareholders are only subject to tax on 3% of dividends preferential treatment must be based on objective, justifiable and when the shares qualify for the Norwegian participation exemption documented criteria. method. b) Non-resident: Non-residents are not subject to tax in Norway on a gain from the 6 Taxation sale of the ownership interest. Non-residents may be subject to tax on income with a Norwegian 6.1 What is the tax treatment of the principal forms of source. This includes non-residents that are carrying out business Alternative Investment Funds identified in question activities in Norway (through a permanent establishment if resident 2.1? in a tax treaty country), as well as non-residents that earn dividend income subject to withholding tax in Norway. Alternative Investment Funds organised as private or public limited Non-residents are subject to withholding tax in Norway at a rate of companies are non-transparent and subject to tax under the general up to 25% on dividends earned. Norwegian tax rules. Alternative Investment Funds organised as limited partnerships are tax transparent and not subject to tax The dividend withhold tax may be reduced both under Norwegian themselves – instead it is the investors that are subject to tax. domestic rules and tax treaties, so that qualifying corporate shareholders in the EEA are exempt from withholding tax. Norway applies a combination of a global income tax principle and a source tax principle. A person tax resident in Norway, both as an For other shareholders, a tax treaty may provide a reduced rate. individual and a company/legal entity, is subject to tax in Norway on Non-resident investors are not subject to net wealth tax on the shares the person’s worldwide income. in Norway.

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Limited partnerships residency rules, which may result in more companies incorporated a) Residents: outside Norway being considered tax resident in Norway, as more emphasis is put on day-to-day management functions. Individual and corporate partners are taxable on their pro rata share of the profits of the partnership at a rate of 23%. However, for the Norway has introduced Country-by-Country Reporting (“CbCR”) purposes of qualifying for the Norwegian exemption method, the requirements that mainly follow OECD BEPS Action 13 relevant criteria are applied at the level of the partnership, meaning requirements. that the exemption method could apply also for partnerships and their investors. Losses are deductible within certain limitations. 6.8 Are there any tax-advantaged asset classes or Individual partners are subject to tax at 23% on distributions and structures available? How widely are they deployed?

gains, but the income is grossed up by a factor of 1.33, resulting in an Norway effective tax rate of 30.59%. A risk-free interest element deduction Sea-going vessels qualifying for tonnage tax has tax advantages. is allowed. Individuals are subject to net wealth tax in Norway and Due to the broad scope of the Norwegian exemption method, share the interest in an Alternative Investment Fund is included in the income is generally considered favourably taxed at the corporate/ basis for net wealth tax. partnership level. Corporate shareholders are only subject to tax on 3% of distributions when the partnership share qualify for the Norwegian participation 6.9 Are there any other material tax issues for investors, exemption method. managers, advisers or AIFs? b) Non-resident: Non-resident’s partners will as a starting point be subject to tax in Norway has interest limitation rules. Under these rules, interest Norway in the same manner as resident partners, as above. expenses paid to related parties that exceed 25% of “tax EBITDA”, which is defined as ordinary taxable income with tax depreciation Individuals are subject to net wealth tax in Norway and the interest and net interest expenses added back, are non-deductible. in an Alternative Investment Fund is included in the basis for net wealth tax. Carried interest is normally taxed as business income at the company c) Pension fund investors: level. See above. 6.10 Are there any meaningful tax changes anticipated in the coming 12 months? 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing Withholding tax on royalty and interests paid by a Norwegian tax an Alternative Investment Fund? resident to a foreign recipient have been proposed previously, but it is still uncertain if and when such rules might be introduced an it is No, it is not. in our view unlikely that this will happen over the next 12 months. The key potential change is the likely change to the tax residency 6.6 What steps have been or are being taken to implement rule as mentioned under question 6.7 above. the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard? 7 Reforms

They are implemented in Norway. 7.1 What reforms (if any) are proposed?

6.7 What steps are being taken to implement the OECD’s Action Plan on Base Erosion and Profit-Shifting No major reforms are on the agenda. However, certain AIFMD (BEPS), in particular Actions 6 and 7, insofar as they relevant regulations EuVECA, ELTIF, EuSEF have been appended affect Alternative Investment Funds’ operations? to the EEA Agreement. We therefore expect that Norwegian law measures implementing these EU regulations will be adopted as Norway has signed the Multilateral Instrument and is working on well. different measures in line with the BEPS project, including the tax

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Christoffer Bergene Jens Fredrik Bøen Wikborg Rein Advokatfirma AS Wikborg Rein Advokatfirma AS Dronning Mauds gt. 11 Cheapside House, 138 Cheapside Oslo EC2V 6HS Norway London United Kingdom Tel: +47 22 82 75 04 Email: [email protected] Tel: +44 20 73 67 03 00 URL: www.wr.no Email: [email protected] URL: www.wr.no Norway Christoffer Bergene is a Specialist Counsel at Wikborg Rein’s Oslo Jens Fredrik Bøen is a Senior Associate at Wikborg Rein’s London office and is part of the firm’s Capital Markets practice. Heworks office and is part of the firm’s Financial Regulatory practice. Bøen primarily with financial regulatory issues. Bergene assists Norwegian advises Norwegian and international banks, financial institutions, and foreign players in the financial sector, i.e. banks, brokerage houses, investment firms, fund managers, insurance companies and insurance insurance companies, fund managers, etc., with establishments, mediation firms. He is regularly advising on regulatory applications licences, permits and ongoing advice and transactions involving such processes regarding, inter alia, establishments and reorganisations, actors. the regulatory aspects of transactions involving regulated financial entities and the day-to-day aspects of regulated financial institutions’ businesses.

Wikborg Rein is an international law firm located in Oslo, Bergen, London, Singapore and Shanghai. Our unique and long-standing presence overseas enables us to offer our clients the benefit of our extensive international expertise. Headquartered in Oslo, Norway, we offer a full range of legal services to our domestic and international clients. Our extensive international experience and expertise is unique, with many of our partners having spent time working abroad or in-house working with their clients. Wikborg Rein’s broad range of legal services includes the following: corporate; dispute resolution; real estate and construction; banking and finance; shipping and offshore; trade, industry and public sector (including technology, media and telecommunications); energy and natural resources.

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Poland Tomasz Masiarz

Dubiński Jeleński Masiarz i Wspólnicy sp.k. Rafał Lidke

The Polish provisions of law determine the following requirements 1 Regulatory Framework as regards advisors: ■ in the case of SFIO and FIZ, TFIs are obligated to employ 1.1 What legislation governs the establishment and at least two investment advisors licensed by PFSA, unless operation of Alternative Investment Funds? TFI manages only FIZ of a special structure (non-public asset fund), then the requirement to employ advisors is not applied; The establishment and operation of Alternative Investment Funds and (“AIFs”) in Poland is governed by the Act on Investment Funds and ■ in the case of ASI, the requirement to employ advisors is the Management of Alternative Investment Funds of 27 May 2004 applicable only to the manager of ASI whose participation (the “Act”), implementing to the Polish legal regime the principles titles may be placed on the market among retail clients. laid down in Directive 2011/61/EU of the European Parliament According to Polish law, external advisory services relating to and of the Council of 8 June 2011 on Alternative Investment Fund financial instruments may be provided only by entities holding an Managers and amending Directives 2003/41/EC and 2009/65/ authorisation of PFSA. EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (“AIFMD”) and directly applicable Community legal provisions. 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a 1.2 Are managers or advisers to Alternative Investment regulatory body? Funds required to be licensed, authorised or regulated by a regulatory body? An authorisation of PFSA is required for the establishment of each SFIO, as well as FIZ and ASI whose participation titles will be In Poland, the operations of AIFs may be carried on in various legal subject to public offering. No authorisation of PFSA is required forms differing, among others, by the type of managers of AIFs and for other types of AIFs (non-public FIZ and ASI). Nevertheless, all the principles of their licensing. The Act distinguishes the following types of AIFs operate under the supervision of PFSA and inform the types of AIFs: supervisor of their establishment, and also provide their articles of ■ AIF operating in the form of an investment fund; association and information about any amendments thereto to the ■ Specialised Open-Ended Investment Fund (“SFIO”); and supervisor. The establishment of each ASI requires registration in ■ Closed-Ended Investment Fund (“FIZ”). the competent registry court. AIF operating in the form of an alternative investment firm (“ASI”): ■ ASI (managed internally or externally) with the value of 1.4 Does the regulatory regime distinguish between portfolio of no more than EUR 100,000,000, and if ASI does open-ended and closed-ended Alternative Investment not apply financial leverage and allows the redemption of Funds (or otherwise differentiate between different participation titles after at least five years from their purchase types of funds or strategies (e.g. private equity v – no more than EUR 500,000,000 (this limit is calculated: hedge)) and, if so, how? (i) in the case of ASI managed internally, individually for a given ASI; and (ii) in the case of ASI managed externally, Distinction between open-ended and closed-ended funds relates as the sum total of portfolios managed by one manager in the Polish legal regime only to AIFs operating in the form of (“Registered ASI”); and investment funds – i.e. SFIO (which is an open-ended fund) and ■ ASI (managed internally or externally) with the value of FIZ (which is a closed-ended fund). AIFs, which are investment portfolio higher than set forth under item a) (“Licensed ASI”). funds, may freely determine their investment policy and strategy with respect to investment limits laid down by the provisions of the SFIO and FIZ may be established and managed only by an Act. Statutory limits are so wide that on the basis thereof you may Investment Fund Management Company (“TFI”) – a joint- structure in principle every type of investment policy – e.g. private stock company holding an authorisation of the Polish Financial equity, hedge, fund of funds. In addition, the Act distinguishes Supervision Authority (“PFSA”). various types within AIFs operating in the form of investment funds, Licensed ASI may be established and managed only by an entity depending on pursued investment policy, and so: holding an authorisation issued by PFSA. Registered ASI may be SFIO may be established as a money market fund, investing its established and managed by an entity registered by PFSA without assets only in money market instruments and deposits. the need to conduct the licensing procedure.

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FIZ may be established as a portfolio fund, whose investment of governing bodies of managing entities do not have to be Polish portfolio (i) is based on the composition of a portfolio of securities residents; however, in accordance with good practices developed underlying determination of the value of regulated market index by PFSA, appropriate participation of members who have a good (index portfolio), or (ii) constitutes a portfolio the composition of command of Polish, as well as knowledge and experience about the which is specified in the fund’s articles of association not based on functioning of the Polish capital market, should be assured in the the index referred to in item (i) (base portfolio). governing bodies of managing entities. FIZ may be established as a securitisation fund, investing predominantly in receivables. 1.7 What service providers are required? SFIO and FIZ may be established as a non-public asset fund,

Poland investing at least 80% of its assets in assets other than securities It is a statutory requirement for each AIF to have a depositary and covered by public offering or admitted to trading on the regulated have its financial statements audited by an independent specialised market and in money market instruments, unless they were issued entity. In other areas, AIF may use the external entities on the terms by non-public companies whose shares are comprised in the fund’s and conditions set forth in the provisions of law. investment portfolio. The investment policy of ASI is specified by its constitution 1.8 What rules apply to foreign managers or advisers documents, and otherwise in the case of investment funds, the wishing to manage, advise, or otherwise operate Act does not set forth in advance any investment limits that ASIs funds domiciled in your jurisdiction? are obligated to observe. With respect to ASI, the Act makes a distinction between entities only as regards the possibility of TFI may entrust the management of SFIO or FIZ to a manager offering their participation titles to professional and retail clients from EU, i.e. a legal person established in the territory of a Member – this classification is connected not with the type of investment State which has obtained an authorisation of the competent policy but with the way participation titles are offered. authority in that Member State to perform the activity involving the management of AIFs in accordance with the Community law 1.5 What does the authorisation process involve and how governing the operations of AIF managers. The manager from EU long does the process typically take? may also take over the management of an externally managed ASI. The manager from EU may start carrying on the activities on the In the licensing procedure for TFI and the manager of ASI, PFSA Polish territory after having effectively notified such activities via examines in particular qualifications and good reputation of the supervision authority in its home state. While in order to take individuals having an impact on the operation of such entities, the over the management of SFIO, FIZ or an externally managed ASI, entity’s ownership structure and the credibility and financial standing it is necessary to obtain an authorisation from PFSA and consent of of its shareholders, the compliance of its organisational structure the AIF’s investors as well as to make respective amendments to the (especially as regards the management of the AIF’s portfolios, AIF’s constitution documents. risk management, and management of conflicts of interest) with the national regulatory requirements, a detailed business plan 1.9 What co-operation or information sharing agreements describing the first year of the entity’s operations. With respect to have been entered into with other governments or AIFs established with an authorisation, PFSA examines in particular regulators? the investment policy, risk profile and general characteristics of operations. A list of agreements on international co-operation is available on The Management Board of TFI and the manager of ASI must be the PFSA’s website at the following address: https://www.knf.gov. composed of at least two members. All management board members pl/en/ABOUT_US/International_cooperation/EU/Memoranda_of_ must have full capacity to perform acts in law, no criminal record and understanding. enjoy good opinion connected with the functions held. At the same time, at least two management board members must have higher education or the licence to practice as an investment advisor and 2 Fund Structures work for at least three years on an executive or independent position in financial market institutions or hold functions in governing bodies of such institutions over the same period. 2.1 What are the principal legal structures used for Alternative Investment Funds? The initial capital of TFI and the external manager of ASI amounts to EUR 125,000, in the case of the internal manager of ASI such AIFs in the Polish legal regime may operate in the form of capital amounts to EUR 300,000. In the event that the total value investment funds (SFIO and FIZ) and in the form of ASI. of portfolios managed by ASI has exceeded EUR 250,000,000, the manager’s initial capital must be increased by 0.02% of such excess. Each investment fund, regardless of its type, is a legal person After the manager’s initial capital has reached EUR 10,000,000, no established pursuant to the Act. By virtue of law, an investment further increases are necessary. fund may be established and represented in relations with third parties only by TFI. Depending on their form, investment funds The provisions of Polish law do not specify any binding time issue: limit for PFSA in which the licencing procedure must be finished. Depending on how complicated the licensing structure is, the ■ in the case of SFIO – participation units, in principle transferred and redeemed at the participant’s request, which procedure can take between six and 12 months. are a divisible financial instrument without status of a security. Participation units may not be transferred in favour 1.6 Are there local residence or other local qualification of a third party, but they may be pledged and inherited; or requirements? ■ in the case of FIZ – investment certificates which are an indivisible security. The principles of issue, redemption and TFIs and managers of ASI must be commercial companies trading in investment certificates are set forth in the Act and established in the territory of the Republic of Poland. Members in the articles of association of FIZ.

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In accordance with the Act, ASI may be established as a capital detailed investment limits and allowed categories of investments company, including European company or limited partnership which should be taken into account when structuring the investment or limited joint-stock partnership. A participation title in ASI, policy of AIF operating in the form of an investment fund (SFIO depending on its legal from, will be a security or a share. The and FIZ) and when managing such AIF. With respect to ASI, rights connected with securities or shares and the manner of their the provisions of law do not specify any investment limits or exercise are set forth in the articles of association of a given ASI and diversification rules. The investment policy and strategy of ASIs in the provisions of the Polish Commercial Companies Code of 15 is determined by their constitution documents at the manager’s September 2000. discretion.

2.2 Please describe the limited liability of investors. 3 Marketing Poland

Investors are not liable for actions and liabilities of AIFs operating in the form of investment funds. In case of ASI, liability of investors 3.1 What legislation governs the production and offering is ruled by the provisions of the Polish Commercial Companies of marketing materials? Code of 15 September 2000. The production and offering of marketing materials on AIFs is 2.3 What are the principal legal structures used for governed in detail by the Act and implementing instruments of managers and advisers of Alternative Investment law thereto. In addition, in the case of marketing materials on FIZ Funds? and ASI offered to the public, the provisions of the Act on Public Offering, Conditions Governing the Introduction of Financial TFI may operate only in the form of a joint-stock company. The Instruments to Organised Trading, and Public Companies are manager of ASI may operate only in the form of a joint-stock applicable. company, a limited liability company or a European company. 3.2 What are the key content requirements for marketing 2.4 Are there any limits on the manager’s ability to materials, whether due to legal requirements or restrict redemptions in open-ended funds or transfers customary practice? in open-ended or closed-ended funds? The scope of marketing materials on AIFs offered in Poland is In the case of SFIO, redemption of participation units may be in compliance with the scope defined in Article 23 AIFMD. The suspended for two weeks, if: national regulations may additionally extend that catalogue. 1) over the last two weeks the sum total of the value of participation units redeemed by the fund and units requested to be redeemed makes the amount in excess of 10% of the 3.3 Do the marketing or legal documents need to be value of the fund’s assets; or registered with or approved by the local regulator? 2) a material part of the fund’s assets may not be reliably valued because of reasons not attributable to the fund. The marketing documents on SFIO and FIZ and ASI offered to the public must be always approved by PFSA. In other cases, although With consent of and subject to terms and conditions specified by there is no requirement of PFSA approval, documents are provided PFSA: to PFSA. 1) redemption of participation units may be suspended for a period longer than two weeks, but not exceeding two months; or 3.4 What restrictions are there on marketing Alternative 2) the fund may redeem participation units in instalments within Investment Funds? a period of maximum six months, applying proportional reduction. The basic restriction on offering AIFs is the circle of recipients to In the case of FIZ and ASI, the principles of redemption of which the offer may be addressed. In the case of ASI and FIZ not participation titles are governed only by their articles of association. offered to the public (so without approval of the marketing materials Because in accordance with Polish law, the transfer always requires by PFSA), the offer may not be addressed to more than 149 investors a prior redemption of participation titles, the above principles are or to an unspecified addressee. applied accordingly depending on the type of AIF. SFIO and ASI and FIZ offered to the public may be addressed to a wide (indefinite) circle of recipients; however, their marketing materials must be approved by PFSA. 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? Any additional restrictions on offering AIFs may be envisaged in their constitution documents. In the Polish legal regime, there are no legal restrictions for the possibility to exchange participation titles in AIFs. Detailed 3.5 Can Alternative Investment Funds be marketed to principles and restrictions in this regard may be envisaged in the retail investors? articles of association of a given AIF. The possibility to offer AIFs to individual investors depends on the 2.6 Are there any other limitations on a manager’s ability type of AIF. General division is as follows: to manage its funds (e.g. diversification requirements, ■ Open-ended AIF (SFIO) may be offered to individual asset stripping rules)? investors without any restrictions. If the articles of association of SFIO provide for that the fund will apply investment The Act and implementing instruments of law thereto specify restrictions typical for FIZ, the Act implements an additional

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restriction that individuals may invest in such SFIO provided In the case of ASIs, their sole activity is to collect assets from that they make a one-off payment to the fund in the amount many investors for the purpose of their investment in the interest of equivalent to EUR 40,000. The offering is made pursuant to those investors in accordance with the investment policy specified the provisions of the Act. in their constitution documents. The Act does not implement any ■ FIZ not subject to public offering (operating without PFSA’s investment limits or restrictions for ASIs. authorisation) may be offered to individual investors; however, if these are individuals, the investment is possible if they make a one-off payment to the fund in the amount 4.2 Are there any limitations on the types of investments equivalent to EUR 40,000. The offering is made pursuant to that can be included in an Alternative Investment the provisions of the Act. Fund’s portfolio whether for diversification reasons or otherwise? Poland ■ FIZ offered to the public (operating with PFSA’s authorisation) may be offered to individual investors without any restrictions pursuant to the provisions of the Act on The provisions of the Act specify a number of investment limitations Public Offering. for AIFs operating in the form of investment funds. Statutory ASI is offered in principle to professional clients. ASI may be investment limitations concern both the type of permissible offered to individual investors if the participation rights in ASI financial instruments, investment objectives, investment limits, as are securities and the information about them and the terms of well as investment techniques which may be applied. In accordance their acquisition, making a sufficient basis for decision-making with a general rule, limitations for the investment policy of open- on the acquisition of such securities, is provided, in any form and ended funds are more restrictive than those relating to the policy of by any means, to at least 150 persons within the territory of one closed-ended funds. Member State or to an unspecified addressee. The offering of ASI to FIZ, in principle, may invest its assets in transferrable: securities; individual investors requires an authorisation of PFSA and is made receivables; shares in limited liability companies; foreign pursuant to the provisions of the Act on Public Offering. currencies; derivatives; property rights the price of which depends; directly or indirectly; on things specified as to their kind; specific 3.6 What qualification requirements must be carried out types of energy; pollution emissions or production volume measures in relation to prospective investors? and limits, admitted to trading on commodity exchanges; money market instruments; participation titles in other AIFs and collective The Act makes a distinction between professional and retail clients. investment undertakings, including foreign ones; real properties; The obligation to have the status of a professional client exists only and sea vessels. The Act specifies maximum and minimum limits in relation to the investment in ASI which is not offered to the public. of FIZ’s exposure to individual categories of investments. SFIO may invest its assets in the following instruments set forth 3.7 Are there additional restrictions on marketing to in the Act: securities (equity and debt), deposits, money market public bodies such as government pension funds? instruments, participation titles in other AIFs and collective investment undertakings, including foreign ones, derivatives, The provisions of Polish law do not implement any additional property rights the price of which depends, directly or indirectly, on restrictions. things specified as to their kind, specific types of energy, pollution emissions or production volume measures and limits, admitted to trading on commodity exchanges. The Act sets forth precise 3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process? conditions to be met by the above instruments and their issuers. Similarly as in the case of FIZ, the Act specifies maximum and Intermediation in the sale of participation titles in ASI may be minimum limits of SIFO’s exposure to individual categories of carried out only by entities operating with an authorisation and investments. If the articles of association of SIFO provide for so, under supervision of PFSA. the fund may apply investment limitations typical for FIZ, which are less restrictive. In such case, the additional restriction regarding the circle of potential investors in SIFO, as described in question 3.9 Are there any restrictions on the participation in 3.5, is in place. Alternative Investment Funds by particular types of investors, such as financial institutions (whether as In the case of ASI, the Act does not define any framework of its sponsors or investors)? policy. The investment policy and strategy of ASI is specified in its constitution documents. There are no restrictions other than specified in question 3.5 for participants of AIF. 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? 4 Investments FIZ may take, only in domestic banks, credit institutions or foreign banks, loans and credit facilities with their total value not exceeding 4.1 Are there any restrictions on the types of activities 75% of the fund’s net asset value at the time of execution of a loan that can be performed by Alternative Investment or credit facility agreement. A similar limit is applied in the case of Funds? issue of bonds by the fund. SFIO may take, only in domestic banks or credit institutions, loans When defining AIFs operating in the form of investment funds, the and credit facilities with maturity up to one year, in the total amount Act implements a restriction for the activities carried on by stating that the sole operations of the fund consist in investing funds raised not exceeding 10% of the fund’s net asset value at the time of by offering the acquisition of participation titles to the public or by execution of a loan or credit facility agreement. way of private placement, in securities, money market instruments With respect to ASI, the Act does not establish any restrictions for and other property rights set forth in the Act. taking loans.

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AIFs depends not only on their legal form but also on the pursued 5 Disclosure of Information investment policy and the way of earning and distribution of income. The form of this study does not allow detailed discussion 5.1 What public disclosure must the Alternative of this topic. Consultation with a tax advisor is necessary on a case- Investment Fund or its manager make? by-case basis.

SFIO must publish information prospectus and key investor 6.2 What is the tax treatment of the principal forms of information, as well as annual and semi-annual financial statements investment manager / adviser identified in question on the websites indicated in the articles of association of SFIO. 2.3?

FIZ offered to the public makes available to the public or to the Poland interested investors an issue prospectus or information memorandum The Polish tax system does not envisage any special forms of by means set forth in the provisions of the Act on Public Offering. taxation for entities managing AIFs or providing investment Such FIZ is also required, pursuant to separate regulations, to advisory services. Such entities are liable to tax in accordance with publish its annual financial statements. general principles applicable to legal persons. FIZ which is not offered to the public makes available, at the request of a fund participant, its annual and semi-annual financial statements. 6.3 Are there any establishment or transfer taxes levied If the articles of association of SFIO or FIZ provide for so, the in connection with an investor’s participation in an fund publishes on a periodic basis information about particular Alternative Investment Fund or the transfer of the components of the fund’s investments, to the extent, in the form and investor’s interest? on dates specified in the articles of association. In addition, all AIFs make available the following: Taxation of capital gains is charged to AIF participants, by way of levying tax at the rate of 19% on income derived from the transfer 1) on a periodic basis – with respect to each fund, each alternative investment firm or each Community AIF, information about: of securities or financial derivatives and the exercise of rights thereunder. a) percentage share of assets which are subject to special arrangements in connection with their non-liquidity; b) changes in internal regulations regarding liquidity 6.4 What is the tax treatment of (a) resident, (b) non- management; and resident, and (c) pension fund investors in Alternative c) current risk profile and risk management systems applied Investment Funds? by the entity managing AIF; and 2) on a regular basis – with respect to AIF applying financial If AIF participants are legal persons and unincorporated leverage, information about: organisational units, income derived by such persons from a) changes in the maximum level of AIF’s financial leverage participation in AIF is chargeable with tax in accordance with which may be applied on its behalf, and the right to re-use principles laid down in the Act on Corporate Income Tax of 15 security instruments or guarantee provided on the basis of February 1992. Income of legal persons is chargeable with the agreement for AIF’s financial leverage; and corporate income tax amounting to 19% of the taxable income. b) the total amount of applied AIF’s financial leverage. The above principles of taxation of AIF participants relate also to taxation of participants who are foreign investors, provided that they 5.2 What are the reporting requirements in relation to may be not applicable if AIF participants are persons covered by Alternative Investment Funds or their managers? the agreements on the avoidance of double taxation concluded with Poland. AIFs and their managing entities are obligated to ongoing and If AIF participants are individuals, income from participation in an periodic reports to PFSA on the basis of implementing instruments investment fund is chargeable with a lump-sum tax of 19%. of law to the Act. Reports express concern in particular over the financial standing of AIF and its manager, the composition of their governing bodies, the pursued investment policy (including the 6.5 Is it necessary or advisable to obtain a tax ruling from observance of investment limits under the law and the articles of the tax or regulatory authorities prior to establishing an Alternative Investment Fund? association), and important events relating to AIF, such as issues, liquidation, suspension of sale or redemption of participation titles. If a standard investment fund is established, it is not usual to apply for a tax ruling as the applicable principles of taxation and current 5.3 Is the use of side letters restricted? practices on the Polish capital market are not ambiguous. There are, however, cases in which the establishment of an alternative The use of side letters is not restricted or prohibited. But it must investment fund assumes a priori the achievement of specific be noted that the Act implements a general obligation of equal taxation objectives. In such situation, the issue of a final ruling may treatment of AIF’s participants. have an impact on the assessment whether the establishment of an entity of specific structure is reasonable. 6 Taxation 6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act 6.1 What is the tax treatment of the principal forms of 2010 (FATCA) and other similar information reporting Alternative Investment Funds identified in question regimes such as the Common Reporting Standard? 2.1? In order to implement the US Foreign Account and Tax Compliance Because of specifics of the Polish tax regulations, taxation of Act 2010 (FACTA) in Poland, the Act on Performance of the

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Agreement between the Government of the United States of America and the Government of the Republic of Poland to Improve 6.10 Are there any meaningful tax changes anticipated in International Tax Compliance and to Implement FATCA and the coming 12 months? Implementing Regulations of 9 October 2015 entered into force. According to our knowledge, no material changes are planned in this area. 6.7 What steps are being taken to implement the OECD’s Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they 7 Reforms affect Alternative Investment Funds’ operations? Poland The execution of Action Plan on Base Erosion and Profit-Shifting 7.1 What reforms (if any) are proposed? (BEPS) was reflected in Poland by making amendments to the Act on Corporate Income Tax, the aim of which was to seal the tax The most important reform relating to AIFs concerns implementation system and to prevent the use of hybrid structures, and especially to to the Polish legal regime of the principles laid down in Directive eliminate investment vehicles using limited joint-stock partnerships 2014/65/EU of the European Parliament and of the Council of and investment funds. 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EE (MIFID II). 6.8 Are there any tax-advantaged asset classes or Therefore, many domestic regulations governing the principles for structures available? How widely are they deployed? the functioning of capital market in Poland were amended this year. At the time of preparation of this study, AIFs and AIF managers are Some of AIF structures especially in the form of investment funds in the adjustment period. The market also expects the adoption of may be more advantageous from a tax perspective. In each case, respective implementing instruments of law corresponding to the the analysis taking into account specific expectations and planned above changes. policy of AIF is necessary.

6.9 Are there any other material tax issues for investors, managers, advisers or AIFs?

According to our knowledge, there are no material tax issues applicable to management companies, investors or managers.

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Tomasz Masiarz Rafał Lidke Dubiński Jeleński Masiarz i Wspólnicy sp.k. Dubiński Jeleński Masiarz i Wspólnicy sp.k. ul. Marszałkowska 142 ul. Marszałkowska 142 00-061 Warszawa 00-061 Warszawa Poland Poland

Tel: +48 22 436 06 01 Tel: +48 22 436 06 01 Email: [email protected] Email: [email protected] URL: www.djm.pl URL: www.djm.pl Poland Tomasz Masiarz graduated from the Law and Administration Faculty Rafał Lidke graduated from the Faculty of Law at the Kozminski at the University of Warsaw and is a Managing Partner at DJM. He University. He has been associated with DJM since 2007. He specialises in capital market law. He has conducted numerous specialises in capital market law. Mr. Lidke participated in works licencing proceedings for various types of financial institutions before connected with the establishment and registration of a dozen or so the Office of the Polish Financial Supervision Authority and the Polish investment fund management companies and several dozens of Securities and Exchange Commission, including he participated funds. He is involved in providing ongoing services to capital market in the establishment of several dozens of investment funds. Mr. entities. He advises on issues connected with personal data protection Masiarz provides legal assistance to banks, investment firms carrying and anti-money laundering and prevention of terrorist financing. Mr. on brokerage activities in Poland, investment fund management Lidke supports clients in contacts with the Polish Financial Supervision companies and other financial institutions. He has conducted Authority and state authorities, including also in the course of projects involving implementation of the provisions of European law inspections. He has held the function of supervision inspector in the in international capital groups. He lectures at universities, specialised investment fund management company and in the brokerage house. courses and conferences devoted to capital market law. Tomasz Rafał Lidke has a fluent command of English. Masiarz has a fluent command of English.

Dubiński Jeleński Masiarz i Wspólnicy sp. k. is a law firm which combines legal jurisprudence with practical knowledge about business projects that DJM is involved in. Thanks to many years of practice and experience gained on various levels, we may actively participate in various types of undertakings of our clients. The effectiveness of our solutions is based both on legal jurisprudence and the knowledge of how to carry on a business. DJM offers comprehensive legal services in all areas of business operations, with the exception of tax advice. DJM has unique, and the most extensive on the Polish market, experience in creating investment funds and management companies of investment funds. We managed proceedings before the Polish Financial Supervision Authority (and/or previously before the Polish Securities and Exchange Commission) for authorisations to conduct activities by management companies of investment funds and authorisations to create investment funds (in total DJM was involved in creating over 500 funds and sub-funds operating on the Polish market). DJM’s lawyers involved in the issues of investment funds make one of the largest teams of that type in Polish law firms. They have unique experience on the Polish market in providing services to investment funds and management companies of investment funds, as well as foreign funds connected with the Polish market. The team members have developed specialisation in various legal issues related to investment funds. DJM’s lawyers have been involved in creating many pioneer structures and models of operation on the Polish market. Special achievements of DJM in the area of investment funds include the execution of the following pioneer projects on the Polish market: ■■ creation of the first closed-end investment fund in Poland organised in accordance with theAct on Investment Funds; ■■ creation of the first dedicated closed-end investment fund in Poland; ■■ creation of the first guaranteed closed-end investment fund in Poland; ■■ creation of the first specialised closed-end investment fund in Poland that may invest in real estate; ■■ creation of the first specialised closed-end investment fund in Poland; ■■ creation of the first specialised open-end investment fund in Poland; ■■ creation of the first umbrella fund with separate sub-funds in Poland; ■■ creation of the first hedging fund in Poland; ■■ the first merger of open-end investment funds on the Polish market; ■■ the first take-over of the management of an investment fund on the Polish market; ■■ creation of the first master-feeder fund in Poland; ■■ creation of the first closed-end investment fund in Poland with its structure implementing as much as possible the common global standard for private equity funds in the form of limited partnerships; and ■■ the first and only transformation of a non-public closed-end investment fund into a public closed-end investment fund in Poland. A number of solutions based on the practice of DJM’s lawyers is currently functioning on the Polish market in all management companies of investment funds. Some of such solutions have been also reflected in legal regulations implemented in Poland. DJM’s lawyers often were, and continue to be, actively involved in the legislation process for investment funds. Recently, pursuant to the provisions of the Act on lobbying activities in the law making process of 7 July 2005, we have participated in legislation works regarding the implementation of UCITS V Directive and AIFMD Directive in Poland.

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Portugal Pedro Simões Coelho

Vieira de Almeida Inês Moreira dos Santos

The UCI Law did not implement in Portugal the de minimis 1 Regulatory Framework exemption foreseen in the AIFMD. As a result, all fund managers, regardless of the asset under management, will need to comply, in 1.1 What legislation governs the establishment and general terms, with the same requirements. operation of Alternative Investment Funds? Nonetheless, considering the type of AIFs the fund manager intends to manage, i.e. AIFs investing in securities or financial assets, The activity involving the management, investment and marketing non-financial assets or real estate, there will be some specific of Alternative Investment Funds (AIFs) is mainly regulated by the requirements to be met, notably as regards investment policies and Undertakings for Collective Investment Law (Regime Geral dos contracts with service providers. Organismos de Investimento Coletivo), enacted by Law no. 16/2015 of 24 February 2015 (UCI Law), which implemented in Portugal 1.3 Are Alternative Investment Funds themselves Directive 2009/65/EC on undertakings for collective investment required to be licensed, authorised or regulated by a in transferable securities (UCITS) (UCITS Directive), as amended regulatory body? from time to time, as well as Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD), which sets out most of Yes. The setting up of AIFs is subject to authorisation with the rules relating to AIFs, the CMVM Regulation no. 2/2015 on the CMVM, which is the competent regulator to undertake the Undertakings for Collective Investment (Regulation no. 2/2015), supervision of AIF managers, ancillary service providers, AIFs’ which sets forth more specific rules regarding certain aspects of the distributors and compliance with the general rules applying to AIFs, UCI Law and the Portuguese Securities Code (Código dos Valores notably those relating to the protection of investors’ interests. Mobiliários or PSC), enacted by Decree-Law no. 486/99 of 13 November 1999, as amended from time to time, that entered into force on 1 March 2000. 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment The Portuguese Securities Exchange Commission (Comissão do Funds (or otherwise differentiate between different Mercado de Valores Mobiliários or CMVM) is the main regulatory types of funds or strategies (e.g. private equity v body in relation to the aforementioned matters. hedge)) and, if so, how? Furthermore, AIFs’ managers, as financial institutions, are also subject to the Bank of Portugal (Banco de Portugal or BoP) Yes. In general terms, the UCI Law distinguishes between AIFs prudential supervision, notably in what concerns the applicable investing (i) in securities or financial assets, such as undertakings provisions of the Portuguese Banking Law, enacted by Decree-Law for collective investment in transferable securities that do not no. 298/92 of 31 December, as amended from time to time, and all comply with the UCITS Directive limits and are thus classified complementary legal documents in connection therewith. as AIFs which invest in securities, (ii) in real estate (real estate investment funds), and (iii) in long-term non-financial assets with a determinable value. 1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or Furthermore, Regulation No. 2/2015 allows AIFs investing in regulated by a regulatory body? securities to adopt the branding of AIF investing in bonds, shares, index tracker, money-market fund, etc., provided that its investment Yes. Fund managers, as financial institutions, are subject to the policy complies with certain criteria. Bank of Portugal’s supervision, notably in respect of prudential The AIFs described in points (i) and (ii) above may be open- or closed- matters. Moreover, fund managers, as financial intermediaries, are ended, but the type referred to in point (iii) shall be closed-ended. also subject to the CMVM’s supervision in what concerns most of The UCI law does not contain any specific provision regarding the rules governing their management of AIFs’ activity. private equity or hedge funds, thus in principle they will be Therefore, the fund managers’ authorisation procedure will be encompassed by the regime of the AIFs investing in securities. conducted before the BoP and the CMVM at the same time, but the In general terms, the open-ended AIFs are addressed to the retail final authorisation will only be granted if both regulators agree that market and the closed-ended AIFs target affluent or professional the candidate fulfils all legal requirements to manage AIFs. investors. As a result, the CMVM’s scrutiny over open-ended AIFs tends to be tighter.

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Furthermore, depending on the type of AIF at stake and whether it is (the majority of which need to be considered independent) plus a open or closed-ended, different investing limits will apply, notably sole auditor. in respect of leverage and asset allocation. The members of the board of directors and audit board of the fund manager need to be previously authorised by the BoP, being subject 1.5 What does the authorisation process involve and how to a thorough suitability assessment during such a procedure. long does the process typically take? Furthermore, the fund manager shall have in place several internal policies aiming to address the risk of its activity, remuneration In a nutshell, the authorisation for the setting up of an AIF must issues, outsourcing, internal control, evaluation of the assets be filed with the CMVM. In requesting such authorisation, the pertaining to the AIFs under management, anti-money laundering, relevant AIF’s manager must provide the CMVM with the AIF’s selection of the members of the boards of directors and audit board, Portugal documentation, notably the Key Investor Information Document all subject to the control of the CMVM, the BoP and to a certain (KIID) and the full prospectus of the AIF (if applicable), which must extent the depository, and entailing permanent record-keeping by also include the AIF’s regulation. the fund manager. In addition, the CMVM must also be given copies of the agreements to be executed between the management company and (i) the 1.7 What service providers are required? depositary, (ii) the distributors or entities that will market the AIF, and (iii) any other entities that will render services to the AIF or to An AIF is legally required in Portugal to have a fund manager (if it the AIF manager. is not endowed with legal personality), a depository, an auditor and, Documents evidencing the acceptance of the rendering of the in the case of real estate AIFs, real estate appraisal experts. relevant services by all entities involved in the AIF’s activities must Furthermore, the AIF may also have, but is not legally compelled also be provided to the CMVM. to have, distributors or entities that will market the AIF, which is An authorisation is given within 20 days (or 30 days in the case standard practice in the case of open-ended AIFs. of self-managed collective investment companies) of the receipt of either the fully documented application or of any supplementary 1.8 What rules apply to foreign managers or advisers information or amendments to the documents required by the wishing to manage, advise, or otherwise operate CMVM. If at the end of such period the applicants have not yet funds domiciled in your jurisdiction? been notified of the deferral of their application, the authorisation is considered to have been tacitly refused. The same rules established for national managers will apply, in However, considering that CMVM tends to request further addition to the harmonised rules for requesting a passport to carry information from the applicant, the legal term for granting the out management of AIFs activity in Portugal. authorisation is halted and the authorisation process takes generally around two months and in the case of self-managed collective investment companies several months in light of the stricter legal 1.9 What co-operation or information sharing agreements have been entered into with other governments or requirements. regulators? The CMVM may refuse the authorisation if the applicant does not submit the required documentation or if the AIF manager at stake In accordance with the information currently available on the engages in irregular management of other investment funds. CMVM’s website, the CMVM has signed memorandums of After the authorisation has been granted, an AIF will be fully set up understanding with the competent regulators of other non-EU from the moment the first subscription is settled. Member States, namely Albania, Australia, the Bahamas, Bermuda, Brazil, the British Virgin Islands, Canada, Canada OSFI, the Cayman Islands, Dubai, Guernsey, Hong Kong MA, Hong Kong 1.6 Are there local residence or other local qualification requirements? SFC, India, the Isle of Man, Israel, Japan FSA, Japan MAFF, Japan METI, Jersey, Labuan, the Former Yugoslav Republic of Macedonia, Malaysia, the Maldives, Mauritius, Mexico, Montenegro, Morocco, Considering that the vast majority of the AIFs in Portugal have been Pakistan, Singapore, South Africa, South Korea (FSC & FSS), set up under the contractual form with no legal personality, they Republika Srpska, Switzerland, Tanzania, Thailand, the United ought to be managed by a separate fund manager. Arab Emirates, the US CFTC, the US SEC and Vietnam. The fund manager may be a Portuguese incorporated financial institution or an entity providing services on a cross-border basis under the AIFMD passport legal framework, either through the free 2 Fund Structures provision of services or the freedom of establishment. However, it is important to bear in mind that the UCI Law only 2.1 What are the principal legal structures used for allows for an EU fund manager, passported under AIFMD, to Alternative Investment Funds? manage a Portuguese AIF if such an AIF exclusively targets professional investors, in accordance with the MiFID definition. An AIF may take one of two forms or structures, both subject to the As regards Portuguese incorporated fund managers, they shall licensing procedures described in question 1.5 above: have a board of directors comprising at least three members, one ■ Contractual structure with no legal personality. This is the of them necessarily being an independent director (or non-executive classic structure and requires that the AIF be managed by a director). separate fund manager. The investors’ or participants’ interests Moreover, pursuant to the recently enacted Law no. 148/2015 of in these funds are called units (unidades de participação). 9 September (Auditing Supervision Framework) the fund manager ■ Collective investment company endowed with legal personality shall also have an audit board comprising at least three members (sociedade de investimento). Collective investment companies

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which mainly invest in securities are classified as SIMs ■ credit institution, provided that it has own funds in an amount (sociedades de investimento mobiliários), while those which no less than €7,500,000, the AIF is closed-ended, and that the mainly invest in real estate are classified as SIIs (sociedades overall asset of the AIFs under its management falls below (i) de investimento imobiliário). Both SIMs and SIIs may be €100,000,000, if the portfolio includes assets acquired with self-managed or have appointed a third party as their manager, resort to the leveraging effect, or (ii) €500,000,000, if the which must be a duly authorised investment fund manager. AIFs do not resort to leveraging. Participants in these collective investment companies will hold Considering that it is unusual for an AIF to be self-managed in shares (ações). Portugal and due to the limitations falling upon credit institutions, Lastly, please note that the AIFMD has been partially implemented almost every AIF is managed by fund managers (financial in Portugal by Law no. 18/2015 of 4 March, relating to Venture institutions) as described in the first two paragraphs above.

Portugal Capital, Social Entrepreneurship and Specialised Investment (Venture Capital Law). 2.4 Are there any limits on the manager’s ability to The Venture Capital Law contains a specific regime applicable to restrict redemptions in open-ended funds or transfers AIFs investing in equity instruments for a limited period of time as in open-ended or closed-ended funds? well as other structures, which in spite of sharing similar features with the UCI’s framework, is perceived under Portuguese law as The UCI Law is silent in respect of the ability of the fund manager being an autonomous subject in relation to the UCIs. That being to restrict redemptions in open-ended funds, but considering that said, the present questionnaire does not take into account the Venture such types of AIFs in general target retail investors, the CMVM will Capital Law as it falls outside the relevant scope. most certainly closely scrutinise this matter. In fact, such possibility In Portugal, besides one collective investment company endowed would need to be clearly set out in the AIF’s regulation, which is with legal personality that has been set up until the present date, all analysed during the authorisation procedure. AIFs are usually set up under the contractual structure with no legal Moreover, the minute of the AIF regulation, approved by Regulation personality. no. 2/2015, contains a field where the conditions set out for In an overall assessment of pros and cons of both structures, it should redemptions must be described, but only as regards the applicable be taken into account that the contractual structure has a long track fees, settlement dates and the criteria for the determination of which record in Portugal, being the preferred choice for setting up AIFs, units/shares will be redeemed. Likewise, Regulation no. 2/2015 as it offers an affordable, simple and well-known model for AIFs. only seems to foresee conditions under which redemptions may be Conversely, the collective investment company endowed with legal suspended, but not restricted. personality is clearly a more complex model that allows, however, As regards the restriction of transfers in open-ended funds, the same greater control for the investors over the management of the AIF. rationale described above in respect of the redemption applies. Nonetheless, the lack of a decisive incentive to change the current Conversely, regarding closed-ended AIFs, mainly those targeting status quo in respect of the way AIFs are usually set up in Portugal professional investors, we trust that it is possible to establish in the may be deemed as holding back a better use of the opportunities AIF’s regulation restrictions on the transfer of units from investors offered by this structure. to third parties.

2.2 Please describe the limited liability of investors. 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? Legally, the asset of an AIF is only liable for its debts, thus it will not be liable for investors, the fund manager, depository, distributors There are no legislative restrictions. or other AIFs’ debts. Likewise, investors are not personally liable for the AIF’s debts and will under no circumstances be burdened by 2.6 Are there any other limitations on a manager’s ability any debt of the AIF. to manage its funds (e.g. diversification requirements, Notwithstanding, in the case of closed-ended real estate AIFs, the asset stripping rules)? UCI Law allows for the AIF’s regulation to establish that, following a resolution of the investors’ assembly, the investors in a privately The ability of the manager to manage its funds will be mainly subscribed real estate AIF will take over the debts of the AIF, limited by the investment policy established in the AIF’s prospectus provided that the creditors agree so and that it is ensured that the or regulation, as applicable, by the general investment limits by type debts arising after the extinction of the AIF will be taken over by of AIF, if any, established in the UCI Law and by the obligation to the fund manager. conduct its activity in the best interest of the investors. The UCI Law has a list of acts that a manager cannot carry out, such 2.3 What are the principal legal structures used for as granting loans, execute certain transactions on its own account, managers and advisers of Alternative Investment execute transactions relating to the assets held by the AIF with Funds? related parties, e.g., entities of its group, the depositary, etc.

The AIF, which is not self-managed, will need to be managed by a: ■ fund manager (financial institution) authorised to manage 3 Marketing UCITS, AIFs investing in securities or financial assets and in non-financial assets, or real estate investment funds (sociedade gestora de fundos de investimento mobiliário); 3.1 What legislation governs the production and offering of marketing materials? ■ real estate fund manager (financial institution), which may only manage real estate funds (sociedade gestora de fundos Please refer to question 1.1 above. de investimento imobiliário); or

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or authorised by the CMVM to perform the relevant activities, 3.2 What are the key content requirements for marketing namely those of placement and reception and transmission of orders materials, whether due to legal requirements or on behalf of third parties, and (iv) other entities as foreseen in customary practice? Regulation no. 2/2015 and subject to its authorisation. Furthermore, the concept of reverse solicitation is not an official Regulation no. 2/2015 provides minutes for the AIF’s legal documents exemption from the UCI Law requirements, but rather a tolerated (KIID, prospectus and regulation). practice, which consists of an investor, on its own initiative and On the contrary, there are no minutes available in respect of marketing without any previous engagement on the part of the distributor, materials. Nonetheless, it is common practice for the fund manager requesting information on the AIF at stake. However, a case-by-case and other distribution entities to provide information on the investment assessment needs to be conducted, considering that the new AIFMD policy, markets targeted, main features (identification of the relevant framework has induced a greater use of the reverse solicitation Portugal entities, ISIN Code, terms and conditions of the investment, links to expedient, which may come under the CMVM’s scrutiny. the legal documents) and historic returns of the AIF. Virtually every type of marketing falls into the category of Pursuant to Regulation no. 2/2015, if the marketing materials distribution (comercialização), thus if such is not carried out by a disclose return figures, they shall also contain, at least: duly licensed entity or under the reverse solicitation exemption, it ■ The identification of the AIF and fund manager. will be in breach of the UCI Law. ■ The reference “the disclosed returns represent past data and A clear distinction must be drawn regarding pre-marketing. If do not guarantee future returns”. such marketing is conducted in relation to a specific AIF with the ■ The identification of the reference period for return figures intention of triggering a future solicitation by the addressee to indicated. receive more information and subscribe the AIF, it is rather likely ■ Confirmation on whether or not the return figures disclosed that the CMVM will consider it to fall within the concept of actual already include the applicable taxation. marketing. Conversely, if the pre-marketing has only a general ■ Information on where and how the KIID and other legal nature, i.e. seeks to present to the investor the existence and activity documents may be obtained. carried out by the fund manager or an overall look at the market, ■ In cases where the AIF’s units/shares are admitted to trading without recommending or referring to any investment opportunity on a regulated market, identification of the market at stake in particular, there are grounds to sustain that we will not be facing a and if the values disclosed are calculated on the basis of the marketing activity subject to the UCI Law requirements. asset value or on the market value of the units/shares. An AIF may only be marketed in Portugal after its constitution has ■ The warning that investment in the AIF may lead to the been authorised by CMVM and in any case the marketing material loss of principal invested, in cases where the AIF does not may contradict or diminish the importance of the AIF’s prospectus guarantee payment of the principal invested. or regulation and KIID. ■ If the figures disclosed are annualised, but have a reference period greater than one year, the information disclosed shall also contain the reference according to which the reference 3.5 Can Alternative Investment Funds be marketed to return could only be obtained if the investment was performed retail investors? during the entire period of reference. ■ The risk level, with identical emphasis of the return figure, Yes. However, AIFs passported under the AIFMD can only be for an identical period of reference. marketed in Portugal to professional investors. Lastly, as a general note, in accordance with the PSC, the information In order for the AIF to be marketed with retail investors in Portugal, contained in the marketing materials shall be prepared in Portuguese the fund manager will need to obtain an authorisation of the CMVM, or followed with a duly legalised translation, and must be complete, to be granted after the conclusion of a full registration procedure in true, updated, clear, objective and licit. Portugal of the AIF.

3.3 Do the marketing or legal documents need to be 3.6 What qualification requirements must be carried out registered with or approved by the local regulator? in relation to prospective investors?

Marketing materials in respect of AIFs do not need to be registered There is no particular requirement to be fulfilled in relation to or authorised by the CMVM. investors in AIFs. However, an AIF’s legal documents, namely the KIID, the full Nonetheless, the fund manager shall ensure that the “know your prospectus of the AIF and/or the AIF’s regulation, as well as any customer and investment suitability analysis” is properly carried out further amendment to them, need to be registered with the CMVM in relation to the potential investor, as well as ensure that the anti- and publicly disclosed through the CMVM’s website. money laundering and terrorism financing procedures are respected. We stress that in the case of AIFs exclusively targeting professional 3.4 What restrictions are there on marketing Alternative investors, the fund manager shall guarantee that the investors that do Investment Funds? not meet such eligibility criteria cannot invest in the AIF.

The marketing or distribution (comercialização) of AIFs is very 3.7 Are there additional restrictions on marketing to broad, being defined as the activity directed towards investors with public bodies such as government pension funds? a view to promoting or proposing the subscription of units/shares, regardless of the means of communication used. There are no additional restrictions. The entities which are legally permitted to market AIFs are (i) AIF managers, (ii) depositaries, (iii) financial intermediaries registered

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encumbered, with liens or charges that may render its future disposal 3.8 Are there any restrictions on the use of intermediaries more difficult, such asin rem security. to assist in the fundraising process? AIFs which invest in long-term non-financial assets with a determinable value need to hold at least 30% of their NAV in long- No. However, the relationship established between the intermediaries term non-financial assets with a determinable value and may invest and the AIF shall be put in a written agreement and disclosed in the up to 25% of their NAV in real estate, units/shares in real estate AIF’s legal documents. investment funds and shares in real estate investment companies. Furthermore, the intermediary, when carrying out the fundraising Lastly, we stress that loan originating from AIFs is not allowed in process, needs to act within the scope of activities that it is authorised general terms under Portuguese law. to conduct, i.e. if the fundraising process corresponds to marketing Portugal of the AIF under the UCI Law, the analysis carried out in respect of question 3.4 above will be entirely applicable herein. 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund?

3.9 Are there any restrictions on the participation in Yes. In respect of real estate AIFs, the borrowing limits are 25% Alternative Investment Funds by particular types of investors, such as financial institutions (whether as of the asset for open-ended AIFs and 33% of the asset for closed- sponsors or investors)? ended publicly and privately (by more than five investors, which are exclusively qualified as professional investors) subscribed No. However, the holding of units/shares in AIFs may have an AIFs. Closed-ended AIFs which are privately subscribed by five impact, that needs to be assessed on a case-by-case basis, on the or fewer investors or whose investors are exclusively qualified as own funds and reserves of the credit and financial institutions. professional investors are not subject to any borrowing limit. Regarding the Portuguese insurance and pension funds sectors, As regards AIFs investing in securities or financial assets and AIFs there are limits relating to the representation of technical provisions investing in long-term non-financial assets with a determinable with interests in AIFs, as well as to the asset allocation of pension value, their regulations shall set out the limits for borrowing, but the funds, which restricts the exposure to a single AIF or the investment UCI Law is silent in respect of borrowing limits. in AIFs in excess of a certain percentage of the portfolio, which will vary in accordance with the entity at stake. 5 Disclosure of Information

4 Investments 5.1 What public disclosure must the Alternative Investment Fund or its manager make? 4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment Besides the reporting obligations referred to in question 5.2 Funds? below, the elements which are made available to the public on the CMVM’s website and the identity of the persons/companies holding Yes. AIFs can only focus on investment activities and their qualifying shareholdings (10% or more) in the fund manager shall management and investment shall comply with the general rules also be publicly disclosed. applicable to the financial instruments markets, notably the ones Furthermore, the legal documents of the AIFs and their updates shall resulting from the implementation carried out in Portugal of the also be made available on the CMVM’s website. Considering that MiFID II by the PSC. the legal documents shall describe the identity of the fund manager, depository, auditor, distributors and other services providers to the 4.2 Are there any limitations on the types of investments AIF, the majority of the data in connection with the AIF will be that can be included in an Alternative Investment made available to the public. Fund’s portfolio whether for diversification reasons or However, the identity of the investors in the AIF is not mandatorily otherwise? subject to public disclosure.

Yes. The assets eligible for the portfolio of the AIF will depend on its specific type. 5.2 What are the reporting requirements in relation to Alternative Investment Funds or their managers? Therefore, AIFs investing in securities or financial assets, such as undertakings for collective investment in transferable securities that The fund manager must prepare and publish annual and biennial do not comply with the UCITS Directive limits, may also invest up accounts. These must be made available free of charge at the to 10% of their NAV in units/shares of real estate AIFs. Moreover, investors’ request. the AIF’s regulation shall set out the other relevant limits, otherwise The marketing entity must send or make available to the investors a the limits established in the UCITS Directive, as implemented by statement informing them of: the UCI Law, shall apply. ■ the number of units such investor holds; and Real estate investment funds shall invest the majority of their assets in real estate, but may also invest in shares of real estate investment ■ their value and the aggregate value of the investment. companies (sociedades imobiliárias), derivatives, mainly for In addition to this information, the marketing entity may provide any hedging purposes, units/shares of other real estate investment funds additional information regarding the investor’s financial situation. and liquidity instruments. The extent to which the investment in the For example, if the marketing entity is a bank of which the investor referred assets is limited will depend on the fact of the AIF being is a client, it could provide the above information together with the closed-ended or open-ended, and privately or publicly subscribed. investor’s bank statement. Either way, the real estate investment fund cannot invest in assets

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Any information published pursuant to the requirements set out below AIFs that are exclusively investing in money market instruments is available to investors, usually through the CMVM’s information and bank deposits will also be subject to stamp duty calculated on diffusion system (website). their global net asset value at a rate of 0.0025% (per quarter). Other Moreover, the fund manager must publish and send to the CMVM: AIFs will be subject to stamp duty to be levied on their global net asset value at a rate of 0.0125% (per quarter). ■ The annual accounts within three months after the end of the financial year. ■ The biennial accounts within two months after the end of the 6.2 What is the tax treatment of the principal forms of relevant semester. investment manager / adviser identified in question ■ An inventory of the fund’s asset portfolio, its global net value, 2.3? any responsibilities not found in the balance sheet and the number of units currently in circulation, on a monthly basis. In the case of AIFs endowed with legal personality which are self- Portugal The fund manager as a regulated entity shall also in respect of its managed, the tax regime referred to in question 6.1 above applies. activities prepare and submit its accounts and financial statements On the contrary, in the case of AIFs managed by a third party, the and internal control report to the BoP and CMVM. In addition, the income obtained by such an AIF manager (including capital gains fund manager shall keep the BoP updated with the beneficial owners earned on the transfer of fund units) is subject to CIT at a rate of 21% of its qualifying shareholdings. to which a municipal surcharge of up to 1.5% may be applicable on taxable profits, depending on the municipality of where the AIF manager is established (the municipalities have the right to decide if 5.3 Is the use of side letters restricted? the municipal surcharge is levied and at which rate). Taxable profits are also subject to a progressive state surcharge which The use of side letters that set out particular terms and conditions in has the following applicable rates: (i) 3% on the part of the taxable respect of governance, investment, etc. of the AIF is not specifically profits exceeding €1.5 million up to €7.5 million; (ii) 5% on the part addressed by the UCI Law. of the taxable profits exceeding €7.5 million up to €35 million; and However, in the case of open-ended AIFs, considering that they (iii) 9% on the part of the taxable profits exceeding €35 million. tend to target retail investors and/or a broader unrestricted scope of investors, the use of side letters which alter any relevant provision of the legal documents, shall be deemed illegal, considering that as a 6.3 Are there any establishment or transfer taxes levied general principle the fund manager needs to abide by the AIF’s legal in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the documents during the provision of its activity. investor’s interest? In closed-ended AIFs, notably those which are privately subscribed or targeting only professional investors, we trust that there is a Establishment taxes are not applicable in Portugal to the mere wider margin to set out, namely through a side letter, giving specific holding of a participation in an AIF. Please note in this regard that provisions in respect of certain matters. However, in general terms, the acquisition of an AIF’s units of a privately subscribed closed- the provisions of the UCI Law are imperative, therefore any side ended real estate AIF, as well as operations of redemption, capital letter providing for actions in breach of such legal provisions will be increase or reduction, which results in a single investor or two deemed illegal and may subject the fund manager to administrative spouses holding more than 75% of the units representing the assets offence proceedings. of such AIF, property transfer tax should apply proportionally at the applicable rate (up to 6.5%) to the taxable value or the total value of 6 Taxation the assets, as the case may be, but in each case with preference to the evaluation report of the investment fund manager, if higher.

6.1 What is the tax treatment of the principal forms of 6.4 What is the tax treatment of (a) resident, (b) non- Alternative Investment Funds identified in question resident, and (c) pension fund investors in Alternative 2.1? Investment Funds?

Decree-Law no. 7/2015 of 13 January 2015 (DL 7/2015) introduced (a) Resident investors. The taxation of resident investors is a new UCI specific tax legal framework, which has been in force as follows: since 1 July 2015. Personal income tax (PIT): Income distributed or derived AIFs are subject to corporate income tax (CIT) at the general rate from redemptions to Portuguese individuals (outside their (currently set at 21%), but are exempt from municipal and state commercial activity) is subject to a 28% final withholding surcharges. Taxable income corresponds to the net profit assessed tax. If the investor opts to aggregate the income received, it in accordance with an AIF’s accounting standards. will be subject to progressive income tax rates of up to 48%. In the latter circumstance, an additional income tax will be However, passive income, such as investment income, rental due on the part of the taxable income exceeding €80,000 as income and capital gains (except when sourced in a tax haven) are follows: (i) 2.5% on the part of the taxable income exceeding disregarded for taxable profit assessment purposes. Costs incurred €80,000 up to €250,000; and (ii) 5% on any taxable income in connection with such income (including funding costs) are exceeding €250,000. also disregarded for profit assessment purposes. The following Income payments to omnibus accounts are subject to a final are also disregarded for taxable profit assessment purposes: (i) withholding tax rate of 35%, unless the relevant beneficial non-deductible expenses under the CIT code; and (ii) income and owner of the income is identified, in which case the tax expenses relative to management fees and other commissions rates applicable to the beneficial owner apply. Capital gains earned by AIFs. arising from the transfer of units are taxed at a special tax rate of 28% on the positive difference between capital gains An AIF’s income is not subject to withholding tax. However, and losses or the above progressive income tax rates and autonomous tax rates established in the CIT Code will apply. additional income tax rates, if the investor opts to aggregate the income received.

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Corporate income tax (CIT): Income payments to a resident of the non-resident entity is held, directly or indirectly, by entity are subject to withholding tax at a rate of 25% (to resident legal entities except when such entities are resident in be paid on account of the final CIT due) and are qualified a Member State of the EU other than Portugal or in a Member as income or gains for CIT purposes. Income payments to State of the European Economic Area provided, in this case, omnibus accounts are subject to a final withholding tax rate that such a State is bound to cooperate with Portugal under an of 35%, unless the relevant beneficial owner of the income is administrative cooperation arrangement in tax matters similar identified, in which case the standard tax rates applicable to to the exchange of tax information existing within the EU the beneficial owner apply. Member States or in a State with which Portugal has a double A resident entity is subject to CIT at a rate of 21% (if the tax treaty in force or a tax information exchange agreement in taxpayer is a small or medium-sized enterprise as established force; or (iii) non-resident investors have not timely provided in Decree-Law no. 372/2007 of 6 November 2007, the rate non-residence evidence in Portugal. Portugal is 17% for taxable profits up to €15,000 and 21% for taxable If the exemptions or reduced withholding tax rates do not profits in excess thereof). A resident entity may also be subject apply, the general rules and tax rates (25%, 28% or 35%, as to a municipal surcharge (derrama municipal) of up to 1.5% the case may be) will apply. on taxable profits, depending on the municipality where it is (c) Pension fund investors. Pension fund investors are taxed established (the municipalities have the right to decide if the as follows: municipal surcharge is levied and at what rate). Taxable profits are also subject to a progressive state surcharge (derrama 1. Pension funds which are established and operate in estadual) which has the following applicable rates: (i) 3% on accordance with Portuguese law are taxed as follows: the part of the taxable profits exceeding €1.5 million up to €7.5 i. In the event of income deriving from AIFs distributions, million; (ii) 5% on the part of the taxable profits exceeding €7.5 pension funds are exempt from CIT and are exempt million up to €35 million; and (iii) 9% on the part of the taxable from withholding tax. profits exceeding €35 million. ii. In the event of income deriving from the redemption Capital gains earned on the transfer of fund units are fully of the units or liquidation of the AIF, pension funds are included in the taxable income of the resident entity and are subject to withholding CIT at a 25% rate, which will subject to the same rates and surcharges as above. be refunded upon submission of the annual income tax (b) Non-resident investors. Non-resident investors are taxed return, since pension funds are exempt from CIT. as follows: 2. Pension funds which are established and operate in PIT: Income payments and capital gains derived from units accordance with the law of a Member State of the EU in a securities AIF are exempt from PIT provided that the other than Portugal or in a Member State of the European evidence of non-resident status required by the tax law is Economic Area are taxed as follows: timely delivered by the beneficiary of the income to the AIF. i. In the event of income distributed by real estate AIFs A refund procedure is available within a two-year period in or through the redemption of the units or liquidation of cases where a 28% withholding tax was applied for failure such a real estate AIF, the pension funds are subject to to timely deliver the documentation. The refund procedure withholding tax at the final rate of 10%. requires the certification of a special form by the competent ii. In the event of income deriving from securities AIFs, authorities of the state of residence. Non-resident investors including income deriving from distributions and from domiciled in a resident country are not able to benefit from the redemption of the units or liquidation of the AIF, income tax exemptions and, in addition, will be subject to pension funds should be exempt from CIT. In order to an aggravated 35% withholding tax. Income payments to benefit from such exemptions, adequate evidence of accounts opened in the name of one or more account holders non-resident status must be timely provided. acting on behalf of one or more unidentified third parties iii. However, non-resident pension funds cannot benefit are subject to a final withholding tax rate of 35%, unless the from the exemptions or the reduced withholding relevant beneficial owner of the income is identified, in which tax rates, as the case may be, pursuant to the case the tax rates applicable to the beneficial owner apply. characteristics of the AIF if: (i) the non-resident Non-resident individuals who obtain income distributed by a pension fund is domiciled in a blacklisted jurisdiction real estate AIF or through the redemption of such AIF units listed in Ministerial Order 150/2004 of 13 February, shall become subject to withholding tax at the final rate of as amended from time to time; (ii) more than 25% of 10% provided the non-residence evidence in Portugal has the capital of the non-resident pension fund is held, been obtained in due time. Capital gains deriving from the directly or indirectly, by resident legal entities except sale of said units are taxed autonomously at a 10% rate. when such entities are resident in a Member State of CIT: A CIT exemption applies where income arising from the the EU other than Portugal or in a Member State of units of a securities AIF is distributed or made available to the European Economic Area provided, in this case, a non-resident entity without a permanent establishment in that such a State is bound to cooperate with Portugal Portugal. Capital gains arising from the transfer of the said under an administrative cooperation arrangement in units are also exempt from CIT. tax matters similar to the exchange of tax information In order to benefit from such exemptions, adequate evidence existing within the EU Member States or in a State of non-resident status must be timely provided. with which Portugal has a double tax treaty in force or a tax information exchange agreement in force; or (iii) Non-resident corporate investors who obtain income non-resident pension funds have not timely provided distributed by a real estate AIF or through the redemption of non-residence evidence in Portugal. units on such AIF are subject to withholding tax at the final rate of 10%. Capital gains deriving from the sale of units in iv. If the exemptions or reduced withholding tax rates do a real estate AIF are taxed autonomously at a rate of 10%. not apply, the general rules and tax rates (25%, 28% or 35%, as the case may be) will apply. However, non-resident investors cannot benefit from the exemptions or the reduced withholding tax rates, as the case 3. In addition, pension funds which are established and may be, pursuant to the characteristics of the AIF if: (i) the operate in accordance with the law of a Member State of non-resident entity is domiciled in a blacklisted jurisdiction the EU other than Portugal or in a Member State of the listed in Ministerial Order 150/2004 of 13 February, as European Economic Area are exempt from CIT, provided, amended from time to time; (ii) more than 25% of the capital in this case, that such Member State is bound to cooperate

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with Portugal under an administrative cooperation to comply with FATCA. Portugal signed an Intergovernmental arrangement in tax matters similar to the exchange of tax Agreement with the US on 6 August 2015, which has been in force information existing within EU Member States which are since 10 August 2016 and, as such, Portuguese financial institutions also exempt from CIT, provided the following cumulative (funds and fund managers) are implementing procedures which will requirements are met: enable them to fully comply with the legal reporting and compliance i. the pension fund covers exclusively the payment of rules. retirement benefits for old age or disability, for survival, In addition, the Common Reporting Standard (CRS) has also been for early retirement, post-employment healthcare enacted, through Decree-Law no. 64/2016, of 11 October 2016, benefits and, where they are supplementary to those benefits and are provided on an ancillary basis to the which implemented the legal framework based on reciprocal previously mentioned benefits, the attribution and death exchange of information on financial accounts subject to disclosure grants; in order to comply with CRS and, as such, Portuguese financial Portugal ii. the pension fund is managed by institutions for institutions (funds and fund managers) are implementing procedures occupational retirement, as provided by Directive no. which will enable them to fully comply with the legal reporting and 2003/41/EC, of the European Parliament and of the compliance rules. Council, of 3 June; iii. the pension fund is the ultimate beneficial owner of the 6.7 What steps are being taken to implement the OECD’s income; and Action Plan on Base Erosion and Profit-Shifting iv. with respect to income distributions made by AIFs, the (BEPS), in particular Actions 6 and 7, insofar as they corresponding participation in the share capital is held, affect Alternative Investment Funds’ operations? continuously, for at least one year. In this case, however, it is not clear if the applicable exemption There have been amendments to the Portuguese legislation in for CIT purposes at the level of the pension funds enables connection with the recommendations of the Base Erosion and either (i) the operation of a withholding tax exemption upon Profit-Shifting (BEPS) action plan, issued by OECD, such as on the payment of income from the AIF to the pension fund or, definition of interest deduction limits and on substance assessment alternatively, (ii) the attribution to the pension funds to the requirements in order to be able to benefit from the Parent- right to claim a refund of the CIT withheld. To the best of our Subsidiary Directive. knowledge, the tax authorities have not provided any public However, to the best of our knowledge, we are not aware at this guidance in this respect up to this moment. stage of any additional proceedings or actions taken or proposed to be taken by the Portuguese Authorities regarding Actions 6 and 7 of 6.5 Is it necessary or advisable to obtain a tax ruling from BEPS, insofar as they affect AIFs’ operations. the tax or regulatory authorities prior to establishing an Alternative Investment Fund? 6.8 Are there any tax-advantaged asset classes or structures available? How widely are they deployed? Portuguese taxpayers may request advance rulings regarding specific tax situations. When advance rulings are issued, thetax There are some types of investment funds that benefit from a tax- authorities may not derogate from such rulings in relation to the advantaged treatment, namely: (a) Real Estate Investment Funds on taxpayers that requested it, except pursuant to court decisions. Forest Resources; (b) Residential Letting Real Estate Investment Subject to the payment of a fee (it may range from €2,550 up to Funds; (c) Real Estate Investment Funds on Urban Rehabilitation; €25,500), an advance ruling may be provided urgently, provided and (d) Venture Capital Funds. that such request by the applicant is accompanied by a tax (a) Real Estate Investment Funds in Forest Resources framework proposal, reasons raised for urgency and the amount to Real Estate Investment Funds in Forest Resources (REIFFR) be determined by the tax authorities according to the complexity of incorporated under the Portuguese law are exempt from CIT when the topic is paid. at least 75% of its assets are allocated to exploitation of forest If the tax authorities accept the urgency of the matter, the binding resources according to approved forest management plans, provided ruling will be issued within 75 days from the date of presentation of they are carried out accordingly to the applicable regulations and are the request, and in the event that the tax authorities do not issue the subject to the legal forest certification proceedings. ruling in such a time frame, it is considered that the tax treatment Investors who obtain income distributed by a REIFFR are subject presented by the taxpayer is agreed to by the tax authorities. Non- to withholding tax at the rate of 10% unless: (i) the investors are urgent rulings are delivered within 150 days, although this deadline entities exempt from CIT on capital income; or (ii) the investors are is merely indicative. non-resident entities with no permanent establishment in Portugal Unless the new law does not provide a clear answer on any particular to which the income can be attributed and that do not reside in a topic that might be raised by an investor, it is not necessary to blacklisted jurisdiction or that are not held in more than 25% by obtain a tax ruling from the tax or regulatory authorities prior to resident entities. establishing an AIF. Individual investors subject to PIT who opt to aggregate the income received may deduct 50% of the distributed income which concerns 6.6 What steps have been or are being taken to implement to dividends, as a means of eliminating the economic double taxation. the US Foreign Account and Tax Compliance Act Capital gains deriving from the transfer of units are taxed at a 10% 2010 (FATCA) and other similar information reporting tax rate if the investors do not benefit from the specific exemption regimes such as the Common Reporting Standard? applicable to capital gains realised by non-residents (foreseen in Article 27 of the Portuguese Tax Benefits Code) or if they are Portugal has implemented, through Law no. 82-B/2014 of 31 individual investors who do not obtain this income under their December, the legal framework based on reciprocal exchange of professional activity and that do not opt to aggregate the income information on financial accounts subject to disclosure in order received.

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Whenever the conditions above described regarding the composition (d) Venture Capital Funds of the fund’s assets cease to be met, the investment fund and its Venture Capital Funds constituted under the Portuguese law are investors shall be taxed according to the regime described in exempt from CIT on any type of income. questions 6.1 and 6.4. Investors who obtain income deriving from the distribution of (b) Residential Letting Real Estate Investment Funds income by a venture capital investment fund or from the redemption Residential Letting Real Estate Investment Funds (RLREIF) of units on such funds are subject to withholding tax at the rate incorporated between 1 January 2008 and 31 December 2015 are of 10% unless: (i) the investors are entities exempt from CIT on exempt from CIT, from Property Transfer Tax and Stamp Duty capital income; or (ii) the investors are non-resident entities with levied on the transfer of the immovable property to the RLREIF no permanent establishment in Portugal to which the income can be when the previous owners become the tenants or when they opt attributed. This exception does not comprise investors that reside Portugal to purchase the immovable property, in accordance to the lease in a blacklisted jurisdiction or that are held in more than 25% by contract. resident entities. This withholding tax becomes final when the Investors who obtain income deriving from these funds are exempt investors are non-resident and have no permanent establishment in from CIT and PIT, except with regards to capital gains earned on the Portugal or when they are individual investors who earn this capital transfer of fund units. gains irrespective of their professional activity and that do not opt to aggregate the income received. These benefits shall apply if certain conditions are met, such as the RLREIF’s portfolio being composed of a minimum of 75% of real Capital gains deriving from the transfer of units are taxed at a 10% estate located in Portugal and used for residential letting purposes. tax rate if the investors do not benefit from the specific exemption applicable to capital gains obtained by non-residents (foreseen Whenever the legally required conditions cease to be met, the in Article 27 of the Portuguese Tax Benefits Code) or if they are investment fund and its investors shall be taxed according to the individual investors who do not obtain this income under their regime described in questions 6.1 and 6.4. professional activity and that do not opt to aggregate the income (c) Real Estate Investment Funds for Urban Rehabilitation received. Real Estate Investment Funds for Urban Rehabilitation (REIFUR) incorporated between 1 January 2008 and 31 December 2013 which 75% of their assets are immovable property subject to urban renewal 6.9 Are there any other material tax issues for investors, managers, advisers or AIFs? and located in urban renewal areas are exempt from CIT on income of any type. This exemption is only applicable if urban renewal If an exemption is not applicable, the acquisition of real estate by interventions were initiated after 1 January 2008 and concluded an AIF is subject to Property Transfer Tax (up to 6.5%) and stamp until 31 December 2020. tax (0.8%) and each applicable tax rate will be levied either on the Income distributed by the REIFUR is subject to withholding tax at purchase price or the tax value of the property if higher. the rate of 10% unless: (i) the investors are entities exempt from CIT on capital income; or (ii) the investors are non-resident entities with no permanent establishment in Portugal to which the income 6.10 Are there any meaningful tax changes anticipated in can be attributed and that do not reside in a blacklisted jurisdiction the coming 12 months? or that are not held in more than 25% by resident entities. This withholding tax becomes final when the investors are non-resident To the best of our knowledge, we are not aware at this stage of and have no permanent establishment in Portugal or when they are any proceedings or actions taken or proposed to be taken by the individual investors who earn this capital gains irrespective of their Portuguese Authorities that consist of meaningful tax changes in the professional activity and that do not opt to aggregate the income coming 12 months. received. Individual investors subject to PIT who opt to aggregate income 7 Reforms received may deduct 50% of the distributed income corresponding to dividends, as means of eliminating the economic double taxation. Capital gains deriving from the transfer of units are taxed at a 10% 7.1 What reforms (if any) are proposed? tax rate if the investors do not benefit from the specific exemption applicable to capital gains realised by non-residents (foreseen Soon, the UCI Law will be subject to amendments by way of the in Article 27 of the Portuguese Tax Benefits Code) or if they are law that will implement in Portugal MiFID II framework, mainly by individual investors who do not obtain this income under their republishing the PSC. professional activity and that do not opt to aggregate the income Although, the amendments to the UCI Law will not be in principle received. substantial, the reference made by the UCI Law to several provisions Whenever the conditions above described regarding the composition of the PSC will entail that many of the changes introduced by MiFID of the fund’s assets cease to be met, the investment fund and its II will indirectly impact the fund manager activity and the AIFs. investors shall be taxed according to the regime described in questions 6.1 and 6.4.

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Pedro Simões Coelho Inês Moreira dos Santos Vieira de Almeida Vieira de Almeida Rua Dom Luís I, 28 Rua Dom Luís I, 28 Lisbon, 1200-151 Lisbon, 1200-151 Portugal Portugal

Tel: +351 21 311 3400 Tel: +351 31 311 3677 Email: [email protected] Email: [email protected] URL: www.vda.pt URL: www.vda.pt Portugal Pedro Simões Coelho joined Vieira de Almeida & Associados in 1998 Inês Moreira dos Santos joined Vieira de Almeida & Associados and is currently head of the firm’s investment funds practice and a in 2010 and rejoined the firm in 2015. She is a senior associate of partner in the Banking & Finance Group. He is also responsible for the tax team. Inês graduated in 2007 from the Portuguese Catholic the Agency & Trust practice and is a member of the firm’s aviation University and is a member of the Portuguese Bar Association since finance team. He has been actively involved in several transactions, 2010. She has an Executive Master in Tax Management (INDEG/ in Portugal and abroad, mainly focused on the advising, structuring ISCTE), an advanced post-graduation in Taxation (IDEFF) and and setting up of collective investment schemes such as mutual funds a post-graduation in Securities Law (IVM). Before joining the firm, and real estate investment funds, infrastructure vehicles, venture she worked at the law firms Garrigues Portugal and Miranda Correia capital funds and private equity structures. He has been responsible Amendoeira & Associados and at the Legal & Tax Department of for several transactions including non-performing loans, asset finance, Banif – Banco Internacional do Funchal. Inês has broad experience particularly in the aviation finance field, notably financing, leasing, sale in tax consulting and international tax planning, namely in Portugal, or purchase of aircraft, and capital markets, retail banking, financial Angola, Mozambique, Cabo Verde and São Tomé and Principe, services and securities’ law. He has also been actively working in having mainly been focused on multijurisdictional tax structuring advising fund managers, venture capitalists, brokers, banks and other investments, elimination of double taxation and structuring expatriates investment firms on a wide range of regulatory and related matters. remuneration packages. Inês has also been providing tax assistance In Agency & Trust services, he has been actively working in several in private wealth transactions, private client planning and compliance securitisations and debt issuing transactions advising several entities with tax reporting obligations. notably in their capacity as common representatives and issuers.

With over 40 years in the making, Vieira de Almeida (VdA) is an international leading law firm, notable for cutting-edge innovation and top-quality legal advice. A profound business know-how coupled with a highly specialised cross-sector legal practice enable the firm to effectively meet the increasingly complex challenges faced by clients, notably in the aerospace, distribution, economy of the sea, green economy, energy, finance, real estate, industry, infrastructure, healthcare, public, professional services, information technology, emerging technologies, telecoms, third, transports and tourism sectors. VdA offer robust solutions based on consistent standards of excellence, ethics and professionalism. The recognition of VdA as a leading provider of legal services is shared with our team and clients and is frequently acknowledged by the major law publications, professional organisations and research institutions. VdA has consistently and consecutively received the industry’s most prestigious awards and nominations. Through VdA Legal Partners clients have access to a team of lawyers across 12 jurisdictions, ensuring wide sectoral coverage, including all African members of the Community of Portuguese-Speaking Countries (CPLP), and several francophone African countries, as well as Timor-Leste. Angola – Cabo Verde – Chad - Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau – Mozambique – Portugal – São Tomé and Principe – Timor-Leste

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Puerto Rico Yarot T. Lafontaine-Torres

Ferraiuoli LLC Alexis R. González-Pagani

rely on certain exemptions in order to be exempt from the 1 Regulatory Framework provisions of the ICA. ■ Investment Advisers Act of 1940 (the “Advisers Act”): The 1.1 What legislation governs the establishment and Advisers Act regulates the business of persons engaged in operation of Alternative Investment Funds? providing advice to other persons, for compensation, with regard to investment in securities. A person advising a Fund generally meets the definition of an “investment adviser” Overview of the Commonwealth of Puerto Rico’s Laws and under the Advisers Act. Regulations ■ Securities Act of 1933 (the “Securities Act”): The offering The Commonwealth of Puerto Rico (“Puerto Rico”) is an and sale of ownership interest or securities in Alternative unincorporated territory of the United States of America (“United Investment Funds are subject to the provisions of the States”). Puerto Rico has a republican government system and has Securities Act. its own Constitution, laws and regulations. In addition, Puerto Rico ■ Securities Exchange Act of 1934 (the “Exchange Act”): enjoys United States constitutional, legal, financial and regulatory The sale and transfer of the ownership interest in Alternative protection. Furthermore, besides the local court system, Puerto Investment Funds are subject to the provisions of the Rico has its own United States District Court and its decisions are Exchange Act. subject to appeal to the First Circuit Court of Appeals in Boston, ■ Internal Revenue Code of 1984 (the “IRC”): Alternative Massachusetts and then to the United States Supreme Court. Investment Funds are generally structured as partnerships. The official currency of Puerto Rico is the United States dollar. As further explained below, the investors in an Alternative Investment Fund could be subject to different tax treatments Puerto Rico’s banking system and its financial institutions (including (e.g. individuals vs. business entities; domestic persons vs. investment advisers, investment companies and broker/dealers) are foreign persons). subject to United States laws and regulations. Bank deposits are ■ Others: Alternative Investment Funds and their Investment insured by the Federal Deposit Insurance Company and Puerto Advisers could be subject to regulation by the Commodity Rico’s geographic access points are protected by the United States Futures Trading Commission (the “CFTC”) if the investment Customs and Border Patrol. strategies of the Fund involve certain types of derivative Legislation Applicable to Alternative Investment Funds securities (e.g. futures, options, and certain swaps, among others). Other regulators include the Financial Industry In general, alternative investment funds (an “Alternative Investment Regulatory Authority (“FINRA”) and the Federal Reserve Fund” or a “Fund”) are regulated in a similar manner to Alternative Board with respect to Alternative Investment Funds affiliated Investment Funds organised in the continental United States in the with or sponsored by banks. sense that they are subject to both federal laws and regulations and Select Puerto Rico Legislation the laws and regulations of the state in which they are formed and/or doing business. It is important to note that Puerto Rico’s securities ■ Puerto Rico Uniform Securities Act (“PRUSA”): PRUSA and investment adviser laws and regulations are modelled after is modelled after the NASAA’s Model Uniform Securities Act. Among other matters, PRUSA regulates the registration the model laws and regulations published by the North American of Investment Advisers and the offer and sale of securities Securities Administrators Association, Inc. (“NASAA”), and that (unless federal pre-emption applies). the local regulator, the Office of the Commissioner of Financial ■ Puerto Rico General Corporations Act (the “PR Institutions of Puerto Rico (“OCFI”), is a member of NASAA. Corporations Act”): The PR Corporations Act establishes Select United States Legislation the framework on the constitution and governance of As mentioned above, Alternative Investment Funds and their corporations and limited liability companies in Puerto Rico. Investment Advisers organised under the laws of Puerto Rico and/or It is modelled after the Delaware General Corporations Act (the “Delaware Corporations Act”) and the Delaware doing business in Puerto Rico are subject to the laws of the United Limited Liability Companies Act (the “DLLC Act”). The States and all applicable rules and regulations promulgated by the Puerto Rico Supreme Court has stated that judicial decisions Securities and Exchange Commission (the “SEC”). from Delaware courts in connection with the interpretation ■ Investment Companies Act of 1940 (the “ICA”): The ICA of the Delaware Corporations Act are highly persuasive and regulates “investment companies” that issue securities and illustrative before Puerto Rico courts. are primarily in the business of investing in securities. As ■ Puerto Rico Investment Companies Act of 2013: (the “PR further discussed below, Alternative Investment Funds ICA”): The PR ICA established the framework for the

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organisation and operation of local investment companies Federal Level and it is modelled after the ICA. Please note that the PR Private Fund Adviser Exemption (SEC Rule 203(m)-1): ICA expressly states that it shall not apply to any investment company that is excluded from the definition as an ■ SEC Rule 203(m)-1 provides an exemption from registration “investment company” under Section 3(b), 3(c)(1) and 3(c) to Investment Advisers with their principal office and place of (7) of the ICA. This chapter will not discuss the provisions business in the United States who (i) only advise “qualifying of the PR ICA and regulations promulgated thereunder, given private funds”, and (ii) have less than USD 150 million in that Alternative Investment Funds are structured in order to AUM in the United States (which is defined to include Puerto be exempt under ICA. Rico). ■ Puerto Rico Internal Revenue Code (“PR IRC”): Puerto ■ The term “qualifying private fund” is defined to mean any (i) Rico has a unique tax system, which is intertwined with the private fund that is not registered under Section 8 of the ICA, United States tax system. It enjoys fiscal autonomy with (ii) private fund that has not elected to be treated as a business Puerto Rico respect to local tax matters. Notwithstanding, given that development company under Section 54 of the ICA, and (iii) Puerto Rico born individuals are also United States citizens, issuer that qualifies for an exclusion from the definition of an they are subject to worldwide taxation. However, pursuant “investment company” under Section 3 of the ICA in addition to Section 933 of the IRC, bona fide residents of Puerto Rico to those provided by Section 3(c)(1) or 3(c)(7) of the ICA are not subject to federal income tax on their Puerto Rico where the Investment Advisers treat the issuer as a private sourced income, providing for unique tax structures. With fund. regard to entities, the IRC excludes Puerto Rican entities ■ Non-United States Investment Advisers (no principal office from the definition of “United States Person” and treats them or place of business in the United States) are exempt from as foreign. Therefore, as with individuals, Puerto Rican registration under Section 203 of the Advisers Act if (i) the entities and entities organised outside the United States doing Investment Adviser has no clients that are United States business in Puerto Rico are not subject to United States persons except for one or more qualifying private funds, and income tax, except to the extent that they (a) engage in trade (ii) has less than USD 150 million in AUM in the United or business within the United States, or (b) derive certain States attributable to private fund assets. categories of investment income from United States sources. ■ Investment Advisers relying on the Private Fund Adviser Exemption are subject to record-keeping and reporting requirements and are classified by the SEC as “Exempt 1.2 Are managers or advisers to Alternative Investment Reporting Advisers”. They are required to prepare and file a Funds required to be licensed, authorised or regulated by a regulatory body? “short-form” version of Form ADV. Venture Capital Fund Adviser Exemption (Section 203 of the Yes, managers or advisers to Alternative Investment Funds are Advisers Act and SEC Rule 203(l)-1): required to be licensed, unless an exception from registration applies. ■ Section 203(l) of the Advisers Act exempts Investment Pursuant to the Advisers Act and PRUSA, Investment Advisers are Advisers from registration when they solely advise one or required to be registered with the SEC or with OCFI, unless an more “venture capital funds” as defined by the SEC. exception from registration applies. Under both statutes, a person ■ Under SEC Rule 203(l)-1, a “venture capital fund” is a private who, for compensation, engages in the business of advising others fund that: (i) represents to investors and potential investors as to the value of securities or as to the advisability of investing in, that it pursues a venture capital strategy; (ii) immediately after purchasing, or selling securities must register with the SEC or with the acquisition of any asset, other than qualifying investments or short-term holdings, holds no more than 20% of the amount OCFI, as applicable. of the fund’s aggregate capital contributions and uncalled Generally, and subject to certain exceptions, the level of assets under committed capital in assets (other than short-term holdings) management (“AUM”) of an Investment Adviser determines whether that are not qualifying investments, valued at cost or fair it should register with the SEC or with a state regulatory body, such value, consistently applied by the fund; (iii) does not borrow, as OCFI with regard to Puerto Rico-based Investment Advisers. issue debt obligations, provide guarantees or otherwise incur leverage in excess of 15% of the private fund’s aggregate ■ Small Advisers: Investment Advisers with less than USD 25 capital contributions and uncalled committed capital, and any million in AUM are regulated by the states unless the state such borrowing, indebtedness, guarantee or leverage is for in which the adviser has its principal office and place of a non-renewable term of no longer than 120 calendar days, business has not enacted a statute regulating advisers. except that any guarantee by the private fund of a qualifying ■ Medium Advisers: Investment Advisers with more than portfolio company’s obligations up to the amount of the value USD 25 million and less than USD 100 million in AUM of the private fund’s investment in the qualifying portfolio are regulated by the states if (i) the Investment Adviser is company is not subject to the 120-calendar-day limit; (iv) only registered with the local regulator in the state in which it has issues securities the terms of which do not provide a holder its principal office, and (ii) it is subject to examination by the with any right, except in extraordinary circumstances, to local regulator. withdraw, redeem or require the repurchase of such securities ■ Large Advisers: Investment Advisers with more than USD but may entitle holders to receive distributions made to all 100 million but less than USD 110 million in AUM may, but holders pro rata; and (v) is not registered under Section 8 are not required to, register with the SEC. Once AUM exceed of the ICA, and has not elected to be treated as a business USD 110 million, the Investment Adviser must register with development company pursuant to Section 54 of the ICA. the SEC. Once an Investment Adviser registers with the SEC, ■ The main difference between the Venture Capital Fund state laws and regulations pertaining to investment advisers Adviser Exemption and the Private Fund Adviser Exemption are pre-empted. is that Investment Advisers relying on the Venture Capital Notwithstanding the foregoing, there are various exemptions from Fund Adviser Exemption can have AUM in excess of USD registration at the federal and Puerto Rico level that Investment 150 million without having to register with the SEC. Advisers to Alternative Investment Funds may rely on: ■ Investment Advisers relying on the Venture Capital Fund Adviser Exemption are subject to the same record-keeping and reporting requirements as Investment Advisers relying on the Private Fund Adviser Exemption.

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Puerto Rico Level 1.4 Does the regulatory regime distinguish between On October 20, 2014, OCFI adopted Regulation 8526, which is open-ended and closed-ended Alternative Investment modelled after NASAA’s Registration Exemption for Investment Funds (or otherwise differentiate between different Advisers to Private Funds Model Rule and provides an exemption types of funds or strategies (e.g. private equity v from registration to advisers of private funds and of venture capital hedge)) and, if so, how? funds that comply with certain requirements. Under Regulation 8526, an Investment Adviser shall be exempt No. Neither United States nor Puerto Rico laws and regulations from registration with OCFI if it satisfies the following conditions: distinguish between open-ended and closed-ended Alternative ■ neither the Investment Adviser nor any of its advisory affiliates Investment Funds. Such distinctions are generally seen with are subject to an event that would disqualify an issuer under regulated investment companies (i.e. mutual funds registered under

Puerto Rico Rule 506(d)(1) of SEC Regulation D; the ICA or the PR ICA). ■ the Investment Adviser files with OCFI each report and amendment thereto that an Exempt Reporting Adviser is 1.5 What does the authorisation process involve and how required to file with the SEC, pursuant to SEC Rule 204-4; long does the process typically take? ■ if the Investment Adviser provides advice to at least one Fund that relies on Section 3(c)(1) of the ICA, that is not a Alternative Investment Fund Entity venture capital fund, it must also comply with the following requirements: Assuming that the Alternative Investment Fund is an on-shore entity, it could be organised as a Delaware limited partnership or limited ■ the Investment Adviser shall advise only Funds (other than venture capital funds) where the outstanding securities (other liability company or as a Puerto Rico limited liability company. than short-term paper) are beneficially owned entirely by As such, it would need to file the corresponding organisational persons who, after deducting the value of the primary residence documents in Delaware or Puerto Rico, as applicable, and would from the person’s net worth, would each meet the definition also be required to make other business filings and permits which of a “Qualified Client” under SEC Rule 205-3 at the time the are outside the scope of this chapter. Please note that in order to securities are purchased from the issuer: rely on the private offering exemption under Regulation D, the ■ as of March 2017, a person needs a net worth of at least USD Alternative Investment Fund would need to prepare and file Form D 2.1 million in order to be classified as a Qualified Client upon the first sale of its securities. under SEC Rule 205-3; Investment Adviser and General Partner/Managing Member ■ at the time of purchase, the Investment Adviser must disclose Entity to each investor: (i) all services, if any, to be provided to individual investors; (ii) all duties, if any, which the The entity or entities that will be organised to serve as the investment adviser owes to the investors; and (iii) any other Investment Adviser and as the General Partner/Managing Member material information affecting the rights or responsibilities of of the Alternative Investment Fund will also be required to file a the investors; and Certificate of Organization with the Delaware State Department ■ the Investment Adviser must obtain, on an annual basis, or the Puerto Rico State Department, depending on the structure audited financial statements of the Fund, and shall deliver a chosen by the sponsors. If any of these entities were organised in copy of such audited financial statements to each beneficial Delaware and want to engage in business in Puerto Rico, then they owner of the Fund. will have to file an Authorization to do Business Certificate with the Puerto Rico State Department. In addition, they will be required to file other customary business filings and permits which are outside 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a the scope of this chapter. regulatory body? The Investment Adviser, whether registering with the SEC, with OCFI or as an Exempt Reporting Adviser, will be required to file The ICA regulates all entities that fall under the definition of an Form ADV. If the Investment Adviser registers with the SEC or investment company. Pursuant to the ICA, an “investment company” with OCFI, it will be required to complete in full Form ADV, as is: any issuer that is or holds itself out as being engaged, or proposes opposed to the “short-form” version that is required from Exempt to engage, primarily in the business of investing, reinvesting, or Reporting Advisers. trading in securities. However, there are two main exemptions from registration on which Alternative Investment Funds rely: 1.6 Are there local residence or other local qualification ■ Section 3(c)(1): An issuer will not be considered an requirements? “investment company” if said issuer securities are owned by not more than 100 persons and the issuer has not made nor If an Investment Adviser decides to register with OCFI as a “state- proposes to make a public offering of its securities. registered” Investment Adviser, it will be required to have a surety ■ Section 3(c)(7): An issuer will not be considered an bond in the amount of USD 10,000 or USD 25,000 (if the entity’s “investment company” if said issuer securities are exclusively net capital is less than USD 25,000). In addition, the Investment owned by person who, at the time of acquisition of such securities, are “Qualified Purchasers” as defined in question Adviser will be required to appoint the Commissioner of OCFI as 3.6 below and the issuer has not and does not propose to its agent to receive service of process in Puerto Rico. make a public offering of its securities. Pursuant to the PR ICA, an entity that would be an “investment 1.7 What service providers are required? company” but for Sections 3(b), Section 3(c)(1) or Section 3(c) (7), is exempt from the requirements of the PR ICA. As such, Generally, Alternative Investment Funds and Investment Advisers Alternative Investment Funds organised and/or operating in Puerto engage: (i) accountants; (ii) independent accountants to serve as Rico are structured in order to meet the requirements of Sections auditors; (iii) legal counsel; (iv) fund administrators; (v) custodians; 3(c)(1) or 3(c)(7). (vi) banks; and (vii) broker/dealers.

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Please note that if an Investment Adviser is considered to have custody all of their investors. As such, the investors are not liable for the of an Alternative Investment Fund’s assets, said Investment Adviser obligations of the Alternative Investment Fund, whether incurred in must take certain precautions or safeguards to protect the client’s contract, tort or otherwise. assets. For example, an Investment Adviser should engage a “Qualified Alternative Investment Funds organised as Delaware LPs offer Custodian” (which includes banks, broker/dealers, and other entities) limited liability to the limited partners unless they actively engage to hold and maintain the Alternative Investment Fund’s assets and have and participate in the business of the LP. an independent public accountant audit the Fund’s financial statements and/or be subject to examination by an independent public accountant. 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment 1.8 What rules apply to foreign managers or advisers Funds? wishing to manage, advise, or otherwise operate funds domiciled in your jurisdiction? Puerto Rico Generally, the managers and advisers of an Alternative Investment Fund are organised as Puerto Rico LLCs. Furthermore, for tax and Answer not available at time of printing. liability considerations, the manager and adviser roles are divided in two entities: (i) an entity to serve as the General Partner (with 1.9 What co-operation or information sharing agreements respect to Delaware LPs) or Managing Member (with respect to have been entered into with other governments or Delaware or Puerto Rico LLCs); and (ii) an entity to serve as the regulators? Investment Adviser which could be either a Corporation or an LLC. Although infrequent, if the Alternative Investment Fund is The United States and Puerto Rico have entered into information structured as a Delaware or Puerto Rico LLC, the sponsors may sharing agreements and memorandums of understanding with multiple governments and regulators. choose a simpler structure in which one entity serves as both the Managing Member and as the Investment Adviser of the Alternative Investment Fund. This structure could provide certain savings 2 Fund Structures from a regulatory and compliance perspective (e.g. less tax filings, state filing fees, and other regulatory disclosures). The choice of the structure will depend on multiple factors, the most important 2.1 What are the principal legal structures used for of which are those related to (i) the type of investment that will Alternative Investment Funds? be made by the Fund, (ii) tax considerations, and (iii) the type of investors in the Fund. The principal legal structure to organise Alternative Investment Funds in Puerto Rico is the Limited Liability Company (“LLC”). However, it is also common for Alternative Fund sponsors to 2.4 Are there any limits on the manager’s ability to organise the Alternative Investment Fund entity as a Delaware restrict redemptions in open-ended funds or transfers Limited Partnership (“LP”) or as a Delaware LLC. In addition, the in open-ended or closed-ended funds? sponsors, for regulatory and tax reasons, may organise fund entities in other tax-neutral jurisdictions, such as the Cayman Islands. Both The concept of open-ended and closed-ended funds does not apply LLCs and LPs grant ample flexibility to the parties regarding the to Alternative Investment Funds that are exempt from the ICA terms and conditions that will govern the activities and functionality and the PR ICA. As such, under local legislation there are no of the Alternative Investment Fund. limits regarding the restriction of redemptions and/or transfers in Due to the applicability of federal laws and regulations and the Alternative Investment Funds. similarity of Puerto Rico securities laws and regulations to those It is a common and even necessary characteristic for Alternative of most states in the United States, Alternative Investment Funds Investment Funds to restrict and/or limit redemptions, withdrawals organised in Puerto Rico generally follow the same structures and transfers. Generally, hedge funds provide certain limited developed by US-based Alternative Investment Funds. redemption and/or withdrawal rights to investors (e.g. quarterly In the most basic Alternative Investment Fund structure, there will windows to withdraw money). On the other hand, private equity be (i) the Alternative Investment Fund entity (either an LLC or LP), funds do not provide withdrawal rights. (ii) a Managing Member or General Partner entity (organised as an Similarly, transfers of the ownership of an Alternative Investment Fund LLC or as a Corporation), and (iii) an Investment Adviser entity interest are generally prohibited unless otherwise approved by the (organised as an LLC or as a Corporation). From the foregoing General Partner/Managing Member in its sole and absolute discretion. basic structure, an Alternative Investment Fund may expand and All these conditions are negotiated in the Alternative Investment include multiple other entities. Fund governance documents (i.e. LP Partnership Agreement or LLC It is also common to see other Alternative Investment Fund that Operating Agreement). are structured to include: (i) parallel funds organised in other jurisdictions (such as the Cayman Islands or the British Virgin Islands) to accommodate investors that might be subject to particular 2.5 Are there any legislative restrictions on transfers of tax, regulatory regimes or other investment limitations; and (ii) so- investors’ interests in Alternative Investment Funds? called “blocker” entities that permit tax-exempt entities or foreign investors to “block” United States sourced income generated by the Alternative Investment Funds restrict the transfer of investors’ Fund investments that could trigger certain income tax obligations. interest in order to limit the risks of losing the exemption from registration under the ICA, the Securities Act, the Exchange Act and PRUSA. In addition, securities offered pursuant to Rule 506 2.2 Please describe the limited liability of investors. of Regulation D are classified as “restricted securities”, which means that the securities cannot be sold for at least a year without Alternative Investment Funds organised as either (i) Puerto Rico registering them under the Securities Act. LLCs, or (ii) Delaware LLCs provide statutory limited liability to

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with respect to any investor or prospective investor in the pooled 2.6 Are there any other limitations on a manager’s ability investment vehicle. to manage its funds (e.g. diversification requirements, asset stripping rules)? Investment Advisers should also take into consideration the provisions of Rule 206(4)-1 and related SEC No-Action Letters with regard to advertisements by Investment Advisers. Answer not available at time of printing.

3.3 Do the marketing or legal documents need to be 3 Marketing registered with or approved by the local regulator?

3.1 What legislation governs the production and offering Alternative Investment Funds generally offer and sell their securities Puerto Rico of marketing materials? to “Accredited Investors” pursuant to the exemption from registration available under Rule 506(b) of Regulation D of the Securities The legislation that governs the production and offering of marketing Act to private offerings that do not engage in general solicitation materials is the Exchange Act. Under Section 10(b) of the Exchange or advertising. As such, neither the SEC nor OCFI impose any Act, it is unlawful for any person, directly or indirectly, by the use requirements regarding the registration or approval of the marketing of any means or instrumentality of interstate commerce or mail, or and legal documentation provided by the Alternative Investment of any facility of any national securities exchange, to use or employ, Fund to potential investors. in connection with the purchase or sale of any security registered on It is common practice to include in the Fund’s legal and marketing a national securities exchange or any security not so registered, any documents certain disclosure language that expressly states that the manipulative or deceptive device or contrivance in contravention of offering materials and the legal documents have not been registered, such rules and regulations as the SEC may prescribe as necessary or reviewed or approved with any regulatory agency. appropriate in the public interest or for the protection of investors. Pursuant to said power, the SEC promulgated Rule 10(b)-5 which 3.4 What restrictions are there on marketing Alternative states that it is unlawful for any person, directly or indirectly, to Investment Funds? employ any device, scheme or artifice to defraud, to make any untrue statement of a material fact or to omit to state a material Under the Securities Act and PRUSA, securities offered and sold in fact necessary in order to make the statements made, in light of the the United States must be registered with the SEC and/or PRUSA, circumstances under which they were made, not misleading or to as may be applicable, unless an exemption from registration applies. engage in any act, practice or course of business which operates as Given the extensive disclosure and regulatory requirements under a fraud or deceit upon any person in connection with the purchase the Securities Act, Alternative Investment Funds rely on the private or sale of any security. offering exemption available under Section 4(a)(2) of the Securities Act. Particularly, Alternative Investment Funds rely on the safe 3.2 What are the key content requirements for marketing harbour provided under Regulation D (for example, Rule 506(b)), materials, whether due to legal requirements or which requires, among others, that the sale of securities under said customary practice? Rule be made only to “Accredited Investors” with an allowance of a maximum of 35 “Non-Accredited Investors” and that no public Besides the provisions of Section 10(b) of the Exchange Act and offering or solicitation be made. of Rule 10(b)-5 promulgated thereunder, the Investment Advisers of Alternative Investment Funds must be aware of the provisions 3.5 Can Alternative Investment Funds be marketed to of Section 206 of the Advisers Act, which make it unlawful for any retail investors? Investment Adviser: (i) to directly or indirectly employ any device, scheme, or artifice to defraud any client or prospective client; (ii) Prior to the enactment of Rule 506(c) under Regulation D, no to engage in any transaction, practice, or course of business which issuer that was relying on the private offering exemption under the operates as a fraud or deceit upon any client or prospective client; Securities Act could publicly market, offer or solicit its securities. (iii) acting as principal for his own account, knowingly to sell any Furthermore, in order to comply with the safe-harbour provisions security to or purchase any security from a client, or acting as broker under Regulation D, the offer and sale of securities had to be made for a person other than such client, knowingly to effect any sale to “Accredited Investors” as defined in question 3.6 below. As or purchase of any security for the account of such client, without such, the marketing of Alternative Investment Funds was strictly disclosing to such client in writing before the completion of such limited. Compliance with the private offering exemption is a matter transaction the capacity in which he is acting and obtaining the of high importance because it is one of the factors to be eligible for consent of the client to such transaction; or (iv) to engage in any exemption from registration under Sections 3(c)(1) and 3(c)(7) of act, practice or course of business which is fraudulent, deceptive or the ICA. manipulative. Now, pursuant to Rule 506(c), issuers can solicit and generally Please note that under Rule 206(4)-8 of the Advisers Act, it shall advertise an offering while still being deemed to be undertaking constitute a fraudulent, deceptive, or manipulative act, practice, a private offering pursuant to Section 4(a)(2) of the Securities Act or course of business within the meaning of Section 206(4) of the if: (i) all the investors in the offering are “Accredited Investors”; Advisers Act for any Investment Adviser to a pooled investment and (ii) the issuer has taken reasonable steps to verify that the vehicle to: (i) make any untrue statement of a material fact or to investors are accredited investors. Under Rule 506(c), the mere omit to state a material fact necessary to make the statements made, representation of an investor that it is an “Accredited Investor” is in light of the circumstances under which they were made, not not enough and among the reasonable steps that can be taken are: (i) misleading, to any investor or prospective investor in the pooled verifying the income via the receipt and review of IRS W-2 Forms; investment vehicle; or (ii) otherwise engage in any act, practice, and (ii) receiving a certification from a certified public accountant, or course of business that is fraudulent, deceptive, or manipulative

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a lawyer, a registered broker/dealer, among others, stating that the ■ Any trust that is not covered by the point above and that was investor, in fact, complies with the requirements to be classified as not formed for the specific purpose of acquiring the securities an “Accredited Investor” under Rule 501 of Regulation D. offered, as to which the trustee or other person authorised to make decisions with respect to the trust, and each settlor or other person who has contributed assets to the trust, is a 3.6 What qualification requirements must be carried out person described in the preceding paragraphs or the paragraph in relation to prospective investors? below. ■ Any person, acting for its own account or the accounts of Qualifications Related to Regulation D Offerings and the ICA other qualified purchasers, who in the aggregate owns and As discussed in other parts of this chapter, Alternative Investment invests on a discretionary basis, not less than USD 25,000,000 Funds offer and sell their securities to “Accredited Investors” in investments. pursuant to private offerings in order to be exempt from registration Qualifications Related to Performance Fees/Carried Interest Puerto Rico under the Securities Act and in order for the Alternative Investment Charged to Investors Fund to be eligible for exemption from registration under Section Under the Advisers Act and PRUSA, Investment Advisers are 3(c)(1) of the ICA (which allows a maximum of 100 investors). prohibited to enter into an agreement that provides for compensation Pursuant to Rule 501 of Regulation D, an “Accredited Investor” to the Investment Adviser on the basis of a share of capital gains includes, among others, the following persons: upon, or capital appreciation of, the funds or any portion of the funds ■ Certain institutional investors such as banks, broker/dealers, of the client. However, under Rule 205-3, an Investment Adviser is insurance companies; any plan established and maintained not prohibited from entering into performing, renewing or extending by a state, its political subdivisions, or any agency or an investment advisory contract that provides for compensation to instrumentality of a state or its political subdivisions, for the the Investment Adviser on the basis of a share of the capital gains benefit of its employees, if such plan has total assets in excess upon, or the capital appreciation of, the funds, or any portion of the of USD 5,000,000; any employee benefit plan within the funds, of a client if, and only if, the client meets the requirements to meaning of the Employee Retirement Income Security Act of be classified as a “Qualified Client” under Rule 205-3. 1974 if the investment decision is made by a plan fiduciary, which is either a bank, savings and loan association, insurance The term “Qualified Client” means: company, or registered investment adviser, or if the employee ■ a natural person who, or a company that, immediately after benefit plan has total assets in excess of USD 5,000,000 or, entering into the contract has at least USD 1,000,000 under if a self-directed plan, with investment decisions made solely the management of the Investment Adviser; by persons that are accredited investors. ■ a natural person who, or a company that, the Investment ■ Any director, executive officer, or general partner of the Adviser entering into the contract (and any person acting on issuer of the securities being offered or sold, or any director, his behalf) reasonably believes, immediately prior to entering executive officer, or general partner of a general partner of into the contract, either: that issuer. ■ has a net worth (together, in the case of a natural person, ■ Any natural person whose individual net worth, or joint net worth with assets held jointly with a spouse) of more than USD with that person’s spouse, exceeds USD 1,000,000 (excluding 2,000,000 (excluding the person’s primary residence and that person’s primary residence and any indebtedness secured any indebtedness secured by the primary residence); or by the primary residence up to a certain limit). ■ is a qualified purchaser as defined in Section 2(a)(51)(A) ■ Any natural person who had an individual income in excess of the ICA at the time the contract is entered into; or of USD 200,000 in each of the two most recent years, or joint income with that person’s spouse in excess of USD 300,000 ■ a natural person who immediately prior to entering into in each of those years, and has a reasonable expectation of the contract is an executive officer, director, trustee, reaching the same income level in the current year. general partner, or person serving in a similar capacity, of the investment adviser; or an employee of the investment ■ Any trust, with total assets in excess of USD 5,000,000, not adviser (other than an employee performing solely formed for the specific purpose of acquiring the securities clerical, secretarial or administrative functions with offered, whose purchase is directed by a sophisticated person. regard to the investment adviser) who, in connection with ■ Any entity in which all of the equity owners are accredited his or her regular functions or duties, participates in the investors. investment activities of such investment adviser and has If the Alternative Investment Fund intends to rely on the exemption engaged in those functions for at least 12 months. from registration available under Section 3(c)(7) of the ICA (which allows more than 100 investors in the Fund), all investors must be 3.7 Are there additional restrictions on marketing to “Qualified Purchasers” or knowledgeable employees. Under the public bodies such as government pension funds? ICA, a “Qualified Purchaser” includes, among others, the following persons: Federal Restrictions ■ Any natural person (including any person who holds a joint, Under Rule 206(4)-5 of the Advisers Act (the “Pay-to-Play Rule”), community property, or other similar shared ownership it is unlawful: (1) for any Investment Adviser to provide investment interest in an issuer that is excepted under Section 3(c)(7) of the ICA with that person’s qualified purchaser spouse) who advisory services for compensation to a government entity within owns not less than USD 5,000,000 in investments. two years after a contribution to an official of the government entity is made by the Investment Adviser or any covered associate of the ■ Any company that owns not less than USD 5,000,000 in investments and that are owned directly or indirectly by or Investment Adviser (including a person who becomes a covered for two or more natural persons who are related as siblings associate within two years after the contribution is made); and (2) for or spouse (including former spouses), or direct lineal any Investment Adviser or a covered associate (a) to provide or agree descendants by birth or adoption, spouses of such persons, to provide, directly or indirectly, payment to any person to solicit the estates of such persons, or foundations, charitable a government entity for investment advisory services on behalf of organisations, or trusts established by or for the benefit of such Investment Adviser unless such person is a regulated person or such persons. an executive officer, general partner, managing member (or, in each

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case, a person with a similar status or function), or employee of the parties, aspirants, candidates, and campaign committees and Investment Adviser, and (b) to coordinate, or to solicit any person or authorised committees, as well as to political action committees political action committee to make, any contribution to an official of making contributions to any of them. Please note that the donations a government entity to which the investment adviser is providing or that the committee makes are subject to the limits applicable to seeking to provide investment advisory services or any payment to natural persons. Currently, said amount equals to USD 2,600 per a political party of a state or locality where the investment adviser calendar year (which shall rise alongside Puerto Rico’s inflation is providing or seeking to provide investment advisory services to a rate, as adjusted by the Electoral Comptroller). government entity. The prohibitions set forth above do not apply to contributions 3.8 Are there any restrictions on the use of intermediaries made by a covered associate (if a natural person) to officials for to assist in the fundraising process? whom the covered associate was entitled to vote at the time of the Puerto Rico contributions and which in aggregate do not exceed USD 350 to There are certain restrictions as to the type of intermediaries that an any one official, per election, or to officials for whom the covered Alternative Investment Fund may use in the sale of its securities to associate was not entitled to vote at the time of the contributions raise funds. Under Section 15 of the Exchange Act, it is unlawful and which in aggregate do not exceed USD 150 to any one official, for any broker or dealer to make use of the mails or any means or per election. In addition, the prohibitions shall not apply to an instrumentality of interstate commerce to effect any transactions in, Investment Adviser as a result of a contribution made by a natural or to induce or attempt to induce the purchase or sale of, any security person more than six months prior to becoming a covered associate unless such broker or dealer is registered with the SEC. Similarly, of the Investment Adviser unless such person, after becoming it is unlawful for a broker or dealer to engage in business in Puerto a covered associate, solicits clients on behalf of the Investment Rico unless said broker or dealer is registered under PRUSA. Adviser. Further, an Investment Adviser may be exempted from the The term “broker” is defined to mean “any person engaged in the prohibitions discussed above if it complies with the following: (1) business of effecting transaction in securities for the accounts of the Investment Adviser must have discovered the contribution which others”. As such, an intermediary engaged in the offering or sale resulted in the prohibition within four months of the date of such of securities of an Alternative Investment Fund must be a registered contribution; (2) such contribution must not have exceeded USD broker/dealer or be exempt from registration as such. 350; and (3) the contributor must obtain a return of the contribution Now, the safe harbour provided by Rule 3a4-1 of the Exchange Act within 60 calendar days of the date of discovery of such contribution allows certain associated persons of an Alternative Investment Fund by the investment adviser. (i.e. the issuer of the securities) to engage in the sale of securities Puerto Rico Restrictions without being deemed to be a broker or dealer if such person is not: The Puerto Rico Code of Ethics for Contractors and Suppliers of ■ subject to a statutory disqualification, as that term is defined in Section 3(a)(39) of the Exchange Act, at the time of his Goods and Services (Act 84 of 2002, as amended) generally prohibits participation; any person from offering or delivering to a public servant of the ■ compensated in connection with his participation by the executive agencies – with whom the person wishes to establish or payment of commissions or other remuneration based either has established a contractual or commercial or financial relationship directly or indirectly on transactions in securities; and – any contributions or donations, among other things. A related ■ an associated person of a broker or dealer at the time of his provision of the Code of Ethics prohibits a person who has “actively participation. participated in political campaigns”, from establishing negotiations The term “associated person” includes any natural person who is with secretaries, heads of agencies, municipal executives or a partner, officer, director or employee of the issuer, a corporate executive directors of public corporations, that may lead to the general partner of a limited partnership that is the issuer, a company improper granting of advantages or favours for their benefit. or partnership that controls, is controlled by, or is under common In addition, pursuant to the Puerto Rico Political Campaign control with, the issuer or an investment adviser registered under the Financing Oversight Act (Act 222 of 2011, as amended), there is a Advisers Act to an investment company registered under the ICA clear prohibition that business entities shall not make contributions which is the issuer. out of their own resources in or outside Puerto Rico to any political Alternative Investment Funds must be aware that the use of persons party, aspirant, candidate, campaign committee, or to any authorised that engage in activities that would classify them as brokers or agent, representative, or committee thereof, or to political action dealers, such as persons engaged as “finders”, entails substantial committees that make contributions to or coordinate expenditure risks and sanctions. For example, the Alternative Investment Fund among such entities. could be forced to rescind the subscription agreements entered However, a business entity may establish, organise, and administer into with investors and be ordered to return in its entirety all of the a committee, to be known as a segregated committee or fund that, capital that was raised from said investors. for the purposes of contributions and expenditures, shall be treated as a political action committee that must be registered in the Office 3.9 Are there any restrictions on the participation in of the Election Comptroller of Puerto Rico, render reports, and Alternative Investment Funds by particular types of comply with all requirements imposed under the Political Campaign investors, such as financial institutions (whether as Financing Oversight Act. Thus, the business entity members, sponsors or investors)? employees, and their immediate family or related persons may make contributions that shall be deposited in the account established and Under Section 619 of the Dodd-Frank Wall Street Reform and registered in the Office of the Election Comptroller. Consumer Protection Act (which added a new Section 13 to the In order for a business entity to be able to establish a segregated Bank Holding Company Act), banking entities are generally committee or fund for these purposes, it must comply with the prohibited from “engaging in proprietary trading or from acquiring limitations and requirements set forth in Section 625j of the Political or retaining an ownership interest in, sponsoring, or having certain Campaign Financing Oversight Act. The committee, organisation relationships with a Hedge Fund or Private Equity Fund, subject to or citizen group may make donations from said account to political certain exemptions”.

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Under Section 13(d)(1)(G), a banking institution is permitted to be performed by an Alternative Investment Fund, as long as those organise and offer a private equity or hedge fund, including serving activities are lawful and permitted under federal and Puerto Rico as a general partner, managing member, or trustee of the fund and in laws and regulations. Please note that the governing documents of any manner selecting or controlling (or having employees, officers, an Alternative Investment Fund may limit the types of activities that directors, or agents who constitute) a majority of the directors, it can perform. trustees, or management of the fund, including any necessary Notwithstanding the foregoing, under the Exchange Act, all expenses for the foregoing, only if: Alternative Investment Funds are prohibited from employing, in ■ the banking entity provides bona fide trust, fiduciary, or connection with the purchase or sale of any security registered or investment advisory services; unregistered on a national securities exchange, any manipulative or ■ the Fund is organised and offered only in connection with deceptive device or contrivance in contravention of the rules and the provision of bona fide trust, fiduciary, or investment regulations that the SEC may prescribe as necessary or appropriate advisory services and only to persons that are customers of Puerto Rico such services of the banking entity; in the public interest or for the protection of investors. ■ the banking entity does not acquire or retain an equity interest, In furtherance of the foregoing, the SEC enacted Rule 10b-5 which partnership interest, or other ownership interest in the Funds states that it is unlawful for any person, directly or indirectly, by except for a de minimis investment (which, no later than one the use of any means or instrumentality of interstate commerce, year after the date of the establishment of the Fund, cannot or the mails or any facility of any national securities exchange, (i) amount to more than 3% of the total ownership interests in to employ any device, scheme or artifice to defraud, (ii) to make the Fund and the aggregate investment of the banking entity any untrue statement of a material fact or to omit to state a material in Funds cannot amount to more than 3% of the Tier 1 Capital fact necessary in order to make the statements made, in light of the of the banking entity); circumstances under which they were made, not misleading, or (iii) ■ the banking entity complies with the restrictions under to engage in any act, practice or course of business which operates paragraphs (1) and (2) of subparagraph (f) of Section 13 regarding certain relationships with Alternative Investment or would operate as fraud or deceit upon any person. Funds; ■ the banking entity does not, directly or indirectly, guarantee, 4.2 Are there any limitations on the types of investments assume, or otherwise insure the obligations or performance of that can be included in an Alternative Investment the Hedge Fund or Private Equity Fund or of any Hedge Fund Fund’s portfolio whether for diversification reasons or or Private Equity Fund in which such Hedge Fund or Private otherwise? Equity Fund invests; ■ the banking entity does not share with the Hedge Fund or Generally, any limitations regarding the types of investments that Private Equity Fund, for corporate, marketing, promotional, or an Alternative Investment Fund may include in its portfolio are other purposes, the same name or a variation of the same name; included in the governance documents and are disclosed in the ■ no director or employee of the banking entity takes or retains offering documents. The limitations, if any, will depend on the an equity interest, partnership interest, or other ownership particular investment strategy of the Alternative Investment Fund. interest in the Hedge Fund or Private Equity Fund, except for any director or employee of the banking entity who is directly However, there are a variety of federal and state laws that limit engaged in providing investment advisory or other services to ownership in companies involved in highly regulated or sensitive the Hedge Fund or Private Equity Fund; and industries or require extensive filings and other regulatory ■ the banking entity discloses to prospective and actual investors requirements in order to acquire an ownership stake. For example, in the Fund, in writing, that any losses in such Hedge Fund there are certain regulatory burdens related to the acquisition or Private Equity Fund are borne solely by investors in the of ownership stakes beyond certain thresholds in the banking, Fund and not by the banking entity, and otherwise complies financial services and insurance industries, in public utilities and with any additional rules of the appropriate federal banking transportation industries (such as airlines and railroads), and in the agencies, the SEC, or the CFTC, as provided in Section 13, designed to ensure that losses in such Hedge Fund or Private defence industry. Equity Fund are borne solely by investors in the Fund and not In addition, the ICA places certain limits on the investments that by the banking entity. an Alternative Investment Fund may make in registered investment Besides the restrictions imposed by the Dodd-Frank Act, the only rules companies. Particularly, under Section 12(d)(1)(A)(i) of the ICA, and regulations that could be considered as restrictions on the type of it is unlawful for an Alternative Investment Fund to acquire any investor that can invest in an Alternative Investment Fund are those security issued by a registered investment company if after the regarding the net worth and sophistication requirements under Rule acquisition the Alternative Investment Fund owns more than 3% 506. As discussed in other parts of this chapter, Alternative Investment of the total outstanding voting stock of the registered investment Funds limit the sale of securities to investors that meet the requirements company. Although there are other investment limitations under to be classified as “Accredited Investors” under Regulation D of the Section 12(d) related to registered investment companies, they are Securities Act and as “Qualified Clients” under Rule 205-3 of the not currently applicable to Alternative Investment Funds that are Advisers Act in order to protect the Fund’s reliance on the safe harbour exempt from the provisions of the ICA under Sections 3(c)(1) and provisions and reduce the risks of running afoul of the ICA. 3(c)(7) of the ICA. Furthermore, Alternative Investment Funds should take into 4 Investments consideration antitrust concerns if a transaction in which they are engaging is subject to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and/or the Puerto Rico Monopoly Act and certain 4.1 Are there any restrictions on the types of activities restrictions related to short-selling of securities under the rules and that can be performed by Alternative Investment regulations promulgated under the Exchange Act, such as Regulation Funds? SHO and Regulation M.

Generally, there are no restrictions on the types of activities that can

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4.3 Are there any restrictions on borrowing by the 5.2 What are the reporting requirements in relation to Alternative Investment Fund? Alternative Investment Funds or their managers?

No. There are no statutory restrictions with respect to borrowings or Please refer to our response in question 5.1 above. leverage by Alternative Investment Funds. However, it is common to see in Alternative Investment Funds’ governing documents clauses 5.3 Is the use of side letters restricted? that limit the amount of leverage that the Alternative Investment Fund may use. If the Alternative Investment Fund is authorised to No. The use of side letters is not restricted. An Alternative Investment use leverage and expects to use it in its investment strategy, it should Fund should disclose in its offering documents that it may enter clearly disclose said fact and explain to potential investors the risks

Puerto Rico into side letters with investors that might have different terms and involved in the use of leverage. conditions to those disclosed in the offering documents. Furthermore, Investment Advisers should always take into consideration their 5 Disclosure of Information fiduciary obligations under the Alternative Investment Fund and its beneficial owners when negotiating side letters with other investors.

5.1 What public disclosure must the Alternative Investment Fund or its manager make? 6 Taxation

Federal Public Disclosures 6.1 What is the tax treatment of the principal forms of Under the Advisers Act, Investment Advisers registering with the Alternative Investment Funds identified in question SEC must complete Form ADV, or certain parts of Form ADV, if the 2.1? Investment Adviser is an Exempt Reporting Adviser. Form ADV is available to the public via the Investment Adviser Public Disclosure As a general rule, LLCs organised in Puerto Rico are taxed as website administered by the SEC. corporations. However, the PR IRC allows LLCs to elect to be Also, Investment Advisers with assets in excess of USD 150 million treated as partnerships for income tax purposes, even if the LLC must file Form PF with the SEC. Form PF requires the Investment has only one member. The PR IRC currently does not provide for Adviser to disclose certain information related to the Funds that they entities to be taxed as disregarded entities. As with tax elections advise, including, without limitation, information regarding size, made pursuant to the IRC, the election to be taxed as a partnership leverage, investor types, geographical concentration of investments, under the PR IRC allows Funds to be transparent for Puerto Rico fund strategy, fund performance, and liquidity. The types and extent tax purposes, making the members the parties responsible for the of the information that needs to be disclosed will depend on the tax liability instead of the Fund. Furthermore, the PR IRC provides amount of AUM and the type of Funds that the Investment Adviser that every LLC that by reason of its election or provision of law or manages. For example, Form PF requires the disclosure of different regulation under the IRC, or similar provision of a foreign country, information if the Fund is a Hedge Fund, as opposed to a Private is treated as a partnership, or whose income and expenses are Equity Fund. attributed to its members for federal income tax purposes or that of All issuers that rely on Regulation D of the Securities Act to offer the foreign country, shall be treated as a partnership for purposes of their securities must file Form D with the SEC, which is publicly the PR IRC, and shall not be eligible to be taxed as a corporation. available via the SEC’s EDGAR system. Form D must be filed within 15 days of the first sale of the Alternative Investment 6.2 What is the tax treatment of the principal forms of Fund securities and must be amended annually for as long as the investment manager / adviser identified in question Alternative Investment Fund offers securities. 2.3? Puerto Rico Public Disclosures As a general rule, a Puerto Rico Investment Adviser elects to be All Investment Advisers doing business in Puerto Rico are required taxed as a partnership under the PR IRC. As mentioned above, to complete and file Form ADV and notify OCFI of its filing. This entities organised in Puerto Rico or that are authorised to do requirement applies whether the Investment Adviser is registering business in Puerto Rico do not have available the option of being with the SEC, registering with OCFI as a “state-registered” adviser treated as a disregarded entity. Notwithstanding the above, certain or if it is filing as an “Exempt Reporting Adviser”. investment managers elect to keep the default corporation tax Although Investment Advisers registering as “state-registered” treatment in order to utilise certain income tax deferrals, simplify advisers with OCFI must complete and file a series of additional tax compliance requirements and possibly maximise benefits under forms, only Form ADV is generally available to the public. certain tax incentives acts (discussed below). Under PRUSA, an issuer that relies on Regulation D to offer and With the enactment of Act No. 20 of January 17, 2012, as amended sell securities in Puerto Rico must send a notification to OCFI with (“Act 20”), certain Investment Advisers organised in Puerto Rico a copy of the Form D filed with the SEC, a notification payment fee or who establish operations in Puerto Rico that provide advice to and their consent to the service of process. Funds located outside of Puerto Rico or to other Investment Advisers Under the PR Corporations Act, each entity organised in Puerto located outside of Puerto Rico (i.e. export their services) are electing Rico or authorised to do business in Puerto Rico must make certain to be to be taxed as corporations to benefit from the interplay of filings with the Puerto Rico Department of State that are available Section 933 of the IRC and Act 20, which provides a preferential tax to the public. Similarly to Delaware, only entities organised as rate of 4% for services rendered from Puerto Rico to persons located Corporations are required to file annual reports. Further, LLCs and outside of Puerto Rico, such as Funds, other Investment Advisers LPs are not required to file annual reports as they are only required or investors. In addition, Act 20 provides a 0% rate on dividends to make an annual fee payment. distributed by the entity to its owners from income derived from

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export activities. Please note that Act 20 requires grantees to have said income from federal and state taxation. Bona fide individuals at least three full-time (or full-time equivalent) employees within are subject to the taxes imposed by the PR IRC. The tax rates that the first six months from the commencement of operations and five apply vary depending on the type of income and amount of income employees within two years after commencement of operations. received. Tax rates vary from 0% to 33% for individuals, and from The terms of the exemption provided to the entity under Act 20 are 20% to 39% for corporations. gathered in a Tax Grant, which is considered a contract between Non-residents that derive Puerto Rico sourced income are subject the government of Puerto Rico and the entity that requested the to the PR IRC. As with residents, the tax rates that apply to benefits. The initial term of an Act 20 Tax Grant is 20 years and can non-residents vary depending on the amount and type of income be extended for an additional 10 years. received by the non-resident. In the case of non-residents that are not engaged in a trade or business in Puerto Rico and derive Puerto Rico sourced income, as a general rule, they are subject to a 29% 6.3 Are there any establishment or transfer taxes levied Puerto Rico in connection with an investor’s participation in an withholding at source. Alternative Investment Fund or the transfer of the Entities organised in Puerto Rico are considered foreign entities investor’s interest? for purposes of the IRC and can also use the exclusion of income provided by Section 933 of the IRC. As with individuals that are The PR IRC does not provide a specific transfer tax on the transfer residents of Puerto Rico and engaged in a trade or business, entities of an investor’s ownership interest in the Alternative Investment are subject to the PR IRC and the tax rates vary depending on the Fund. As with the IRC, the PR IRC imposes a capital gains tax on type of income. The PR IRC tax rates for entities range from 20% the sale of appreciated ownership interest in the Fund. If the Fund up to 39%. In the case of entities that are not engaged in a trade or elects to be taxed as a partnership, as with the IRC, the PR IRC business that derive Puerto Rico sourced income, they are subject to provides that the tax liability on the income received by the Fund a 39% withholding tax. will flow through to the members and they will be responsible for any tax liability determined under the PR IRC. 6.5 Is it necessary or advisable to obtain a tax ruling from Notwithstanding, the Puerto Rico government enacted Act No. 22 the tax or regulatory authorities prior to establishing of January 17, 2012, as amended (“Act 22”), which provides an an Alternative Investment Fund? exemption from Puerto Rico sourced passive income. This includes capital gains, interest and dividends. Act 22 ties into both the IRC It is not required to request a tax ruling from the Puerto Rico exemption for a bona fide resident to not be subject to federal Treasury Department prior to the establishment of an Alternative taxation on Puerto Rico sourced income and the sourcing rules of Investment Fund. the IRC. Therefore, for example, an individual that receives interest income from an investment in a Fund located in Puerto Rico would 6.6 What steps have been or are being taken to implement be exempt from Puerto Rico and federal taxes. By the same token, the US Foreign Account and Tax Compliance Act given that capital gains are sourced to the residence of the seller and, 2010 (FATCA) and other similar information reporting in the case of partnership, are determined at the level of the partners, regimes such as the Common Reporting Standard? investors can greatly benefit from the interplay of the above rules. Furthermore, an individual who owns an Investment Adviser which Puerto Rico is subject to the Foreign Account and Tax Compliance has an Act 20 Tax Grant (as discussed above), and which provides Act 2010. services to an Alternative Investment Fund or to another Investment Adviser located outside of Puerto Rico, can receive dividend 6.7 What steps are being taken to implement the OECD’s distributions subject to a 0% tax rate. Action Plan on Base Erosion and Profit-Shifting To benefit from Act 22, individuals must becomebona fide residents (BEPS), in particular Actions 6 and 7, insofar as they of Puerto Rico and they must not have been residents of Puerto Rico affect Alternative Investment Funds’ operations? between 2006 and 2012. As of this date, Puerto Rico has not adopted the OECD’s Action Plan on Base Erosion and Profit-Shifting (BEPS). 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative Investment Funds? 6.8 Are there any tax-advantaged asset classes or structures available? How widely are they deployed? Puerto Rico born individuals are also United States citizens. As such, they are subject to taxation on their worldwide income, under Answer not available at time of printing. both the IRC and the PR IRC. To determine the tax treatment that may apply to (a) residents, (b) non-residents, and (c) pension fund 6.9 Are there any other material tax issues for investors, investors, it is required to examine their treatment under both the managers, advisers or AIFs? IRC and the PR IRC. In addition, as mentioned above, bona fide residents of Puerto Rico can exclude from federal and state taxation There are none. any income that is treated as Puerto Rico sourced, pursuant to the exclusion of Section 933 of the IRC. To be considered a bona fide resident of Puerto Rico, the individual must comply with three 6.10 Are there any meaningful tax changes anticipated in (3) residency tests during the tax year in which they received the the coming 12 months? income. The three (3) tests are: (i) physical presence; (ii) tax home; and (iii) closer connection. If the individual complies with all three Answer not available at time of printing. (3) tests and receives Puerto Rico sourced income, they can exclude

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Please note that at the federal level, the Trump Administration has 7 Reforms stated its intentions to scale back the financial regulations enacted under the Obama Administration, particularly those enacted under 7.1 What reforms (if any) are proposed? the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). It is also worth noting that President On the local front, the Puerto Rico Legislature will propose to the Trump has expressed that the preferential tax treatment applicable United States Congress an amendment to the Foreign Assistance to “carried interest” could be changed so that it is classified as Act of 1961 in order to authorise the Overseas Private Investment “ordinary income” or subject to a higher tax rate than the current Corporation to facilitate financing, risk insurance and support rate of 15%. As of April 2017, we are not able to provide further Private Equity Funds to invest in Puerto Rico. If the aforementioned guidance regarding the scope of deregulation initiatives or what amendment becomes law, it could provide a boost to local Private will be the ultimate treatment of “carried interest” under the tax Puerto Rico Equity Funds and to the business sector. As of March 31, 2017, legislation overhaul being considered by the Trump Administration. there are no other local proposed reforms that may have a material impact on the regime governing Alternative Investment Funds.

Yarot T. Lafontaine-Torres Alexis R. González-Pagani Ferraiuoli LLC Ferraiuoli LLC 221 Ponce de León Ave., 5th Floor 221 Ponce de León Ave., 5th Floor San Juan 00917 San Juan 00917 Puerto Rico Puerto Rico

Tel: +1 787 766 7000 Tel: +1 787 766 7000 Email: [email protected] Email: [email protected] URL: www.ferraiuoli.com URL: www.ferraiuoli.com

Yarot T. Lafontaine-Torres is a Senior Associate Attorney with our Alexis R. González-Pagani is a Senior Associate Attorney with our Corporate Practice Group. His main practice areas are: alternative Tax Practice Group. His main practice areas include: local taxation investment funds and investment adviser regulation, mergers & of individual and entities; addressing international taxation issues of acquisitions; corporate governance; banking and financial services individuals and entities; assisting the relocation process of individuals regulation; and securities regulation. He counsels clients in commercial under Act 22-2012; establishment of export companies under and corporate matters including, among others: structuring of private Act 20-2012; structuring of new businesses; and advising on the funds (private equity, real estate and hedge funds); registration restructuring of existing businesses in order to maximise tax savings of investment advisers with the SEC and Puerto Rico regulatory and opportunities under other incentives acts such as Act 73-2008. He agencies; private securities offerings (including the preparation of counsels clients in: devising sophisticated tax and corporate structures private placement memorandums, subscription documents and filings for clients who are expanding operations locally and making outbound with regulators); mergers & acquisitions; establishment of international investments from Puerto Rico; structuring the inbound Puerto Rico financial entities; and other corporate governance matters. investments and operations of multinational entities; and regarding the tax aspects of contracts, mergers, acquisitions and reorganisations.

Ferraiuoli LLC is one of the leading full-service law firms in Puerto Rico. The firm provides value-added, comprehensive legal advice to industry- leading private and publicly owned companies on mergers & acquisitions, intellectual property, general corporate law, labour and employment, energy and land use, litigation, tax, among many others. Ferraiuoli has received international recognition in the legal field byChambers & Partners, a London-based firm that publishes, on an annual basis, leading directories of the legal profession identifying the world’s top lawyers and law firms. Since 2010,Chambers & Partners has ranked Ferraiuoli as a leader in both Corporate and Intellectual Property and several firm attorneys were named “Leaders in their fields” by the publication. Ferraiuoli has further been honoured as one of Puerto Rico’s outstanding firms by Chambers & Partners as it was shortlisted as one of the candidates for Puerto Rico’s Law Firm of the Year since 2011.

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Scotland Andrew Akintewe

Brodies LLP Karen Fountain

In cases where the manager and operator do not have the required 1 Regulatory Framework FCA authorisations, it is usually possible to structure the AIF so as to outsource these activities to authorised service providers. 1.1 What legislation governs the establishment and operation of Alternative Investment Funds? 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a The primary legislation that governs the establishment and operation regulatory body? of Alternative Investment Funds (AIFs) in Scotland is: ■ the Financial Services and Markets Act 2000 (FSMA) and AIFs that are structured as SLPs under the LPA 1907 are generally related orders; classed as unregulated collective investment schemes (UCIS) and ■ the Limited Partnerships Act 1907 (LPA 1907); and are not themselves required to be authorised or regulated by the ■ the Companies Act 2006. FCA or any other regulatory body. Registration with the Registrar of Limited Partnerships in Edinburgh is required. In general, the relevant provisions of the above legislation apply on a UK-wide basis; however, many AIFs are structured as Scottish The vast majority of AIFs registered in Scotland utilise the SLP Limited Partnerships (SLPs), which benefit from particular structure. However, in terms of market practice, other AIF structures provisions of the LPA 1907 that do not apply to limited partnerships have been used in Scotland and two examples are considered below. governed by English law. This is discussed further in section 2 AIFs can be structured in Scotland (as they can in England) using below. certain forms of authorised fund structures, for example, qualified The rules which implement the EU Alternative Investment Fund investor schemes (QISs) which take the form of an open-ended Managers Directive (AIFMD) apply in Scotland. These rules affect authorised unit trust (AUT) or open-ended investment company the AIFs managed by managers within the scope of the Directive. (OEIC). In general, the same regulatory regime applies to these funds irrespective of whether they are domiciled in England or Scotland. The European Venture Capital Funds Regulation also applies in QIS structures are required to be authorised by the FCA, but can only Scotland. be marketed to certain categories of eligible investor. AIFs that are SLPs are the main focus of this chapter. However, some structured as QISs benefit from investment and borrowing powers consideration is also given to other AIF structures which have been that are very flexible, for example, compared with UCITS and other used in Scotland. authorised funds designed for retail investors. QISs are required to achieve a basic spread of risk consistent with the investment objective 1.2 Are managers or advisers to Alternative Investment and policy. QIS structures can also be used for non-retail fund of funds Funds required to be licensed, authorised or structures, facilitating indirect investment exposure to, for example, regulated by a regulatory body? private equity, hedge funds, and real estate funds. These are referred to as ‘Funds of Alternative Investment Funds’ (FAIFs) and are subject The management and operation of an AIF in Scotland will normally to specific rules in relation to matters such as concentration, liquidity involve regulated activities that are required to be carried out by and due diligence, valuation and audit of the underlying funds. FAIFs persons authorised by the UK Financial Conduct Authority (FCA). may also be structured as ‘non-UCITS retail schemes’ (NURS) to The exact scope of regulated activities will depend on factors such facilitate marketing to a wider range of investors. as (i) the assets under management, and (ii) the structure of the fund; In addition, there has been a trend for certain retail funds using however, regulated activities that are typically considered during the authorised UCITS structures to adopt investment strategies similar fund structuring process are: to those used by some hedge funds. As with QIS structures, the same ■ establishing and operating a collective investment scheme regulatory regime applies to these funds irrespective of whether they (CIS); are domiciled in England or Scotland. ■ managing investments; Listed AIFs have also been created using Scottish companies with ■ managing an AIF; securities admitted to trading on a securities market such as the Main ■ arranging transactions in investments; and Market or the Alternative Investment Market (AIM) or the Specialist ■ advising on investments. Fund Market (SFM) of the London Stock Exchange. Historically there have been examples of Scottish investment companies of this

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type, designed to facilitate indirect investment into alternative asset classes such as forestry assets. In these cases, the company becomes 1.4 Does the regulatory regime distinguish between subject to regulation by the FCA and the London Stock Exchange, open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different in respect of compliance with applicable provisions of FSMA, the types of funds or strategies (e.g. private equity v Disclosure and Transparency Rules, the Admission & Disclosure hedge)) and, if so, how? Standards of the London Stock Exchange and, as applicable, the Prospectus Rules and/or AIM Rules for Companies. The table below sets out the key features of the three main examples of AIF described above:

Investment Company Admitted Scotland Authorised Unit Trust or OEIC to Trading on a Securities Key Feature Scottish Limited Partnership (for example: Qualified Investor Market (for example, AIM or Schemes) SFM) Legal structure Partnership Trust or Company Company Separate legal personality Yes Yes Yes Open-/closed-ended Either Open-ended Closed-ended Manager or Authorised Corporate Manager and Custodian (FCA), Is the Fund/Manager/Trustee/ Manager and/or operator (FCA) Director, Trustee/Depositary and Fund (Companies Act, FCA listing Depositary regulated? Fund (FCA) rules or AIM rules) Admitted to trading on a Not in practice, with the exception securities market, for example, Admitted to trading on a securities of those Exchange Traded Funds No the Alternative Investment Market market? (ETFs) that use these fund or Specialist Funds Market of the structures London Stock Exchange Collective Investment Scheme? Yes Yes No Bespoke valuation provisions in Pricing NAV of fund Determined by market fund documentation

with the AIM Rules for Companies and the AIM Rules for Investing 1.5 What does the authorisation process involve and how Companies), and (ii) the appointment of a nominated adviser (nomad) long does the process typically take? and broker. A nomad is usually a corporate finance firm, investment bank or a broker that has been approved by the London Stock AIFs structured as SLPs Exchange. The nomad is responsible to the London Stock Exchange No authorisation is required at fund level. As indicated in question for assessing the appropriateness of a company for an application to 1.3 above, the manager and/or operator will typically be required to AIM and for advising the company on the admission process and its be authorised by the FCA. Where not already authorised prior to continuing obligations under the AIM Rules for Companies. the launch of the fund, the manager or operator will be required to The process of applying for admission to the Specialist Fund Market apply to the FCA for authorisation to conduct the expected range of is a two-stage process. The requirements include (i) the approval of a regulated activities. This will require the production of a detailed prospectus by the UK Listing Authority, and (ii) following approval business plan, including proposed internal controls and outsourcing, of the prospectus, application to the London Stock Exchange for a staff organisational chart including all those individuals who admission to trading on the SFM. Applicants will require specialist are seeking approved person status and relevant reporting lines, a advice. compliance monitoring programme, details of IT systems as well as numerous other pieces of information. A typical, straightforward application would normally be processed within three months. More 1.6 Are there local residence or other local qualification complex applications can take longer. As indicated in question 1.2 requirements? above, where the manager and operator do not have the required FCA authorisations, it is usually possible to structure the AIF so as Basic formation requirements for Scottish Limited Partnerships to outsource these activities to authorised service providers. Some market practice for the formation of SLPs is outlined below. AIFs structured as QISs or NURSs Where the separate legal personality of the SLP is required for the An application for authorisation of a QIS or NURS must be submitted operation of the fund (which is often the case with AIFs, particularly to the FCA. This involves submission of a structured application in the case of fund of funds, feeder funds and other vehicles), some form, constitutional documents and prospectuses which comply of these steps are of particular importance: with the detailed requirements of the FCA Collective Investment ■ It is fundamental that the partnership agreement be written so Schemes sourcebook (COLL), and a solicitor’s certificate. A typical as to be governed by Scots Law, specifically stating that the application would normally be processed within two months. partners intend the partnership to be a Scottish partnership. AIFs structured as public companies admitted to trading on ■ The SLP is generally required to have a principal place of AIM or SFM business in Scotland. This is often an address provided by the lawyers advising on the SLP formation. The company must be registered as a public limited company and ■ It is recommended that the general partner is a Scottish obtain a trading certificate. A prior requirement is that the nominal entity. This is most usually a Scottish special purpose private value of the company’s share capital is not less than £50,000. At least limited company. The general partner will be responsible one quarter of the nominal capital and the whole of any premium for any day-to-day management of the SLP; however, this is must be paid-up. normally delegated to an authorised manager. The registered The process of applying for admission to AIM includes (i) the office of the general partner is normally the principal place of production of a detailed AIM admission document (which complies business of the SLP.

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■ The partnership agreement is usually signed in Scotland. As indicated in question 1.4 above, the focus of this chapter is on This is often undertaken by an attorney for the partners, SLPs. who do not have to be physically present in Scotland to sign SLP key features include (i) flexible terms of management and documents. operation, (ii) tax transparency, (iii) separate legal personality, (iv) In addition, an occasional meeting, for example, an annual review limited liability for investors, and (v) the possibility of multiple meeting, is sometimes held at the SLP’s principal place of business passive investors (limited partners). For these reasons SLPs are address in Scotland. frequently used as AIF vehicles, particularly as private equity funds, real estate funds (including their feeder funds and carried interest 1.7 What service providers are required? vehicles), and fund of funds structures. Scotland In the case of SLPs, the service providers required will vary 2.2 Please describe the limited liability of investors. depending on the activities of the fund. As indicated above, the management and operation of a typical AIF SLP will be undertaken Investors participate in SLPs as limited partners. Provided it does by manager and operator, which may be the same entity, authorised not involve itself in the management of the SLP, a limited partner’s by the FCA to carry out the regulated activities involved. However, liability for the debts and obligations of the SLP is limited to the operator services are often provided by specialist fund administration amount of its capital contribution. It is normal for AIF SLPs to be businesses, which will often also provide ancillary services such as structured so as to ensure that this capital contribution is a nominal fund accounting. amount. For example, ‘capital contribution’ is often defined in the The rules implementing the EU Alternative Investment Fund partnership agreement as a fraction (e.g. 0.01 per cent) of a limited Managers Directive (AIFMD) in the UK apply in Scotland. These partner’s commitment to the SLP. The rest of the limited partner’s rules introduced requirements for specific service providers, such commitment to the SLP will comprise a loan. as depositaries, for AIFs managed by managers within the scope of If the partnership is wound up, for example, on an insolvent basis, the AIFMD. the limited partner will normally rank as an ordinary creditor for sums advanced above the nominal capital commitment. 1.8 What rules apply to foreign managers or advisers With effect from 6 April 2017, most AIF SLPs can apply to be treated wishing to manage, advise, or otherwise operate as Private Fund Limited Partnerships (PFLPs). Limited partners in funds domiciled in your jurisdiction? PFLPs are not required to contribute capital and any capital contributed can be repaid at any time without affecting the limited liability status. As indicated in question 1.2, the management and operation of an The general partner of the SLP, which (subject to any delegation AIF in Scotland will normally involve regulated activities that are arrangements) is responsible for the management and operation of required to be carried out by persons authorised by the UK Financial the SLP, has unlimited liability. Conduct Authority (FCA). The exact scope of regulated activities will depend on factors such as (i) the assets under management, and (ii) the structure of the fund. 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment In cases where the manager and operator do not have the required Funds? FCA authorisations, it is usually possible to structure the AIF so as to outsource these activities to authorised service providers. The principal legal structures used for managers and advisers These rules apply to foreign managers or advisers. Specific advice of AIFs in Scotland are limited companies and limited liability should be taken on whether the relevant regulated activities are partnerships (LLPs). within the UK regulatory perimeter or not. LLPs are tax-transparent, which may assist efficient structuring of the management vehicle. 1.9 What co-operation or information sharing agreements have been entered into with other governments or regulators? 2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? Co-operation or information sharing agreements are entered into at the UK level and there are currently no separate agreements AIF SLPs can be either open- or closed-ended. applicable to Scotland. Please see the England & Wales chapter of this publication for an overview of those agreements entered into at Subject to the point below about the restriction on distributions of the UK level. capital by SLPs, a manager may restrict redemptions or transfers, generally in accordance with the terms of the fund documentation. The LPA 1907 restricts distributions of capital by SLPs during the life 2 Fund Structures of the partnership. This makes the redemption of an investor’s capital commitment difficult. However, as described in question 2.2 above, 2.1 What are the principal legal structures used for this capital commitment is usually a nominal amount, with the rest Alternative Investment Funds? of an investor’s commitment comprising a loan. This means that in practice there is no legal impediment to structuring an SLP as an open- As indicated in question 1.3 above, the vast majority of AIFs ended vehicle. In addition, with effect from 6 April 2017, most AIF registered in Scotland utilise the SLP structure. However, in terms SLPs can apply to be treated as PFLPs. Limited partners in PFLPs are of market practice, some other structures have been used, for not required to contribute capital and any capital contributed can be example, QIS structures and listed investment companies (described repaid at any time without affecting the limited liability status. in questions 1.3 and 1.4 above).

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This content is required by a combination of market practice and 2.5 Are there any legislative restrictions on transfers of certain provisions of the FSMA and related orders, the common law investors’ interests in Alternative Investment Funds? of Scotland and the securities laws of other jurisdictions in which the fund may be being promoted. The AIFMD-driven rules apply In the case of SLPs, transfers of partnership interests are required where the manager is within the scope of the Directive. to be advertised in the Edinburgh Gazette and, for the purposes of In addition, the Packaged Retail and Insurance-based Investment the LPA 1907, do not take full effect until publication of the advert. Products Regulation (PRIIPS Regulation) requires product Publication of the advert is a simple administrative procedure. manufacturers to prepare Key Investor Documents (KIDs) for With effect from 6 April 2017, the requirement to advertise in the all Packaged Retail and Insurance-Based Investment Products Edinburgh Gazette has been removed for PFLPs. (PRIIPS) that are offered to sale to retail investors in the EEA. This Scotland includes alternative investment funds (AIFs) sold to retail investors. 2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, 3.3 Do the marketing or legal documents need to be asset stripping rules)? registered with or approved by the local regulator?

The AIFMD rules regulating the acquisition of substantial stakes in SLPs are required to be registered with the Registrar of Limited EU companies apply in Scotland as in the rest of the UK. These rules Partnerships in Edinburgh. This requires the filing of a form at impose disclosure obligations on the acquisition of major holdings registration, containing basic details of the partnership, the partners (starting at 10% of voting rights) in non-listed EU companies as and capital contributions. There are limited continuing obligations well as restrictions on “asset stripping”. These rules impose certain to notify the registrar of various changes relating to the partnership, limitations on distributions, share redemptions or buybacks and its business and capital. There is no registration requirement in capital reorganisations during a period of 24 months following the respect of an SLP’s marketing document. acquisition of control.

3.4 What restrictions are there on marketing Alternative 3 Marketing Investment Funds?

As indicated in question 3.1 above, most AIF SLPs are classified as 3.1 What legislation governs the production and offering unregulated collective investment schemes (UCIS). The marketing of marketing materials? and promotion of UCIS is regulated by the FSMA and related orders.

As indicated in question 1.3 above, for regulatory purposes, AIF In very general terms, these regulations mean that, as is the case with SLPs are generally classified as unregulated collective investment AIFs in many other jurisdictions, AIF SLPs cannot be freely marketed schemes (UCIS). to the public, but only to certain categories of eligible investor (such as ‘investment professionals’, ‘high-net-worth individuals’ and The marketing and promotion of UCIS is regulated by the FSMA ‘sophisticated investors’). and related orders and the AIFMD-driven rules, where the manager is within the scope of the Directive. In very general terms, these regulations mean that, as is the case 3.5 Can Alternative Investment Funds be marketed to retail investors? with AIFs in many other jurisdictions, AIF SLPs cannot be freely marketed to the public, but only to certain categories of eligible In general, no – but AIFs can be marketed to some investors classed investor (such as ‘investment professionals’ and ‘sophisticated as retail investors subject to the restrictions described under question investors’). 3.4 above and compliance with suitability assessment rules.

3.2 What are the key content requirements for marketing materials, whether due to legal requirements or 3.6 What qualification requirements must be carried out customary practice? in relation to prospective investors?

Key content requirements for AIF SLP marketing materials are A range of qualification requirements for eligible investors are similar to those used in many other jurisdictions and, typically, set out primarily in the Financial Services and Markets Act 2000 details include: (Financial Promotion) Order 2005 (FPO), the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) ■ investment objectives and strategy; (Exemptions) Order 2001 (CIS Promotion Order) and specific FCA ■ investment process; conduct of business rules. The specific rules that apply will depend ■ management personnel; on factors such as whether the promoter of the AIF is authorised by ■ summary of key fund terms; the FCA or not. Some commonly used categories of eligible investors ■ risk disclosures; are noted below: ■ disclosure of UK tax treatment of the fund and investors ■ investment professionals; and, if the fund is being distributed on a cross-border basis, ■ certified high-net-worth individuals; and disclosure of the tax treatment of the fund and investors in ■ certified sophisticated investors. other key jurisdictions; and These categories are specifically defined in the applicable legislation. ■ regulatory statements and disclosures required by the FSMA and other securities laws in the UK and, if the fund is being AIFMD also introduced a passport which facilitates marketing to distributed on a cross-border basis, regulatory statements professional investors on a pan-European basis. and disclosures required by securities laws in other key jurisdictions.

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3.7 Are there additional restrictions on marketing to 4.3 Are there any restrictions on borrowing by the public bodies such as government pension funds? Alternative Investment Fund?

No; public bodies will often fall within one of the categories of No such restrictions apply to AIF SLPs, although it is common for eligible investor, such as ‘investment professional’, but this should fund documentation to limit borrowing by the fund. be specifically checked. The rules implementing the AIFMD in the UK require managers within the scope of the Directive to specify leverage limits. 3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process?

5 Disclosure of Information Scotland The restrictions on marketing that apply to the manager or promoter will also apply to intermediaries. 5.1 What public disclosure must the Alternative Investment Fund or its manager make? 3.9 Are there any restrictions on the participation in Alternative Investment Funds by particular types of The registration and disclosure requirements, contained in the LPA investors, such as financial institutions (whether as 1907, that apply to AIF SLPs are set out in question 3.3 above. sponsors or investors)? In addition, the Partnerships (Accounts) Regulations 2008 (as amended) require the annual accounts of certain SLPs to be filed. Generally, and subject to the points made above (see questions 1.2 and 3.4 in particular) on authorisation and marketing, there are no restrictions on the participation in Alternative Investment Funds by 5.2 What are the reporting requirements in relation to particular types of investors. Alternative Investment Funds or their managers? Some qualifications apply to this. For example, Scottish local government pension schemes (LGPS) are subject to the restrictions The rules which implement the AIFMD in the UK introduce various set out in the Local Government Pension Scheme (Management and reporting requirements. These involve periodic reports to the FCA Investment of Funds) (Scotland) Regulations 2010, which contains using an online reporting system. concentration limits for various classes of investments. LGPS, together with other types of pension funds, will also be subject to 5.3 Is the use of side letters restricted? the terms of their internal investment policies. Certain types of retail investment funds (for example, UCITS funds) A requirement to disclose arrangements, such as side letters, was also have to comply with investment restrictions which may limit introduced by the AIFMD. Other than this, the use of side letters their exposure to Alternative Investment Funds. is not restricted by current legislation. As is common in other In addition, investments by financial institutions in AIFs may impact jurisdictions, investors will often seek to negotiate ‘most favoured their regulatory capital requirements. nation’ provisions. The rules which implement the AIFMD in the UK apply in Scotland. These significantly restrict the range of activities which managers 6 Taxation within the scope of the Directive can undertake.

6.1 What is the tax treatment of the principal forms of 4 Investments Alternative Investment Funds identified in question 2.1? 4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment Although SLPs have separate legal personality (which is why they Funds? are often used in fund of funds structures, feeder funds, and similar vehicles), they are tax-transparent for most UK taxes. This means In general, no. However, (as described in question 1.2 above) the that no income, corporation or capital gains tax is payable by the SLP management and operation of an AIF in Scotland will normally itself. Instead, the UK tax authorities look through the partnership involve regulated activities that are required to be carried out by structure and partners are taxed on their share of partnership income persons authorised by the FCA. Such persons will be authorised to arrived at in accordance with their profit-sharing ratios (which can conduct a specific scope of activities. be different from the ratios in which capital has been contributed). The rules that implement the AIFMD in the UK also restrict certain For capital gains tax purposes, partners are treated as owning activities, for example, where an AIF acquires control of a non-listed fractional shares in the underlying assets. company. These restrictions relate to matters such as distributions, capital reductions and share buybacks. 6.2 What is the tax treatment of the principal forms of investment manager / adviser identified in question 2.3? 4.2 Are there any limitations on the types of investments that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or The tax treatment of the principal forms of investment manager/ otherwise? adviser will vary according to the structure used, for example, a company or limited liability partnership (LLP). LLPs are often No such limitations apply to AIF SLPs, although it is common for used as management vehicles, as they are tax-transparent corporate fund documentation to limit the types of investments held. vehicles, offering limited liability, with no restrictions on members

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participating in management. VAT on management fees is often a key tax consideration, as is the use of the Investment Manager 6.5 Is it necessary or advisable to obtain a tax ruling from Exemption, which allows a non-UK resident fund that is trading for the tax or regulatory authorities prior to establishing an Alternative Investment Fund? tax purposes, such as a hedge fund, to appoint a UK-based investment manager without creating a permanent establishment in the UK. This is not generally necessary.

6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an 6.6 What steps have been or are being taken to implement Alternative Investment Fund or the transfer of the the US Foreign Account and Tax Compliance Act investor’s interest? 2010 (FATCA) and other similar information reporting

Scotland regimes such as the Common Reporting Standard? There are no establishment taxes levied in connection with an investor’s participation in an AIF. Stamp duty may be payable on FATCA compliance is currently coordinated at the UK level the transfer of an investor’s interest in an SLP if the SLP’s property (primarily by the International Tax Compliance (United States of includes stock or marketable securities. In practice, transfers of America) Regulations 2013). The use of AIFs domiciled in Scotland interests are often structured so as to mitigate stamp taxes. Stamp should not ordinarily introduce any additional material factors duty land tax or land and buildings transaction tax may apply where relevant to FATCA or compliance with similar information reporting the SLP’s property includes land. regimes. It is to be noted that SLPs often elect to be treated as corporations for US tax purposes. Where that is the case, it may be relevant 6.4 What is the tax treatment of (a) resident, (b) non- for FATCA compliance purposes (for example, when considering resident, and (c) pension fund investors in Alternative Investment Funds? which entity may become liable for FATCA withholding tax).

As indicated above, although SLPs have separate legal personality, 6.7 What steps are being taken to implement the OECD’s they are generally tax-transparent and the UK tax authorities look Action Plan on Base Erosion and Profit-Shifting through the partnership structure. Partners are taxed on their share (BEPS), in particular Actions 6 and 7, insofar as they of partnership income in accordance with their profit-sharing ratios affect Alternative Investment Funds’ operations? (which can be different from the ratios in which capital has been contributed). For capital gains tax purposes, partners are treated as Implementation of the OECD’s Action Plan on Base Erosion and owning fractional shares in the underlying assets. The tax profile of Profit-Shifting is being dealt with at UK level. individual investors determines their tax liability. AIF SLPs are generally operated so that they are not treated for UK 6.8 Are there any tax-advantaged asset classes or tax purposes as carrying on a trade, the result of which is that non- structures available? How widely are they deployed? resident investors should not be subject to UK tax on gains from the SLP. Non-resident investors may, however, be subject to UK tax on Other than SLPs, which are described above and are generally investment income, although this is likely to be restricted to UK tax tax-transparent, the tax and regulatory regime applicable to tax that is withheld at source (for example, by a portfolio company in advantaged fund structures and asset classes generally applies on a private equity fund). Withholding tax on UK investment income a UK-wide basis. would be subject to the relevant double taxation treaty between the UK and the investor’s jurisdiction of residence. 6.9 Are there any other material tax issues for investors, Non-resident investors who hold their interest in the AIF SLP as managers, advisers or AIFs? part of their trade (for example, financial traders such as banks) are likely to be treated as carrying on part of that trade in the UK Individual investors, managers and advisors who are classed as through a permanent establishment, branch or agency which is a Scottish tax payers for income tax purposes will be liable to pay UK representative (for example, the general partner or manager the Scottish rates of income tax on any non-savings non-dividend of the fund). The UK-resident general partner would then be income. For example, management fees or trading income treated treated as the investor’s UK tax representative, and would share as arising from an SLP could be subject to the Scottish rates. responsibility with the investor for submitting UK tax returns and paying any UK tax due on the investor’s partnership income. In these circumstances, the manager will often be authorised to retain 6.10 Are there any meaningful tax changes anticipated in the coming 12 months? an amount equal to such investor’s liability to UK corporation or income tax and pay such amounts to the UK tax authorities. These tax liabilities can usually be mitigated by the use of special purpose The Scottish Government is consulting on introducing: (a) a seeding vehicles established for the purpose of participating in the AIF SLP. relief for PAIFs and COACs, to exempt the introduction of Scottish property to funds from LBTT; and (b) an exemption from LBTT In addition, non-UK jurisdictions may apply or withhold tax on for the transfer of units in a COACs which invest in Scottish land. income or gains receivable by the AIF SLP from investments in those jurisdictions. In these circumstances, investors will normally These changes should bring the LBTT treatment of PAIFs and seek relief under applicable double tax treaties, and the availability COACs closer to the current SDLT regime. of relief may depend on whether the SLP is treated as fiscally It should be noted that the LBTT rules will apply to funds investing transparent in the overseas jurisdiction. in Scottish property regardless of which jurisdiction the fund itself is resident in.

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requirement for managers to be authorised to market funds only 7 Reforms once they have reviewed final form documentation. If regulators do not take a practical approach to these rules, we could end up in the 7.1 What reforms (if any) are proposed? situation where the regulator rejects fund documents on the basis that they are not in final form, which then prevents the fund manager On 12 March 2018, the European Commission published a proposal from negotiating with investors. These rules appear to be better (comprising a Regulation and a Directive) to harmonise national suited to funds where the terms are not negotiated, and investors fund marketing rules across EU Member States. The Regulation simply buy into an already established product (such as a UCITS seeks to ensure that regulatory fees levied by regulators for fund). For more bespoke products, the proposal is likely to prove authorisation, registration and supervision are proportionate and particularly challenging. publicly disclosed The Regulation will also require regulators to Other developments include the EU prudential framework for Scotland maintain databases outlining applicable marketing rules for AIFs investment firms. At the moment, investment firms that are and UCITS funds. authorised under MiFID are largely regulated under the Capital The proposed Directive is more controversial, and aims to further Requirements Directive (“CRD IV”) and Capital Requirements “facilitate” cross-border marketing. The Directive clarifies the Regulation (“CRR”), which also establish the prudential framework definition of “pre-marketing” compared to “marketing”. The for credit institutions. The European Commission is proposing to proposed Directive states that “pre-marketing” excludes information change this for certain categories of investment firm and introduce that: a more bespoke set of prudential standards which will fall under the umbrella of an Investment Firms Directive and accompanying ■ Relates to an established AIF. Regulation. ■ Contains a reference to an established AIF. At the time of writing, the impact of Brexit on the UK investment ■ Enables investors to commit to acquiring units or shares of a management industry, including Scotland, is uncertain. Topics particular AIF. such as the availability of marketing passports under AIFMD will ■ Amounts to a prospectus, constitutional documents of a be an area of focus. The FCA recently announced that firms and not-yet established AIF, offering documents, subscription funds will continue to benefit from passporting between the UK documents or similar documents whether in draft or final form, allowing investors to take an investment decision. and EEA during a transition period, following Brexit. Obligations under EU law will continue to apply, and firms must continue with The proposals are intended to provide clarity and align marketing their implementation plans for EU legislation that is due to come rules across the EU Member States but, if implemented, are likely into effect before the end of 2020 (this is likely to include the new to give rise to a number of serious difficulties for fund products prudential regime). where fund managers expect to negotiate their terms with potential investors. As the rules are currently drafted, a fund manager The FCA has stated that this transition period is intended to allow discussing the terms of a limited partnership agreement would for further cooperation between UK and EU regulators, to provide technically be ‘marketing’ to investors. This contradicts the FCA’s solutions for investment managers firms following Brexit.

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Andrew Akintewe Karen Fountain Brodies LLP Brodies LLP 15 Atholl Crescent 15 Atholl Crescent Edinburgh, EH3 8HA Edinburgh, EH3 8HA Scotland Scotland

Tel: +44 131 656 0210 Tel: +44 131 656 0179 Fax: +44 131 228 3878 Fax: +44 131 228 3878 Email: [email protected] Email: [email protected] URL: www.brodies.com URL: www.brodies.com Scotland Andrew specialises in the formation and operation of investment funds, Karen has over 20 years’ experience of advising leading financial related corporate transactions and financial regulation. He advises a institutions, funds and institutional and strategic investors across diverse client base of investment managers, banks and other market the globe on a broad range of matters (and covering all major asset participants on investment fund structures, regulatory projects and classes and sectors including infrastructure, real estate, private equity related corporate finance assignments. In particular, he has advised and venture capital and other investment strategies). Karen has also on Takeover Code transactions, schemes of arrangement and capital been instrumental in the formation and development of many complex reorganisations involving London Stock Exchange quoted investment joint ventures and consortia. Many of these have stood the test of companies. Andrew has worked for a major financial institution and time, having successfully completed contested acquisitions, complex is an Associate Member of the Chartered Institute for Securities and refinancing, broader syndications and total and partial exits. Investment.

Brodies is a UK law firm, operating across offices in Edinburgh, , Aberdeen and Brussels. We are ranked ‘No.1’ in 40 key practice areas by leading independent legal directories. Our core expertise is on Scottish jurisdictional work and we have the local market knowledge combined with the market-leading expertise to deliver tailored advice in all relevant business areas and sectors, with a particular focus on banking, funds and financial services. Our investment funds practice draws on the leading expertise within the firm including corporate, private equity, property, banking, regulation, tax and employee benefits. We have established a strong reputation for advising a diverse client base of investment managers, banks and other market participants on the full range of specialist and retail investment structures, including marketing, distribution, financing, tax and transactional matters. We are a market leader in the use of Scottish entities in global fund structures – and regularly work with fund specialists in other jurisdictions.

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Singapore Amit R. Dhume

Colin Ng & Partners LLP Abel Ho

to hold immovable assets) may be exempted from holding a CMS 1 Regulatory Framework licence if all the investors in the AIF are qualified investors. There are also exemptions from these licensing requirements available for 1.1 What legislation governs the establishment and certain financial institutions such as banks and finance companies, operation of Alternative Investment Funds? provision of fund management services to related corporations etc., but these exemptions cannot be used by independent investment The applicable legislation that governs the establishment and managers or advisers who want to manage third-party monies. operation of an Alternative Investment Fund (AIF) in Singapore depends on how the AIF is structured. Some common structures 1.3 Are Alternative Investment Funds themselves include private limited companies, limited partnerships, and unit required to be licensed, authorised or regulated by a trusts. If the AIF is structured as a private limited company, the regulatory body? applicable governing legislation will be the Companies Act (Cap. 50) of Singapore (Companies Act). If the AIF is structured as a While the MAS regulates managers and advisers in Singapore, the limited partnership, then the Limited Partnership Act (Cap. 163B) AIFs by themselves are not required to be licensed by any specific of Singapore (Limited Partnership Act) will be applicable. While regulatory body. That being said, if the AIF is incorporated as a there is no specific governing legislation applicable to an AIF if it is Singapore company, it would have to be registered by the Registrar established as a unit trust, the AIF will need to operate in accordance of Companies and comply with the Companies Act and the rules with the trust deed constituting the AIF, and unless such units are and regulations thereunder. Similarly, if the AIF is structured as offered to the retail public for investment then the prudential rules a Singapore limited partnership, it would have to be registered by and procedural requirements pursuant to the Securities and Futures the Registrar of Limited Partnerships and comply with the Limited Act (Cap. 289) of Singapore (SFA) will apply accordingly. Partnership Act and the rules and regulations thereunder. In general, an AIF need not be authorised save for situations where: (i) the AIF 1.2 Are managers or advisers to Alternative Investment is offered to accredited investors or certain other persons pursuant Funds required to be licensed, authorised or to the prospectus exemption under section 305 of the SFA (S305 regulated by a regulatory body? Exemption) for investment, in which case, a simple notification of the proposed offer of the interest in the AIF has to be filed with the Any person conducting fund management activity in Singapore is MAS before it is offered to such investors in Singapore; or (ii) the required to either hold a Capital Markets Services (CMS) licence AIF is offered to the retail public for investment, in which case, for fund management or qualify for an exemption to hold a CMS the AIF needs to be authorised or recognised by the MAS and the licence under the SFA. Fund management is defined broadly and prudential rules and procedural requirements pursuant to the SFA includes the management of a portfolio of securities on behalf will apply accordingly. of a customer (whether on a discretionary authority granted by the customer or otherwise). Therefore, managers and advisers 1.4 Does the regulatory regime distinguish between of private equity funds are required to be licensed and regulated open-ended and closed-ended Alternative Investment by the Monetary Authority of Singapore (MAS) unless they Funds (or otherwise differentiate between different qualify for any of the licensing exemptions. In situations where types of funds or strategies (e.g. private equity v a manager or adviser to a private equity fund proposes to manage hedge)) and, if so, how? up to S$250 million in assets for up to 30 qualified investors (i.e. institutional and accredited investors) of which no more than 15 The regulatory regime in Singapore currently (since 1 July 2013) may be funds or limited partnership fund structures offered to does not differentiate between open-ended and closed-ended AIFs. accredited or institutional investors, the manager or adviser is not required to hold a CMS licence but has to be registered with 1.5 What does the authorisation process involve and how the MAS as a Registered Fund Management Company (RFMC). long does the process typically take? Another frequently utilised exemption is the “immovable property exemption”. That is, managers and advisers of AIFs that directly A person who wishes to apply for a CMS licence for fund or indirectly (through another entity) invest in immovable assets management or to register itself as a RFMC is required to submit to (or corporations or unincorporated bodies whose sole purpose is the MAS the relevant prescribed forms duly completed along with

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all supporting documents. These include a simple business plan, a shareholding chart and an organisation chart of the applicant. The 1.9 What co-operation or information sharing agreements MAS would also need details of the applicant’s audited financial have been entered into with other governments or regulators? statements, and where applicable, the consolidated financial statements of the group of which the applicant is a part. After the application is submitted to the MAS via its Corporate Electronic Singapore has concluded several international co-operation Lodgement system, the MAS would generally take around four to and information sharing agreements with other governments or six months to review and raise any queries it may have in respect regulators as follows: of the application. The Guidelines on Licensing, Registration and (a) Exchange of Information Agreements; Conduct of Business for Fund Management Companies issued (b) Convention on Mutual Administrative Assistance in Tax

Singapore by the MAS, which are to be read along with the SFA and related Matters; and regulations, provide key details of the application process and (c) International Tax Compliance Agreements (e.g. Foreign requirements. Account Tax Compliance Act (FATCA), Common Reporting Standard (CRS), Country-by-Country Reporting, Multilateral Competent Authority Agreements on Automatic Exchange of 1.6 Are there local residence or other local qualification Financial Account Information under the CRS and Exchange requirements? of Country-by-Country Reports).

Where the AIF is incorporated as a Singapore company, at least one Singapore resident director must be appointed onto the board 2 Fund Structures of the AIF (i.e. Singapore citizen, Singapore permanent resident or holder or an employment pass issued by the Ministry of Manpower 2.1 What are the principal legal structures used for in Singapore). The other directors on the board of the AIF can Alternative Investment Funds? be residents of foreign countries. Where the AIF is set up as a Singapore limited partnership and the general partner is ordinarily While the structure of the AIF would depend on various factors resident outside of Singapore, the Registrar of Limited Partnerships such as the type of the underlying investments and the nature of will require an ordinarily resident natural person acting as the local the investors etc., the legal structures principally used for AIFs are manager to be appointed. private limited companies and limited liability partnerships.

1.7 What service providers are required? 2.2 Please describe the limited liability of investors.

In general, the MAS requires Assets Under Management (AUM) If the AIF is structured as a private limited company, the liability of to be held by an independent custodian; i.e. a prime broker, the investors is limited to the extent on any amount unpaid on their depositories or banks which are properly registered or authorised shares. The investors do not have to contribute any amount more in their home jurisdictions, although it recognises that private than the share capital they have paid into the AIF. equity and wholesale real estate funds may adopt other methods, subject to appropriate disclosures and other safeguards. The AUM If the AIF is structured as a limited partnership, the investor as a must be subject to an independent valuation carried out by a third- limited partner has limited liability for the debts and obligations of party service provider or by an in-house fund valuation function the limited partnership, unless the limited partner takes part in the under certain conditions. Investment managers or advisers are management of the limited partnership. also expected to put in place internal audit procedures and comply with annual external audit requirements. The annual external audit 2.3 What are the principal legal structures used for performed by the independent auditor is meant to serve as a periodic managers and advisers of Alternative Investment check on the valuation of the assets and the MAS has emphasised Funds? that taken on its own, the annual audit will not fulfil the requirement for independent valuation. The manager or adviser to the AIF is typically incorporated as a It must also be noted that all arrangements with third-party service separate private limited company. providers have to be in accordance with the requirements set out in the MAS Guidelines on Outsourcing, where applicable. 2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? 1.8 What rules apply to foreign managers or advisers wishing to manage, advise, or otherwise operate funds domiciled in your jurisdiction? There are no statutory limits on the manager’s ability to restrict redemptions in open-ended funds or transfers in open-ended or closed- Under the Guidelines on Licensing, Registration and Conduct of ended funds. That said, for AIFs that have been authorised by the Business for Fund Management Companies issued by the MAS, MAS for investment by the public and are not listed on the Singapore managers or advisers regulated under the MAS should be Singapore Exchange, there are certain prescribed liquidity requirements under incorporated companies and have a permanent physical office in the Code on Collective Investment Schemes (CIS Code). Singapore. Therefore, foreign managers or advisers wishing to manage or advise or otherwise operate funds in Singapore should set 2.5 Are there any legislative restrictions on transfers of up a subsidiary in Singapore and would be subject to the licensing investors’ interests in Alternative Investment Funds? requirements unless it qualifies for an exemption. Where the AIF is managed by a manager who is licensed by the MAS to manage funds for qualified investors, all transfers of

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investors’ interests in the AIF shall be made only to qualified investors. Where an AIF is not authorised by the MAS for 3.3 Do the marketing or legal documents need to be investment by members of the public, the manager shall not make registered with or approved by the local regulator? any offering of such interests in the AIF to members of the public, unless one or more exemptions are invoked (i.e. private placement Whether the marketing materials for the AIF would need to be exemption, the institutional investors’ exemption, the accredited registered with the MAS depends on which specific prospectus investors’ or certain other relevant persons’ exemption). In addition, exemption is being invoked. Where an AIF is offered or marketed the constitutive documents of the AIF should restrict transfers of to accredited investors under the S305 Exemption, a copy of the their investors’ interest so that such interests are not held by any information memorandum would need to be submitted to the MAS member of the public. for its records. The MAS does not approve the said information memorandum. Singapore Here, information memorandum refers to any materials given to 2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, investors to enable them to decide whether or not they want to invest asset stripping rules)? in the AIF (e.g. private placement memorandum and fund fact sheets).

There are no statutory limitations on the manager’s ability to 3.4 What restrictions are there on marketing Alternative manage its funds. However, the CIS Code prescribes various Investment Funds? requirements for retail funds with respect to permissible investments and borrowing. There are restrictions as to the maximum amount An offer of interests in AIFs in Singapore would generally have to of exposure to unlisted securities, listed and unlisted derivatives as be made in or accompanied by a prospectus that is registered with well as maximum exposure to transferrable securities and money the MAS, unless the said offer is made under one of the exemptions market instruments issued by a single entity or related entities. or safe-harbours in the SFA. The requirements will differ based on whether the fund is a non- The restrictions on marketing the AIFs depend on which safe-harbour specialised fund or a specialised fund such as a currency fund, or prospectus exemption is being invoked. In the event that the offer money market fund, hedge fund, or a property fund, etc. is made under the private placement exemption in the SFA, the AIF may be offered to not more than 50 offerees over a period of 12 3 Marketing months. In the event that the offer is made under the “small offers” exemption, then not more than S$5 million can be raised by a person from “personal offers” of interests in the AIF over a period of 12 3.1 What legislation governs the production and offering months. In both scenarios, no advertisements relating to the offer can of marketing materials? be published, and marketing of the AIF can only be done by people who hold a CMS licence for dealing in securities and a Financial The SFA, the Financial Advisers Act (Cap. 110) of Singapore and Advisors licence for marketing Collective Investment Schemes the rules and regulations made thereunder including the various (CIS), or people who are exempted from holding such licences. guidelines issued by the MAS govern the offering of marketing materials. 3.5 Can Alternative Investment Funds be marketed to retail investors? 3.2 What are the key content requirements for marketing materials, whether due to legal requirements or AIFs are usually marketed to institutional investors and accredited customary practice? investors (as opposed to members of the public), either due to the terms of offer of the AIF (e.g. higher minimum subscription amounts) For offers made under the S305 Exemption, there is a prescribed or because the licence granted by the MAS to the investment manager list of specific matters that have to be disclosed in the information or adviser restricts its clientele to qualified investors only. memorandum of such AIFs. Amongst the matters which must be disclosed are: the investment objectives and focus of the AIF; the investment approach of the manager; the risks of subscribing for 3.6 What qualification requirements must be carried out in relation to prospective investors? or purchasing units in the restricted scheme; where applicable, the conditions, limits and gating structures for redemption of the units; where applicable, the past performance of the restricted scheme; Prospective investors are usually institutional investors and details of where the accounts of the restricted scheme may be accredited investors. They would usually be required to produce obtained; and the fees and charges payable by the investors and by the supporting documents such as their latest financial statements or restricted scheme. Further, the Guidelines on Licensing, Regulation bank statements as evidence of their financial worth. and Conduct of Business for Fund Management Companies also set out matters to be disclosed to investors. These include: disclosure of 3.7 Are there additional restrictions on marketing to counterparties; brokers and prime brokers used by the AIF; disclosure public bodies such as government pension funds? of custodians, trustee, fund administrators and/or auditors used by the AIF; disclosure of valuation policy and performance measurement No, there are no additional restrictions. standards; disclosure of professional indemnity insurance arrangements or the absence of such arrangements; and disclosure on 3.8 Are there any restrictions on the use of intermediaries the use of leverage and the extent to which it is permitted. to assist in the fundraising process? In practice, even for AIFs that are not offered under the S305 Exemption, it is common or customary to see almost all of the Intermediaries that assist in the fundraising process are required aforementioned matters disclosed in the information memorandum. to hold a CMS licence for dealing in securities and a Financial

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Advisors licence for marketing CIS under the current legislation. When the Securities and Futures (Amendment) Act 2017 is gazetted 5 Disclosure of Information to come into force in Singapore, all entities marketing AIFs will only be required to hold a CMS licence for dealing in securities or 5.1 What public disclosure must the Alternative be exempted from holding such a licence. Investment Fund or its manager make?

3.9 Are there any restrictions on the participation in AIFs structured as Singapore companies must file their financial Alternative Investment Funds by particular types of statements and information on their shareholders and directors with investors, such as financial institutions (whether as the Accounting and Corporate Regulatory Authority of Singapore sponsors or investors)? (ACRA). Members of the public can obtain such information from

Singapore ACRA upon payment of a fee. Under Section 32 of the Banking Act of Singapore, banks in AIFs structured as limited partnerships do not need to file annual Singapore are prohibited from acquiring or holding any major stakes returns with ACRA. If the AIF is managed by a licensed manager (that is, any beneficial interest exceeding 10% of the total number or a person exempt from the requirement to be so licensed, the of issued shares or control over more than 10% of the voting power) particulars of its limited partners will not be open to inspection by in a company undertaking non-financial business, unless the prior members of the public. approval of the MAS has been obtained. However, private equity AIFs which are registered by the MAS for offers to members of and venture capital investments are excluded from the scope of the public have extensive disclosure obligations in the prospectus Section 32 of the Banking Act of Singapore pursuant to Regulation that they have to lodge with the MAS. As continuing disclosure 7 of the Banking Regulations. The scope of private equity and obligations, such AIFs have to disclose the interests of its substantial venture capital investments that can be undertaken by Singapore investors (i.e. those who hold 5% or more of the equity interests in banks, the duration of investments and the bank’s involvement in the AIFs), directors and the chief executive officer of the manager in the management of such investments can be found in MAS Notice the AIFs and the financial performance of the AIFs. 630 to banks on private equity and venture capital investments. For instance, a bank shall not hold any indirect private equity and venture capital investment if such investee is not managed by the 5.2 What are the reporting requirements in relation to bank or a related party, for a period exceeding 12 years from the date Alternative Investment Funds or their managers? of its first investment in the investee. AIFs structured as companies would need to make regular filings with ACRA, such as filings relating to issuance of securities, changes 4 Investments in directors and shareholders, creation of charges and annual reports. A general partner of a limited partnership is also required to lodge a statement with the Registrar of Limited Partnerships if there are 4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment changes in the registered particulars of the limited partnership. Funds? AIFs that are registered by the MAS for offers to the members of the public are required to send semi-annual and annual performance There are currently no statutory or regulatory restrictions on the types reports to their investors. of activities that can be performed by AIFs that are not registered by the MAS for offers to members of the public. However, it is 5.3 Is the use of side letters restricted? common for investment restrictions to be provided for contractually.

There are no restrictions on the use of side letters. However, the MAS 4.2 Are there any limitations on the types of investments has prescribed certain disclosures under the Section 305 Exemption that can be included in an Alternative Investment to be made to investors in the private placement memorandum on Fund’s portfolio whether for diversification reasons or such side letter arrangements (e.g. the nature and scope of such side otherwise? letters) for restricted funds marketed only to accredited investors.

There are no such limitations for AIFs that are not registered by the MAS for offers to members of the public. 6 Taxation

4.3 Are there any restrictions on borrowing by the 6.1 What is the tax treatment of the principal forms of Alternative Investment Fund? Alternative Investment Funds identified in question 2.1? There are currently no statutory or regulatory restrictions on borrowing by AIFs that are not registered by the MAS for offers to Singapore limited partnerships are not treated by the Inland Revenue members of the public. However, it is common for restrictions on Authority of Singapore (IRAS) as a legal person and therefore no borrowing to be provided for contractually. tax will be levied at the partnership level. However, the share of income accruing to each partner from the limited partnership will be taxed at the rates applicable to them accordingly.

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Singapore income tax is imposed on income accruing in or derived Singapore company will attract stamp duty upon a transfer of shares from Singapore and on foreign-sourced income received or construed in the AIF at a rate of 0.2% of the consideration for the transfer or to have been received in Singapore, subject to certain exceptions. the net asset value of the shares transferred, whichever is higher. Singapore does not impose tax on capital gains; however, gains from Stamp duty may be incurred on the transfer of limited partnership the disposal of investments may be construed to be of an income interests in an AIF if the assets of the partnership include shares of nature and subject to Singapore income tax. Generally, gains on the Singapore companies and immovable properties in Singapore. disposal of investments are considered income in nature and sourced in Singapore if they arise from or are otherwise connected with the 6.4 What is the tax treatment of (a) resident, (b) non- activities of a trade or business carried on in Singapore. Therefore, resident, and (c) pension fund investors in Alternative one common issue for AIFs on taxation is whether gains are capital in Investment Funds? nature, and thus not taxable in Singapore, or taxable as trading income. Singapore AIFs that incorporate as Singapore companies are generally taxed at If the AIF is not able to invoke any of the available tax exemption a fixed rate of 17% on their chargeable income. That said, there is schemes such as the basic tier tax incentive scheme or the an exemption where an AIF owns 20% or more of the ordinary share enhanced tier tax incentive scheme, the tax treatment of investors capital of another company and has held those shares for at least 24 in an AIF becomes a relevant consideration for investors. Limited months prior to their disposal, then the gains will be exempt from tax partnerships are tax-transparent vehicles. Accordingly, income and provided they are disposed of between 1 June 2012 and 31 May 2022. gains received by the fund are taxable in the partners’ hands. The particular partner’s tax profile would determine the tax payable by Over the years, Singapore has also developed several tax incentive him. Resident individual investors are taxed at progressive tax rates schemes in order to attract managers and AIFs alike to the city state. of up to 22% on their taxable income. Corporates are taxed at 17% The MAS administers certain tax incentive schemes which are on their taxable income. available for AIFs that are managed by Singapore-based managers. Such schemes allow AIFs that satisfy the qualifying conditions to Non-resident investors in a private equity fund structured as enjoy exemption from all incidents of income tax save for income a Singapore company are not subject to taxation. There is no sourced from immovable properties in Singapore. withholding tax on dividend distributions made to non-resident investors by AIFs structured as Singapore companies. Withholding It must be noted that an AIF may not make taxable supplies for tax at a rate of 15% is applicable if any interest or royalty is paid by Goods and Services Tax (GST) purposes and therefore its ability an AIF to a non-resident investor. to recover input tax suffered on supplies made to it is very limited. Management fees payable to the manager or adviser will in principle Pension fund investors are subject to tax on their taxable income in attract GST. MAS has issued a circular to allow AIFs qualifying the same way as corporate investors. for income tax concessions managed or advised by a manager or adviser to recover most of this GST. 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing an Alternative Investment Fund? 6.2 What is the tax treatment of the principal forms of investment manager / adviser identified in question 2.3? Generally, it is not necessary to obtain a tax ruling from the tax or regulatory authorities prior to establishing an AIF. There are tax Investment managers and advisers are usually structured as exemption schemes for AIFs in Singapore called the basic tier tax private limited companies and the general corporate income tax incentive scheme and the enhanced tier tax incentive scheme as rate in Singapore is 17%. Under the Financial Sector Incentive- mentioned in the answer to question 6.8. Many investment managers Fund Management (FSI-FM) Scheme, fee income derived by an or advisers of AIFs would consider applying for a tax exemption approved Singapore domiciled investment manager or adviser scheme in practice if they were able to meet the qualitative and from the provision of prescribed fund management or investment quantitative conditions. advisory services would be subject to a concessionary tax rate of 10%. An application needs to be made to the MAS for the grant of 6.6 What steps have been or are being taken to implement this award and the award of the concessionary tax rate is subject to the US Foreign Account and Tax Compliance Act MAS’ discretion. One of the conditions that the investment manager 2010 (FATCA) and other similar information reporting or adviser needs to satisfy for the grant of this award is that the regimes such as the Common Reporting Standard? investment manager or advisor should have a minimum of S$250 million of AUM. Accordingly, an investment manager or adviser Singapore and the US signed a FATCA Model 1 intergovernmental with AUM above this level will be able to apply for the FSI-FM agreement (IGA) on 9 December 2014 to ease the FATCA compliance Scheme, but RFMCs will not be able to avail themselves of this burden of Singapore-based financial institutions (SGFIs). The IGA incentive as a RFMC must not have AUM in excess of S$250 million. and Regulations came into force on 18 March 2015. The FSI-FM Scheme is extended until 31 December 2023 as SGFIs now have to register with the FATCA Registration Portal as announced in the Budget Statement for Financial Year 2018 delivered a “Registered Deemed-Compliant Financial Institution (Including a in the Singapore Parliament on 19 February 2018 (Budget 2018). Reporting Financial Institution under a Model 1 IGA)” pursuant to the IGA and Regulations. SGFIs will obtain a Global Intermediary Identification Number when they register with the US Internal 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an Revenue Service. SGFIs need to perform due diligence procedures Alternative Investment Fund or the transfer of the relating to new individual accounts and new entity accounts opened investor’s interest? on or after 1 July 2014. SGFIs also need to automatically remit information regarding accounts believed to be beneficially owned No establishment taxes are levied in connection with an investor’s by US persons (including US entities) to the new US government participation in an AIF. However, investors in an AIF structured as a via the Inland Revenue Authority of Singapore (IRAS). Such

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information would include the holder’s name, US Tax Identification provisions which allow taxpayers to request for mutual agreement Number, account balance and interest earned on the account. procedure cases to be resolved through an arbitration process if the The Income Tax (International Tax Compliance Agreements) competent authorities are unable to reach an agreement within a (Common Reporting Standard) Regulations 2016 of Singapore specified time period. These changes will only take effect after the (CRS Regulations) were published on 2 December 2016. MLI has been ratified by both Singapore and the DTA jurisdiction. The specific textual changes to each DTA will be provided through The CRS Regulations allow Singapore to implement the Standard subsidiary legislation made under the Income Tax Act. for Automatic Exchange of Financial Account Information in Tax Matters (AEOI) (also known as the Common Reporting Standard Action 7 deals with Permanent Establishment (PE) status and (CRS)) from 1 January 2017 onwards. Pursuant to the CRS mandates the development of changes to the definition of PE in Regulations, all SGFIs have to put in place necessary processes Article 5 of the OECD Model Tax Convention (MTC) to prevent Singapore and systems to collect CRS information from all non-Singapore tax artificial avoidance of PE status. Although Singapore has signed resident account holders from 1 January 2017. This is necessary the MLI, Singapore has elected to reserve against this optional to enable the SGFIs to submit the required information to IRAS in amendment, so the specific activity exemptions from PE under all 2018 for subsequent exchange under the CRS. This timeline is in the existing DTAs which correspond to Articles 5(4)(a) to (d) of the line with Singapore’s commitment to commence the first exchange MTC will be preserved. of information under the CRS by September 2018, as envisaged by IRAS. 6.8 Are there any tax-advantaged asset classes or Reporting SGFIs would need to transmit to IRAS the CRS structures available? How widely are they deployed? information of their account holders who are tax residents of jurisdictions with whom Singapore has a Competent Authority There are no specific tax-advantaged asset classes available in Agreement for CRS. Singapore. However, there are tax exemptions available for the returns generated by the AIF (i.e. tax incentives for the AIF).

6.7 What steps are being taken to implement the OECD’s A foreign AIF managed by a Singapore domiciled manager who Action Plan on Base Erosion and Profit-Shifting holds a CMS licence in Singapore or is exempted will be exempt (BEPS), in particular Actions 6 and 7, insofar as they from tax on specified income from designated investments if the affect Alternative Investment Funds’ operations? fund is a “prescribed person” (Offshore Fund Scheme). A fund will generally qualify as a prescribed person if it is not resident in On 16 June 2016, Singapore joined the inclusive framework for the Singapore and not 100% owned by Singapore investors. global implementation of the BEPS project, which is that profits For AIFs that are based in Singapore, they may be exempt from should be attributable to the jurisdiction where the substantial tax on specified income from designated investments if the AIF is economic activities giving rise to the profits are conducted. The an “approved company” (Singapore Resident Fund Scheme). An inclusive framework was proposed by the OECD and endorsed by AIF will generally qualify as an approved company if: (i) the AIF the G20 in February 2016. By joining this framework, Singapore is incorporated in Singapore and the manager is registered with the will work with other participating jurisdictions to ensure the MAS or holds a CMS licence or is expressly exempted from holding consistent implementation of measures under BEPS, and a level a CMS license; (ii) it is not 100% owned by Singapore investors; playing field across jurisdictions. Singapore has stated that itis (iii) the AIF has a local business spending amounting to S$200,000 committed to implementing the four minimum standards under per year; (iv) the AIF uses a Singapore-based fund administrator; BEPS, namely, the standards on countering harmful tax practices, and (v) the MAS approves of the tax exemption and there is no preventing treaty abuse, transfer pricing documentation, and change in investment strategy or objective after such approval by enhancing dispute resolution. the MAS. Action 6 deals with treaty abuse, namely treaty shopping. IRAS There is also another tax exemption that is available to onshore and has stated that they do not condone treaty shopping. In this offshore AIFs if the size of the AIF is over S$50 million, the AIF is regard, a number of Singapore’s bilateral tax treaties do contain managed by a Singapore manager, the manager or adviser employs anti-treaty shopping provisions to prevent abuse. In line with at least three investment professionals and incurs at least S$200,000 Singapore’s commitment to implement the minimum standard on local business spending per year (Enhanced Tier Fund Scheme). In preventing treaty abuse, Singapore has participated actively in the the recent Budget 2018, it was announced that the Enhanced Tier ad hoc group formed under the aegis of the OECD and the G20 to Fund Scheme will be extended to all fund vehicles constituted in all develop a Multilateral Instrument (MLI), and on 7 June 2017, 68 forms besides companies, trusts and limited partnerships provided jurisdictions including Singapore signed the MLI. The MLI seeks they fulfil all qualifying conditions. to facilitate the efficient updating of existing avoidance of Double The aforementioned exemptions are currently available until 31 Taxation Agreements (DTAs) to incorporate treaty-related measures March 2019. It is possible that these exemptions will be extended recommended by OECD to counter BEPs, without the need for to a further date. For Singapore-based AIFs, the Singapore Resident jurisdictions to bilaterally re-negotiate each DTA. Signatory Fund Scheme and the Enhanced Tier Fund Schemes are commonly jurisdictions may choose which of their DTAs they wish to be used, whereas for many offshore AIFs, such as those domiciled in modified by the MLI, and a DTA is only modified by the MLI if the Cayman Islands, the Offshore Fund Scheme is commonly used. both parties to the DTA choose for the DTA to be modified by the Managers should note that even if the AIF is based offshore, if most MLI. For DTAs that will be amended by the MLI, some of the of the fund management activities are conducted in Singapore, the key provisions adopted by Singapore that will bring about changes IRAS may still regard the AIF as having a permanent establishment to the existing DTAs include (i) a statement of intent that a DTA in Singapore is thus subject to Singapore income tax unless it is is to eliminate double taxation without creating opportunities for covered by the Offshore Fund Scheme. non-taxation or reduced taxation through tax evasion or avoidance, (ii) the adoption of a general anti-abuse rule, commonly known as There are also no specific structuring requirements to avail investors the Principal Purpose Test, and (iii) the inclusion in some DTAs of of an AIF in Singapore preference in taxation, though master-feeder structures are commonly used where a manager or adviser is seeking

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to accept subscriptions from different sets of investors with different tax and regulatory regimes. For example, investors based in the US 7 Reforms and those based outside of the US, where taxable US investors may have their own structuring requirements. 7.1 What reforms (if any) are proposed?

6.9 Are there any other material tax issues for investors, On 23 March 2017, MAS published a consultation paper on a managers, advisers or AIFs? proposed framework for the S-VACC to introduce a new corporate structure for CIS. As it is anticipated that the S-VACC will be There are no other material tax issues for investors, managers, used in Singapore by Singapore-domiciled investment managers or advisers or AIFs. advisers, it is apposite to note a few of the interesting features of the proposed S-VACC. The S-VACC is proposed to be regulated under Singapore the Singapore Variable Capital Companies Act jointly by ACRA and 6.10 Are there any meaningful tax changes anticipated in MAS, and can be used as a CIS vehicle either as a stand-alone entity, the coming 12 months? or as an umbrella entity with multiple sub-funds with segregated assets and liabilities. The S-VACC’s assets are to be managed by In the 2018 Budget, it was announced that a new tax framework an investment manager or adviser that is duly registered, licensed for the Singapore Variable Capital Company (S-VACC) will be or exempted by the MAS, and an approved custodian must be introduced to complement the S-VACC regulatory framework (as appointed to supervise custody of the assets. One of the directors further described in question 7.1 below). Under this tax framework, of the S-VACC will be required to be a director of the S-VACC’s an S-VACC will be treated as a company and a single entity for investment manager or adviser, and all directors must be “fit and tax purposes and therefore it is clarified that the Singapore-resident proper persons” for MAS purposes, and there will be regular checks S-VACC would be entitled to enjoy and rely on the various tax conducted on an S-VACC’s directors. While the register of holders treaties Singapore has concluded with other countries. The S-VACC of an S-VACC will not be required to be disclosed to the public, it would therefore be able to enjoy the same tax benefits as a company would have to be disclosed to the MAS, ACRA and other public incorporated in Singapore with the added corporate and regulatory authorities for regulatory, supervisory and law enforcement purposes. advantages accorded to the S-VACC. In addition, it was further Importantly, an S-VACC will be permitted to freely redeem shares clarified in the Budget 2018 that the main tax exemptions for and pay dividends using its net assets/capital, thereby providing Singapore-based AIFs (i.e. the Singapore Resident Fund Scheme flexibility in the distribution and return of capital. This is different and the Enhanced Tier Fund Scheme) will be extended to S-VACCs from the Companies Act which requires a solvency statement to be which are able to meet the qualifying conditions for such schemes. made by all directors for the redemption of redeemable preference Also, the FSI-FM Scheme will be extended to approved managers shares. In addition to solvency statements which must be made by managing an incentivised S-VACC. The GST remission for AIFs all directors, the Companies Act also requires a creditor objection will also be extended to incentivised S-VACCS. Further details are period of six weeks to lapse before the capital reduction can be expected to be released by the MAS in October 2018. affected, and stipulates that dividends may only be paid out of the profits of a company.

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Amit R. Dhume Abel Ho Colin Ng & Partners LLP Colin Ng & Partners LLP 600 North Bridge Road, #13-01 600 North Bridge Road, #13-01 Parkview Square Parkview Square Singapore 188778 Singapore 188778

Tel: +65 6349 8729 Tel: +65 6349 8667 Email: [email protected] Email: [email protected] URL: www.cnplaw.com URL: www.cnplaw.com

Singapore Amit R. Dhume is a Partner at Colin Ng & Partners LLP (“CNP”) and Abel Ho is a Practice Trainee at Colin Ng & Partners LLP (“CNP”) and Co-head of the Funds and Financial Services Practice Group of CNP. a member of the Funds and Financial Services Practice Group of CNP. He works closely with fund managers to assist them to establish He graduated with First Class Honours in law from the University of investment funds and fund management companies and offer the Warwick in 2016. Prior to law school, Abel graduated with a Bachelor investment funds in Singapore. These include private equity funds, of Commerce (Hons) and spent three years working as a management real estate and infrastructure funds, as well as hedge funds. He also liability underwriter in a multi-national general insurance company with advises family offices on various wealth management issues and operations in Singapore and overseas. legal documentation. He regularly advises clients on regulatory and compliance matters in relation to securities laws and regulations in Singapore. Amit’s expertise has been recognised in The Legal 500 Asia Pacific 2018 as “Recommended Lawyer for Investment Funds”. He is registered to practise Singapore law in the areas of corporate law, banking and finance and securities laws. He is enrolled as a Solicitor in England and Wales. Amit was designated a Sheridan Fellow by the National University of Singapore in 2004 and was awarded the faculty graduate scholarship. In December 2016, Amit was named by Singapore Business Review as one of the 70 most influential lawyers in Singapore under the age of 40.

Colin Ng & Partners LLP (“CNP”) is a Singapore based full-service law firm providing a comprehensive range of legal services to our clients. CNP enjoys a distinguished reputation and is annually endorsed and recommended by professional and commercial publications, including Asialaw Profiles, Chambers and Partners, IFLR1000 and The Legal 500 Asia Pacific, for its expertise in various practice areas. CNP has a multi-disciplinary service team of lawyers with experiences in different areas of practice. Some of our lawyers are qualified in or originate from different jurisdictions. CNP has a wide-ranging client base covering private and public companies, high-net-worth individuals, the public sector, property developers and financial institutions. We support clients in all major Asian markets. Since 1988, the firm has been driven by its vision of “Delivering Exceptionally Good Service” to its clients. CNP prides itself in delivering innovative and pragmatic solutions, and adding value in our services to all our clients.

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South Africa

Webber Wentzel Nicole Paige

1 Regulatory Framework 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body? 1.1 What legislation governs the establishment and operation of Alternative Investment Funds? This is dependent on the type of AIF. Generally, partnerships and trusts are regarded as collective investment schemes, but The legislation governing the establishment and operation of an not companies. The promotion of local and foreign collective Alternative Investment Fund (“AIF”) will depend on the structure investment schemes in South Africa is regulated by the CISCA. If the AIF takes. AIFs are usually formed in South Africa as a company, the AIF is a CIS, it will be regulated under the CISCA and will be bewind trust (a form of trust where the assets are owned by the required to be registered with the Financial Services Board (“FSB”). beneficiaries but administered by the trustees) or an en commandite An AIF will only qualify as a CIS if members of the public are partnership (a form of limited partnership in South Africa). invited to invest in the AIF. If the AIF is structured as a company, the Companies Act, 2008 will CICSA currently recognises five categories of CIS, being: (i) a apply. If the AIF is structured as a trust, the trust will be governed collective investment scheme in securities (listed securities); (ii) a by the Trust Property Control Act, 1988, and the trust deed will need collective investment scheme in property; (iii) a collective scheme to be registered with the Master of the High Court in the jurisdiction in participation bonds; (iv) retail hedge funds; and (v) qualified where the trust’s assets are situated. If the AIF is structured as an en hedge funds. Currently, private equity funds do not fall within any commandite partnership, there is no specific legislation governing of the categories of CIS and accordingly may not be registered with the establishment of a partnership and the AIF will be established the FSB. This means that private equity funds may not be offered to and operated in terms of the partnership agreement constituting the members of the public in South Africa, unless such offer is made by AIF. way of private placement. A foreign collective investment scheme that is carried on outside 1.2 Are managers or advisers to Alternative Investment South Africa but which will be promoted in South Africa must Funds required to be licensed, authorised or be registered under CISCA as an approved foreign collective regulated by a regulatory body? investment scheme.

The Financial Advisory and Intermediary Act 37 of 2002 (“FAIS”) provides that no person may act or offer to act as a financial 1.4 Does the regulatory regime distinguish between services provider (“FSP”) unless such person has been issued with open-ended and closed-ended Alternative Investment a licence under the FAIS Act. A FSP is effectively defined to mean Funds (or otherwise differentiate between different types of funds or strategies (e.g. private equity v any person other than an employee or agent of a FSP, who as a hedge)) and, if so, how? regular feature of the business of such person, furnishes advice (i.e. investment recommendations but not factual advice) and/or renders The regulatory regime does not distinguish between open-ended and any intermediary service (which includes discretionary investment close-ended AIFs, but does distinguish between types of strategies management) to clients in respect of financial products (defined to (see above). Currently, private equity funds may not be registered encompass a broad range of local and foreign securities and financial under CISCA and, as such, interests in a private equity fund may instruments). Accordingly, any person who manages the assets of not be offered to members of the public, but only through a private an AIF, or who advises an AIF on the management of its assets, will placement. There are two types of hedge fund that may be registered be required to obtain a FSP licence. Advisors will be required to under CISCA: qualified investor funds; and retail funds. Qualified obtain a Category I FSP licence, discretionary managers a Category investor funds are hedge funds that only permit investment by II licence, and hedge fund managers a Category IIA FSP licence. investors who have demonstrable knowledge and experience in A manager of a registered CIS is required to be authorised as a financial and business matters that would enable them to assess the CIS Manager under the Collective Investment Schemes Control merits and risks of a hedge fund investment (or are advised by a Act 45 of 2002 (“CISCA”), rather than licensed as a FSP under FSP having such knowledge) and who initially invest at least R1 FAIS (although in practice managers will be authorised under both million. A retail fund does not have any such restrictions but retail CISCA and FAIS if they conduct financial services business other funds must comply with more onerous regulatory and prudential than the management of the CIS). requirements.

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A foreign collective investment scheme that is carried on outside 1.5 What does the authorisation process involve and how South Africa but which will be promoted in South Africa must be long does the process typically take? registered under CISCA as an approved foreign collective investment scheme. The requirements for such approval include that the foreign The prior approval of the FSB is required to establish a CIS under scheme must be carried on in a regulatory environment of at least CISCA or to form a new portfolio of the CIS in which investors the same standing as the South African regulatory environment and participate. As part of the authorisation process, CISCA (and may not offer investments with a significantly higher risk profile the regulations promulgated thereunder) prescribes various than investments that may be offered by any local CIS. The foreign requirements in relation to the authorisation of both the CIS manager scheme must either establish a representative office in South Africa who administers the scheme and the trustee or custodian who holds or enter into a representative agreement with a local CIS manager. the assets and oversees compliance with CISCA, the formation

South Africa of the CIS itself and the creation of each portfolio. The FSB will generally take up to nine months to approve the application. 1.9 What co-operation or information sharing agreements have been entered into with other governments or There are no registration requirements for AIFs that are not offered regulators? to members of the public, but the manager or advisor of such AIF must be registered as a FSP under FAIS. An application for a FSP The Convention on Mutual Administrative Assistance in Tax licence by the manager of, or advisor to, an AIF involves filling Matters, various bilateral Tax Information Exchange Agreements out the prescribed application forms and submitting the applicant’s and international tax compliance agreements, including the USA financial statements, business plan and organisational chart. The FATCA Intergovernmental Agreement, Common Reporting key individuals of the FSP that will be responsible for managing Standards (CRS) and the Organisation for Economic Co-operation and overseeing the activities of the FSP must also be approved by and Development – Base Erosion and Profit Shifting. the FSB. Key individuals must meet the fit and proper requirements of honesty and integrity, demonstrate that they have appropriate management and financial product experience, have a recognised 2 Fund Structures qualification and pass regulatory exams. The FSB will generally take around five months to approve the application and grant the FSP licence. 2.1 What are the principal legal structures used for Alternative Investment Funds?

1.6 Are there local residence or other local qualification AIFs that are registered under CISCA are usually formed by a requirements? trust agreement entered into between an authorised manager and a registered trustee. The CIS then creates portfolios, subject to If the AIF is a registered CIS in South Africa, the CIS manager must approval from the FSB, in which investors purchase participatory be a company registered in terms of the Companies Act, 2008 and interests. While CISCA permits other legal structures, in practice the trustee of the CIS must be a South African public company, a only these forms of unit trusts are used. South African bank (or South African branch of a foreign bank) or a South African-registered long-term insurer. A foreign collective The most common structure in South Africa for a private equity fund investment scheme that is carried on outside South Africa but which is the en commandite partnership, which is equivalent in all material will be promoted in South Africa must be registered under CISCA respects to a limited partnership as understood by international as an approved foreign collective investment scheme. investors. There is no statute in South Africa governing the establishment and management of en commandite partnerships, There are no local resident or local qualification requirements for which are created through written agreement between the partners. any manager or advisor of an AIF that wishes to apply for an FSP In its simplest form, an en commandite partnership comprises two licence under FAIS. categories of partner, a disclosed or general partner, whose liability is unlimited, and one or more commanditarian partners (limited 1.7 What service providers are required? partners), whose liability is limited. Another type of structure sometimes used for private equity funds A registered CIS must have an approved CIS manager who is a bewind trust. A bewind trust is a type of trust vehicle governed administers the scheme and an approved trustee or custodian who by the Trust Property Control Act, in terms of which the assets are holds the CIS assets and oversees compliance with CISCA. owned by the beneficiaries of the trust, but the trustee of the trust There are no required service providers for AIFs that are not holds and manages such assets on their behalf. Each investor is registered under CISCA, although such AIFs will generally have a beneficiary of the trust and the investors own the assets ofthe an investment manager/advisor that will then need to be licensed trust jointly in undivided shares in proportion to their respective under FAIS. contributions. The trust deed must be registered with the Master of the High Court. 1.8 What rules apply to foreign managers or advisers AIFs may also be structured as companies. However, whilst the wishing to manage, advise, or otherwise operate legal status of companies is well established and the limited liability funds domiciled in your jurisdiction? position of shareholders is clear, companies are separate taxpayers in their own right. This makes them unattractive vehicles for Foreign financial services providers may not render financial investors that are otherwise tax exempt. The exception to this is services in or into South Africa without a FAIS licence. Such licence venture capital companies, where investors have been provided tax is obtained in the same manner as a local FSP licence (depending relief in terms of which, subject to certain conditions being met, on its level of activity in South Africa, the foreign applicant may investors may deduct 100% of their investment in the venture have to register as an external company with the Company and capital company in that year of assessment. Intellectual Properties Commission).

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Long-term insurance companies may also market investment comprehensive requirements relating to the documentation used to exposure to asset portfolios to investors through the issue of linked market the AIF. These requirements will also apply to any foreign investment policies. collective investment scheme that is carried on outside South Africa and which is also registered under CISCA as an approved foreign collective investment scheme for marketing in South Africa. 2.2 Please describe the limited liability of investors. The manager of the local or foreign CIS must lodge copies of all advertisements and marketing material with the FSB (including For AIFs established as en commandite partnerships, the limited fund fact sheets and relevant investor application forms) before partners occupy the position of partners only insofar as their co- publication or use of the material. partners are concerned, but not with respect to outsiders. Each limited partner will enjoy limited liability and will not be liable to There is no specific legislation governing the marketing of interests creditors of the partnership for more than their capital commitments in private equity funds in South Africa and other AIFs that are not South Africa to the partnership, provided that they are and remain limited offered to members of the public. partners. A limited partner’s limited liability is compromised if it holds itself out publicly as an ordinary partner or participates 3.2 What are the key content requirements for marketing actively in the management or operation of the partnership. The materials, whether due to legal requirements or general partner will have unlimited liability to third parties for the customary practice? partnership’s debts. From a liability perspective, there is little difference between an en For AIFs that are authorised under CISCA, CISCA requires the commandite partnership and a bewind trust, both forms of entity CIS manager to disclose to each investor (prior to any investment) afford limited liability for investors. information about the investment objectives of the CIS, the For AIFs incorporated as companies, the limited liability of calculation of the net asset value and dealing prices, charges, shareholders is clear and is not dependent on the role that the risk factors and distribution of income accruals. CISCA also shareholders may play in the management of the company. prescribes various particulars that must be included in any price list, brochure or similar document published for the purpose of soliciting investment in a CIS. These particulars include details of 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment charges levied by the manager and the basis on which the manager Funds? will undertake the repurchase of interests, as well as a clear and unambiguous statement to the effect that the value of participatory Private limited companies incorporated under the Companies Act, interests in a portfolio is subject to fluctuation from time to time. 2008. The same requirements will apply to foreign collective investment schemes authorised under CISCA to be promoted in South Africa.

2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers 3.3 Do the marketing or legal documents need to be in open-ended or closed-ended funds? registered with or approved by the local regulator?

For AIFs that are authorised under CISCA, there are certain liquidity For AIFs that are authorised under CISCA, the manager of the requirements for investors prescribed under CISCA. There are local or foreign CIS must lodge copies of all advertisements and no such statutory limits for any other form of AIFs (other than as marketing material with the FSB (including fund fact sheets and contractually agreed with investors). relevant investor application forms) before publication or use of the material. 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? 3.4 What restrictions are there on marketing Alternative Investment Funds? There are no such legislative restrictions, other than for a hedge fund which is registered as a qualified investor fund under CISCA, where An AIF may not be marketed to members of the public in South all investors must meet the prescribed qualifying criteria. Africa without first being registered as a CIS under CISCA or, in the case of a foreign AIF, as a foreign collective scheme. 2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, 3.5 Can Alternative Investment Funds be marketed to asset stripping rules)? retail investors?

For AIFs that are authorised under CISCA, CISCA places significant An AIF may not be marketed to retail investors without first being restrictions on the asset classes in which a CIS can invest, as well as registered as a CIS under CISCA or, in the case of a foreign AIF, concentration limits on CIS portfolio exposure. There are no such statutory limits for any other form of AIFs. as a foreign collective scheme. Hedge funds that are registered as qualifying investor funds may only accept investments from qualifying investors. 3 Marketing 3.6 What qualification requirements must be carried out 3.1 What legislation governs the production and offering in relation to prospective investors? of marketing materials? There are no qualification requirements except for the case of an For AIFs that are authorised under CISCA, CISCA prescribes AIF registered under CISCA as qualified investor fund (hedge

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fund), where the manager may only permit investment by investors with exchange control requirements. An AIF that wishes to invest who have demonstrable knowledge and experience in financial and outside of South Africa but in Africa can obtain an upfront exchange business matters that would enable them to assess the merits and control approval to invest 100% of its commitments in Africa. For risks of a hedge fund investment (or are advised by a FSP having investments outside of Africa, exchange control approval will such knowledge). generally need to be obtained for each such investment.

3.7 Are there additional restrictions on marketing to 4.3 Are there any restrictions on borrowing by the public bodies such as government pension funds? Alternative Investment Fund?

There are no additional marketing restrictions. For an AIF that is authorised under CISCA as a CIS in securities, such AIF may not borrow any funds, save where the manager must South Africa 3.8 Are there any restrictions on the use of intermediaries repurchase participatory interests but insufficient liquidity exists to assist in the fundraising process? in a portfolio or assets cannot be realised. In such circumstances, the manager may borrow the necessary funds for such repurchase AIFs may be marketed by any person having an appropriate FSP from registered financial institutions at the best commercial terms licence under FAIS. There are restrictions relating to the fees that available, provided that the maximum amount borrowed may not intermediaries may charge. Intermediaries may earn fees expressed exceed 10% of the market value of such portfolio at the time of as a percentage of the net value of a financial product (such as an borrowing. investment in a CIS) only on condition that if such fees are deducted For an AIF that is authorised under CISCA as a retail hedge fund, from the investment, the client must specifically agree to this in a manager may borrow up to 10% of the value of the portfolio for writing and must have the power to stop the payment of fees. liquidity purposes in respect of the repurchase of participatory purposes. 3.9 Are there any restrictions on the participation in There is no limitation on borrowings by an AIF that is not open for Alternative Investment Funds by particular types of investment by members of the public (other than as contractually investors, such as financial institutions (whether as agreed with investors). sponsors or investors)?

South African pension funds and financial institutions can invest 5 Disclosure of Information in AIFs in accordance with their statutorily prescribed prudential limits. For example, South African pension funds are permitted to invest up to 10% of their assets in private equity funds, with a 2.5% 5.1 What public disclosure must the Alternative Investment Fund or its manager make? limit per fund and a 5% limit per fund of funds. A registered CIS in securities may not itself invest in a private equity AIFs that are structured as companies are required, in terms of the fund or hedge fund (other than a listed fund) as it is restricted form Companies Act, 2008, to file a copy of their annual audited returns investing in unlisted securities. with the Companies Office. South African exchange control regulations also determine the extent AIFs that are structured as trusts are required to register their trust to which South African residents may invest in AIFs established deed with the Master of the High Court in the jurisdiction where the outside of South Africa. trust’s assets are situated.

4 Investments 5.2 What are the reporting requirements in relation to Alternative Investment Funds or their managers? 4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment For an AIF that is authorised under CISCA, the manager of the AIF Funds? must report to investors at least on a quarterly basis, must submit quarterly reports to the FSB relating to all assets in the portfolios For AIFs that are authorised under CISCA, CISCA places significant administered by them and must annually submit to the FSB their restrictions on the asset classes in which a CIS can invest, as well audited financial statements, together with audited financial as concentration limits on CIS portfolio exposure. There are no statements for each portfolio, certain prescribed information and a such statutory restrictions for an AIF that is not open to investment compliance report. by members of the public (although investment restrictions are There are no statutory reporting requirements for AIFs that are not commonly provided for contractually). open to investment by members of the public, save that AIFs that are structured as companies are required, in terms of the Companies 4.2 Are there any limitations on the types of investments Act, 2008, to file a copy of their annual audited returns with the that can be included in an Alternative Investment Companies Office. Fund’s portfolio whether for diversification reasons or otherwise? 5.3 Is the use of side letters restricted? For AIFs that are authorised under CISCA, CISCA places significant restrictions on the asset classes in which a CIS can invest, as well as There are no restrictions on the use of side letters by AIFs. However, concentration limits on CIS portfolio exposure. AIFs that are authorised under CISCA will need to disclose the nature and scope of side letters to investors. There are no such statutory restrictions for an AIF that is not open to investment by members of the public, subject to compliance

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6 Taxation 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing an Alternative Investment Fund? 6.1 What is the tax treatment of the principal forms of Alternative Investment Funds identified in question 2.1? There are general AIF structures with established laws regulating these structures and as such, it is unnecessary to obtain a tax ruling from the South African Revenue Service (“SARS”), unless an In general, AIFs that are structured as trust vehicles and authorised exceptional circumstance exists, such as an entirely new transaction under CISCA are treated as conduit vehicles in relation to income or form of legal entity. amounts and, accordingly, if the income amounts are distributed within 12 months of their accrual, such amounts will retain their nature and are taxed in the hands of the investors in accordance with 6.6 What steps have been or are being taken to implement South Africa their tax profile. the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting South African partnerships are fiscally transparent. Partnership regimes such as the Common Reporting Standard? income and capital gains are taxed in the partners’ hands. Foreign partners are only taxed on South African-sourced income and capital SARS imposes sanctions for the non-compliance with FATCA. gains derived in respect of certain “land-rich” assets. In maintaining records and collecting the information, financial Ownership of fund assets of a bewind trust resides in the investors’ institutions must comply with the due diligence requirements hands, with the trustees merely administering such assets on their as mandated by the Tax Administration Act and set out in the behalf. Bewind trusts are therefore fiscally transparent and treated prescribed Business Requirement Specification: Foreign Account on the same basis as partnerships as above. Tax Compliance Act Automatic Exchange of Information (BRS: South African companies are taxpayers in their own right and are FATCA AEOI) return required under Public Notice 509. SARS will taxed at the current company rate of 28%. A withholding tax is exchange information with the U.S. Treasury through an automatic levied on the declaration of a dividend by a company, which is a process. tax borne by investors (this may be reduced for foreign investors in terms of applicable double tax treaties). 6.7 What steps are being taken to implement the OECD’s Section 12J of the Income Tax Act offers tax relief to investors in Action Plan on Base Erosion and Profit-Shifting venture capital companies by allowing investors to deduct 100% (BEPS), in particular Actions 6 and 7, insofar as they of their investment into such company in that year of assessment, affect Alternative Investment Funds’ operations? provided that the investor holds their interest in the company for a minimum of three years. The types of assets that a section 12J There is a Davis Tax Committee (“DTC”) Base Erosion and Profit company can invest in are regulated by statute. Shifting (“BEPS”) Sub-committee that actively seeks to implement OECD’s Action Plan. The DTC is mandated to inquire into the role of South Africa’s tax system in the promotion of inclusive economic 6.2 What is the tax treatment of the principal forms of growth, employment creation, development and fiscal sustainability investment manager / adviser identified in question 2.3? and on an international front, the DTC is required to address concerns about BEPS, especially in the context of corporate income South African companies are taxed at the current company rate of tax, as identified by the OECD and G20. To this end, the DTC set 28%. up the BEPS sub-committee which has since then reported on the DTC’s position on BEPS.

6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an 6.8 Are there any tax-advantaged asset classes or Alternative Investment Fund or the transfer of the structures available? How widely are they deployed? investor’s interest? Section 12J of the Income Tax Act offers tax relief to investors in There will only be securities transfer tax if the AIF is structured as a venture capital companies by allowing investors to deduct 100% company, which will be levied at a rate of 0.25% of the market value of their investment into such company in that year of assessment, of the shares transferred. provided that the investor holds their interest in the company for a minimum of three years. The types of assets that a section 12J company can invest in are regulated by statute. 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative Investment Funds? 6.9 Are there any other material tax issues for investors, managers, advisers or AIFs? South Africa has a residence-based tax system, which means residents are, subject to certain exclusions, taxed on their worldwide No, there are not. income, irrespective of where their income was earned. By contrast, non-residents are taxed on their income from a South African 6.10 Are there any meaningful tax changes anticipated in source. South African pension fund investors do not pay tax on the coming 12 months? their investment. VAT, which will be charged on management fees payable to a South African manager/advisor, will be increased to 15% on 1 April 2018.

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7 Reforms Nicole Paige Webber Wentzel 90 Rivonia Road 7.1 What reforms (if any) are proposed? Sandton Johannesburg, 2196 On 21 August 2017, the Financial Sector Regulation Act 2017 South Africa (“FSR Act”) was signed into law. The FSR Act establishes two new Tel: +27 11 530 5857 financial sector regulators, the Financial Sector Conduct Authority Email: [email protected] and the Prudential Authority with jurisdiction over all financial URL: www.webberwentzel.com institutions. It aims to promote the following: ■ financial stability; Nicole Paige, co-head of Webber Wentzel’s Private Equity Sector, South Africa specialises in the formation of alternative investment funds. She has ■ the safety and soundness of financial institutions; advised and acted for local and international private equity and venture ■ the fair treatment and protection of financial customers; capital houses looking to raise funds for deployment in South Africa as well as in Africa generally and also for limited partners looking to ■ the efficiency and integrity of the financial system; invest in those funds. Her experience in fund formation, which has ■ the prevention of financial crime; been recognised by various international research organisations ■ financial inclusion; including Chambers Global and The Legal 500, includes the full spectrum of generalist and sector funds, including buyout, real estate, ■ transformation of the financial sector; and debt, housing, healthcare, infrastructure, listed and renewable energy ■ confidence in the financial system. funds. She also advises on all regulatory aspects of investment funds as well as tax structuring of funds. The FSR Act also regulates the provision of financial services and financial products, and allows for the Financial Sector Conduct Authority and Prudential Authority to issue regulatory instruments (such as prudential standards and conduct standards) to govern financial institutions.

Founded in 1868, Webber Wentzel is a leading South African full-service law firm providing clients with innovative solutions to their most complex legal and tax issues across Sub-Saharan Africa. With over 450 lawyers in Johannesburg and Cape Town, our multi-disciplinary expertise is consistently ranked top-tier in leading directories and awards, both in South Africa and on the continent. Our collaborative alliance with Linklaters and our deep relationships with outstanding law firms across Africa provide clients with market-leading support wherever they do business. Core to the ethos of our firm is the belief that diversity is the key to delivering effective legal services in South Africa. In harnessing the varied experiences and perspectives of our people, we are collectively able to offer our clients a unique and tailored service. For more information visit www.webberwentzel.com or follow us on twitter: @WebberWentzel.

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Spain Miguel Cases

Cases & Lacambra Toni Barios

regulation of UCITS regime) (“Sociedad Gestora de Instituciones de 1 Regulatory Framework Inversión Colectiva” or “SGIIC”, in Spanish official terminology) are governed by Law 35/2003. For additional information, please review 1.1 What legislation governs the establishment and the Spanish chapter of the ICLG to: Public Investment Funds 2018. operation of Alternative Investment Funds? Management companies of closed AIFs (“Sociedad Gestora de Entidades de Inversión Colectiva de Tipo Cerrado” or “SGEIC” in For the purpose of this chapter, Alternative Investment Funds Spanish official terminology) are governed by Law 22/2014. SGEIC (hereinafter, “AIFs”) means a collective investment scheme are regulated by the Spanish National Securities Market Commission undertaking, including investment compartments thereof, which: i) (“CNMV”) and require its prior authorisation; although it has to raise capital from a number of investors, with a view to investing be noted that non-Spanish AIFMs already authorised in other EU it in accordance with a defined investment policy for the benefit Member States can be passported with no need of obtaining further of those investors; and ii) do not require authorisation pursuant to authorisation or any other additional requirements. article 5 of Directive 2009/65/EC. Management companies from non-EU countries providing marketing Spanish legislation distinguishes between closed-ended and opened- services in Spain are not required to obtain prior authorisation by the ended AIFs. CNMV, although a prior authorisation of the AIF is required prior to its marketing in Spain. This process is governed by the reciprocity Spanish closed-ended AIFs are governed by Law 22/2014, of 12 principle, and the following conditions shall be evidenced to the November 2014, regulating private equity entities, venture capital CNMV prior to its marketing among Spanish investors: entities and other closed-ended collective investment entities and the management companies of closed-ended collective investment ■ The existence of cooperation agreements between the CNMV entities, and amending the Collective Investment Schemes Act and the home country regulator of the management company, (“Law 22/2014”), which involves the transposition into Spanish with the purpose to ensure proper exchange of information. law of Directive 2011/61/EU of the European Parliament and of the ■ The home country of the management company shall not be Council of 8 June 2011 on Alternative Investment Fund Managers listed as a Non-Cooperative Country and Territory (“NCCT”) (“AIFMD”) applicable to companies managing AIFs. The main by the Financial Action Task Force on anti-money laundering purpose of the Law 22/2014 is the establishment of the applicable and terrorist financing. rules for the authorisation and supervision process and governance Please note that SGIIC, management companies for UCITS funds, of management companies managing AIFs, rather than the particular can also carry out activities for close-ended AIFs. When managing requirements of closed-ended AIFs for which the Law 22/2014 is AIFs, SGIIC must comply with the provisions of Law 22/2014. very flexible. The CNMV, as the supervisory authority, has created a special Spanish open-ended AIFs are governed by Law 35/2003, of 4 register where AIFMs must register prior to the start of their November, on Collective Investment Schemes (“Law 35/2003”), activities. Although, depending on the type of AIF, the requirements which has been modified by the indicated Directive relating to fund and timeline will vary and Spanish AIFMs must be registered management companies of alternative funds, and Royal Decree in the Commercial Registry and must have obtained prior 83/2015, of 13 February, amending Royal Decree 1082/2012, of 13 authorisation from the CNMV after the approval of their application July, approving the Regulation for the Development of Collective (demonstrating that they meet the regulatory criteria, including: Investment Schemes Law (“RD 83/2015”). The current Spanish equity requirements; suitable risk management and investment legal framework transposes the Directive 2009/65/EC of the selection procedures; suitability requirements of the shareholders, European Parliament and of the Council of 13 July 2009, on the managers, directors and other key persons; and, if any, applicable coordination of laws, regulations and administrative provisions exemptions). Consequently, any AIFM which does not appear to relating to undertakings for collective investment in transferable be registered in the special CNMV registry is not able to perform securities (“UCITS”). management activities.

1.2 Are managers or advisers to Alternative Investment 1.3 Are Alternative Investment Funds themselves Funds required to be licensed, authorised or required to be licensed, authorised or regulated by a regulated by a regulatory body? regulatory body?

Yes, management companies of open-ended AIFs (under the Yes. AIFs themselves must obtain authorisation by the CNMV,

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since it is the authorising, supervisory and control authority. For EU management companies, the cross-border marketing of AIF duly 1.5 What does the authorisation process involve and how authorised in an EU country is free once the regulator’s home country long does the process typically take? notifies to the management company that it has sent the notification letter to the CNMV including information required pursuant to the Given the difference treatment between open-ended and closed- EU Passport Regime. In case an EU management company intends ended AIFs, the authorisation process will depend on the type of to market an AIF not registered in a EU country, it will be necessary fund and, in addition, on whether it is authorised outside or within to demonstrate the CNMV that the following conditions are met: the EU. ■ The existence of cooperation agreement between the CNMV Those AIFs authorised within the EU will not require specific

Spain and the home country regulator of the management company, authorisation by the CNMV and are enabled to operate in the with the purpose to ensure proper exchange of information. country through the EU passport. However, non-EU AIFs shall be ■ The AIF’s home country shall not be listed as a Non- required to obtain prior authorisation by the CNMV in order to carry Cooperative Country and Territory (“NCCT”) by the out any activity in Spain. Financial Action Task Force on anti-money laundering and An AIF seeking to set up in Spain shall submit its application and terrorist financing. draft constitution documents for approval by the CNMV. The ■ The AIF’s home country has signed a tax agreement with authorisation request must, in all cases, include the following Spain according to the principles stated in art. 26 of the documents: (i) a report; (ii) accreditation of the good reputation Organisation for Economic Co-operation and Development and professionalism, in the terms stated in the regulations, of those (OECD) regulation for the exchange of tax information. who hold a position of fund administrator; (iii) in general terms, any Non-EU management companies intending to market AIFs are also data, reports or records deemed appropriate to verify compliance required to comply with the aforementioned conditions. with the conditions and requirements legally established; (iv) the prospectus and the key investor information document; and (v) the rules of management. 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment In the case of both AIFs and investment companies which designate Funds (or otherwise differentiate between different an AIFM already authorised by the CNMV as their management types of funds or strategies (e.g. private equity v company, they must notify the CNMV of this. hedge)) and, if so, how? AIFs cannot start their activity until they are registered in the special CNMV register. Yes, as set out in question 1.1 above, the Spanish legal system distinguishes between open-ended and closed-ended AIFs, The resolution of the CNMV shall be notified within two months regulated, respectively, by Law 35/2003 and Law 22/2014. Each after submitting the authorisation request or having presented law establishes different types of structures and, among others, all the required documentation. If no management company has the requirements, aspects and procedures of each of these entities. been appointed, the resolution will be notified within three months Neither the Spanish regulator (the Spanish Securities Market after submitting the authorisation request or having presented all Commission, “CNMV”) nor Law 22/2014 (AIFs) nor Law 35/2003 the necessary documentation. The resolution shall be considered (UCITS) have included a specific definition of an Alternative denied if it has not been resolved five months after having submitted Investment Fund (“AIF”). In our understanding, all collective the application or all the needed documents. investment schemes which are not UCITS should be classified as Regarding the formal authorisation of a “Sociedad Gestora de AIFs. Entidades de Inversión Colectiva de Tipo Cerrado” or “SGEIC”, the The open-ended AIFs are those whose object is the collective final resolution of the CNMV must be motivated and shall be notified investment of the funds raised from the public and whose operation is within the three followings months after the initial submission subject to the principle of risk sharing, and whose units, at the request by the management company of its application. Last February of the holder, are repurchased or reimbursed, directly or indirectly, 2017, the CNMV published a welcome programme for investment out of the assets of these undertakings. Open-ended AIFs may adopt and management firms, although this dossier is for informational the form of either an investment fund or investment company, and purposes only and does not entail any legal or administrative can be financial or non-financial, depending on their purpose and on responsibility for the CNMV, the guide highlights that the CNMV whether or not they invest in financial instruments or assets. will try to complete its authorisation process within two months, provided that the applicant meets the mandatory requirements and The closed-ended AIFs are those collective investment entities that, the required documentation has been substantially presented. lacking a commercial or industrial goal, raise capital from investors, through an advertising activity, to invest in all types of financial and non-financial assets, according to a defined investment policy. 1.6 Are there local residence or other local qualification requirements? Law 22/2014 designates close-ended AIFs as (“Entidades de Inversión de Capital Cerrado” or “EICC”), establishing the following types: (i) closed-ended investment funds (“Fondos de Local residence and other local qualification requirements only Inversión de Capital Cerrado” or “FICC”); and (ii) closed-ended apply for Spanish-based AIFs or AIFMs registered in Spain and for investment companies (“Sociedades de Inversión de Capital those foreign AIFs intended to be marketed in Spain. Cerrado” or “SICCC”). Thus, those AIFs or AIFMs which carry out their activities in Spain In addition, Law 22/2014 establishes two types of closed-ended will be subject to local residence or qualification requirements, entities focused on private equity activity: (“Entidades de Capital except in those cases where the AIFM is authorised to carry out its Riesgo” or “ECR”) and companies (“Sociedades de Capital Riesgo” activities in Spain on a cross-border basis through the EU passport, or “SCR”). These entities are not considered in this chapter, since as noted in question 1.2 above. the focus of this guide are AIFs. Foreign AIFs marketed in Spain shall designate a legal person responsible for complying with the general provisions of disclosure

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of information and communication of any change affecting the If the managing company is under the control of the same natural essential elements in its offering to investors or data registration or legal persons as another managing company authorised under with CNMV. In addition, all foreign AIFs will be required to submit Directive 2009/65/EC or Directive 2011/61/EU, of an investment to the CNMV statistical data on a regular basis. services company, of a credit entity or insurance or reinsurance company authorised in another Member State.

1.7 What service providers are required? 1.9 What co-operation or information sharing agreements In addition to the management of an AIF, the “Sociedad Gestora have been entered into with other governments or regulators? de Entidades de Inversión Colectiva de Tipo Cerrado” or “SGEIC” Spain can perform duties of administrative, distribution or fiduciary The CNMV, within the EU supervisory framework, has subscribed nature. Furthermore, different types of ancillary services such as: to many information exchange agreements with other jurisdictions discretionary management portfolio; investment advice; reception; and supervisory bodies from within the EU and abroad; for example, or transmission of client orders can be handled also by any SGEIC. Argentina, Australia, Belgium, Bolivia, Brazil, Canada, Chile, The applicable law and regulations set out that there shall be a China, Colombia, Costa Rica, the Czech Republic, the Dominican depositary institution in which: (i) securities, cash or any other Republic, Ecuador, El Salvador, France, Germany, Hong Kong, products; and (ii) management companies (in case of investment Italy, Mexico, Panama, Peru, Portugal, Romania, Taiwan, the United funds), need to be deposited. Arab Emirates and the USA. Although SGEIC are allowed to outsource certain functions, they Specifically with regard to information sharing agreements, these must retain the ultimate responsibility, establishing reasonable include, amongst others: (i) the European Union Agreement on controls of any of such outsourced functions. The information Cooperation Between the Financial Supervisory Authorities, Central related to the outsourcing of functions shall be at the disposal of Banks and Finance Ministries – On Financial Stability in the European the CNMV. Union; (ii) the International Organization of Securities Commissions In addition, please note that AIFs may be marketed by financial (“IOSCO”) Multilateral Agreement; (iii) the European Securities intermediaries, which mainly tend to be banks, securities or and Markets Authority (“ESMA”) Multilateral Agreement for the securities agencies. Exchange of Information and Supervision of Securities Activities; (iv) the Co-operation Framework Agreement for Mutual Assistance in the Supervision and Monitoring of an AIFM, its Delegates and 1.8 What rules apply to foreign managers or advisers Depositaries; (v) the Securities and Exchange Commissions (“SEC”) wishing to manage, advise, or otherwise operate and Committee of European Securities Regulators (“CESR”) funds domiciled in your jurisdiction? (currently ESMA) Work Plan; and (vi) the exchange of confidential information between the SEC and the CNMV, in accordance with Under Law 35/2003 foreign managers or advisers wishing to manage, International Financial Reporting Standards (“IFRS”), on companies advise or operate open-ended funds domiciled in Spain can do so if issuing securities in both markets. they have been authorised by Directive 2009/65/EC, 13 July 2009, All information regarding sharing agreements is available in CNMV in another Member State. If they have been authorised in another webpage which is updated when necessary. Member State they can operate in Spain either through a subsidiary or under the free provision of services regime. As established in article 55.2 of Law 35/2003 under any circumstances the establishment 2 Fund Structures of subsidiaries or the free provision of services can be conditioned to the acquisition of an additional authorisation or contribute to an endowment fund or any measure of equivalent effect. 2.1 What are the principal legal structures used for Alternative Investment Funds? Under Law 22/2014 foreign managers or advisers wishing to manage, advise or operate close-ended funds domiciled in Spain Essentially, AIFs can be constituted through either an investment can do so filing a request for authorisation before the CNMV if fund or an investment company. However, investment funds can they have been authorised in another Member State under Directive only be managed by a management company since they have no 2009/65/EC. legal personality, whereas an investment company can be managed According to article 82 Law 22/2014, EU management companies directly (by its own board of directors), or by delegating management are also allowed to manage close-ended AIFs domiciled in Spain, as to an authorised institution. well as to provide services in Spain either through a subsidiary or The main legal structures for open-ended AIFs are investment funds under the free provision of services regime with similar procedures whose objective is to obtain the highest possible return using all the to those mentioned in Law 35/2003 for open-ended AIFs. investment opportunities available to the manager (“hedge fund” or For foreign management companies to be registered in Spain, article “Instituciones de Inversión Colectiva de Tipo Libre”) and funds of 49 of Law 22/2014 establishes the obligation for the CNMV to, prior hedge funds (“Fondos de Instituciones de Inversión Colectiva de to authorisation of the manager, consult with the national authority Tipo Libre”). of the Member State where the manager was authorised if: The main legal structures for closed-ended AIFs are: private equity ■ The manager wishing to operate in Spain is a subsidiary entities (which can take the form of funds or companies); and other of another manager company authorised under Directive types of entities (i.e. closed-ended collective investment entities, 2009/65/EC in another Member State. which can be either funds or companies, as noted in question 1.4 ■ If the manager company is the subsidiary of the mother above). To sum up, the Law 22/2014 distinguishes between two company of another managing company authorised under types of open-ended investment schemes: Directive 2009/65/EC, of an investment services company, of a credit entity, of an insurance or reinsurance company “Sociedades de Inversión de Capital Cerrado” or “SICCC” authorised in another Member State. (Spanish terminology), closed-ended collective investment scheme with company form.

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“Fondos de Inversión de Capital Cerrado” or “FICC” (Spanish terminology) closed-ended collective investment scheme with funds 3 Marketing form. 3.1 What legislation governs the production and offering 2.2 Please describe the limited liability of investors. of marketing materials?

It must be assumed that the participants will be responsible up to Legislation governing either production and marketing materials of the limit of their contributions, which constitutes limited liability. investment funds will depend on whether it is a closed-ended or open-ended fund. Thus, Law 35/2003 and Regulation 1082/2012

Spain on Collective Investment Entities apply to open-ended AIFs; and 2.3 What are the principal legal structures used for Law 22/2014 to closed-ended funds. However, there is a common managers and advisers of Alternative Investment regulation for both types of AIF, which consists of: (i) the revised Funds? text of the Securities Market Law 4/2015, which states, in general terms, the basic conditions for marketing materials, as well as Act As mentioned, managing both investment funds, being either UCITS 34/1998, of 11 November 1998, for advertising; and (ii) Royal or AIFs, is a regulated activity, limited to licensed institutions. Decree 217/2008, of 15 February 2008, on investment firms. Any legal persons whose regular business is to manage one or more closed-ended AIFs must be registered at the CNMV under the official name of Sociedad Gestora de Entidades de Inversión 3.2 What are the key content requirements for marketing Colectiva de Tipo Cerrado (“SGEIC”). Consequently, the name of materials, whether due to legal requirements or customary practice? SGEIC can only be used by any legal person with this sole purpose. All SGEIC must be a public limited company whose corporate purpose is the managing of AIFs. For retail investors, the new legislation of Packaged Retail Investment Products (“PRIPS”) came into force last January 2018. SGIIC Please take into account that management companies managing providing the former Key Investment Information Document (“KIID”) UCTIS or open-ended AIFs (“Sociedad Gestora de Instituciones de are exempt to apply the new PRIPS regime until 2020. The fund shall Inversión Colectiva” or “SGIIC”, in Spanish terminology) can also not carry out their activities until the current KIID and information manage closed-ended AIFs complying with Law 22/2014. The legal brochure is registered in the relevant CNMV’s administrative register. status of SGIIC is similar to SGEIC. The KIID shall include information containing the essential characteristics of the fund. The works “key investor information” 2.4 Are there any limits on the manager’s ability to shall appear prominently at the top of the first page of the document restrict redemptions in open-ended funds or transfers in Spanish or another language that accepts the CNMV. Specifically, in open-ended or closed-ended funds? information shall include the following data: (i) identification of the AIF; (ii) a brief description of its investment objectives and The management companies of open-ended AIFs issue and redeem investment policy; (iii) a presentation of the historical returns or, shares at the same intervals as net asset value calculations upon the where appropriate, profitability scenarios; (iv) costs and associated request of any participant, under the terms established in the relevant expenses; and (v) risk/reward investment, with appropriate guidance regulations. Notwithstanding the foregoing, AIFs do not have to and warnings in relation to the risks associated with investments in grant the requested redemption on a net asset value calculation date the Council of Institutional (“CII”) considered warnings profile. set by the participant, and so it does not constitute any right by itself The KIID will be drafted in concise, non-technical language and and shall be expressly stated in the prospectus. However, in the presented in a common format, allowing for comparison, and must CNMV, on its own initiative or upon the request of the management be easily analysable and comprehensible to the average investor company, this may temporarily suspend the subscription or in order that he/she is reasonably able to understand the essential redemption of units when it is not possible to determine its price or characteristics, nature and risks of the investment product that is concur on other force majeure events. In principle, subscription or offered and make investment decisions without recourse to other redemption of shares may only be restricted or suspended if there is documents. The document must be continuously updated and any just cause or in cases of force majeure. amendments thereto should be sent to the CNMV. Closed-ended AIFs can establish restrictions on redemptions and Regarding close-ended AIFs, once the PRIPS has come into force in will be subject to their own ruling provisions. January 2018, a Key Investment Information Document (“KIID”) is required to be delivered to any retail investor. 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? No, there are no specific legislative restrictions. However, general principles of public order and of company law may apply. Yes. The CNMV establishes the standard model applicable to all the documentation to be submitted to investors. In this sense, it keeps a 2.6 Are there any other limitations on a manager’s ability record of brochures, documents with key investor information, and to manage its funds (e.g. diversification requirements, annual and quarterly reports on the AIF, to which the public will asset stripping rules)? have free access. All documents published in the public domain will be forwarded As mentioned, for close-ended AIFs, Law 22/2014 focus mainly in simultaneously to the CNMV in order to keep the above-mentioned the authorisation process of management companies (“SGIEC”), records updated. considering that this type of fund is more flexible than UCITS and there are no significant requirements for their investment and In the case of the dissemination of the prospectus and the document liquidity structure. containing key investor information, prior registration by the CNMV is

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required. Registration of the prospectus and the document containing entities, shall perform activities related to the selling, buying, key investor information will require prior verification by the CNMV. transferral or subscription of participations in AIFs.

3.4 What restrictions are there on marketing Alternative 3.9 Are there any restrictions on the participation in Investment Funds? Alternative Investment Funds by particular types of investors, such as financial institutions (whether as From a client perspective, there is a very relevant distinction between sponsors or investors)? the marketing of UCITS and AIFs. UCITS can be marketed both to retail or professional investors. However, as a general rule, AIFs No, there are no specific restrictions in the applicable laws or are to be marketed to professional clients, as defined in the Spanish regulations. However, we would recommend that an in-depth Spain Securities Market Act. The marketing to retail clients is an exception analysis be carried out, on a case-by-case basis, on the individual limited to those retail clients who commit to invest a minimum of restrictions resulting from legal or statutory provisions of the EUR 100 and acknowledge in writing that they understand the risks relevant sponsor or investor. of the fund marketed. AIFs and their management companies must respect, in any event, 4 Investments the regulations concerning marketing and advertising in Spain. The CNMV monitors compliance with these obligations. It is especially relevant that authorisation is required for marketing 4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment in Spain. The CNMV monitors compliance with these obligations. Funds? Authorisation for marketing in Spain may be refused due to prudential reasons, specifically: (i) not being treated in an equivalent Compared to UCITS, AIFs have lower investment rules and the manner to investment funds in the respective country of origin; (ii) possibility to have a higher leverage ratio. Their investment object non-compliance with the rules of order and discipline in the Spanish can consist of either financial or non-financial activities. The securities markets; (iii) not sufficiently ensuring the adequate distinction between open-ended and closed-ended has been already protection of investors resident in Spain; or (iv) the existence of explained (please see question 1.4). disruption in the conditions of competition between AIFs authorised outside Spain and those authorised in Spain. Closed-ended funds are subject to different restrictions regarding their object, as this cannot constitute a commercial or industrial purpose. The object of closed-ended funds must be related to a 3.5 Can Alternative Investment Funds be marketed to predefined investment policy. retail investors?

Please see the answer to question 3.4. 4.2 Are there any limitations on the types of investments that can be included in an Alternative Investment According to AIFMD and MiFID, those AIFs managed by AIFMs Fund’s portfolio whether for diversification reasons or regulated by AIFMD may be marketed and advertised to retail otherwise? investors but subject to enhanced investment requirements set forth in the Spanish legislation in order to ensure protection for such retail Law 35/2003, states that requirements for financial UCITS are investors. applicable to open-ended AIFs. Accordingly, open-ended funds can be marketed to retail investors To comply with the principle of risk diversification, AIFs must provided the following conditions are fulfilled: (i) an investment of, comply with the limitations that are imposed regarding the at least, EUR 100,000; and (ii) a written declaration from the retail minimum percentage of the assets which shall be invested (in some investor confirming that it is aware of the associated risks. cases, investment in assets and financial instruments may not exceed Despite the fact that the advertising of closed-ended AIFs is targeted certain thresholds). to professional investors, this does not preclude the possibility for In both open-ended and closed-ended AIFs, a minimum of 60% of retail investors to invest in closed-ended funds, provided they fulfil their assets shall be invested. However, open-ended AIFs cannot the conditions mentioned above. invest more than 10% of their assets in another hedge fund. In the case of closed-ended funds, the aforementioned minimum of 60% 3.6 What qualification requirements must be carried out of their assets must be invested in financial instruments as shares or in relation to prospective investors? profit-participating loans. Those AIFMs authorised within any Member State of the EU or in those Prior to investment, investors shall declare, in writing, that they countries not included in the Financial Action Task Force (“FATF”) list acknowledge the investment risks. of countries not co-operating in the exchange of information, are able to invest up to 100% of their assets in other ECRs. 3.7 Are there additional restrictions on marketing to As mentioned, Law 22/2014 mainly focus on the requirements public bodies such as government pension funds? for management companies (SGEIC). Compared to UCITS, Law 22/2014 establishes only high-level principles regarding due The legislation does not provide any additional restrictions on diligence procedures that the SGEIC need to perform in managing marketing to public bodies. close-ended AIFs, especially regarding conflicts of interest, valuation procedures, risk and liquidity levels. Indeed, there is no specific limit on leverage. In any case, SGEIC have to disclose to 3.8 Are there any restrictions on the use of intermediaries the potential investors sufficient information regarding the main to assist in the fundraising process? characteristics of every single fund, level of risks and leverage limits.

Financial intermediaries, which can be banking or non-banking

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SGIIC, SGEIC or any other management companies providing 4.3 Are there any restrictions on borrowing by the services on a cross-border basis need to report statistical information Alternative Investment Fund? on a regular basis to the CNMV. Circular 2/2017 of the CNMV defines the information requirements. While the applicable law does not state a specific cap for closed- ended AIFs, in the case of open-ended AIFs, debt may not exceed five times the value of its assets and must be consistent with the 5.3 Is the use of side letters restricted? implementation of its strategy and investment policy. In both open-ended and closed-ended funds, the cap on borrowing shall be Any preferential treatment shall be disclosed in the prospectus. specified in the prospectus. However, AIFs shall comply with the relevant provisions in relation Spain to conflicts of interest and the overall obligation to keep investors duly informed. 5 Disclosure of Information 6 Taxation 5.1 What public disclosure must the Alternative Investment Fund or its manager make? 6.1 What is the tax treatment of the principal forms of In general, AIFMs shall disclose any facts considered specifically Alternative Investment Funds identified in question 2.1? relevant to the situation or development of the institution and must be communicated immediately to the CNMV. Once analysed, the CNMV must disseminate and include any relevant development in The tax treatment of the main forms of Alternative Investment the quarterly and annual or semi-annual report immediately. Funds depends on whether the fund is an open-ended or a closed- ended fund. The legislation applicable to open-ended AIFs states that a series of documents must be provided on a mandatory basis, the most Open-ended funds are subject to a special tax regime foreseen in the important of which are: (i) a prospectus, containing the investment Spanish Corporate Income Tax Law, which includes the application fund rules; (ii) the document containing the main information for of a 1% tax rate if certain requirements are met. the investor; (iii) an annual report containing, among others, the Closed-ended funds (e.g. private equity entities) are subject to annual accounts, the management report and the audit report; and the general Spanish Corporate Income Tax rate of 25% on their (iv) two quarterly reports. These are provided in order to ensure that worldwide income. However, these sorts of funds will benefit from: all relevant circumstances that may influence the determination of (i) a 99% tax exemption for capital gains derived from the sale of the value of the assets and prospectus of the institution are publicly subsidiaries; and (ii) a full exemption for dividends obtained from known, on a continually updated basis, as well as the inherent risks their subsidiaries, both subject to certain requirements. involved, and compliance with the applicable laws. These tax measures are compatible with the existing participation In the case of closed-ended funds, AIFMs must notify the CNMV, exemption regime, which may also be applicable. within 10 days, of any acquisition or loss of a significant interest held by the AIF, provided that the voting rights of the AIF in such 6.2 What is the tax treatment of the principal forms of company increase or decrease from a certain triggering percentage investment manager / adviser identified in question (10% to 50% or 75%). However, in the case of open-ended funds, 2.3? the obligation to inform the CNMV arises when the investor position reaches, goes above, or falls below the triggering percentage (20%, The Spanish tax system does not foresee any special tax treatment 40%, 60%, 80% or 100% of the company capital or fund assets). for investment managers or advisers. Consequently, the provisions set out in the Spanish Corporate Income Tax Law will apply and the 5.2 What are the reporting requirements in relation to tax rate will be 25% on their worldwide income. Alternative Investment Funds or their managers? The management of the fund may be exempt from VAT if several requirements are met. An AIFM must provide the CNMV with any information it requires at any time, and shall provide on a regular basis, information about: (i) the 6.3 Are there any establishment or transfer taxes levied principal markets and instruments in which it trades on behalf of the in connection with an investor’s participation in an fund, company or entity it manages; (ii) the main instruments in which Alternative Investment Fund or the transfer of the the fund trades; and (iii) the principal exposures and concentration of investor’s interest? each of the funds it manages. In particular, and as noted in question 5.1 above, AIFMs shall provide the CNMV with an annual report. No. However, further analysis would be required on the tax Open-ended AIFs must submit to the CNMV a monthly implications derived from the transfer of participations in a fund memorandum containing the operational statistics, and another with more than 50% of its assets in real estate located in the Spanish investment portfolio. Also, they must provide every investor with a territory. In particular, Spain has introduced an anti-abuse clause semi-annual and a quarterly report. in order to avoid the transfer of real estate through the sale of real AIFs should inform the CNMV about, inter alia: (i) the percentage estate companies. However, this clause will not apply if the real of the fund’s assets that are subject to special arrangements arising estate owned by these companies is used for business activities. from their illiquid nature; (ii) any new arrangements for managing the liquidity of the fund; (iii) the actual risk profile of the fund and 6.4 What is the tax treatment of (a) resident, (b) non- risk management systems used by the management company for, resident, and (c) pension fund investors in Alternative among others, market risk, liquidity risk, counterparty risk and Investment Funds? operational risk; (iv) the main categories of assets in which the Collective Investment Undertaking (“CIU”) has invested; and (v) Both resident and non-resident investors, or pension fund investors, the results of the stress tests.

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will be taxed on dividends and capital gains, if any, derived from to the Spanish tax authorities in order to comply with the FATCA the sale of shares. Capital gains will be assessed for the difference provisions. Spanish Royal Decree 1065/2007 Regarding the between the transfer value and the acquisition cost. Obligation to Report Information on Financial Accounts, has also been adapted to incorporate the FATCA provisions. Residents Like many other jurisdictions, Spain will begin to report information Individuals will be subject to a 19% to 23% tax rate, and companies after a maximum of nine months after December 31st 2017 with will be subject to a fixed 25% tax rate. regards to complying with the CRS provisions. It is important to point out that Spanish tax-resident individuals will not be taxed on the capital gains derived from the sale of 6.7 What steps are being taken to implement the OECD’s participations in an investment fund, provided a subsequent Action Plan on Base Erosion and Profit-Shifting Spain investment in a qualifying investment fund is made. (BEPS), in particular Actions 6 and 7, insofar as they Non-residents affect Alternative Investment Funds’ operations? Depending on the tax treaty enforced with Spain, capital gains may Spain has passed measures to adopt the actions of the OECD’s Action be taxed at the source or only in the country of residence of the Plan with regard to Action 6 (“Prevent treaty abuse”). Spain has seller. In addition, EU residents may apply for an exemption on the signed tax treaties with several countries (Belgium, Bolivia, Croatia, capital gains obtained in Spain. As a general rule, the applicable Cuba, Ireland, Israel, Nigeria, Portugal, Russia, Slovenia, etc.), with tax rate will be 19%. However, if the non-resident constitutes a a specific Limitation on Benefits (“LoB”) clause. The tax treaty permanent establishment (“PE”) in Spain, the tax rate will be 25% between Spain and the United States contains a global LoB clause. and the Corporate Income Tax provisions will apply. Spain has also introduced excluding clauses for several entities or Capital gains arising from the transfer or reimbursement of regimes (for example, in the tax treaties with Barbados, Jamaica, participations in a closed-ended Alternative Fund obtained by a Luxembourg and Uruguay). non-resident investor would not be considered to be obtained in In addition, in 2017 Spain signed the multilateral Convention to Spain for tax purposes. However, this rule will not apply if the non- Implement Tax Treaty Related Measures to Prevent BEPS. resident investor resides in a country qualified as a tax haven for tax purposes or if capital gains are obtained through a tax haven. 6.8 Are there any tax-advantaged asset classes or Pension fund investors structures available? How widely are they deployed? Tax treatment of pension fund investors will depend on their tax There are not any tax-advantaged structures others than what is residence as indicated in previous paragraphs. described in question 6.1. Income obtained by a Spanish-resident pension fund will be subject to Corporate Income Tax at 0% over its income if it is covered under the scope of the Act 1/2002, of 29 November. 6.9 Are there any other material tax issues for investors, managers, advisers or AIFs? Dividends obtained by a pension fund resident in the EU or EEA will not be subject to withholding tax in Spain. No, there are not.

6.5 Is it necessary or advisable to obtain a tax ruling from 6.10 Are there any meaningful tax changes anticipated in the tax or regulatory authorities prior to establishing the coming 12 months? an Alternative Investment Fund? No, there are not. It is not strictly necessary to obtain a tax ruling from the Administration as a step prior to establishing an AIF. However, it would be advisable to file a tax ruling in order to foresee the tax 7 Reforms treatment given by the Administration to a particular AIF. The ruling must be issued by the General Tax Directorate within six 7.1 What reforms (if any) are proposed? months following the request. Tax rulings duly requested are binding on the tax authorities, and their criteria must be compulsorily applied No reforms at a Spanish level have been proposed so far. Nevertheless, to taxpayers in similar cases, provided the regulations existing at the in 2018 we shall see the adaptation of the Spanish legal order to time of issuance and the applicable case law remains unchanged. the provisions of Directive 2014/65/EC, on markets in financial However, in practice, the tax authorities may change their criteria instruments and amending Directive 2002/92/EU (recast) (“MiFID on newly issued tax rulings from time to time, but such changes II”) and Regulation (EU) No 600/2014 of the European Parliament will not have retroactive effects for taxpayers (the new criteria will and of the Council of 15 May 2014 on markets in financial instruments supersede the previous ones for future cases). and amending Regulation (EU) No 648/2012 (“MiFIR”), which have been partially transposed to the Spanish legal system through the The filing of a tax ruling prevents penalties in case of a tax audit, Royal Decree 21/2017, of 29 December, on urgent measures to adapt provided the facts are the same. the Spanish legal order to the European regulations regarding the securities market. 6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard?

FATCA has been developed in Spain by Orden HAP/1136/2014, which regulated Form 290, and which is used to provide information

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Miguel Cases Toni Barios Cases & Lacambra Cases & Lacambra Av. Pau Casals, 22 Paseo de la Castellana 8 08021 Barcelona 28046 Madrid Spain Spain

Tel: +34 93 611 92 32 Tel: +34 93 611 92 32 +34 91 061 24 50 +34 91 061 24 50 Email: [email protected] Email: [email protected] URL: www.caseslacambra.com URL: www.aseslacambra.com Spain

Miguel Cases is the Managing Partner of Cases & Lacambra and Toni Barios is a Partner of Cases & Lacambra and leads the Finance leads the Commercial & Corporate law and Financial Services Group practice of the Financial Services Group. He has extensive experience practices. He has extensive experience advising credit institutions, in banking and finance, having been involved in debt and equity capital investment services firms and undertakings, being the legal counsel markets transactions and all sorts of public and private financings and of several national and international financial institutions, public debt restructuring transactions. He provides advice on the structuring, authorities and investment funds in respect of their regulatory situation, formation and operation of public and alternative investment funds, banking agreements, structuring and negotiating financial derivatives, and represents institutional and private investors. and debt transactions.

Cases & Lacambra is a client-focused boutique law firm with a top-tier specialisation in financial services and tax law. We offer bespoke advice and solutions to our clients, which rank among the most highly reputed national and international financial institutions, family offices, investment firms, group companies and high-net-worth individuals. Cases & Lacambra has offices in both Spain and the Principality ofAndorra.

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Sweden Gustav Sälgström

Harvest Advokatbyrå AB Emelie Persson

the detailed contents of the applications are set out in AIFMA and 1 Regulatory Framework FFFS 2013:10. In order to be an adviser, an external AIF Manager must obtain 1.1 What legislation governs the establishment and authorisation for discretionary portfolio management, and such operation of Alternative Investment Funds? a manager can, in addition, apply for authorisation to provide investment advice under the Swedish Securities Market Act and Alternative Investment Funds (AIFs) are regulated by the Swedish the SFSA’s regulations governing investment services and activities Alternative Investment Fund Managers Act (AIFMA), although (FFFS 2017:2) implementing the MiFID II Directive 2014/65/EU. the AIFMA primarily addresses AIF managers. Further regulation of AIFs is stipulated under the Swedish Financial Supervisory 1.3 Are Alternative Investment Funds themselves Authority’s (SFSAs) Regulations regarding Alternative Investment required to be licensed, authorised or regulated by a Fund Managers (FFFS 2013:10). regulatory body? AIFs structured as, e.g. a Swedish limited liability company or a limited partnership must, in addition, comply with applicable The authorisation requirements in AIFMA addresses AIF managers. company law. In respect of internal AIF managers, the AIF must be authorised For a special fund, which falls within the definition of an AIF, the accordingly since the AIF manager and the AIF acts as one legal entity. Swedish UCITS Act and the SFSA’s Regulation regarding Swedish Management of additional AIFs does, however, require: UCITS funds (FFFS 2013:9) apply in relevant parts. ■ notification to the SFSA if the Swedish AIF manager is registered under AIFMA; or 1.2 Are managers or advisers to Alternative Investment ■ authorisation by the SFSA if the Swedish AIF manager is Funds required to be licensed, authorised or authorised under AIFMA. regulated by a regulatory body? Regarding special funds, the fund’s articles of association must be approved by the SFSA. i. Registration For a Swedish AIF manager, registration with the SFSA is sufficient 1.4 Does the regulatory regime distinguish between if the following criteria are met: open-ended and closed-ended Alternative Investment ■ the assets of the AIFs, including those acquired through Funds (or otherwise differentiate between different financial leverage, do not exceed EUR 100 million; or types of funds or strategies (e.g. private equity v ■ the assets of the AIFs do not exceed EUR 500 million, hedge)) and, if so, how? provided that the portfolios consist of AIFs without financial leverage and without the right to redemption for a period of The regulatory regime does distinguish between open-ended five years from the date of the first placement of the AIF. and closed-ended AIFs, for example, with regards to regulation An application for registration to manage AIFs shall include the regarding asset valuation. Furthermore, the regulatory regime, to following: some extent, distinguishes between special funds and other AIFs. ■ information regarding the AIF manager and the AIFs and Unlike other AIFs, a special fund is obligated to be opened for their investment strategies; redemption at least once a year. ■ information set out in Article 5 (1) and (2) of the AIFM Delegated Regulation 231/2013/EU (Annex IV need not be 1.5 What does the authorisation process involve and how completed at registration); long does the process typically take? ■ information about the investors’ right to redemption; and ■ a description of how marketing to retail investors is prevented. A Swedish AIF manager, exceeding the thresholds mentioned above ii. Authorisation (question 1.2), must apply for authorisation in accordance with AIFMA and FFFS 2013:10. After the application has been filed Given that the assets of the AIFs exceed the aforementioned and the application fee paid (currently SEK 350,000), the SFSA thresholds, the Swedish AIF managers must apply for authorisation. starts processing the matter. The handling time for the application In comparison with a registration process, a licence application is three months but if there are special circumstances the SFSA can requires additional documents to be filed with the SFSA whereby

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extend the handling time by an additional three months. However, it should be noted that the process can be delayed and applicants 2 Fund Structures should expect a handling time of six to nine months. 2.1 What are the principal legal structures used for 1.6 Are there local residence or other local qualification Alternative Investment Funds? requirements? An AIF can take the legal form of a special fund, or an association, A Swedish AIF manager must have its registered office and such as a limited liability company, trading partnership or a limited conduct its business in premises located in Sweden. Additionally, partnership. Whether an association constitutes an AIF is, however, the Swedish AIF manager shall, depending on its legal structure, to be determined based on the object of the association, i.e. if the Sweden comply with certain residency requirements under company object meets the criteria of an AIF pursuant to Article 4 of the AIFM law. For example, in the case of a Swedish AIF manager legally Directive 2011/61/EU. structured as a limited liability company not less than one-half of In Sweden, real estate funds and private equity funds are commonly the members of the board of directors, and the managing director, structured as limited liability companies or limited partnerships. shall as a main rule be domiciled within the EEA. At least one of the persons authorised to represent the company and act as an authorised signatory shall be domiciled within the EEA. In the event 2.2 Please describe the limited liability of investors. that the limited liability company has no authorised representative who is resident in Sweden, the board of directors shall authorise As a main principle, an investor of an AIF is only liable to the such person to act as agent for service of process on behalf of the amount invested. However, exceptions may occur based on the company (special agent for service of process). legal structure of the AIF manager. For example, in relation to an internal AIF manager legally structured as a limited partnership (Sw. kommanditbolag), the general partner and investor (Sw. 1.7 What service providers are required? kommanditdelägaren) is personally responsible for the agreements and debts of the limited partnership. A Swedish AIF manager shall ensure that a depositary is designated for each Swedish AIF managed by the company. The depositary shall maintain its registered office in Sweden or, in cases where the 2.3 What are the principal legal structures used for depositary is a branch established in Sweden, in another country managers and advisers of Alternative Investment within the EEA. Funds?

An AIF manager can either be internal meaning that the AIF 1.8 What rules apply to foreign managers or advisers manager, due to its legal structure, can manage the administration wishing to manage, advise, or otherwise operate of the AIF itself (for example, a limited liability company that also funds domiciled in your jurisdiction? constitutes the AIF); or external (for example, a Swedish limited liability company authorised to manage AIFs) meaning that the AIF The following applies to foreign AIF manager wishing to offer AIFs manager is separate from the AIFs. in Sweden: ■ A foreign EEA-based AIF manager, who has such authorisation in its home Member State as referred to in the 2.4 Are there any limits on the manager’s ability to AIFM Directive 2011/60/EU may, following a notification to restrict redemptions in open-ended funds or transfers the SFSA market units or shares in an AIF (not a special fund) in open-ended or closed-ended funds? domiciled in Sweden. If the AIF manager’s authorisation in its home Member State includes the right to provide There are no legal limits except from the limits on special funds. investment advice, such services may, after notification to the For special funds, a Swedish AIF manager must specify in the fund’s SFSA be carried out in Sweden in accordance with Chapter 5, articles of association the conditions for transfers and whether it Section 1 (2) of AIFMA. shall be possible to close the fund for subscription of new units. If ■ A foreign EEA-based AIF manager, who has such the special fund can be closed, the fund’s articles of association must authorisation in its home Member State as referred to in the AIFM Directive 2011/60/EU may, following authorisation state under what objective conditions such a measure is possible. from the SFSA market units or shares in a special fund. According to AIFMA special funds must, however, be open for ■ A foreign AIF manager based in a country outside the EEA redemption at least once a year. may market units or shares in an AIF managed by a manager in Sweden, following authorisation from the SFSA. 2.5 Are there any legislative restrictions on transfers of The detailed contents of the authorisation applications and investors’ interests in Alternative Investment Funds? notifications are stipulated in AIFMA and FFFS 2013:10. Regarding marketing to retail investors, see question 3.5. There is no explicit legislative restriction on this matter. Restrictions on transfers of investors’ interests may, however, be stipulated in 1.9 What co-operation or information sharing agreements the AIF’s articles of association, investment policy or equivalent have been entered into with other governments or regulation of the AIF. regulators? 2.6 Are there any other limitations on a manager’s ability Information on co-operations and information sharing agreements to manage its funds (e.g. diversification requirements, entered into by the Swedish government, is available on https:// asset stripping rules)? www.government.se/. In addition to the asset stripping provision in AIFMA, implementing

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Article 30 of the AIFM Directive 2011/61/EU, there are general legal limitations imposing the AIF manager to act honestly, fairly 3.4 What restrictions are there on marketing Alternative and in the best interest of the AIF, and to ensure public confidence Investment Funds? in the financial market. There are restrictions on marketing to retail investors. AIF managers In effect, the AIF manager must adhere to the fund’s articles of marketing AIFs to professional investors must take measures to association, investment policy or equivalent regulation of the AIF, prevent units and shares in the AIF from being marketed to retail which normally contains certain diversification requirements. investors. For special funds additional legal restrictions apply, see question In addition, see question 3.6. 4.1. Sweden 3.5 Can Alternative Investment Funds be marketed to 3 Marketing retail investors?

i. Swedish-based AIF managers 3.1 What legislation governs the production and offering of marketing materials? Swedish AIF managers authorised under AIFMA can market special funds to retail investors. Other AIFs can also be offered to the public, but in that case the AIF must have been admitted to trade on The legislation governing the production and offering of marketing a regulated market. materials are: A Swedish AIF manager registered in accordance with AIFMA can, ■ The Swedish Marketing Practices Act. after approval by the SFSA, market units to a retail investor who (i) ■ The Swedish UCITS Act (partly with regards to special undertakes to invest a minimum of EUR 100,000, and (ii) in writing, funds). in a separate document, states the awareness of the risks associated ■ The AIFMA. with the investment. ■ The Swedish Investment Fund Association’s (Sw. ii. EES-based and Non-EES-based AIF managers Fondbolagens Förening) guidelines for marketing and An EES-based and non-EES-based AIF manager’s marketing of information by fund management companies. units or shares in AIFs to retail investors requires authorisation from ■ The Swedish Consumer Agency (Sw. Konsumentverket) and the SFSA. If a foreign AIF is equivalent to a special fund, there the Swedish Investment Fund Association’s agreement on is a possibility to apply for authorisation to market the fund to the rules for the marketing of funds. public, even though the fund is not admitted to trade on a regulated market. However, in practice, the SFSA hardly ever approves such 3.2 What are the key content requirements for marketing an application. materials, whether due to legal requirements or customary practice? 3.6 What qualification requirements must be carried out in relation to prospective investors? All marketing shall be designed and formulated in accordance with good marketing practice (laws and other ordinances, legal A Swedish AIF manager solely authorised under AIFMA, must precedents, good business practice, etc). The content requirement take measures to prevent units and shares in the AIFs from being varies, e.g. depending on whether the AIF is offered to professional unintentionally marketed to prospective investors domiciled abroad. or retail investors, and whether the AIF and/or the AIF manager is based within or outside the EEA. However, in general the key In addition, see question 3.4. information to be provided is the AIF’s articles of association or equivalent documents, prospectus, information on risks, fees and 3.7 Are there additional restrictions on marketing to other charges, and information identifying the AIF’s depositary. public bodies such as government pension funds? An AIF manager solely marketing AIFs to professional investors shall within the application to the SFSA, provide information on the No, there are no such additional requirements. measures adopted and taken to prevent units and shares in the AIF from being marketed to retail investors. 3.8 Are there any restrictions on the use of intermediaries If marketing material extends an offer to retail investors, it shall to assist in the fundraising process? be made clear in the offer that the KIID and full prospectus of the AIF are available and details shall be provided of where they can be A Swedish AIF manager can use intermediaries to assist in the obtained. AIF managers are under a duty to provide a clear account fundraising process. The fundraiser may, however, require a licence of all fees and charges in the fund’s KIID and full prospectus, which under, e.g. the Swedish Securities Market Act. In accordance with shall be made available to customers before any units are bought. the AIFM Directive 2011/61/EU, an EES-based AIF manager’s fundraising in another EES Member State may be considered a cross- border activity. Such activity requires authorisation or notification, 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? depending on the type of activity being pursued by the AIF manager.

Except from the documents being filed to the SFSA within the 3.9 Are there any restrictions on the participation in notification and/or the authorisation process, no other marketing or Alternative Investment Funds by particular types of legal documents need to be registered with or approved by the local investors, such as financial institutions (whether as sponsors or investors)? regulator.

Except for what is stated above regarding professional and retail investors, there are no such legal restrictions. However, the AIF’s

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articles of association, investment policy or equivalent regulation of ■ EEA-based AIF managed by the AIF-manager. the AIF may stipulate specific boundaries on participation. ■ AIF marketed by the AIF manager within the EEA. The AIF’s investors shall be provided with the annual report upon 4 Investments request. The SFSA shall also be provided with the annual report, as well as the home country authority if the fund is domiciled outside Sweden. 4.1 Are there any restrictions on the types of activities An AIF manager which manages a special fund shall submit a that can be performed by Alternative Investment quarterly report for each special fund to the SFSA at the end of every Funds? quarter. The quarterly report shall contain a profit and loss account

Sweden and a balance sheet with specifications as well as information A Swedish special fund must adhere to the following requirements: regarding the calculation of own funds and capital requirements. ■ the fund’s sole purpose must be to invest in liquid financial The quarterly report shall relate to the conditions on the last day of assets only (in principle eligible assets as defined under the every calendar quarter (the report date) and the SFSA should have UCITS Directive 2009/65/EU although the SFSA may grant received the report no later than 21 April, 21 July, 21 October and exemptions from the UCITS requirements); 21 January, respectively. ■ the fund must apply the principle of risk diversification; and An AIF manager shall provide regular reports to the SFSA on: ■ the fund units are repurchased or redeemed at the unit holder’s request at least once every year. ■ the principal markets where the AIF manager trades; Furthermore, there are specific requirements of acquisition of non- ■ the financial instruments the AIF manager trades in; and listed companies and issuers. These requirements are listed in ■ each fund’s principal exposure and concentration of risks. Chapter 11 AIFMA and do, e.g. contain the asset stripping rule (see AIF managers shall for each EEA-established managed AIF and question 2.6). for each of the funds it markets in the EEA provide the following information to the SFSA: 4.2 Are there any limitations on the types of investments ■ the percentage of the fund’s assets which is of a illiquid that can be included in an Alternative Investment nature; Fund’s portfolio whether for diversification reasons or ■ any amendments or new arrangements for managing the otherwise? liquidity; ■ the fund’s risk profile and the risk management systems used There are legal restrictions with regards to Swedish special funds to manage those risks; (see question 4.1). Otherwise, there are generally no such legal ■ information on the main categories of assets in which the limitations. fund invests in; and ■ the results of the stress tests performed in the fund. 4.3 Are there any restrictions on borrowing by the AIF managers shall upon the SFSA’s request provide the following Alternative Investment Fund? documents: 1. a detailed list of the AIFs managed by the AIF manager A Swedish special fund cannot have cash loans exceeding 10 per updated at the end of each quarter; and cent of the fund’s assets, unless the SFSA has granted an exemption. 2. the annual reports for each fund managed by the AIF manager Otherwise there are no such legal restrictions. marketed in the EEA.

5 Disclosure of Information 5.3 Is the use of side letters restricted?

No, there are no legal restrictions, but when side letters are used they 5.1 What public disclosure must the Alternative shall be disclosed for the investors. Investment Fund or its manager make?

Swedish and other EES-based AIF managers must comply 6 Taxation with the disclosure requirements stipulated in the Commission Delegated Regulation 231/2013/EU. Furthermore, Swedish AIF managers must publish information on their website regarding 6.1 What is the tax treatment of the principal forms of sustainability, and if such issues are considered when managing the Alternative Investment Funds identified in question AIF. AIF managers legally structured as Swedish limited liability 2.1? companies shall, in addition, publish on their websites the name of the company, the address of its registered office, as well as the All Swedish special funds are exempt from taxation and are not company’s registration number. liable to pay Swedish income tax. For Swedish special funds, the AIF manager must publish KIID for AIFs that do not meet the requirements of special funds are liable to each fund on its website. pay Swedish corporate tax, if domiciled in Sweden.

5.2 What are the reporting requirements in relation to 6.2 What is the tax treatment of the principal forms of Alternative Investment Funds or their managers? investment manager / adviser identified in question 2.3? Each AIF manager shall, within a six-month period from the end of each fiscal year, provide an annual report for each: External and internal AIF managers are taxed in accordance with applicable tax rules of the legal structure at hand. For example,

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for an external AIF manager in the capacity of a limited liability av rapporteringspliktiga konton med anledning av FATCA-avtalet, company a corporation tax of 22 per cent applies. and lagen (2015:911) om identifiering av rapporteringspliktiga konton vid automatiskt utbyte av upplysningar om finansiella konton). Recently, several technical clarifications regarding, e.g. 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an the identification of reportable accounts and content of control data Alternative Investment Fund or the transfer of the on reportable accounts have been proposed. The proposal is, at the investor’s interest? time of writing, still under review.

Investors of special funds, domiciled in Sweden with no investment 6.7 What steps are being taken to implement the OECD’s savings account must pay income tax on an annual flat income Action Plan on Base Erosion and Profit-Shifting Sweden amounting to 0.4 per cent of the value of the shares at the beginning (BEPS), in particular Actions 6 and 7, insofar as they of the calendar year. The flat income is then taxed by 30 per cent affect Alternative Investment Funds’ operations? (an individual) or 22 per cent (legal entity). In addition, dividends on the shares or units of the special fund are taxable. A proposal regarding the implementation of OECD’s Action Plan Furthermore, any profit derived from a transfer initiated by the on Base Erosion and Profit-Shifting (BEPS) has been published by investor is taxable. The calculation of taxation depends on whether the Swedish government and is currently pending approval from the special fund is listed or unlisted. Parliament, since new legislation is required to realise the minimum standards that follow Articles 6 and 7 of BEPS. Regarding investors domiciled outside Sweden, see question 6.4.

6.8 Are there any tax-advantaged asset classes or 6.4 What is the tax treatment of (a) resident, (b) non- structures available? How widely are they deployed? resident, and (c) pension fund investors in Alternative Investment Funds? No, there are not. (a) Resident See question 6.3. 6.9 Are there any other material tax issues for investors, (b) Non-resident managers, advisers or AIFs? Non-residents are as a main rule taxable in their country of It is worth mentioning that financial institutions such as securities residence. In accordance with the FATCA and CRS agreements, the institutions, investment funds and management companies, who Swedish Tax Agency shall forward information on taxable accounts are intending to conduct business in Sweden without establishing of non-residents to the designated foreign competent authority of a branch or similarly establishing in Sweden, must submit an the agreements. undertaking to file income statements to the SFSA. (c) Pension fund investors Pension fund investors domiciled in Sweden do not pay capital gains 6.10 Are there any meaningful tax changes anticipated in tax in relation to transfers or pension pay-outs but do, however, pay the coming 12 months? tax on the return on capital and income tax on paid-out pension. No, there are not. The changes referred to in question 6.6 are mainly 6.5 Is it necessary or advisable to obtain a tax ruling from clarifications of already existing legislation. the tax or regulatory authorities prior to establishing an Alternative Investment Fund? 7 Reforms It is not necessary, but can be requested from the National Tax Board (Sw. Skatterättsnämnden). 7.1 What reforms (if any) are proposed?

6.6 What steps have been or are being taken to implement No major reforms are proposed. However, within the EEA the the US Foreign Account and Tax Compliance Act Commission has proposed new regulation in order to facilitate 2010 (FATCA) and other similar information reporting cross-border distribution of AIFs and UCITS. regimes such as the Common Reporting Standard?

In Sweden FATCA and CRS have been implemented mainly through two separate Acts (Sw. lagen (2015:62) om identifiering

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Gustav Sälgström Emelie Persson Harvest Advokatbyrå AB Harvest Advokatbyrå AB Hamngatan 15, Box 7225 Hamngatan 15, Box 7225 103 89 Stockholm 103 89 Stockholm Sweden Sweden

Tel: +46 76 149 73 00 Tel: +46 76 146 92 00 Email: [email protected] Email: [email protected] URL: www.harvestadvokat.se URL: www.harvestadvokat.se Sweden Gustav Sälgström is a partner at Harvest, specialising in exchange Emelie Persson is an associate at Harvest, specialising in securities and securities law, banking and finance legislation and fund law, banking and finance legislation and fund operations. operations. Gustav has significant regulatory experience representing clients contact with the Swedish Financial Supervisory Authority. He has participated in a number of long-term projects implementing new legislation, such as MIFID and AIFMD in the course of his career. Gustav’s client portfolio includes banks, securities institutions, payment institutions and asset management companies. During his career, Gustav has held a number of senior legal positions, among others in Alfred Berg Asset Management AB (part of BNP Paribas Investment Partners). Gustav was recommended by The Legal 500 2016 guide.

Harvest offers comprehensive legal advice for anyone engaged in licensable activities. We assist, among others, banks, asset managers, securities companies and other financial institutions in Sweden and abroad with matters such as compliance, internal audits, application procedures, financing and other types of legal issues. We also assist clients with matters such as establishment, authorisation or capital structure, to name just a few. We maintain regular and close contact with the Swedish Financial Supervisory Authority (Sw. Finansinspektionen), and a number of our employees have previously worked for the authority. Thanks to a large number of assignments involving the authority, we are constantly kept up to date with new rule interpretations and handling of different types of cases. Our services include assisting companies within the financial sector to implement GDPR (the General Data Protection Regulation) and to adapt and review their procedures. We also assist with the relevant consents and information texts, and undertake the role of data protection officer. We have extensive experience and specialist expertise on matters regarding different kinds of capital market transactions such as IPOs, EMTNs, high-yield debt instruments and takeover bids.

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Switzerland Dr. François Rayroux

Lenz & Staehelin Dr. Patrick Schleiffer

1 Regulatory Framework 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body? 1.1 What legislation governs the establishment and operation of Alternative Investment Funds? Swiss Alternative Investment Funds are required to be licensed by FINMA irrespective of the type of investors to whom their shares/ The establishment and operation of Alternative Investment Funds units are distributed. (“AIFs”) (and their managers) is mainly governed by the Swiss Collective Investment Schemes Act (“CISA”) and the implementing With respect to foreign (i.e. non-Swiss) Alternative Investment Funds, the licensing requirements depend on what types of investor ordinance, the Collective Investment Schemes Ordinance (“CISO”). are approached in Switzerland. The distribution of shares/units in Further, the Swiss Financial Market Supervisory Authority a foreign Alternative Investment Fund to non-qualified investors (“FINMA”) has enacted additional ordinances that provide for requires prior authorisation from FINMA. The distribution of a specific rules regarding (i) the investment policy, bookkeeping, foreign Alternative Investment Fund to non-supervised qualified valuation and publication duties of collective investment schemes investors, such as pension funds, does not trigger the obligation to (regulated in FINMA’s Collective Investment Schemes Ordinance), register or license such foreign Alternative Investment Fund with and (ii) the insolvency of collective investment schemes (regulated FINMA, but entails certain consequences as to the content of the in FINMA’s Collective Investment Schemes Insolvency Ordinance). fund’s documentation and the obligation of the foreign Alternative In addition, FINMA has published a number of circulars addressing Investment Fund to appoint a Swiss representative and a paying specific areas of collective investment schemes law (such asthe agent in Switzerland, and the obligation of the Swiss representative distribution of collective investment schemes). Further, a number to enter into a distribution agreement with each person distributing of guidelines of the Swiss Funds & Asset Management Association the fund to non-supervised qualified investors in Switzerland. The (“SFAMA”) have been recognised as a minimum standard by distribution of foreign Alternative Investment Funds to supervised FINMA. Hence, these are of general application, regardless of qualified investors, such as banks, securities dealers, insurance SFAMA membership. companies or Swiss-licensed fund management companies or asset Investment companies that are incorporated as a Swiss corporation managers of collective investment schemes, is not considered to and that are either listed on a Swiss stock exchange or restricted be a distribution activity subject to authorisation by FINMA. The to qualified investors (within the meaning of the CISA) do not fall specific regulatory requirements applicable to the distribution of within the scope of the CISA. Accordingly, the establishment and foreign collective investment schemes to non-qualified investors the operation of such investment companies are governed by Swiss as well as to non-supervised qualified investors are further detailed corporate law and, in the case of a listed company, the listing rules below (see questions 3.2 to 3.5). and any additional regulations of the relevant stock exchange. 1.4 Does the regulatory regime distinguish between 1.2 Are managers or advisers to Alternative Investment open-ended and closed-ended Alternative Investment Funds required to be licensed, authorised or Funds (or otherwise differentiate between different regulated by a regulatory body? types of funds or strategies (e.g. private equity v hedge)) and, if so, how? Asset managers of collective investment schemes are required to The Swiss regulatory regime distinguishes between open-ended and obtain a licence from FINMA regardless of whether they manage closed-ended collective investment schemes. The main differences a Swiss or a foreign collective investment scheme. With respect between open-ended and closed-ended collective investment to asset managers that only manage foreign collective investment schemes are the different rules regarding the redemption of shares/ schemes, the CISA provides for certain de minimis exemptions. units of collective investment schemes and different legal structures. The licence is subject to specific licence requirements that include, Open-ended collective investment schemes must be established in inter alia, minimum capital requirements and rules regarding the the form of either a contractual fund or an investment company organisation and the operation of the asset manager. with variable capital (“SICAV”). On the other hand, closed-ended The mere advisory activity is not subject to any licensing collective investment schemes may only be set up as either a limited requirements. partnership for collective investments (“LP”) or an investment company with fixed capital (“SICAF”).

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The CISA further distinguishes open-ended funds based on the type Swiss paying agent, unless the distribution is strictly limited to (i) of investments. Accordingly, securities funds, real estate funds, supervised financial intermediaries (e.g. banks, securities dealers other traditional investment funds and Alternative Investment Funds and insurance companies), or (ii) investors that entered into a written each follow a different set of rules regarding the investment policy discretionary asset management agreement with a supervised and permitted investment techniques. financial intermediary and provided the distribution activities are The CISA as such does not distinguish between different types of made through such supervised financial intermediary. strategies. However, the Swiss limited partnership for collective investments (Kommanditgesellschaft für kollektive Anlagen/la 1.8 What rules apply to foreign managers or advisers société en commandite de placements collectifs) (“Swiss LLP”), wishing to manage, advise, or otherwise operate which is provided by CISA, is often used as an investment vehicle funds domiciled in your jurisdiction? for private equity, real estate and hedge funds. Switzerland Foreign managers or advisers cannot as such act as fund managers of Swiss funds. A Swiss fund management company, a SICAV, a 1.5 What does the authorisation process involve and how long does the process typically take? Swiss asset manager of collective investment schemes and a Swiss representative of foreign collective investment schemes may, The formation of a Swiss Alternative Investment Fund, as well as however, delegate certain fund administration activities, as well as the formation of a Swiss Alternative Investment Fund manager, are asset management to foreign asset managers who are subject to a subject to authorisation by FINMA. In addition to an extensive recognised supervisory body under certain circumstances. The tasks application that has to be filed with FINMA, a FINMA-recognised delegated to third parties shall be set out in written agreements. audit firm has to be appointed to carry out the review of the application These shall include a precise description of the delegated tasks as in the case of the authorisation of a Swiss Investment Fund manager. well as the powers and responsibilities, any authorities in respect of For the purpose of the performance of this “entry audit”, such audit further delegation, the agent’s duty to give an account of its activities, firm may not be the fund’s or the manager’s regular auditor. and the control rights of the licensee. The delegation of tasks may not hinder the audit by the audit company or supervision by FINMA. The duration of the authorisation process may vary and will depend In particular, where tasks are delegated abroad, the licensee must be on the complexity and the scope of the application, the applicable able to demonstrate that it, the regulatory audit company and FINMA investment strategies and also on the organisation of the applicant. are able to exercise their respective rights and enforce them under the law. The regulatory audit company must review the confirmatory 1.6 Are there local residence or other local qualification documentation before outsourcing takes place. requirements?

1.9 What co-operation or information sharing agreements Swiss Alternative Investment Funds are required to have their have been entered into with other governments or central administration in Switzerland. Accordingly, the ultimate regulators? supervision of the fund must be carried out in Switzerland. However, the delegation of investment decisions to third parties In December 2012, FINMA entered into a co-operation arrangement (including foreign entities) is possible, provided such third parties with the EU securities regulators (represented by the European are subject to a recognised supervision and, furthermore, that a regulator ESMA) for the supervision of Alternative Investment co-operation agreement has been entered into with the relevant Funds, including hedge funds, private equity and real estate funds. jurisdictions where the third parties are located, in case such The co-operation arrangements include the exchange of information, jurisdictions (typically European Union (“EU”) countries under cross-border on-site visits and mutual assistance in the enforcement the EU Directive on Alternative Investment Fund Managers of the respective supervisory laws. Such co-operation arrangement (“AIFMD”)) require on their part that third countries conclude such applies to Swiss Alternative Investment Fund managers (“AIFMs”) co-operation agreements. that manage or market Alternative Investment Funds in the EU and The members of the executive board of Swiss fund management to EU AIFMs that manage or market AIFs in Switzerland. The companies or Swiss asset managers of collective investment agreement also covers co-operation in the cross-border supervision schemes are required to take up residence at a location which is of depositaries and delegates of AIFMs. suitable for the proper management of the business operations. In addition, with respect to the distribution of foreign collective Furthermore, both the members of the Board of Directors, as well investment schemes to non-qualified investors, FINMA has entered as the persons responsible for management, must possess adequate into various agreements regarding co-operation and the exchange professional qualifications. of information. As of 24 April 2017, FINMA had entered into such agreements with the supervisory authorities of Austria, Belgium, 1.7 What service providers are required? Denmark, Estonia, France, Germany, Guernsey, Hong Kong, Ireland, Jersey, Liechtenstein, Luxembourg, Malta, the Netherlands, Open-ended Swiss Alternative Investment Funds are required Norway, Sweden and the United Kingdom. to appoint a custodian. The custodian must be a Swiss bank. Single Alternative Investment Funds may, subject to the approval 2 Fund Structures of FINMA, also appoint a prime broker. If the prime broker is a licensed Swiss securities dealer or a Swiss bank, a separate custodian is not required. 2.1 What are the principal legal structures used for In addition, the fund management company, the SICAV, the SICAF Alternative Investment Funds? and the LP must appoint an auditor. Swiss Alternative Investment Funds are often set up as open-ended Foreign Alternative Investment Funds that are distributed in contractual funds of the category of “other funds for alternative Switzerland are required to appoint a Swiss representative and a

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investments”. Contractual funds are based on a collective investment restrictions in their articles of association to ensure that their agreement under which a fund management company commits itself shareholders are exclusively qualified investors. to managing the fund’s assets in accordance with the provisions of the Typically, Swiss collective investment schemes, whether for fund contract at its own discretion and of its own account. A different alternative investments or not, provide for a compulsory redemption Swiss legal structure that could be used for Alternative Investment in their fund documentation in case an investor no longer meets the Funds is the SICAV launched as an “other fund for alternative eligibility requirements to invest in the fund or if their investment investments”. The SICAV is also an open-ended fund structure. in the fund could jeopardise the interests of all the other investors. Further, Swiss law provides for a “closed LP”. However, only a few Swiss LPs have been established so far and they are typically used for private equity investments or investments in real estate projects. 2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements,

asset stripping rules)? Switzerland 2.2 Please describe the limited liability of investors. Generally, there are no other limitations on a manager’s ability to The liability of investors is capped at the amount of their investments manage its funds than the investment restrictions as defined in the in the Swiss Alternative Investment Fund. In the case of an umbrella fund contract or fund regulations. fund, investors are only entitled to the income and assets of the respective sub-fund in which they are participating and each sub- fund is only liable for its own liabilities. 3 Marketing

2.3 What are the principal legal structures used for 3.1 What legislation governs the production and offering managers and advisers of Alternative Investment of marketing materials? Funds? The production and offering of marketing materials are governed Typically, Swiss managers and advisers are incorporated as a by the CISA and its implementing ordinances. The production and corporation within the meaning of art. 620 et seq. of the Swiss Code offering of marketing materials of investment companies that are of Obligations. According to the CISA, a Swiss-based manager not subject to the CISA are governed by Swiss corporate law and, must use one of the following Swiss legal structures: (i) corporation; in the case of a listed investment company, the listing rules of the (ii) partnership limited by shares; (iii) limited liability company; (iv) relevant stock exchange. general partnership; or (v) limited partnership. Further, marketing activities in Switzerland are also subject to the Foreign asset managers of collective investment schemes may, Swiss legislation against unfair competition that provides for a subject to certain additional requirements, open a branch in number of prohibited marketing practices. Switzerland.

3.2 What are the key content requirements for marketing 2.4 Are there any limits on the manager’s ability to materials, whether due to legal requirements or restrict redemptions in open-ended funds or transfers customary practice? in open-ended or closed-ended funds? The minimum content requirements for marketing materials (i.e. Investors in open-ended funds are, in principle, entitled to request prospectus, simplified prospectus, or key investor information the redemption of their units and payment of the redemption amount document) are set out in the CISO and in the revised Guidelines on in cash at any time. This right to redeem at any time may only the Distribution of Collective Investment Schemes (“Distribution be restricted in the case of collective investment schemes whose Guidelines”) as well as in the revised Guidelines on Duties value is difficult to ascertain, or which have limited marketability Regarding the Charging and Use of Fees and Costs (“Transparency (e.g. investments which are not listed or traded on another regulated Guidelines”), which specify certain requirements regarding market open to the public; mortgages; or private equity investments). the distribution of funds and investor information, issued by In any event, the right to redeem at any time may only be suspended SFAMA, and which entered into force on 1 July 2014. According for a maximum period of five years and such restrictions must be to the relevant provisions, the prospectus of a Swiss Alternative stated explicitly in the fund’s regulations and in the prospectus. Investment Fund must contain, inter alia, information on: (i) the Alternative Investment Fund, such as place of incorporation, types of shares/units and the rights attached thereto; (ii) the modalities 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? and conditions for the repayment and/or redemption of shares/units; (iii) the investment policy and investment restrictions; (iv) the fees payable to the fund management company, the custodian and any The transferability of investors’ interests in an Alternative Investment other third party; (v) other fees and costs, such as performance fees, Fund depends on the fund’s legal structure. Generally speaking, commissions, retrocessions and other financial benefits and rebates; there are no legislative restrictions on transfers of investors’ interests (vi) the relevant tax provisions (including any withholding taxes); in open-ended Alternative Investment Funds. However, restrictions (vii) the fund management company and the custodian; and (viii) may be provided for in the fund’s regulations. This would be the third parties that carry out delegated tasks. case if a contractual fund or a SICAV were not open to retail clients. With respect to the distribution of funds to non-qualified investors, Further, the Swiss LP is, by design, a legal structure that is only FINMA will verify in the context of the registration process the available to qualified investors. Consequently, interests in an LP contents of such foreign funds prospectus. That prospectus has to may only be transferred to other qualified investors. be completed with a “Swiss wrapper”, containing specific Swiss Finally, investment corporations that do not fall within the scope information, including the name of the Swiss representative and of of the CISA (see question 1.1) are required to provide for transfer the paying agent, the place where the prospectuses, the last annual

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and semi-annual reports as well as the articles of association can custodian’s organisation, investor rights and investment policy, is be obtained without costs. Swiss law also requires, for private equivalent to the provisions of the CISA; (iii) the designation of placements to non-supervised qualified investors, that the prospectus the collective investment scheme does not give reason for deception (or any other marketing documentation) contain information on the and confusion; (iv) appointment of a Swiss representative and a identity of the Swiss representative and paying agent, the place Swiss paying agent; and (v) FINMA and the foreign supervisory where the prospectus, the annual and semi-annual reports as well authorities have entered into an agreement on the co-operation and as the articles of association can be obtained free of charge and the exchange of information regarding the distribution of the fund. As place of jurisdiction in Switzerland. a matter of practice, since a couple of years ago, FINMA has only In addition, the fund’s regulations and the prospectus distributed to registered investment funds which are organised as Undertakings non-qualified investors in Switzerland must contain a notice regarding for Collective Investments in Transferable Securities (“UCITS”). the special risks involved in alternative investments. The wording of Due to the FINMA practice which requires that a non-UCITS fund Switzerland such warning clause must be approved by FINMA and must be placed meets equivalent criteria to those which apply to Swiss Alternative on the first page of the fund’s regulations and the prospectus. Investment Funds, there have been no new registrations of foreign Alternative Investment Funds in Switzerland recently. Existing Unlike traditional investment funds, Alternative Investment Funds foreign Alternative Investment Funds are grandfathered. are not required to prepare a simplified prospectus or a key investor information document. 3.6 What qualification requirements must be carried out in relation to prospective investors? 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? If a foreign Alternative Investment Fund has not been approved for distribution to retail clients in Switzerland, the fund’s manager Swiss Alternative Investment Funds must submit their prospectus and any third-party distributor must ensure that the fund is only and any amendments thereto to FINMA. Foreign Alternative distributed to qualified investors. According to the CISA, the Investment Funds must only submit their prospectus to FINMA following investors are considered as qualified investors: (i) (along with any other relevant fund documentation) if they distribute supervised financial intermediaries (i.e. banks, securities dealers, their shares/units to non-qualified investors in Switzerland. insurance companies, fund management companies, asset managers Accordingly, no registration or approval of the marketing or legal of collective investment schemes and central banks); (ii) public documents of foreign Alternative Investment Funds is required as bodies and pension funds with professional treasury management; long as the shares/units of such funds are exclusively distributed (iii) corporations with professional treasury management; (iv) to qualified investors. In respect of foreign Alternative Investment investors that have entered into a written discretionary asset Funds, the placement restrictions applicable to the distribution management agreement with a supervised financial intermediary of all non-registered funds applies (see also question 3.6 below), or an independent asset manager, provided such investors have not whereby a distinction must be made between the placement to opted out of their qualified investor status; (v) independent asset non-supervised qualified investors as opposed to the placement to managers (if the relevant independent asset manager meets the supervised institutions, as well as within the context of discretionary requirements of the CISA and undertakes in writing to exclusively asset management agreements (in which case no “distribution” is use the fund-related information for clients who are themselves deemed to occur). qualified investors); and (vi) high-net-worth individuals, provided they have declared that they may be considered as qualified 3.4 What restrictions are there on marketing Alternative investors. Investment Funds?

3.7 Are there additional restrictions on marketing to There are no specific restrictions on the marketing of Swiss public bodies such as government pension funds? Alternative Investment Funds. However, reference to the special risks involved in alternative investments must be made in the fund’s Public bodies such as government pension funds are considered name, prospectus and other marketing materials (see also question qualified investors provided that the assets are managed ona 3.2). Additionally, Swiss Alternative Investment Funds that are “professional basis”. The marketing and subsequent distribution of incorporated as an LP may only be marketed and distributed to Alternative Investment Funds to qualified investors do not need to be qualified investors (see question 3.5). authorised by FINMA. In particular, there are no rules that require the fund’s manager, investment adviser or placement agents to 3.5 Can Alternative Investment Funds be marketed to obtain a separate licence or registration to market the fund’s shares/ retail investors? units to public bodies. However, to market and distribute foreign Alternative Investment Funds to such non-supervised qualified Swiss Alternative Investment Funds can be marketed to retail investors (including public bodies), a Swiss representative and a investors. However, Alternative Investment Funds that are Swiss paying agent must be appointed and distribution agreements structured as an LP may not be marketed to retail investors, but have to be entered into between the relevant Swiss representative only to qualified investors. In addition, the fund’s regulation may and the persons distributing the Alternative Investment Fund provide for further restrictions with respect to retail clients. in Switzerland. In addition, pension funds are subject to certain Foreign collective investment schemes may be marketed to retail investment restrictions (see question 3.9). investors if they were authorised for distribution in Switzerland by FINMA. In order to obtain an authorisation, the following criteria 3.8 Are there any restrictions on the use of intermediaries have to be met: (i) the collective investment scheme, the fund to assist in the fundraising process? management company or the fund company, the asset manager as well as the custodian, are subject to public supervision intended The fundraising process is considered a part of the distribution of to protect investors; (ii) the regulatory framework regarding the collective investment schemes. Consequently, any third parties that fund management company’s or the fund company’s as well as the

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assist in the fundraising process, such as placement agents or other intermediaries, are considered distributors of collective investment 5 Disclosure of Information schemes. Swiss distributors of collective investment schemes are required to obtain a licence from FINMA. Foreign distributors 5.1 What public disclosure must the Alternative may only engage in distribution activities in Switzerland if (i) the Investment Fund or its manager make? fund is exclusively distributed to qualified investors, (ii) the foreign distributor is subject to adequate supervision in its home country, Alternative Investment Funds or its manager must prepare a and (iii) the distributor entered into a distribution agreement with prospectus that has to include, inter alia, information on the the Swiss representative. investment policy, investment techniques, and any fees paid to managers and third parties (see question 3.2). In addition, the fund or its manager must publish the fund’s regulations and prepare

3.9 Are there any restrictions on the participation in Switzerland Alternative Investment Funds by particular types of annual and semi-annual reports (see question 5.2). Investors may investors, such as financial institutions (whether as request the disclosure of additional information, such as the basis sponsors or investors)? for the calculation of the net asset value per unit or information on specific business transactions effected by the fund. There are no restrictions per se. However, certain financial institutions and other qualified investors, such as pension funds and 5.2 What are the reporting requirements in relation to insurance companies, are only allowed to invest a certain amount of Alternative Investment Funds or their managers? their net assets in Alternative Investment Funds. Open-ended collective investment schemes are required to keep 4 Investments separate accounts and to publish an annual report within four months of the end of the financial year. Such annual report has to include, inter alia, financial statements, information on the number 4.1 Are there any restrictions on the types of activities of shares/units redeemed and newly issued during the financial year, that can be performed by Alternative Investment the inventory of the fund’s assets at market value, the performance Funds? of the open-ended collective investment scheme, as well as a short- form report by the auditors regarding the information provided in Alternative Investment Funds may only (i) pledge or cede as the annual report. collateral up to 100 per cent of the fund’s net assets, and (ii) commit In addition, open-ended collective investment schemes are required to an overall exposure of up to 600 per cent of the fund’s net assets. to publish a semi-annual report within two months of the end of the The fund’s regulations must explicitly set out those investment first half of the financial year. The semi-annual report must include, restrictions. inter alia, an unaudited statement of net assets or an unaudited Further, Swiss Alternative Investment Funds are allowed to engage balance sheet and income statement, respectively. in short selling transactions, but only to the extent permitted in the Further, the fund management companies and the SICAV must fund’s regulations. publish the net asset value of their funds at regular intervals.

4.2 Are there any limitations on the types of investments 5.3 Is the use of side letters restricted? that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or otherwise? The use of side letters is, as such, not expressly restricted or prohibited. However, the use of side letters raises delicate issues in According to the CISO, the following types of investments can be light of the principle of the equality of treatment which applies strictly included in a Swiss Alternative Investment Fund: securities; units among investors in the context of Swiss Alternative Investment in collective investment schemes; money market instruments; sight Funds. Where the use of side letters leads to potential conflicts of and time deposits with a maturity of up to 12 months; precious interest, the Alternative Investment Fund and/or its manager has metals; derivative financial instruments; and structured products. to implement effective measures to detect, prevent and supervise In addition, FINMA may authorise other investments such as such conflicts of interest. If conflicts of interest arising from the commodities and commodity certificates. use of side letters cannot be avoided, the side letter arrangement has to be disclosed. In addition, side letter arrangements that cannot Any investment that (i) has only limited marketability, (ii) is subject be justified by objective reasons (e.g. enticing early investors or to strong price fluctuations, (iii) exhibits limited risk diversification, attracting investors that are willing to contribute a large amount of or (iv) is difficult to value, may only be made if it is explicitly assets) could be considered a breach of the CISA’s rules of conduct, permitted under the fund’s regulations. in particular the duty of loyalty, and could trigger civil liability as well as administrative measures. 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? 6 Taxation Alternative Investment Funds may only raise loans for an amount of up to 50 per cent of the fund’s net assets, provided that this 6.1 What is the tax treatment of the principal forms of is expressly laid down in the regulations on Swiss Alternative Alternative Investment Funds identified in question Investment Funds. 2.1?

Swiss collective investment schemes (i.e. a contractual fund, SICAVs and LPs) are viewed in a transparent manner from

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a Swiss corporate income tax perspective. They are thus not or partially, depending on the terms of the applicable double taxation subject to Swiss corporate income taxes on their income or gains treaty, if any (see question 6.1). There is in general no special tax (except if they directly hold real estate situated in Switzerland. A regime for pension fund investors in Alternative Investment Funds. collective investment scheme directly holding real estate situated A number of double taxation treaties do, however, allow for a full in Switzerland may nevertheless be tax-exempt for the purposes withholding tax refund for taxes paid on dividends to a pension fund. of corporate income tax if its investors consist exclusively of tax- Furthermore, a collective investment scheme whose investors consist exempt occupational pension institutions). exclusively of tax-exempt domestic occupational pension institutions Distributions made by Swiss collective investment schemes may apply for the declaration procedure for the purposes of the are subject to withholding tax at a 35 per cent rate, unless they withholding tax. Certain foreign occupational pension institutions correspond to distributions of capital gains or income realised from are considered tax-exempt investors for transfer stamp duty purposes. real estate held directly by the fund. Swiss investors may claim Switzerland the refund of withholding tax if they declare the income in their 6.5 Is it necessary or advisable to obtain a tax ruling from tax return or account for it in their financial statements. Foreign the tax or regulatory authorities prior to establishing investors may qualify for an exemption from Swiss withholding an Alternative Investment Fund? tax under the so-called affidavit procedure (exemption provided for by Swiss internal law irrespective of the applicability of a treaty). The laws and regulations applicable to Swiss collective investment This requires that more than 80 per cent of the Swiss collective schemes are clear. Thus, it is generally not necessary to obtain a tax investment scheme’s assets are from a non-Swiss source and ruling as regards the Alternative Investment Fund itself. This being that the investors demonstrate (typically via their bank) that they said, when an entire structure is set up, including an asset manager are not Swiss residents. Foreign-resident investors may further in Switzerland with Alternative Investment Funds located offshore, qualify for a partial or total exemption from Swiss withholding tax under a double taxation treaty existing between their country of then it is market practice to require rulings from the competent local residence and Switzerland. The relief is typically granted by way of tax authorities in respect mainly, but not exclusively, of the allocation reimbursement rather than by way of exemption. of profits between the different entities of the structure (i.e. asset manager in Switzerland, manager offshore, and investment funds). SICAF and investment companies that are incorporated as a Swiss Furthermore, when dealing with private equity or hedge funds, tax corporation not regulated under the CISA (see question 1.1) are rulings may be necessary to confirm the tax treatment of the carried taxed as corporate entities and hence subject to corporate income interest or performance fees. In this respect, the practice of the tax tax and tax on net equity. In addition, their distributions are subject authorities may vary widely from one Swiss canton to another. to withholding tax at a 35 per cent rate. In light of developments regarding the spontaneous exchange of information in tax matters, such a ruling may be subject to a 6.2 What is the tax treatment of the principal forms of spontaneous exchange of information with the tax authorities of investment manager / adviser identified in question 2.3? countries of residence of entities involved in the structure and the country of residence of the ultimate shareholder of the structure. Swiss investment managers/advisers are subject to corporate income tax at federal, cantonal and communal levels on their net profit as 6.6 What steps have been or are being taken to implement accounted for in the statutory financial statements and, as the case the US Foreign Account and Tax Compliance Act may be, adjusted for tax purposes. They may also be subject to tax 2010 (FATCA) and other similar information reporting on their net equity at cantonal and communal levels. There is no regimes such as the Common Reporting Standard? special tax status available for investment managers/advisers. Switzerland has entered into a FATCA inter-governmental agreement (“IGA”). This Swiss IGA follows the Model 2 IGA. Accordingly, a 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an Swiss Financial Institution (as such term is defined in the Swiss IGA) Alternative Investment Fund or the transfer of the is required to register with the US Internal Revenue Service (“IRS”) investor’s interest? and enter into a Foreign Financial Institution (“FFI”) agreement. Under the Swiss IGA, the Reporting Swiss Financial Institution Liability for issuance stamp duty does not generally arise on the will report its US-related accounts directly to the IRS. Further, it issuance and redemption of Swiss collective investment scheme should be noted that the Swiss IGA provides for certain exemptions shares/units. However, the issuance of shares of a SICAF or any with respect to Swiss collective investment schemes. The Swiss other investment company in the form of a Swiss corporation (see IGA, as well as the Swiss Federal Act on the Implementation of question 1.1) is subject to the Swiss issuance stamp duty. The the FATCA Agreement with the United States of America, entered discussion of the Swiss parliament on the proposal to abolish the into force on 30 June 2014 and non-compliance with the provision issuance stamp duty has been suspended. of the Act or the Swiss IGA may be sanctioned by a fine of up to Further, the transfer of shares/units in a Swiss collective investment CHF 250,000. Unlike most jurisdictions, which have entered into a scheme (irrespective of its legal form) is subject to a 0.15 per cent Model 1 type IGA, Switzerland has not issued any official guidance transfer stamp duty if a Swiss securities dealer (e.g. Swiss bank, notes regarding the implementation of the Swiss IGA. However, a Swiss broker-dealer, etc.) is involved in the transaction as a party committee known as the FATCA Qualification Committee, headed or an intermediary. by the State Secretariat for International Financial Matters (“SIF”) and consisting of representatives of the major financial industry associations including SFAMA, publishes a Q&A section in order 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative to provide some assistance regarding questions arising from the Investment Funds? implementation of the Swiss IGA. Switzerland has also created the necessary legal basis for the Non-resident investors financially suffer the withholding tax paid implementation of CRS. The national legislation entered into force by the fund, whereby such withholding tax may be recovered in full and data is being collected as of 1 January 2017.

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Certain collective investment schemes may qualify as non-reporting financial institutions. Additionally, for an automatic exchange of 7 Reforms information to actually take place, an international agreement between the respective countries is needed. Switzerland has entered 7.1 What reforms (if any) are proposed? into such agreements with various countries (i.a. the EU Member States, Japan, Canada and Australia). On 1 March 2013, the amended CISA entered into force. In addition to new rules for private placements of non-Swiss collective 6.7 What steps are being taken to implement the OECD’s investment schemes, the amended CISA aligns the Swiss regulatory Action Plan on Base Erosion and Profit-Shifting framework applicable to investment managers with international (BEPS), in particular Actions 6 and 7, insofar as they standards, in particular with the EU Directive on Alternative affect Alternative Investment Funds’ operations? Investment Fund Managers (“AIFMD”), by requiring all Swiss Switzerland investment managers of non-Swiss collective investment schemes Switzerland, as a member of the OECD, has actively participated in to obtain an authorisation from FINMA. However, as Switzerland the base erosion and profit-shifting (“BEPS”) project. The Federal is part of neither the EU nor the European Economic Area (“EEA”), Council has instructed the Federal Department of Finance (“FDF”) Swiss Alternative Investment Funds and Swiss Alternative to offer analyses and proposals in order to implement the outcomes. Investment Fund managers will not yet be able to benefit from the Currently, Switzerland is undergoing a third series of corporate EU passport rights provided for in the AIFMD and the respective tax reforms. These reforms address certain BEPS outcomes. In national implementing laws. As a last part of the amended CISA, particular, a patent (or royalty) box that complies with internationally on 1 January 2014, a new duty to keep documentary records entered accepted standards is to be introduced and internationally criticised into force. This new obligation applies when a distributor (including tax regimes are to be abolished. However, the Swiss voters rejected any third parties mandated by such distributor) of an Alternative the proposal in February 2017. The Federal Council charged the Investment Fund provides individual advice to an investor to FDF to draw up the substantive parameters for a new tax proposal buy units or shares in one or more Alternative Investment Funds. including the abolishment of special tax arrangements for status The documentary record must contain information on investment companies. The foreseen exchange of information on tax rulings objectives and the investor’s risk profile, as well as the reasons for requires a legal basis in Swiss law. Switzerland has ratified the making the specific personal recommendation. It should be noted multilateral administrative assistance convention of the Organisation that this new obligation does not, however, apply in cases where the for Economic Cooperation and Development (“OECD”)/Council relevant marketing activity is not considered distribution within the of Europe and put in place national legislation on this matter. meaning of the CISA (such as distribution of funds to supervised Additionally, the total revision of the Tax Administrative Assistance qualified investors). Ordinance (“TAAO”) entered into force on 1 January 2017. The The revision of the CISA and CISO led to the issuance of a new new ordinance defines the framework and the procedures required circular of the Swiss financial regulator, the FINMA Circular for the spontaneous exchange of information. The implementation “Distribution of Collective Investment Schemes” (FINMA-Circ. of country-by-country reports is also in need of legal foundations. 2013/9). The FINMA Circular entered into force on 1 October To this effect, the Federal Council adopted the dispatch on the 2013. In this context, on 22 May 2014 SFAMA issued its revised multilateral agreement on the exchange of country-by-country Distribution Guidelines as well as its revised Transparency reports and the federal act required for its implementation. Treaty Guidelines, which specify certain requirements regarding the abuse is combatted through the respective anti-abuse clauses in distribution of funds and investor information. The Guidelines have double taxation treaties. Switzerland will, in light of the OECD’s been recognised as a minimum standard by FINMA. This means work, make the necessary adjustments either multilaterally or that the Guidelines are of general application, regardless of SFAMA bilaterally where the new standard does not already apply. membership. The Guidelines entered into force on 1 July 2014 (see Regarding the other recommendations not part of the minimum question 3.2). standards, the Federal Council has charged the FDF to collaborate The Distribution Guidelines are applicable to fund promoters, in with the cantons and business circles to conduct further analysis particular to fund managers, SICAVs and Swiss Representatives on the amendment of Swiss corporate tax law in accordance with of foreign funds distributed in Switzerland. The Distribution international developments. Guidelines incorporate several provisions applicable to distributors (“Provisions for Distributors”). The Provisions for Distributors 6.8 Are there any tax-advantaged asset classes or must be incorporated in the distribution agreement entered into structures available? How widely are they deployed? between the foreign distributors and the Swiss representative. As of 1 July 2014, the Distribution Guidelines are applicable to all This is not applicable. distributors and representatives that started their activities after 1 March 2013. Existing distribution agreements had to be amended by 30 June 2015. 6.9 Are there any other material tax issues for investors, In substance, the Transparency Guidelines are applicable to Swiss managers, advisers or AIFs? representatives of foreign funds, and distributors (Swiss or foreign) of these funds in Switzerland. In particular, the Transparency This is not applicable. Guidelines apply to foreign funds distributed to qualified investors and non-qualified investors by their incorporation by reference in the 6.10 Are there any meaningful tax changes anticipated in distribution agreement entered into with the Swiss representative. the coming 12 months? Further, in November 2015, the Swiss Federal Council published a new law on financial services, inter alia, aimed at improving This is not applicable, besides the changes mentioned under question investor protection. Among the measures proposed are, inter 6.7 above. alia, the introduction of cross-sector rules of business conduct,

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the improvement of product documentation for clients and stricter rules for the cross-border distribution of financial products into Switzerland. The debate on this new law started in the Swiss Parliament in December 2016. The new law is expected to be approved by the Swiss Parliament in June 2018 and should enter into force in 2020, at the earliest.

Dr. François Rayroux Dr. Patrick Schleiffer Lenz & Staehelin Lenz & Staehelin Switzerland Route de Chêne 30 Brandschenkestrasse 24 CH-1211 Geneva 6 CH-8027 Zurich Switzerland Switzerland

Tel: +41 58 450 70 00 Tel: +41 58 450 80 00 Fax: +41 58 450 70 01 Fax: +41 58 450 80 01 Email: [email protected] Email: [email protected] URL: www.lenzstaehelin.com URL: www.lenzstaehelin.com

Dr. François Rayroux has been a partner with Lenz & Staehelin since Dr. Patrick Schleiffer has been a partner with Lenz & Staehelin since 1998. He is considered a leading lawyer in banking and financial 2002 and is co-head of the capital markets group in Zurich and services in Switzerland. As such, he has been nominated by various regarded as a leading expert on financial market law, particularly professional organisations as an expert in Switzerland in banking, capital markets, stock exchange and securities law, investment fund financial as well as capital markets law, including by Chambers in law, financial services regulation and corporate law and corporate 2016 as a leading individual in Investment Funds. François Rayroux governance matters. Patrick Schleiffer holds lic. iur. and Ph.D. degrees is the co-head of the Banking and Finance group of Lenz & Staehelin from the University of Zurich and an MCJ degree from the New York in Geneva. He advises a number of Swiss and international financial University School of Law. He was admitted to the Zurich Bar in 1995 institutions in all banking and regulatory matters, with a particular and to the New York Bar in 1997. Patrick Schleiffer is admitted as a focus on funds management and distribution as well as all types of recognised representative for the listing of securities on the SIX Swiss financial products; in particular, derivative instruments. François Exchange. He is a frequent speaker at professional conferences on Rayroux teaches investment funds law in professional organisations capital market and banking law topics. He is co-editor of the Swiss and is also a frequent speaker at professional conferences on banking internet-based law journal CapLaw and the newsletter editor of the and financial law issues. Securities Law Committee of the International Bar Association (IBA).

While Lenz & Staehelin is acknowledged by most as Switzerland’s leading law firm, its connections and expertise span the globe. With over 200 lawyers, its ability to innovate and adapt to the ever-changing complexities of legal and regulatory environments in Switzerland and beyond has attracted many of the world’s top corporations as well as private individuals. Continuity, stability and a pragmatic understanding of the big picture have all played a significant part in the firm’s development and success – and in its ability to attract the best young talent. Swiss-orientated but globally attuned, Lenz & Staehelin is rightly recognised in Switzerland and abroad as ‘The world’s Swiss law firm’.

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USA Heather Cruz

Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates Anna Rips

limited liability protections applicable to investors in such entities. 1 Regulatory Framework Delaware also has sophisticated court systems that are experienced in matters involving alternative entities, and the governing statutes 1.1 What legislation governs the establishment and generally support the principles of freedom of contract among operation of Alternative Investment Funds? sponsors, managers and investors to order their affairs as they wish. All of these factors make Delaware the most common choice for In the United States, Alternative Investment Funds and their U.S.-domiciled Alternative Investment Funds. advisers are subject to the laws of the federal government and of the individual state or jurisdiction in which the entities are incorporated, 1.2 Are managers or advisers to Alternative Investment doing business and/or selling securities. Funds required to be licensed, authorised or At the federal level, investment companies organised in and/or regulated by a regulatory body? operating in the United States, including Alternative Investment Funds, are generally subject to the jurisdiction of the Securities and Investment advisers to Alternative Investment Funds are subject Exchange Commission (“SEC”). The SEC’s jurisdiction comes to regulation by the SEC under the Advisers Act and by the state by way of the Investment Company Act of 1940, as amended securities regulators in the states in which the adviser conducts (“Investment Company Act”), which governs the activities of business. investment companies, and the Investment Advisers Act of 1940, In general, an adviser is required to register with the SEC if it has at as amended (“Advisers Act”), which governs the operations and least $110 million in assets under management (“AUM”), subject to activities of investment advisers. In addition, the offering and sale certain exemptions. Advisers with less than $110 million but more of interests in Alternative Investment Funds is regulated by the SEC than $100 million AUM may but are not required to register with the under the Securities Act of 1933 (“Securities Act”) and the Securities SEC. Advisers with less than $100 million in AUM are generally Exchange Act of 1934 (“Exchange Act”), and are also regulated by prohibited from registration with the SEC and instead must comply the Financial Industry Regulatory Authority (“FINRA”), a self- with the registration requirements of the states in which the adviser regulatory agency. conducts business. The state-level registration requirements and In addition, depending on the activities of the Alternative Investment exemptions vary on a state-by-state basis. Fund, other federal regulators may have jurisdiction over the Registering as an investment adviser with the SEC provides for pre- Alternative Investment Fund or its adviser. Alternative Investment emption from the various state registration requirements. However, Funds that invest in futures, options on futures, or swaps (other investment advisers that are exempt from registration with the SEC than certain security-based swaps) are subject to the jurisdiction of or are ineligible to register with the SEC based on their AUM may be the Commodity Futures Trading Commission (“CFTC”). Further, required to comply with multiple states’ investment adviser regimes. Alternative Investment Funds sponsored by banks or bank holding Generally, a non-U.S. adviser may register with the SEC regardless companies may also be subject to certain requirements under the of its AUM. Further, under the SEC’s “territorial” approach to federal banking laws and may be subject to the jurisdiction of Advisers Act jurisdiction, a non-U.S. adviser that is registered with the Board of Governors of the Federal Reserve System (“Federal the SEC is generally subject to the substantive requirements of the Reserve”). Alternative Investment Funds that trade or invest in Advisers Act only with respect to its U.S. clients. electricity are subject to regulation by the Federal Energy Regulatory In 2010, the Dodd-Frank Wall Street Reform and Consumer Commission (“FERC”). Protection Act (“Dodd-Frank Act”) revised the exemptions Most Alternative Investment Funds operating in the United States applicable to investment advisers in the United States. Prior to are formed as limited partnerships or limited liability companies the Dodd-Frank Act, many investment advisers were exempt from and are therefore subject to the laws of their state or jurisdiction both SEC and state registration by virtue of the “private adviser of incorporation. Alternative Investment Funds offered in the exemption”, which exempted any adviser that (i) had fewer than 15 United States may be formed either under the laws of a U.S. state clients during the course of the preceding 12 months, and (ii) neither or in a non-U.S. jurisdiction. Alternative Investment Funds that held itself out generally to the public as an investment adviser are domiciled in the United States are typically formed in the state nor acted as an investment adviser to any registered investment of Delaware, which offers well-established statutes governing company or business development company. The Dodd-Frank Act the formation and operation of alternative entities, including the eliminated the private adviser exemption and in its place introduced certain narrower exemptions, which are summarised below.

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1.2.1 Foreign Private Adviser Exemption pursuant to the Investment Company Act. However, most Alternative To be eligible for the Foreign Private Adviser Exemption, an adviser Investment Funds qualify for an exemption or exclusion from must: (i) have no place of business in the United States; (ii) have, registration under the Investment Company Act and therefore from in total, fewer than 15 clients (e.g., managed accounts or pooled most of its substantive requirements. Most Alternative Investment investment vehicles) and investors in the United States in private Funds are designed to qualify for the exclusions provided by funds advised by the investment adviser; (iii) have less than $25 Sections 3(c)(1) or 3(c)(7) of the Investment Company Act. Section million in aggregate assets under management that are attributable 3(c)(1) provides an exclusion for any fund whose securities are to clients in the United States and investors in the United States in beneficially owned by not more than 100 persons and which does not private funds advised by the investment adviser; and (iv) neither publicly offer its securities. Section 3(c)(7) provides an exclusion USA hold itself out generally to the public in the United States as an for any fund whose securities are owned exclusively by “qualified investment adviser nor act as an investment adviser to any registered purchasers”; i.e., purchasers who meet certain net worth/investor investment company or business development company. sophistication tests and who do not publicly offer their securities. Alternative Investment Funds that are exempt from registration are Advisers relying on the Foreign Private Adviser Exemption are not still subject to certain requirements under the Investment Company subject to reporting or recordkeeping provisions under the Advisers Act, such as anti-pyramiding requirements that limit investments in Act and are not subject to examination by the SEC. While this U.S.-registered investment companies. exemption is narrow in scope, the full exemption it provides from the Advisers Act is desirable for many non-U.S. investment advisers. Further, as described above, investment advisers to Alternative Investment Funds are regulated pursuant to the Advisers Act. When 1.2.2 Private Fund Adviser Exemption an adviser registers under the Advisers Act, the adviser is required to The Private Fund Adviser Exemption provides an exemption for report certain information about the adviser’s Alternative Investment investment advisers to private funds only with less than $150 million Funds to the SEC on both Form ADV (the SEC’s annual reporting in assets under management in the United States. For investment form, which is publicly available) and Form PF (a private fund advisers with their principal office and place of business outside the reporting form which is kept confidential by the SEC). The SEC United States, the exemption applies if (x) the investment adviser conducts periodic examinations of registered investment advisers has no client that is a U.S. person except for one or more private and exempt reporting advisers, and at such examinations the SEC 1 funds, and (y) all assets managed by the investment adviser at a may inspect records relating to any Alternative Investment Funds place of business in the U.S. are solely attributable to private fund advised by the investment adviser. assets, with a total value of less than $150 million. Advisers exempt under the Private Fund Adviser exemption are 1.4 Does the regulatory regime distinguish between subject to certain SEC reporting and recordkeeping requirements open-ended and closed-ended Alternative Investment with respect to their private funds. The “place of business” Funds (or otherwise differentiate between different requirement allows a non-U.S. adviser to manage an unlimited types of funds or strategies (e.g. private equity v amount of private fund assets from outside the United States, which hedge)) and if so how? allows many non-U.S. advisers to make use of the Private Fund Adviser Exemption. In general, the U.S. regulations do not distinguish between open- 1.2.3 Venture Capital Fund Adviser Exemption ended and closed-ended Alternative Investment Funds. The new private fund reporting regime on Form PF seeks different information The Venture Capital Fund Adviser Exemption exempts from for hedge funds (which generally allow redemption rights) and registration investment advisers that solely advise venture capital private equity funds (which generally do not allow redemption rights funds. The definition of “venture capital fund” is relatively narrow, in the ordinary course); however, this distinction does not impact the encompassing any private fund that: (i) holds no more than 20 operations or strategies of the funds. per cent of the fund’s capital commitments in non-qualifying investments as defined by the SEC (other than short-term holdings); (ii) does not borrow or otherwise incur leverage, other than limited 1.5 What does the authorisation process involve and how short-term borrowing (excluding certain guarantees); (iii) does not long does the process typically take? offer its investors redemption or other similar liquidity rights except in extraordinary circumstances; (iv) represents itself as pursuing a Unlike the securities laws in many other countries, U.S. federal venture capital strategy to its investors and prospective investors; securities laws do not provide for any suitability requirements, and (v) is not registered under the Investment Company Act and has capital requirements, or qualification requirements for owners and not elected to be treated as a business development company. key personnel of investment advisers. Rather than providing a Like the advisers exempt under the Private Fund Adviser Exemption, comprehensive regulatory regime, the Advisers Act provides for advisers exempt under the Venture Capital Fund Adviser Exemption disclosure requirements and imposes on advisers a broad fiduciary are subject to certain SEC reporting and recordkeeping requirements duty to act in the best interests of their clients. As a result, investors with respect to their private funds. have the responsibility to negotiate their own arrangements with investment advisers based on the disclosure they receive. Advisers relying on the Private Fund Adviser Exemption or the Venture Capital Fund Adviser Exemption are referred to as “exempt Investment advisers register with the SEC and with state securities reporting advisers” by the SEC, reflecting the fact that these regulators by filing Form ADV. Within 45 days of filing Form ADV, advisers are not registered but are subject to SEC reporting and the SEC must either grant registration or institute an administrative recordkeeping requirements. proceeding to determine if registration should be denied. Form ADV is publicly available and consists of the following parts: 1.3 Are Alternative Investment Funds themselves 1.5.1 Part 1A: this part requires information about the adviser’s required to be licensed, authorised or regulated by a business practices, ownership and employees in a “check-the- regulatory body? box” or “fill-in-the-blank” format, although certain sections and schedules require brief, narrative disclosure about various matters, including disciplinary events. It is filed electronically In the United States, Alternative Investment Funds are regulated with the SEC.

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1.5.2 Part 1B: this part requires additional information about certain Part 1A responses, as well as narrative disclosure with respect 1.8 What rules apply to foreign managers or advisers to disciplinary events. It is only completed by advisers wishing to manage, advise, or otherwise operate registered with one or more states and is filed electronically funds domiciled in your jurisdiction? with the states. 1.5.3 Part 2A: this part is known as the “brochure”. It requires The regulations discussed in the answer to question 1.1 above a narrative, plain English response to a number of specific will apply to any foreign manager or adviser wishing to manage, items, including a description of the business, fees and advise, or otherwise operate funds domiciled in the United States. compensation, disciplinary information, and key risk factors. Further, as stated in the answer to question 1.6 above, a non-U.S. It is filed electronically with the SEC and delivered to clients.

adviser registering with the SEC must consent to appointing the USA 1.5.4 Part 2B: this part is known as the “brochure supplement”. It Secretary of the SEC as such adviser’s agent for receiving service requires résumé-like information about certain personnel of of process. If the non-U.S. manager or adviser is operating a fund the adviser who provide advisory services to the particular domiciled in the U.S. that is investing in certain industries or assets client. The brochure supplement does not have to be filed that may implicate U.S. national security, the Committee on Foreign with the SEC for federally-registered advisers but must be Investment in the United States (“CFIUS”) could review those delivered to relevant clients of the adviser. transactions if they might result in control of a U.S. business by The SEC uses the information provided in Part 1 of Form ADV a foreign person. A portfolio company owned by a fund generally for regulatory purposes, including determining whether to approve would be deemed controlled by the non-U.S. manager or adviser to the registration of a new adviser. Part 2 of Form ADV includes such fund. information that must be provided to clients. Advisers must keep their Form ADV current by filing periodic amendments as long as they are registered. Amendments are required promptly in 1.9 What co-operation or information sharing agreements accordance with Form ADV instructions in the event that certain have been entered into with other governments or regulators? types of information become inaccurate (such as identifying information, custody information and disciplinary information), The United States government authorities have entered into a or certain other types of information become materially inaccurate memoranda of understanding with numerous governments and (such as information about successions, client transactions and regulators, including almost all EU countries in connection with control persons). Amendments are otherwise required at least the implementation of the AIFMD. The agreements underlying annually within 90 days of the adviser’s fiscal year-end. such MOUs vary country by country, and may permit on-site visits, sharing of information, and provision of other types of reciprocal 1.6 Are there local residence or other local qualification assistance among regulators party to each such MOU with respect requirements? to investment advisers, including investment advisers to Alternative Investment Funds. The SEC does not impose any local residence requirements for a registered adviser. However, as part of the registration process, a non-U.S. adviser registering with the SEC or with a state must 2 Fund Structures consent to appointing the Secretary of the SEC and/or the applicable Secretary of State as the adviser’s agent to receive service of process 2.1 What are the principal legal structures used for in the United States. Additionally, if an Alternative Investment Alternative Investment Funds? Fund or its investment adviser is domiciled in a particular state, that state may have similar requirements regarding the appointment of Alternative Investment Funds organised in the U.S. most commonly an agent for service of process. take the form of a limited partnership organised in Delaware. The Delaware limited partnership allows great flexibility in the terms 1.7 What service providers are required? governing the relationship between the sponsor, as general partner, and the investors, as limited partners. Delaware has a relatively Alternative Investment Funds typically engage service providers well-developed body of law governing partnerships and experienced including accountants, auditors, administrators and custodians. One courts, and the resulting legal certainty together with the fact that or more prime brokers may be engaged as well, and the adviser will practitioners in major legal centres in the U.S. are likely to be familiar typically engage legal counsel with respect to the formation and with Delaware partnership law contribute to the general tendency offering of the Alternative Investment Fund. to use Delaware partnerships. The limited partnership form’s Most of these engagements are customary rather than required, prevalence among Alternative Investment Funds is attributable to although in certain cases the applicable laws will indirectly require the limited liability status it affords investors as limited partners, the use of certain service providers. For example, the Advisers Act the flow-through treatment it receives for U.S. federal and state requires that any registered adviser with custody of client funds or income tax purposes, and the operational efficiencies of capital securities take certain steps to safeguard those assets. These steps (as opposed to share) accounting. In general, a Delaware limited include maintaining the client funds and securities with a “qualified liability company offers equivalent advantages, but it remains a custodian” (which includes banks, broker-dealers, and certain non- less commonly used vehicle for Alternative Investment Funds U.S. financial institutions that customarily hold such assets separate due to the widespread familiarity with limited partnerships. In from their own). The qualified custodian may be the adviser or addition, limited liability companies may attract franchise taxes an affiliate thereof; although in such cases the adviser or affiliate in certain jurisdictions within the United States and are not treated is required to undergo an annual examination by an independent as transparent in certain non-U.S. jurisdictions for foreign tax and public accountant. treaty purposes. Delaware statutory trusts offer advantages similar to those of a limited partnership but also are not commonly used for Alternative Investment Funds.

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Alternative Investment Funds are often structured as a complex of through a seat on a limited partnership advisory board provided several pooled investment vehicles rather than one vehicle in order for in the partnership agreement will fall within this safe harbour. to accommodate the tax preferences of different types of investors Even if the limited partner’s conduct falls outside of the statute’s (and occasionally regulatory requirements and investors’ internal safe harbours, the limited partner will only be liable to persons policies). A common approach is to establish “parallel” or “mirror” transacting business with the limited partnership that reasonably funds that invest in a side-by-side manner. This allows the form and believed, based upon the limited partner’s conduct, that the limited the jurisdiction of the organisation to be varied according to investor partner is a general partner. The position under the limited liability type, the most common variation being to house non-US investors company statute in Delaware is slightly better because it does not within an entity located offshore in a tax-neutral jurisdiction such as contain an exception to the limited liability status of the members

USA the Cayman Islands. It also permits each parallel fund to structure of a limited liability company that is based on their participation in its holding of particular portfolio investments or categories of control or management, though in most cases this is unlikely to be investments in whatever manner is optimal for the investors in that critical given the extensive protections described above for limited parallel fund. For example, a parallel fund through which U.S. partners. tax-exempt investors or foreign investors invest may hold certain Note that the limited liability of limited partners and members of investments through corporations, real estate investment trusts limited liability companies described above relates to liability arising (“REITs”) or other vehicles that are non-transparent for tax in order from their status as such, and is not a general shield against liabilities to “block” income that might otherwise subject them directly to they may incur due to actions giving rise to any independent basis income tax or reporting requirements in the U.S. while choosing not for liability. Moreover, in the case of both the partnership and the to “block” for other investments. limited liability company, all amounts distributed to investors may The parallel fund structure is often used by private equity, real estate be clawed back in certain bankruptcy or fraudulent conveyance and other closed-ended funds likely to be holding investments large scenarios to pay partnership liabilities unless otherwise agreed enough and for long enough to warrant structuring their holdings on in the organisational document. In addition, courts may (though a case-by-case basis. Hedge funds, on the other hand, often opt to rarely) apply a doctrine similar to “piercing the corporate veil” in forego this flexibility in favour of a “master-feeder” or “spoke-and- the context of corporations to find limited partners or members hub” structure. In this structure, investors subscribe for interests liable for partnership or company debts or obligations in cases of in “feeder funds” that in turn all invest in one “master” fund that actual fraud. In no event would an investor be liable for more than holds all investments. Typically, U.S. taxable investors invest the amounts contributed by it and amounts distributed to it. in an onshore feeder and foreign and U.S. tax-exempt investors invest through a “blocker” vehicle classified as a corporation for 2.3 What are the principal legal structures used for U.S. tax purposes and organised in a tax-neutral jurisdiction. By managers and advisers of Alternative Investment making all investments through a master fund, the “master-feeder” Funds? structure avoids the need to rebalance holdings among parallel funds as investors subscribe and redeem, and the loss of flexibility Fund sponsors may control the Alternative Investment Fund is a small price to pay given that the volume and velocity of hedge and receive compensation solely through the general partner (or fund trading strategies tend to make it impractical to hold one equivalent governing body) of the fund vehicle. However, they often investment or group of investments through multiple structures, and choose to divide this role between the general partner and a separate the nature of assets held tends to reduce the need to structure for vehicle, usually called the “manager”. The manager, acting pursuant tax. Another potential advantage of the “master-feeder” structure to a management agreement with the Alternative Investment Fund, relates to “ERISA”, the U.S. federal regime protecting U.S. private manages the fund’s day-to-day operations, and often enters into pension fund investors. Many Alternative Investment Funds seek to transactions on behalf of the fund pursuant to a power of attorney. avoid the application of ERISA by assuring that the portion of their These services are provided in return for a fee, typically calculated equity held by private pension funds is not “significant” (generally as a percentage of commitments, capital contributed to the fund, net assumed to mean 25 per cent or more of any class of equity). By asset value of the fund or some combination thereof. The general assuring that all capital is invested through a master fund, the partner retains ultimate control of the management of the fund “master-feeder” structure opens up the possibility that, with certain delegated to the manager, and receives some share of the fund’s additional precautions, this test can be performed by reference to profit in the form of an allocation or distribution, commonly referred U.S. private pension fund investors’ indirect interest in the master to as an “incentive allocation”, “carried interest” or “promote”. The fund as opposed to applying this test to each feeder fund vehicle general partner often also serves as the vehicle through which the in which these investors invest directly. This is helpful because sponsor contributes capital to the fund. U.S. private pension fund investment will tend to be concentrated The decision to bifurcate the sponsor’s role and compensation in certain feeder fund vehicles, such as those established for U.S. as between the general partner and the manager results from the tax-exempt investors. interplay of various liability and tax considerations. A general partner of a fund organised as a partnership is likely to face greater 2.2 Please describe the limited liability of investors. exposure to liability than a manager providing services pursuant to contract due to the general partner’s unlimited liability for the debts The Delaware limited partnership statute provides that limited and obligations of the partnership, as well as the liabilities associated partners of Delaware limited partnerships are not liable for the with any duties and undertakings owed by the general partner to obligations of the partnership unless they participate in the control of limited partners (for example, the general partner owes a duty of the business of the partnership. The statute does not define control good faith and fair dealing to the limited partners under Delaware for this purpose but it provides numerous safe harbours, including law but does not owe a fiduciary duty to them under Delaware law that no limited partner will be deemed to “participate in the control if the partnership agreement so states). This fact will often lead of the business” solely by virtue of exercising or possessing the sponsors to seek to cordon off fund-specific liability by establishing rights granted to it under the partnership agreement. Accordingly, a separate general partner for each fund or fund complex, while for example, voting as a limited partner or exercising control maintaining one manager entity to provide common infrastructure

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such as employment and service provider contracts and ownership in the fund and reselling them through its distribution channels), of intellectual property. General partner liability also militates in transfers could result in disqualification of the fund’s offering from favour of compensating the sponsor uniquely through fee payments relying on an exemption from the otherwise applicable requirement to the manager. However, structuring compensation as an allocation to register issuances of securities with the SEC. Similarly, if the of fund profits to the general partner of the fund may allow the profits interests were issued outside of the United States in reliance on to retain their tax character in the hands of the sponsor, which profits the registration exemption under the SEC’s Regulation S, transfers may include capital gains and/or dividend income (recent legislation resulting in the interests coming to rest in the United States could generally requires a three-year holding period for the favourable result in disqualification from that exemption. In addition, the tax treatment of profit allocations consisting of capital gains). sponsor must ensure that transfers do not result in 2,000 or more

Moreover, the activities delegated to the manager may subject its investors holding interests in the fund in order to avoid a requirement USA fee income to state or local tax (for example, the Unincorporated to register the fund’s interests under the Exchange Act (the limit was Business Tax in New York City), and this provides the additional fewer than 500 until it was raised to 2,000 under the Jumpstart Our advantage of a profits allocation to the general partner. Business Startups Act (“JOBS Act”)). If the fund chooses to avoid The Delaware limited liability company is the form used most often registration and regulation as an investment company under the for general partners and managers. This form offers the benefits of Investment Company Act by relying on the Section 3(c)(1) exclusion the Delaware limited partnership referenced above under question described in question 1.3 above, it must also ensure that transfers 2.1, including the ability to elect pass-through tax treatment. do not result in the fund exceeding the 100 U.S. beneficial owners In addition, a limited liability company can be governed by a limitation of such exclusion. Otherwise, the fund would need to managing member or board of directors, which, unlike a general come within another investment company registration exemption partner, are not by virtue of their status exposed to liability for the available for funds, such as the exemption for funds whose investors entity’s debts and obligations. Certain sponsors still use an older are all “qualified purchasers” (generally, individuals owning $5 form of entity called a “subchapter S corporation”, which also offers million or more in investments, institutions owning and investing limited liability and pass-through tax treatment. However, this older on a discretionary basis $25 million or more in investments and form has generally fallen out of use because it imposes numerous directors, officers and certain other “knowledgeable employees” restrictions, including that only one class of stock may be issued and of the fund or its affiliates). Finally, depending on the precise the holders typically cannot be other entities or non-U.S. persons. circumstances of the fund, it may want to restrict transfers in order The limited liability company by contrast permits great variation to ensure that it avoids treatment as a “publicly traded partnership”, in the treatment of members, on an individual or class basis, both which could subject it to entity-level U.S. federal income taxation if as to governance and economic rights. For example, control may it is a U.S. entity or engaged in certain activities in the U.S. be given solely to senior management, and the share of profits and terms governing vesting of profits interests may easily be varied as 2.6 Are there any other limitations on a manager’s ability among members according to any number of criteria. If the general to manage its funds (e.g. diversification requirements, partner or manager entity will include non-U.S. persons, a Delaware asset stripping rules)? limited partnership is often preferable to a Delaware limited liability company due to the fact that the limited liability company is not Though there are no further limitations on a manager’s ability to treated as transparent in certain non-U.S. jurisdictions for foreign manage its funds under the Advisers Act or the Investment Company tax treaty purposes. Act, as discussed in the answer to question 4.2 below, there exists a range of federal and state regulatory functions with jurisdiction over a number of industries in which a fund may be making its 2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers investments (for example, investments in insurance companies or in open-ended or closed-ended funds? utility companies are subject to certain restrictions).

“Open-ended” in the United States is a term for registered investment 3 Marketing companies under the Investment Company Act. Alternative Investment Funds are not open-ended as they all restrict redemption to a greater or lesser degree varying from hedge-style (e.g., monthly) 3.1 What legislation governs the production and offering to private-equity-style (no redemptions absent special situations). of marketing materials? No restrictions are imposed by generally applicable law on the ability of sponsors of Alternative Investment Funds to restrict the Section 10(b), the general antifraud provision of the Exchange Act, liquidity of an investor’s interest in an Alternative Investment Fund permits the SEC to adopt rules that prohibit any “manipulative or by restricting frequency or volume of redemptions, withdrawals or deceptive device or contrivance” in connection with the purchase or transfers. sale of securities. Pursuant to such authority, the SEC adopted Rule Both hedge-style and private equity-style investment funds usually 10b-5, which generally prohibits the use of any “device, scheme, or do not permit transfers to unaffiliated parties without sponsor artifice to defraud”, and which creates liability for any misstatement consent on a case-by-case basis due, among other things, to the or omission of a material fact. Rule 10b-5 and the other Exchange need to assure compliance with the regulatory requirements noted Act antifraud rules have a broad scope of applicability, which directly below. encompasses the marketing of Alternative Investment Funds. Alternative Investment Fund marketing is also regulated by the Advisers Act, specifically the general antifraud provisions set forth 2.5 Are there any legislative restrictions on transfers of in Section 206 and the rules promulgated thereunder. The SEC has investors’ interests in Alternative Investment Funds? generated layers of additional Advisers Act marketing guidelines through various means, including no-action letters and enforcement If made in connection with an offering of interests as part of a actions against advisers. The Advisers Act regulations and the distribution (for example, by an underwriter purchasing interests additional guidelines articulated by the SEC collectively form a

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complex and non-intuitive framework of detailed requirements determinations, without in each case prominently disclosing the that extends across all aspects of Alternative Investment Fund limitations thereof and the difficulties with respect to its use; or (d) marketing. Care should be taken to avoid conflating the Advisers any statement to the effect that any report, analysis or other service Act regulations with the Exchange Act antifraud provisions. For will be furnished free or without charge, unless such materials or example, in contrast to Rule 10b-5, the Advisers Act regulations are services are entirely free and without any direct or indirect condition not limited to situations involving the purchase or sale of a security. or obligation. To the extent that an adviser’s communications with an investor Rule 206(4)-1 also prohibits an adviser from publishing, circulating are outside of the federal securities laws, they remain subject to or distributing any advertisement that contains any untrue statement, common-law and state securities law prohibitions against fraud. or which is otherwise false or misleading. The foregoing “catch-all” USA prohibition has generated various no-action letter interpretations 3.2 What are the key content requirements for marketing by the SEC, particularly in connection with the standards and materials, whether due to legal requirements or methodology for calculating and presenting past performance and customary practice? for the construction of model performance results. For example, in Clover Capital Management, Inc. (available October 28, 1986), one The communications of all advisers, whether or not they are registered of the most important no-action letters regarding advertisements, with the SEC, are subject to the general antifraud provisions of Section the SEC identified a wide range of specific practices that would be 206 of the Advisers Act, which prohibit advisers from engaging in any misleading with respect to the presentation of past performance, act, practice, or course of business which is fraudulent, deceptive or including, among other things: (a) failing to disclose the effect of manipulative. In addition, the Supreme Court in SEC v. Capital Gains material market or economic conditions on the results portrayed; Research Bureau, Inc. (75 U.S. 180, 186 (1963)) stated that an adviser, (b) failing to reflect the deduction of investment advisory fees, as a fiduciary, has “an affirmative duty of ‘utmost good faith, and full brokerage or other commissions, and any other expenses that a and fair disclosure of all material facts’, as well as ‘an affirmative client would have paid or actually paid; (c) suggesting or making obligation’ ‘to employ reasonable care to avoid misleading’... clients”. claims about the potential for profit without also disclosing The duty of full and fair disclosure is especially important when an the possibility of loss; and (d) failing to disclose any material adviser’s interests may conflict with those of its clients. An adviser is conditions, objectives, or investment strategies used to obtain the required to make appropriate disclosure to clients regarding any facts performance advertised. In Clover, the SEC also stated that several that may affect the adviser’s independence, including situations that practices would be misleading with respect to the presentation of involve a potential conflict of interest. An adviser may be found to model results, including, among other things, (i) failing to disclose have violated Section 206 in cases where the prohibited conduct was the limitations inherent in model results, and (ii) failing to disclose unintentional. if any of the securities or strategies reflected in a model portfolio do Advisers to Alternative Investment Funds are also subject to Rule not relate, or relate only partially, to the services currently offered 206(4)-8 of the Advisers Act, which defines fraud to include certain by the adviser. conduct not commonly considered fraudulent. Rule 206(4)(8) deems The standards set forth in Clover are just one part of a broader it to constitute a fraudulent, deceptive or manipulative act, practice set of guidelines created by the SEC to interpret the “catch-all” or course of business within the meaning of Section 206 for any provision and the other requirements of Rule 206(4)-1. Although registered or unregistered adviser to a pooled vehicle to (a) make a summary of the Rule 206(4)-1 guidelines is beyond the scope of any untrue statement of material fact, (b) omit to state a material this article, any adviser that is subject to the U.S. advertising rules fact necessary to make a statement not misleading, or (c) otherwise must become familiar with all aspects of the SEC’s requirements. engage in any other fraud on investors or prospective investors in In addition, advisers should be mindful that SEC no-action letters the pooled investment vehicle. The SEC does not have to establish generally advise that whether any particular advertisement is false scienter on the part of an adviser in order to bring an enforcement or misleading also depends on the facts and circumstances involved case specifically for fraud. Even an unintentional violation of the in its use, including: (i) the form as well as the content of the substantive provisions of Rule 206(4)-8 that occurs due to negligence advertisement; (ii) the implications or inferences drawn from the would be deemed to constitute fraud within the meaning of Section advertisement in its total context; and (iii) the sophistication of the 206. For example, if an adviser inadvertently and in good faith prospective client. neglected to include a material fact necessary to make its offering memorandum not misleading, the SEC could bring an enforcement Rule 206(4)-1(b) defines “advertisement” as including “any notice, case for fraud against the adviser under Rule 206(4)-8. circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any In addition to the foregoing antifraud provisions, Rule 206(4)-1 of publication or by radio or television, that offers: (1) any analysis, the Advisers Act specifically prohibits an adviser that is registered or required to be registered with the SEC from certain practices report, or publication concerning securities, or that is to be used in that the SEC considers to be misleading or likely to be misleading. making any determination as to when to buy or sell any security, Rule 206(4)-1 prohibits including in an advertisement any of the or which security to buy or sell; or (2) any graph, chart, formula, following: (a) direct or indirect references to a testimonial of any kind or other device to be used in making any determination as to when concerning the adviser or concerning any advice, analysis, report or to buy or sell any security, or which security to buy or sell; or (3) other service it has rendered; (b) direct or indirect references to past any other investment advisory service with regard to securities”. specific recommendations by the adviser that were or would have Any material that promotes advisory services for the purpose of been profitable to any person, unless the advertisement sets out or maintaining existing clients or soliciting potential clients to buy offers to furnish a detailed list of all recommendations made within those services will typically be considered an “advertisement”. the immediately preceding period of not less than one year, and Because of the broad definition of “advertisement”, advisers includes certain disclaimers; (c) any direct or indirect representation should exercise caution before making a determination that any that any graph, chart, formula or other device being offered: (i) can communication with existing or prospective clients falls outside of in and of itself determine which securities to buy or sell or when to the definition of advertisement and is not subject to the advertising buy or sell securities; or (ii) will assist any person in making such requirements under Rule 206(4)-1.

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also confirmed that an offering in the United States under amended 3.3 Do the marketing or legal documents need to be Rule 506 involving general solicitation or general advertising will registered with or approved by the local regulator? not prevent an issuer from conducting a concurrent offshore offering pursuant to Regulation S under the Securities Act. The SEC does not impose any requirements for registering or An unregistered offering by an Alternative Investment Fund that approval of the marketing documents of an Alternative Investment fails to comply with all aspects of the exemption from the Securities Fund. Nor does the SEC generally provide assistance to advisers Act’s registration requirements will generate rescission rights under in determining whether they are in compliance with the advertising state and federal law for each investor at the original purchase price. rules. However, during any SEC examination of a registered These rescission rights are exercisable at any time, regardless of adviser, the SEC will often request to view advertising materials USA performance, with the adviser potentially bearing the economic distributed by the adviser, along with documentation supporting the risks involved. claims made in the advertisements. In addition, any inconsistencies between an adviser’s advertising materials and its statements made in filings such as its Form ADV and Form PF are likely to attract the 3.5 Can Alternative Investment Funds be marketed to attention of the SEC. retail investors?

Alternative Investment Funds generally must be sold only to 3.4 What restrictions are there on marketing Alternative Investment Funds? “accredited investors” as defined under Regulation D in order to avoid being required to register under the Securities Act, subject to a 35-investor exception for non-accredited investors.2 The definition Securities sold in the United States (including interests in Alternative of “accredited investors” is discussed in question 3.6 below. Investment Funds) must be registered with the SEC absent an exemption from the registration requirements under the Securities Act. Interests in Alternative Investment Funds are typically sold in 3.6 What qualification requirements must be carried out the United States pursuant to an exemption from such requirements in relation to prospective investors? because registration would subject an Alternative Investment Fund to regulation under the Investment Company Act and to substantive As noted in the prior section, Alternative Investment Funds disclosure and reporting obligations. Alternative Investment Fund generally must be sold only to “accredited investors” in order to interests are sold either under the private placement exemption under avoid being required to register under the Securities Act, subject to a Section 4(2) of the Securities Act or the safe harbour thereunder 35 investor exception for non-accredited investors. An “accredited contained in Regulation D. Generally, to fall within either exemption investor” includes: an individual who either has a net worth (taken an adviser must adhere to the following requirements: (a) sales together with the net worth of any spouse) of $1 million,3 or in only to “accredited investors” as defined under Regulation D; (b) a the last two years has had either an annual income of $200,000 “reasonable belief” that its investors are accredited; (c) no general or a combined annual income (with spouse) of $300,000 and a solicitation through television, newspapers, the internet and the like; reasonable expectation of the same income level in the current (d) maintenance of records of all solicitations made in the U.S.; and year; a bank or other financial institution; a tax-exempt or other (e) no interviews or co-operation with the U.S. press or with press entity with assets in excess of $5 million; or any entity in which all likely to be directed into the U.S. The definition of “accredited such entities’ beneficial owners are accredited investors. As noted investors” is discussed in greater detail in question 3.6 below. previously, issuers wishing to avail themselves of the opportunity With the 2013 adoption of amendments to Rule 506 of Regulation under amended Rule 506 to make general solicitations and use D implementing certain components of the JOBS Act, Alternative general advertising must take “reasonable” steps to verify that Investment Funds gained the ability to employ general solicitations purchasers of their securities are accredited investors. Issuers who and general advertising to offer their securities without becoming do not make general solicitations and do not use general advertising subject to Securities Act registration requirements. However, only need to have a “reasonable belief” that all of their investors are in order to engage in such activities, an issuer is required to take accredited investors. “reasonable” steps to verify that purchasers of its securities are In addition, Alternative Investment Funds typically avail themselves accredited investors. Whether the steps taken by the issuer are of the exclusion from the definition of an “investment company” “reasonable” is determined based on the particular facts and contained in either Section 3(c)(1) or 3(c)(7) of the Investment circumstances of each offering and each purchaser. An issuer Company Act (Alternative Investment Funds operating under such making a general solicitation should retain records that document exclusions are referred to herein as “3(c)(1) funds” and “3(c)(7) the processes and procedures used to verify that all of its purchasers funds”, respectively). Alternative Investment Funds whose securities are accredited investors. To date, Alternative Investment Funds have (other than short-term paper) are beneficially owned by no more generally not availed themselves of the opportunity to make general than 100 persons are exempted from the definition of an investment solicitations and use general advertising. Most continue to abide by the pre-existing requirements prohibiting general solicitation. company under Section 3(c)(1). A “look-through” provision applies in determining the number of beneficial owners for purposes of In order to avoid registration as an “investment company” under Section 3(c)(1). In the case of a 3(c)(1) fund investor that itself is the Investment Company Act, Alternative Investment Funds both (i) a 10 per cent or greater owner of the voting securities of typically rely on one of the exclusions from the definition of an such 3(c)(1) fund, and (ii) a registered investment company, a 3(c) investment company provided by the Investment Company Act that (1) fund, a 3(c)(7) fund, or an owner that would have to register are discussed in question 3.6 below. While under the Investment were it organised under U.S. law, then the 3(c)(1) fund must “look Company Act these exclusions cannot be relied upon if an Alternative through” to such investor’s underlying security holders for the Investment Fund makes a public offering of its securities, the purposes of calculating its number of owners. In addition, a 3(c)(1) SEC takes the view that with the adoption of the amendments to fund must “look through” any investing entity that was formed for Rule 506, Alternative Investment Funds may now employ general the purpose of investing in the 3(c)(1) fund. It should also be noted solicitations and general advertisements without losing the private that under the Advisers Act a registered investment adviser may not fund exclusions under the Investment Company Act. The SEC has

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charge performance fees (typically measured based on the amount to remove the connection between political contributions to state of both realised and unrealised gains and losses) in connection with and local officials who may have influence over the awarding of an Alternative Investment Fund unless its investors are deemed to government and public pension investment advisory business (i.e., be “qualified clients” capable of bearing the risks associated with “pay-to-play” practices). This is accomplished by: performance fee arrangements. Qualified client status requires ■ prohibiting advisers from being compensated for investment that net worth or assets under management meet certain dollar advisory services provided to a state or local government thresholds that are generally higher than the thresholds required to entity for two years if covered employees of the firm make be an accredited investor. Accordingly, 3(c)(1) funds that charge political contributions to certain officials of that government performance fees must ensure that their investors are qualified entity;

USA clients in addition to being accredited investors. ■ prohibiting solicitation or coordination of political For an Alternative Investment Fund to qualify as a 3(c)(7) fund, each contributions to such officials or certain state or local party committees; investor must be a qualified purchaser or knowledgeable employee. Under the Investment Company Act, qualified purchasers include: ■ only allowing employees of the adviser and certain regulated entities to solicit investment advisory business from (a) any natural person that owns not less than $5 million in government entities; and “investments” (as defined by the SEC); (b) any company directly or indirectly owned entirely by two or more closely related natural ■ requiring advisers to maintain books and records relating to state and local government entity clients, political persons, their estates or foundations, charities, or trusts formed by or contributions, use of placement agents, and information for their benefit that owns not less than $5 million in “investments”; relating to covered employees. (c) any person, acting for its own account or the accounts of other qualified purchasers, that in the aggregate owns and invests ona Each state and many localities also have lobby laws that impose discretionary basis not less than $25 million in “investments”; (d) lobby registration and reporting requirements on persons who any other trust not formed for the specific purpose of acquiring contact certain public officials for the purpose of influencing the 3(c)(7) fund’s securities and as to which both the person with certain governmental decisions or actions. In addition to requiring investment discretion with respect to the trust and each of the registration for “traditional” lobbying activity such as lobbying contributors is a qualified purchaser under (a), (b) or (c) above; legislation and regulations, the majority of states and numerous (e) any person who received securities of a 3(c)(7) fund as a gift localities also require registration for procurement lobbying, or bequest, or due to an involuntary event (such as death, divorce including marketing to public bodies or attempting to influence any or legal separation) from a qualified purchaser; and (f) any entity other non-ministerial official action of the executive branch or any in which all beneficial owners of all securities issued are qualified of its agencies. purchasers. Section 3(c)(7) does not “look through” its investors, Each state also has its own gift laws regulating gifts, e.g., meals, provided that the investors were not formed for the purpose of entertainment, gift items, transportation, or lodging, given to its state making the investment. A 3(c)(7) fund may have an unlimited and/or local public officials. Also note that certain local jurisdictions number of investors without having to register under the Investment have their own separate gift laws. These laws vary depending on the Company Act. In practice, however, onshore 3(c)(7) funds typically jurisdiction, and tend to fall into four categories: jurisdictions which: stay below 499 total investors and offshore 3(c)(7) funds typically (1) absolutely ban gifts regardless of value; (2) impose dollar limits stay below 1,999 U.S. investors (with unlimited non-U.S. investors) on gifts – some are per occasion and some are per time period; (3) in order to remain within certain exemptions from Exchange Act prohibit gifts that may reasonably tend to influence an official; and (4) registration. only restrict gifts which may be problematic under a bribery standard.

3.7 Are there additional restrictions on marketing to 3.8 Are there any restrictions on the use of intermediaries public bodies such as government pension funds? to assist in the fundraising process?

Some jurisdictions have so-called “pay-to-play” laws which prohibit Section 3(a)(4) of the Exchange Act defines the term “broker” to a corporation from entering into business arrangements or contracts mean “any person engaged in the business of effecting transactions with certain governmental entities if the corporation, its PAC, its in securities for the accounts of others”. The Exchange Act further affiliates, and in many cases certain covered directors, employees, requires that brokers be registered as such with the SEC. In and their family members (such as spouses or children) make or addition, depending on various fact-based circumstances, brokers solicit political contributions in that jurisdiction.4 These bans on may have to register with the securities commissions of the states government contracting could last up to five years in some cases. In in which they are effecting transactions in securities. Accordingly, some jurisdictions, a contribution by a covered donor does not trigger when interests in an Alternative Investment Fund are sold, the a ban on government contracts but rather requires such contractor question should be asked whether the person selling such interests to report contributions made by its covered donors. Directors and in an Alternative Investment Fund is acting as a “broker” and should employees individually making or soliciting political contributions therefore be registered as such. can under many of these laws automatically trigger legal liability for However, Rule 3a4-1 under the Exchange Act provides a safe harbour, the company. Thus, to address these laws, a company will have to which deems certain partners, directors, officers, employees, and institute a policy pre-clearing or prohibiting director and employee other agents (collectively, “associated persons”) of an issuer not to contributions. The question is how broadly to apply such policy. be brokers. This exemption permits associated persons of an adviser Applying a ban on contributions too broadly can have implications to participate in the sale of the interests of an Alternative Investment under applicable labour laws. Fund provided that certain requirements are met, including, among Rule 206(4)-5 under the Advisers Act and the related recordkeeping others, that each person selling interests is not (a) subject to certain rules in Rule 204-2 provide one example of such a pay-to-play statutory disqualifications, (b) directly or indirectly compensated in restriction, in this case specifically restricting political activity by connection with sales of interests in an Alternative Investment Fund, investment advisers who do business with government entities, or (c) currently (and, with respect to certain employees, has not and the use of placement agents. The intent of Rule 206(4)-5 is recently been) associated with a registered broker. This exemption is

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relatively narrow and requires attention to the precise circumstances (iv) the banking entity is prohibited from entering into a surrounding the sale of the Alternative Investment Fund’s interests. relationship with any covered fund that would be a “covered For example, in order to comply with the exemption’s requirement transaction” under Federal Reserve Act Section 23A. Unlike that associated persons not be compensated in connection with Section 23A of the Federal Reserve Act, pursuant to which “covered transactions” are subject to limits and certain sales of the Alternative Investment Fund’s interests, an adviser that conditions and exemptions, the Volcker Rule prohibition is is contemplating a bonus for an associated person must consider absolute (subject to certain exemptions) and thus is frequently whether that bonus may be correlated with, or may even have the referred to as “Super 23A”; appearance of being correlated with, such associated person’s sales (v) the banking entity may not, directly or indirectly, guarantee, of the interests of the Alternative Investment Fund. assume, or otherwise insure the obligations or performance The safe harbour offered by Rule 3a4-1 is especially significant of the covered fund or of any covered fund in which such USA given that the use of a broker who should be, but is not, registered, covered fund invests; to sell interests of an Alternative Investment Fund can result in (vi) the fund, for corporate, marketing, promotional or other substantial sanctions for the broker, the Alternative Investment purposes, may not share the same name or a variation of Fund and its adviser. Such sanctions could include the granting the same name with the banking entity (or an affiliate or of rescission rights to investors, such that the relevant investors subsidiary thereof) and may not use the word “bank” in its may recoup the original price of their investment in an Alternative name; Investment Fund regardless of the current valuation of that holding. (vii) no director or employee of the banking entity may take an Practitioners sometimes encounter the claim that a person who ownership interest in the covered fund except for any director introduces a potential buyer of securities to an issuer is not engaged or employee who is directly engaged in providing investment in the business of effecting transactions in securities for the accounts advisory or other services to the covered fund; and of others and therefore is merely a “finder” who is not required to (viii) the banking entity must clearly and conspicuously disclose, in register as a broker. However, the circumstances in which a person writing, to any prospective and actual investor in the covered could be considered a “finder” are extremely rare because the concept fund certain enumerated disclosures and comply with any of a “finder” does not include the normal range of selling activities additional rules of the appropriate agencies designed to (e.g., discussions regarding an Alternative Investment Fund and the ensure that losses in such covered fund are borne solely by investors in the covered fund and not by the banking entity. delivery of an Alternative Investment Fund’s offering materials). Consequently, it is unusual to find a person who confines the scope of his activities in such a way as to meet the definition of a “finder”. As 4 Investments such, advisers must take precautions to ensure that paid sales agents are properly registered or actually exempt from registration. Rule 206(4)-3 under the Advisers Act prohibits an adviser that is 4.1 Are there any restrictions on the types of activities required to be registered under the Advisers Act from directly or that can be performed by Alternative Investment indirectly paying a cash fee to a solicitor with respect to solicitation Funds? arrangements unless certain additional conditions are met. Among the requirements is an agreement by the solicitor to provide the Limitation on Insider Trading client with a copy of the investment adviser’s Form ADV Part 2A Federal and state securities laws prohibit Alternative Investment and a separate written solicitor disclosure.5 Form ADV also requires Funds from trading securities – including equity and debt securities that an adviser disclose that it pays solicitation fees and describe the and derivative instruments – based on “inside information” or fee arrangements. “material, nonpublic information”. These laws also prohibit the distribution of inside information to others who may use that 3.9 Are there any restrictions on the participation in knowledge to trade securities (also known as “tipping”). Alternative Investment Funds by particular types of Information is material where there is a substantial likelihood that investors, such as financial institutions (whether as a reasonable investor would consider that information important in sponsors or investors)? making his or her investment decisions. Generally, this includes any information the disclosure of which may have a substantial effect The Volcker Rule, a provision of the Dodd-Frank Act, prohibits on the price of a company’s securities. No simple test exists to banking entities (including asset manager subsidiaries of such determine when information is material; assessments of materiality banking entities) from organising and offering, or investing in, involve a highly fact-specific inquiry. hedge funds or private equity funds. Despite the ban on investments in such funds, however, the Volcker Rule allows banking entities to Material information often relates to a company’s financial results continue to sponsor and invest in covered funds, subject to certain and operations, including, for example, dividend changes, earnings exemptions. results, changes in previously-released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, The primary exemption available to banking entities is the “permitted liquidity problems, and extraordinary management developments. funds exemption”. In order to qualify for the permitted funds exemption, a banking entity must satisfy the following conditions: Material information also may relate to the market for a company’s (i) the banking entity must provide bona fide trust, fiduciary, securities. Pre-publication information regarding reports to be investment advisory or commodity trading advisory services; published in the financial press also may be material. (ii) the fund must be organised and offered only in connection with Information is “public” when it has been disseminated broadly to the provision of bona fide trust, fiduciary, investment advisory, investors in the marketplace. For example, information is public after or commodity trading advisory services and only to persons it has become available to the general public through a public filing that are customers of such services of the banking entity; with the SEC or some other government agency, a news reporting (iii) the banking entity must limit (a) its ownership of the fund to service or publication of general circulation, and after sufficient time less than 3 per cent of the fund’s ownership interests, and (b) has passed so that the information has been disseminated widely. its aggregate ownership in all covered funds to less than 3 per cent of the banking entity’s Tier 1 capital;

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■ the Alternative Investment Fund’s depositor or principal 4.2 Are there any limitations on the types of investments underwriter must be a registered broker-dealer, or a person that can be included in an Alternative Investment controlled by a registered broker-dealer; and Fund’s portfolio whether for diversification reasons or ■ the purchase of Registered Fund shares must be made pursuant otherwise? to an arrangement whereby the Alternative Investment Fund is required to vote all proxies: (i) in accordance with Generally, advisers advising Alternative Investment Funds are the instructions of its security holders; or (ii) in the same obligated to cause such funds to invest in the types of investments that proportion as the vote of all other shareholders of the are consistent with such fund’s investment objective, as disclosed in Registered Fund. such fund’s offering materials. In addition, certain other restrictions USA Finally, Alternative Investment Funds may be permitted to invest on the types of investments that can be included in an Alternative in certain registered, exchange-traded funds (“ETFs”) beyond the 3 Investment Fund’s portfolio apply, as discussed below. per cent aggregate limit established by Section 12(d)(1). The ETF, Investments in Regulated Industries however, must have obtained an exemptive order from the SEC that A variety of federal and state laws place limits on ownership of the specifically permits investments above 3 per cent by Alternative securities of certain companies. Most of these federal and state Investment Funds, and an Alternative Investment Fund’s investment laws apply to companies in highly regulated industries. The laws in the ETF must meet all terms and conditions contained in the order. are designed to prevent a single person or group from acquiring an Short Sales influential or controlling position in a company. These laws may Short selling involves selling securities that may or may not be require prior consent of a regulator before the securities can be owned by the seller and borrowing the same securities for delivery to purchased, and, for purposes of determining ownership or control, the purchaser, with an obligation to replace the borrowed securities an investment adviser may be required to aggregate the holdings of at a later date. “Naked” short selling generally refers to a practice all accounts over which it exercises investment discretion along with whereby securities are sold short without the seller’s owning or any proprietary accounts and accounts of its principals. Some of the having borrowed the requisite securities and therefore may result types of issuers where applicable laws place restrictions include: in a “failure to deliver”. Short selling allows the investor to profit ■ public utility companies or public utility holding companies; from declines in securities prices. A short sale creates the risk of ■ bank holding companies; a theoretically unlimited loss, in that the price of the underlying ■ owners of broadcast licences, airlines, railroads, water security could theoretically increase without limit, thus increasing carriers and trucking concerns; the cost to the Fund of buying those securities to cover the short ■ casinos and gaming businesses; position. There can be no assurance that the security necessary to ■ defence-related industries, including CFIUS review of cover a short position will be available for purchase. Consequently, transactions that could result in control of a U.S. business by certain market participants could accumulate such securities in a foreign person; a “short squeeze”, which would reduce the available supply, and ■ insurance companies; and thus increase the cost, of such securities. Purchasing securities to close out the short position could itself cause the price of the ■ public service companies (such as those providing gas, securities to rise further, thereby exacerbating the loss. In order to electric or telephone services). reduce “failures to deliver” and address certain concerns and abuses In addition, the Hart-Scott-Rodino Anti-Trust Improvements Act associated with naked short selling, the SEC adopted Rule 203(b) of 1976 (the “HSR Act”) places notification requirements and of Regulation SHO under the Exchange Act to limit the ability waiting periods before transactions subject to the HSR Act may of a broker or dealer to accept short sale orders unless the person be consummated. The HSR Act is intended to address antitrust entering the order, e.g., the Firm, has already arranged to borrow the concerns, and the notification and waiting periods are designed security necessary to cover the position or has reasonable grounds to allow government officials to review and approve certain to believe the security can be borrowed in time to meet the delivery transactions. The HSR Act’s requirements may be triggered by the date. Additionally, Rule 201 of Regulation SHO (the “circuit proposed acquisition of voting securities and assets of the acquired breaker” rule) limits the ability to execute orders on short sales on person having an aggregate value of $50 million (as adjusted). Such certain securities that are not marked “short exempt” (within the an acquisition, however, would be exempt from these requirements meaning of Rule 200(g) of Regulation SHO) and that have declined of the HSR Act if the acquisition were for investment purposes only in value by 10 per cent or more from the prior day’s closing price. and if, as a result of such acquisition, the acquirer would hold 10 per cent or less of the issuer’s outstanding voting securities. SEC Rule 105 of Regulation M under the Exchange Act (“Rule 105”) prohibits any “person” from purchasing from a secondary Investments in Registered Funds offering of equity securities for cash if the person has effected a Although Alternative Investment Funds are not registered under short sale in such security during the “Rule 105 Restricted Period”, the Investment Company Act, they are nevertheless subject to the that is, the shorter period beginning: (i) five business days prior to restrictions of Sections 12(d)(1)(A)(i) and (B)(i) of that Act. These the pricing of the offered securities; or (ii) with the initial filing of provisions require that any Alternative Investment Fund and any the registration statement or other offering document with the SEC entity controlled by the Alternative Investment Fund, may not own, and, in each case, ending with the pricing of the offered securities. in the aggregate, more than 3 per cent of the total outstanding voting Generally, all Alternative Investment Funds managed by a single securities of any registered open-ended or closed-ended investment adviser would be treated collectively as a “person” for the purposes company (each, a “Registered Fund”), including money market of Rule 105, unless formal information barriers are adopted that funds. The 3 per cent limit is measured at the time of investment. prevent coordination of trading and sharing of information between Alternative Investment Funds that invest all of their assets (other than portfolio managers of different Alternative Investment Funds cash) in a Registered Fund pursuant to a master-feeder arrangement, directly or indirectly. however, are not subject to the restrictions of Section 12(d)(1), Further, another possible exception is the “bona fide purchase” provided that the following conditions are met: exception, as defined in Rule 105.

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■ Large private fund advisers. This includes any adviser with: 4.3 Are there any restrictions on borrowing by the ■ $1 billion or more in liquidity and registered money Alternative Investment Fund? market fund assets under management, which must file Form PF quarterly, within 60 days of the end of each fiscal There are no restrictions on borrowing by the Alternative Investment quarter. Funds but the leverage and its attendant risks must be disclosed in ■ $1.5 billion or more in hedge fund assets under the fund’s offering materials. management, which must file Form PF quarterly, within 15 days of the end of each fiscal quarter. ■ $2 billion or more in private equity fund assets under

5 Disclosure of Information USA management, which must file Form PF annually, within 120 days of the end of the fiscal year. 5.1 What public disclosure must the Alternative These investment advisers must include more detailed information Investment Fund or its manager make? than smaller investment advisers. The reporting focuses on the following types of private funds that the investment adviser manages: An Alternative Investment Fund that relies on the exemptions ■ Hedge Funds. Large hedge fund advisers must report on from registration under Regulation D of the Securities Act to offer an aggregated basis (and not on a position-level basis) its interests must file a Form D at the time of the first closing of information regarding exposures and turnover by asset class such fund in which U.S. investors participate and must amend it and geographical concentration. In addition, for each managed annually for so long as the fund continues to offer its interests. hedge fund having a net asset value of at least $500 million, Form D requires disclosure of certain information about the fund, these advisers must report certain information relating to that including: the identity of the issuer’s executive officers, directors, fund’s exposures, leverage, risk profile and liquidity. promoters and other related persons; the amounts sold; and any sales ■ Liquidity Funds. Large liquidity fund advisers must provide commissions paid. Filed Forms D are publicly available online. information on the types of assets in each of their liquidity Furthermore, Alternative Investment Funds are subject to similar fund’s portfolios, certain information relevant to the risk profiles of the funds and the extent to which a fund has a policy filings with states under Blue Sky Laws. of complying with all or certain aspects of the Investment Alternative Investment Funds and their advisers must make certain Company Act’s principal rule concerning registered money public filings, including, but not limited to, the following: market funds (Rule 2a-7). ■ SEC Reporting on Ownership of Equity Securities. The ■ Private Equity Funds. Large private equity fund advisers Securities Exchange Act requires any person who, directly or must respond to questions focusing primarily on the extent of indirectly, acquires more than 5 per cent of any class of shares leverage incurred by their funds’ portfolio companies, the use of a domestic public company to file a report with the SEC of bridge financing and their funds’ investments in financial within 10 days of such acquisitions. Additional reporting is institutions. required if a person acquires more than 10 per cent of the ■ Smaller private fund advisers. This includes all other private shares of a U.S. public company. advisers that are not considered large private fund advisers. ■ SEC Portfolio Reporting. Any institutional investment These investment advisers must file Form PF annually within manager with investment discretion over $100 million or 120 days of the end of the fiscal year and report only basic more in equity securities at the end of a calendar year must information regarding the private funds they advise. This file quarterly reports with the SEC containing position includes information regarding size, leverage, credit providers, information about the equity securities under the discretion of investor types and concentration and fund performance and, the fund manager, and the type of voting authority exercised additionally for hedge funds, fund strategy, counterparty by the fund manager. credit risk and use of trading and clearing mechanisms. ■ Filings with the Internal Revenue Service. ■ Form ADV, the form used by investment advisers to register 5.2 What are the reporting requirements in relation to with the SEC, which requires certain disclosure about: Alternative Investment Funds or their managers? ■ the types of services offered by an investment adviser; ■ the adviser’s fee schedule; See question 5.1 above. ■ disciplinary information relevant to the adviser or its employees; 5.3 Is the use of side letters restricted? ■ conflicts of interest; ■ the educational and business background of management There are no outright restrictions on the use of side letters. However, and key advisory personnel of the adviser; and advisers to Alternative Investment Funds are subject to fiduciary ■ certain information regarding each Alternative Investment duties under Section 206 of the Advisers Act and Rule 206(4)-8 Fund managed by the adviser, including each fund’s under the Advisers Act, which prohibit an adviser from making false gross asset value, number and nature of beneficial or misleading statements of material fact to current and prospective owners, minimum investment or commitment amount, investors or engaging in other fraudulent conduct with respect to and information pertaining to such fund’s auditors, prime a fund’s investors. Therefore, to the extent side letters provide brokers, custodians and administrators. investors with preferential terms that may have an adverse effect on In addition, the SEC has adopted substantial reporting obligations other investors in the Alternative Investment Fund, the Alternative with respect to Private Investment Funds under Form PF. Investment Fund should make the disclosures reasonably necessary Under these rules, only SEC-registered private fund advisers with to give other investors the ability to assess the impact of such side at least $150 million in private fund assets under management must letters on their investment, if any. Such preferential terms include file Form PF. Within this group, private fund advisers are divided any modifications to the voting or control rights, preferential liquidity by size into the following two broad groups with different reporting rights, and terms that materially alter the investment programme. requirements: In addition, to the extent an Alternative Investment Fund agrees to

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provide any additional material information to an investor pursuant passive foreign investment company (“PFIC”) rules (or potentially to a side letter, such Alternative Investment Fund should take steps the CFC rules if the U.S. investor owns a significant interest (at least to disclose such information to all investors simultaneously. 10 per cent) of the fund). (Although PFIC tax treatment is similar to that of a partnership, certain differences may be important, including that losses do not flow through to investors and expenses of the fund 6 Taxation are not subject to the miscellaneous itemised deduction limitations that apply to U.S. taxable individual investors. CFC tax treatment is similar except the investor generally loses the potential for long- 6.1 What is the tax treatment of the principal forms of Alternative Investment Funds identified in question term capital gain treatment, with the result that all income and gain USA 2.1? is taxable at ordinary income rates.) U.S. managers of investment funds with non-U.S. investors Most U.S.-sponsored private investment funds are classified typically take steps to ensure that fund investments qualify under as partnerships, which are transparent for U.S. federal income a safe harbour for trading in stocks or securities for the fund’s own tax purposes. If the fund will make significant non-U.S. equity account, which ensures that the fund will not be subject to tax in investments, forming the fund as a non-U.S. entity in a tax-neutral the U.S. despite the manager’s activities in the U.S. on behalf of jurisdiction, such as the Cayman Islands, minimises the likelihood the fund. Likewise, managers typically monitor investments to that the portfolio investments will be subject to the anti-deferral avoid taxation under the “FIRPTA” rules that can apply if the fund controlled foreign corporation (“CFC”) rules, which can require invests in U.S. real property (or entities holding substantial U.S. taxable U.S. investors to include their share of the portfolio company’s real property that constitute United States real property holding earnings in income in advance of the receipt of cash attributable to companies (“USRPHCs”)). These constraints may pose additional such income. Transparent tax treatment may be obtains for corporate considerations in structuring investments or sales of fund assets. For entities (such as Cayman limited companies) by filing a “check-the- example, investments in newly originated loans or debt instruments box” election with the IRS to elect partnership classification for U.S. may not qualify for the trading safe harbour. Likewise, investments federal income tax purposes. in USRPHCs would subject the fund to U.S. federal income tax and As noted above, in order to accommodate structures that take into reporting obligations unless the investment was in the form of debt account the tax considerations relevant to different categories of or 5 per cent or less of the equity of a publicly traded company. investors, private investment funds are often established with several Private investment funds with U.S. tax-exempt or non-U.S. “parallel” or “mirror” funds that invest in a side-by-side manner. investors often take additional steps to structure investments and This permits each parallel fund to structure its holding of particular sales of assets in a manner that avoids triggering U.S. tax for non- portfolio investments or categories of investments in the manner that U.S. and tax-exempt investors, as noted above. is optimal for the investors in that parallel fund. For example, certain U.S. tax-exempt investors are subject to U.S. federal income tax on 6.2 What is the tax treatment of the principal forms of “unrelated taxable business income”, which includes income treated investment manager / adviser identified in question as debt financed (“UBTI”). U.S. tax-exempt investors may invest in 2.3? a parallel fund that structures any investments that would give rise to UBTI through investments in corporations, real estate investment trusts U.S. sponsors typically form the fund investment manager/advisor (“REITS”) or other non-transparent entities that “block” income that as an entity classified as a partnership for U.S. federal income tax might subject them directly to income tax or reporting requirements in purposes, although some have recently considered incorporating the U.S. Similarly, a parallel fund established for non-U.S. investors in light of reduced corporates tax rates under the Tax Act (see will allow the fund to “block” any investments that would result in below). As noted above, the sponsors often form separate vehicles U.S. tax and reporting obligations for those investors if held on a flow- to serve as the manager and the fund general partner so that the through or transparent basis by making such investments through general partner is not subject to certain state or local franchise taxes corporations, REITS or other non-transparent entities. (such as the Unincorporated Business Tax in New York City) with Hedge funds, by contrast, often employ a “master-feeder” type of respect to the profits it receives in the form of a “carried interest” structure. In this structure, investors subscribe for interests in “feeder or “promote” from the fund. Under current U.S. federal income tax funds” that in turn all invest in one “master” fund that holds all law, profits allocated to the general partner from the fund (which investments. Typically, U.S. taxable investors invest in an onshore profits may include capital gains and/or dividend income) retain feeder that is classified as a partnership (and thus transparent) for their tax character when they flow through to the sponsor’s equity U.S. federal income tax purposes, while foreign and U.S. tax-exempt owners, except that, under carried interest provisions contained in investors invest through an offshore feeder classified as a non-U.S. U.S. tax legislation enacted in December, 2017, commonly known corporation for U.S. tax purposes and organised in a tax-neutral as the “Tax Cuts and Jobs Act” (the “Tax Act”), assets generally jurisdiction. The offshore feeder’s corporate classification “blocks” must be held for at least three years (as opposed to the usual 12 any UBTI that would result from leverage used by the master fund. months) in order for individuals to obtain long-term capital gains The feeder’s corporate status also ensures that the feeder, rather than treatment (subject to more favourable rates than ordinary income). the investors, would be subject to any U.S. tax reporting obligations The holder of a partnership interest generally recognises capital gain should they arise. upon a sale of his interest in the partnership (except to the extent The master fund is typically classified as a partnership for U.S. attributable to the value of certain inventory items). Thus, if the federal income tax purposes. If classified as a corporation, provided equity owners of the fund manager and fund general partner sell it is formed in a non-U.S. jurisdiction, the fund generally will not their interests in the manager and general partner entities, they be subject to entity-level tax in the U.S. so long as the fund is not would generally recognise capital gain on the sale. Although not treated as engaged in a U.S. trade or business in the U.S. as discussed completely clear, the Tax Act likely requires owners to have held below. U.S. taxable investors in the onshore feeder generally will their interests for at least three years in order to obtain long-term include their share of the fund’s income and gains in income on a capital gain treatment. current basis (much like the tax treatment of a partnership) under the

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The Tax Act significantly reduced the corporate tax rate – from the of the fund). (Although PFIC tax treatment is similar to that of previous maximum rate of 35 per cent to the new rate of 21 per a partnership, certain differences may be important, including that cent. The Tax Act also prohibits individuals from deducting state losses do not flow through to investors and expenses of the fund and local taxes but allows corporations to continue to deduct these are not subject to the miscellaneous itemised deduction limitations taxes, and the carried interest provisions described above do not that apply to U.S. taxable individual investors. CFC tax treatment apply to corporations. As a result, sponsors may consider the benefit is similar except the investor generally loses the potential for long- of forming the manager and/or advisor as a corporation. Dividends term capital gain treatment, with the result that all income and gain distributed from the corporation would be subject to a second-level is taxable at ordinary income rates.) of tax, however, and potential buyers generally prefer to acquire Non-U.S. Investors. Provided the fund is structured to ensure that assets in order to obtain a fair market value (stepped-up) tax basis non-U.S. investors are not treated as engaged in a U.S. trade or USA for the assets. As a result, it is likely that most manager/advisor business (including by way of their direct investment in a partnership entities will continue in pass-through form. or other transparent entity that is treated as so engaged) or subject Sponsors may utilise different and more complex structures where to state and local tax and that the fund’s investments are not subject key employees or other service providers are located in both U.S. to tax under FIRPTA, no U.S. federal income tax or reporting and non-U.S. jurisdictions. These structures may involve separate obligations should apply to a non-U.S. investor’s participation in, or vehicles for U.S. versus non-U.S. service providers and/or sub- sale or transfer of its interests in the fund. advisory agreements between the main fund advisor and sub-advisors Non-U.S. investors (or, in hedge fund master-feeder structures, the operating in different jurisdictions. Transfer pricing considerations offshore feeder fund) may be subject to U.S. withholding tax at are relevant to ensuring that the economic arrangements among the a 30 per cent rate on their share of interest, dividends, dividend- different vehicles, the advisor and the sub-advisors minimise the equivalents and other fixed or determinable annual or periodical likelihood of double taxation. (“FDAP”) income from sources within the U.S. Certain interest is exempt from this withholding tax. 6.3 Are there any establishment or transfer taxes levied Separately, under the Foreign Account Tax Compliance Act in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the (“FATCA”), certain foreign financial institutions, including most investor’s interest? investment funds and non-U.S. custodians (“FFIs”), will be subject to a 30 per cent withholding tax on U.S. source dividends, interest Provided the fund is structured to ensure that non-U.S. investors and certain other payments, and, starting in 2019, on the gross are not treated as engaged in a U.S. trade or business (including by proceeds from the sale of equity interests or debt issued by U.S. way of their direct investment in a partnership or other transparent issuers and possibly other payments, unless the institution enters into entity that is treated as so engaged) and that the fund’s investments an agreement with the U.S. Internal Revenue Service (the “IRS”) to are not subject to tax under FIRPTA, no U.S. federal income tax or report certain information regarding beneficial ownership by U.S. transfer tax generally applies to a non-U.S. investor’s participation persons and complies with other requirements (or, where the U.S. in, or sale or transfer of its interests in the fund. Likewise, U.S. has entered into an intergovernmental agreement with a relevant tax-exempt investors are not subject to U.S. federal income tax or jurisdiction (an “IGA”), the institution complies with requirements transfer tax provided that their investment is structured in a manner under the IGA, which will entail reporting information regarding that “blocks” UBTI (for example, investment in the offshore feeder beneficial ownership either to the IRS or the taxing authority in of a master-feeder hedge fund structure or investment in a parallel the relevant jurisdiction). A non-U.S. investor that is considered private investment fund that structures investment to prevent UBTI) to be an FFI under FATCA or a relevant IGA may be subject to U.S. and that an investor does not finance its investment in the fund with withholding tax unless it complies with applicable requirements. debt. Pension Fund Investors. U.S. state pension funds generally take Investors (or the fund itself) may be subject to certain U.S. the position that they are not subject to U.S. federal income tax, withholding taxes as described below. including with respect to UBTI. Non-U.S. pension funds are Typically, funds will endeavour to structure their investments so generally subject to the same consequences described above for that the fund is not treated as having a permanent establishment non-U.S. investors, except to the extent they qualify for the benefits in the jurisdiction by reason of its investments or activities in that of a treaty. Certain more favourable rules may apply to them if the jurisdiction. Non-U.S. jurisdictions may impose withholding or fund makes investments potentially subject to tax under FIRPTA. transfer taxes on the fund or fund investors.

6.5 Is it necessary or advisable to obtain a tax ruling from 6.4 What is the tax treatment of (a) resident, (b) non- the tax or regulatory authorities prior to establishing resident, and (c) pension fund investors in Alternative an Alternative Investment Fund? Investment Funds? No tax ruling is typically obtained in the U.S., although tax counsel U.S. Taxable Investors. Typically, U.S. taxable investors invest in a to private investment funds may render an opinion to the sponsor, fund vehicle that is classified as a partnership (and thus transparent) based on customary assumptions and representations from the for U.S. federal income tax purposes. U.S. taxable investors sponsor, on the expected U.S. federal income tax classification of generally will include their share of the fund’s income and gains the fund. in income on a current basis. If instead the fund is classified as a Funds may make certain non-U.S. investments in the form of corporation, U.S. taxable investors generally will include their share investments in special purpose vehicles in non-U.S. jurisdictions in of the fund’s income and gains in income on a current basis (much like the tax treatment of a partnership) under the passive foreign order to allow the funds to obtain the most efficient non-U.S. tax investment company (“PFIC”) rules (or potentially the CFC rules treatment of certain investments. In this case, it may be advisable if the U.S. investor owns a significant interest (at least 10 per cent) to seek a tax ruling from the relevant tax authorities confirming the intended tax treatment.

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With respect to Action 7 (permanent establishment status), the U.S. is 6.6 What steps have been or are being taken to implement reportedly awaiting completion of a report on the attribution of profits. the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting The U.S. has taken steps with respect to Action 13 (country-by- regimes such as the Common Reporting Standard? country (“CbC”) reporting), releasing final regulations requiring CbC reporting by U.S. parents of multi-national groups with annual Congress enacted FATCA as part of the HIRE Act in 2010 in order revenues of $850 billion. The Treasury and IRS based the regulations to stop U.S. taxpayers from evading U.S. taxes through undisclosed on the OECD model template for CbC reporting. The U.S. is offshore accounts and investments. FATCA requires foreign currently expected to enter into bilateral agreements providing for financial institutions – including most non-U.S. investment funds automatic exchange of CbC information. USA and other collective investment vehicles – to report information about the holdings of U.S. taxpayers or face 30 per cent withholding 6.8 Are there any tax-advantaged asset classes or on certain payments they receive. FATCA also imposes withholding structures available? How widely are they deployed? and reporting obligations on U.S. funds. The U.S. Treasury Department and IRS have finalised detailed Depending on the facts, certain entities may allow for tax-efficient regulations and forms necessary for FATCA compliance and investment in certain assets classes, such as real property in the continue to update online FATCA Questions & Answers (“Q&As”) case of REITs. Provided they distribute their income and gains to facilitate compliance through its internet web portal, which each to shareholders, REITs are not subject to U.S. federal income tax foreign financial institution must use to register and receive a global at the entity level. Likewise, certain trusts or other entities may intermediary identification number (“GIIN”) needed to evidence qualify for similar treatment, such as trusts classified as regulated FATCA compliance to payors. investment companies (“RIC”s) or real estate mortgage investment Meanwhile, local jurisdictions are implementing FATCA conduits (“REMIC”s). All of the foregoing are only suitable for through local regulations and guidance, as envisioned under certain asset classes (e.g., real property, mortgages) and favourable intergovernmental agreements (“IGAs”) with the U.S. The IGAs tax treatment requires compliance with a number of restrictions, address local law impediments, such as bank secrecy and data including asset composition, distribution and other requirements. protection laws, that would prevent institutions in those countries These types of structures tend to be less common due to their from fully complying with FATCA. heightened compliance and other restrictions. Finally, the OECD’s common reporting standard (“CRS”) for Automatic Exchange of Financial Account Information, modelled 6.9 Are there any other material tax issues for investors, on FATCA, has taken effect for many countries who have chosen managers, advisers or AIFs? to participate. Under the CRS, participating countries are able to obtain annual financial information from financial institutions in their The foregoing is a general summary of certain U.S. federal income jurisdictions and then automatically exchange that information with tax issues. A private investment fund may encounter other material their exchange partner countries. Many countries have taken steps to U.S. tax issues depending on the relevant facts and circumstances. translate the CRS into domestic law. The CRS supplements existing exchange of information arrangements (e.g. tax treaties and the OECD 6.10 Are there any meaningful tax changes anticipated in Multilateral Convention on Mutual Assistance in Tax Matters). the coming 12 months?

6.7 What steps are being taken to implement the OECD’s The recently enacted Tax Act represents the most significant Action Plan on Base Erosion and Profit-Shifting U.S. tax reform legislation since 1986. Among other things, the (BEPS), in particular Actions 6 and 7, insofar as they Tax Act reduced the maximum individual rates through 2025 and affect Alternative Investment Funds’ operations? permanently reduced the corporate rate (to 21 per cent from the previous 25 per cent); eliminated most itemised deductions for The U.S. has taken steps with respect to certain aspects of BEPS and individuals (including deductions for management and advisory is considering others. fees and state and local taxes), allowed a 20 per cent deduction for Specifically, with respect to Action 6 (prevention of treaty abuse), individuals’ share of certain types of U.S. business income earned the U.S. generally already satisfies the minimum standard through through pass-through entities (the “section 199A deduction”), limitation on benefits (“LOB”) articles in its tax treaties in force restricted deductions for business interest to an amount not to exceed or in treaties or protocols awaiting ratification and its anti-conduit 30 per cent of adjusted taxable income, disallowed deductions for rules. Certain treaties with LOB provisions (e.g., Poland and excess business losses from pass-through entities, imposed a one- Hungary) are stalled awaiting ratification in the U.S. Senate. In time transition tax on accumulated earnings of “specified foreign 2016, the Treasury Department released for comment a revised corporations” (generally, a non-U.S. corporation in which a U.S. U.S. Model Tax Convention on Income, used by Treasury as the person owns, directly or indirectly, including through attribution, a template when it negotiates tax treaties. The Treasury sought to 10 per cent interest), expanded the definition of “controlled foreign address issues arising from local tax regimes that provide for low corporation” for purposes of the CFC rules, imposed a new category rates of taxation in certain countries with respect to mobile income, of “subpart F” income for CFC shareholders (termed global such as royalties and interest. The Treasury stressed its concern intangible low-tax income or “GILTI”)), and made numerous other that taxpayers can easily shift such income across the globe through significant changes to the U.S. federal income tax law. Many aspects deductible payments that can erode the U.S. tax base. The draft of the Tax Act are uncertain, and the U.S. Treasury Department model is intended to prevent a taxpayer from utilising provisions in and IRS have published notices and are working on several sets of the tax treaty, combined with special tax regimes, to pay no or very proposed regulations to provide guidance in many of these areas, low tax in treaty partner countries. which they plan to release before the end of 2018.

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7 Reforms Endnotes

1. For these purposes, a “private fund” is any fund that would be 7.1 What reforms (if any) are proposed? an investment company under the Investment Company Act but for Sections 3(c)(1) or 3(c)(7) of that Act. The Dodd-Frank Act represented a significant change in the 2. Certain barriers to accepting non-accredited investors exist. regulatory regime governing Alternative Investment Funds and their Rule 506 requires that non-accredited investors have sufficient advisers. Prior to the Dodd-Frank Act, many investment advisers knowledge and experience in financial and business matters to Alternative Investment Funds were exempt from registration to make them capable of evaluating the merits and risks of under the Advisers Act and as a result did not have to comply with the prospective investment. Non-accredited investors are USA the reporting and compliance obligations that apply to registered unlikely to be “qualified clients” that are eligible to be charged performance fees. In addition, Alternative Investment Funds investment advisers. However, as a result of the Dodd-Frank Act’s that wish to avail themselves of the opportunity to make changes to the Advisers Act (described in question 1.2), nearly all general solicitations following the implementation of the advisers to Alternative Investment Funds that are offered or sold in amendments to Rule 506 of Regulation D will be unable to the United States are either required to be registered with the SEC accept non-accredited investors. (or state regulatory agencies) or are “exempt reporting advisers” and 3. Net worth calculation includes personal property and other required to file annual reports with the SEC. assets, provided that the value of the individual’s primary Additionally, the Dodd-Frank Act led to the creation of Form PF, residence, as well as the amount of indebtedness secured the SEC’s and CFTC’s systemic risk reporting form described in by the primary residence up to the fair market value of the question 1.3. Form PF requires registered investment advisers primary residence, is excluded, but (i) indebtedness secured with over $150 million in private fund assets under management to by the primary residence in excess of the value of the primary residence is considered a liability, and (ii) if the amount of report detailed portfolio-level information about the private funds indebtedness secured by the primary residence outstanding they advise. Unlike Form ADV, Form PF is a confidential form at the time of the individual’s purchase of the interests in an that is reported only to the SEC and CFTC, and may be shared with Alternative Investment Fund exceeds the amount outstanding other regulatory agencies and with Congress. The information 60 days before such time, other than as a result of the contained in Form PF is designed, among other things, to assist the acquisition of the primary residence, the amount of such U.S. financial regulators in their assessment of systemic risk in the excess is considered a liability. U.S. financial system. 4. Providing gifts and entertainment to public officials triggers These recent changes have increased the compliance obligations pay-to-play restrictions in some jurisdictions as well. Please applicable to advisers. They have also given the SEC a great deal also note that a number of states and entities have imposed more information about the Alternative Investment Funds industry restrictions or outright bans on investment advisers’ use of “placement agents” as intermediaries when contacting public in the United States. pension funds. Separately, the U.S. executive branch and members of the U.S. 5. The solicitor disclosure is required to include: (a) the name Congress have stated that U.S. federal tax reform is one of their of the solicitor; (b) the name of the adviser; (c) the nature top legislative priorities, including significant changes to taxation of the relationship between the solicitor and the adviser; (d) of business entities. There is substantial uncertainty as to the a statement that the solicitor will be compensated by the likelihood, timing and details of any such tax reform and the effect adviser for the referral; (e) the terms of such compensation of any potential tax reform on Alternative Investment Funds or their arrangement including a description of the fees paid or to be sponsors. paid to the solicitor; and (f) the amount that will be charged in addition to the investment advisory fee and the differential attributable to such a solicitor arrangement.

Acknowledgment The authors would like to acknowledge the assistance of their colleague Pamela Lawrence Endreny in the preparation of this chapter. Pamela is a Partner in Skadden’s Tax practice. Email: [email protected]

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Heather Cruz Anna Rips Skadden, Arps, Slate, Meagher & Flom LLP Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates and Affiliates 4 Times Square 4 Times Square New York, New York 10036 New York, New York 10036 USA USA

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Heather Cruz is a member of the firm’s Investment Management Anna Rips is a member of the firm’s Investment Management Group. She represents investment advisers and investment banks Group. She represents investment advisers in connection with the in connection with the structuring and distribution of U.S. and non- structuring and distribution of U.S. and international private offerings U.S. private investment products, including multi- and single-strategy of investment funds, including hedge funds, private equity funds hedge funds, private equity funds and hedge and private equity and hybrid funds, and in connection with managed accounts, funds funds of funds, including traditional private equity, credit and trading of one and investment advisory agreements. She also represents strategies, and infrastructure strategies. She also advises clients institutional investors in all aspects of their investments in private on the establishment, operation and sale of investment adviser and investment funds, managed accounts and investment advisers. Ms. broker-dealer businesses. Rips advises clients on related general corporate and regulatory matters, such as compliance with the U.S. Investment Advisers Act, With respect to private investment funds, Ms. Cruz advises clients on the U.S. Investment Company Act, and the rules and regulations of a broad spectrum of legal issues and considerations relating to the FINRA. establishment and operation of private investment funds marketed and operated on a global basis. She also represents institutional investors seeking to invest in private investment funds and in investment advisers. In addition, Ms. Cruz has extensive experience in providing regulatory advice to broker-dealers and investment advisers, including regarding compliance with various aspects of the Dodd-Frank Act, the U.S. Investment Advisers Act, the U.S. Investment Company Act and the rules and regulations of FINRA. When counselling these clients, she is often asked to conduct detailed reviews of their investment management, administrative and marketing operations and to assist in the development of policies and procedures intended to enable them to meet their fiduciary and other legal obligations.

Skadden is one of the world’s leading law firms, serving clients in every major financial centre with over 1,700 lawyers in 22 locations. Our strategically positioned offices across Europe, the U.S. and Asia allow us proximity to our clients and their operations. For almost 60 years Skadden has provided a wide array of legal services to the corporate, industrial, financial and governmental communities around the world. Wehave represented numerous governments, many of the largest banks, including virtually all of the leading investment banks, and the major insurance and financial services companies.

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