ICLG The International Comparative Legal Guide to: Alternative Investment Funds 2017

5th Edition

A practical cross-border insight into Alternative Investment Funds work

Published by Global Legal Group, in association with AIMA, with contributions from:

Andreas M. Sofocleous & Co LLC König Rebholz Zechberger Attorneys at Law Babbé LLP Lenz & Staehelin Bae, Kim & Lee LLC Maples and Calder Bonn & Schmitt McCarthy Tétrault LLP Brodies LLP Mori Hamada & Matsumoto Cadwalader, Wickersham & Taft LLP Skadden, Arps, Slate, Meagher & Flom LLP Cases & Lacambra and Affiliates Davis Polk & Wardwell LLP Taylors (in Association with Walkers) Dillon Eustace Travers Smith LLP FenXun Partners VdA Vieira de Almeida Ferraiuoli LLC WongPartnership LLP Horten Advokatpartnerselskab WTS Tax Legal Consulting Jones Day The International Comparative Legal Guide to: Alternative Investment Funds 2017

General Chapters:

1 How External Forces Will Shape Fund Terms – 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 3 Contributing Editor Stephen G. Sims, 3 Allocating Fees and Expenses: The SEC Is Paying Close Attention – Leor Landa & James H. R. Windels, Skadden, Arps, Slate, Davis Polk & Wardwell LLP 6 Meagher & Flom LLP and Affiliates 4 Bringing Foreign Investment Funds into Japan – Yasuzo Takeno & Fumiharu Hiromoto, Mori Hamada & Matsumoto 13 Sales Director Florjan Osmani Account Director Country Question and Answer Chapters: Oliver Smith 5 Andorra Cases & Lacambra: Miguel Cases 18 Sales Support Manager Paul Mochalski 6 Angola VdA Vieira de Almeida: Pedro Simões Coelho & Alexandre Norinho Oliveira 23 Sub Editor Nicholas Catlin 7 Bermuda Taylors (in Association with Walkers): Jonathan Betts & Ariane West 29 Senior Editors 8 British Virgin Islands Maples and Calder: Richard May & Heidi de Vries 37 Suzie Levy, Rachel Williams Chief Operating Officer 9 Canada McCarthy Tétrault LLP: Sean D. Sadler & Nigel P. J. Johnston 45 Dror Levy Group Consulting Editor 10 Cayman Islands Maples and Calder: Grant Dixon & Andrew Keast 52 Alan Falach 11 China FenXun Partners: Sue Liu 58 Publisher Rory Smith 12 Cyprus Andreas M. Sofocleous & Co LLC: Christina Sofocleous & Published by Antigoni Hadjiyianni 63 Global Legal Group Ltd. 59 Tanner Street 13 Denmark Horten Advokatpartnerselskab: Claus Bennetsen 69 London SE1 3PL, UK Tel: +44 20 7367 0720 14 England & Wales Travers Smith LLP: Jeremy Elmore & Emily Clark 76 Fax: +44 20 7407 5255 Email: [email protected] 15 France Jones Day: Florence Moulin & Guillaume Cavalin 85 URL: www.glgroup.co.uk GLG Cover Design 16 Germany WTS Tax Legal Consulting: Steffen Gnutzmann & Robert Welzel 91 F&F Studio Design 17 Guernsey Babbé LLP: Robert Varley & Chris Dye 98 GLG Cover Image Source iStockphoto 18 Ireland Dillon Eustace: Brian Kelliher & Sean Murray 104 Printed by Ashford Colour Press Ltd 19 Korea Bae, Kim & Lee LLC: Tongeun Kim & Dongwook Kang 113 June 2017 20 Liechtenstein König Rebholz Zechberger Attorneys at Law: Dr. Helene Rebholz 121 Copyright © 2017 Global Legal Group Ltd. 21 Luxembourg Bonn & Schmitt: Corinne Philippe & Amélie Thevenart 127 All rights reserved No photocopying 22 Mozambique VdA Vieira de Almeida: Pedro Simões Coelho & Carlos Filipe Couto 134 ISBN 978-1-911367-55-0 ISSN 2051-9613 23 Portugal VdA Vieira de Almeida: Pedro Simões Coelho & Manuel Simões de Carvalho 140

Strategic Partners 24 Puerto Rico Ferraiuoli LLC: Yarot T. Lafontaine-Torres & Alexis R. González-Pagani 149

25 Scotland Brodies LLP: Andrew Akintewe & Karen Fountain 160

26 Singapore WongPartnership LLP: Charlotte Sin 167

27 Spain Cases & Lacambra: Miguel Cases & Toni Barios 173

28 Switzerland Lenz & Staehelin: François Rayroux & Patrick Schleiffer 179

29 USA Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates: Heather Cruz & Anna Rips 187

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

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 EDITORIAL

Welcome to the fifth edition of The International Comparative Legal Guide to: Alternative Investment Funds. This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of Alternative Investment Funds laws and regulations. It is divided into two main sections: Four general chapters. These are designed to provide readers with an overview of key issues affecting Alternative Investment Funds, particularly from the perspective of a multi-jurisdictional transaction. Country question and answer chapters. These provide a broad overview of common issues in Alternative Investment Funds laws and regulations in 25 jurisdictions. All chapters are written by leading Alternative Investment Funds lawyers and industry specialists, and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editor Stephen G. Sims of Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates for his invaluable assistance. Global Legal Group hopes that you find this guide practical and interesting. The International Comparative Legal Guide series is also available online at www.iclg.com.

Alan Falach LL.M. Group Consulting Editor Global Legal Group [email protected] Chapter 1

How External Forces Will Shape Fund Terms Stephen G. Sims

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

The importance of world events in shaping political and economic also to think about making more structural changes to the ways in policies around the globe has, at least in peacetime, rarely been which they operate. One manager recently established a new fund higher. Brexit, President Trump, the rise of protectionism and to buy approximately €750m of assets then held in its existing fund, nationalism, the economic response to the global financial crisis and gave existing investors the ability to exit, or re-invest in the of 2008, sanctions, technological innovation, international co- new fund. In theory, this structure has something for everyone. operation on tax policies and targeting tax avoidance and evasion – Investors seeking cash can exit; investors seeking revenue streams to name but a few – have the ability to shape our futures. On a more can re-invest; and for the manager it can be possible to realise granular level, they may also bring about significant changes to performance fees in the old vehicle. The structure also potentially fund terms as managers and investors seek to respond to the unusual offers continuing investors a lower combination of management and challenges and upheavals to which these events give rise. performance fees for managing the now established assets acquired It seems clear that many Western voters blame free trade, and open by the new fund in order to match the fees to the risk profile of the borders, for the woes that they suffer. This is despite much research assets. In the example mentioned, the transaction was underwritten which suggests that the rise in technology is likely to be more to by a leading secondaries investor. blame. An increase in protectionism, and less open borders, seem the Other possibilities include exiting by way of an IPO (initial public likely result. As countries take sides on the regional disputes around offering), although while this sounds attractive in principle, the world, it is also possible that they will impose stricter ownership depending on the market it may only be possible to sell a significant and control limitations on investors who are from countries which majority stake and be locked in for a period after the offering, with are seen to be on the wrong side of the given dispute. the result that the IPO only offers a partial exit for the existing fund. This will lead to increased scrutiny of fund investors by both Addressing the issues on the way in, rather than on exit, a number of managers and regulators, particularly for those managers targeting firms have already begun raising longer-life funds in order to avoid investments in strategic sectors such as defence, telecoms and missing out on these sorts of opportunities. infrastructure. The presence of an investor who might cause the Of course, protectionism is not new. Many saw the European fund to require regulatory clearance prior to purchasing an asset is Union’s Alternative Investment Fund Managers Directive (AIFMD) likely to lead to sellers favouring other buyers who do not have that as being about protecting the EU’s fund managers from competition issue, or to managers seeking or strengthening rights to exclude as much as it was intended to protect the EU’s institutional investors investors from participating in certain investments, or to lessen from repeats of Madoff, Lehman Brothers, and the various banking their economic or voting rights in relation to certain portfolio scandals. investments. Managers offering co-investment opportunities may AIFMD, which introduced separate regimes for EU and non- also seek to differentiate between investors in terms of priority EU funds, gave EU funds an advantage by allowing them to be based on their actual or perceived acceptability to sellers and marketed throughout the EU with a single regulatory passport, while regulators. at the same time making it increasingly difficult for managers of The era of seemingly permanent low interest rates after the financial non-EU funds to market them in the EU, in particular in certain crisis has led to an increase in the relative attractiveness of private more restrictive jurisdictions. The upshot of this was to make equity as returns from other asset classes have lessened. At the Luxembourg and the Republic of Ireland, the EU’s premier same time, where managers have built up portfolios of stabilised, ‘onshore’ jurisdictions for establishing funds, increasingly attractive revenue-generating assets, particularly in the real estate space, for managers wishing to market to potential investors across a range investors are in many cases content to receive the income associated of EU jurisdictions. While the offshore jurisdictions have always with the investments rather than push for an exit, knowing that they been keen to ensure that their legal and regulatory regimes are up to may struggle to make similar returns if the cash is given back to date and flexible in order to preserve their attractiveness as locations them. The increase in competition from sovereign wealth funds, in which to site investment funds, the onshore jurisdictions have and large family offices, who are not constrained by the 10-year life now joined in. We have even seen the UK, which first considered of typical funds, but instead are able to hold assets for the longer partnership law reform in 2003, finally introduce legislation term, has also led existing managers to be wary of the potential updating its limited partnerships law. The changes should make the of such alternative investors to exploit their advantages in pricing UK a more attractive place to site funds, and given that the UK is potential acquisitions. The uncertainty around the globe has also host to the largest proportion of fund managers in the EU, it would led potential buyers to be cautious. In the round, these events have make sense to be able to keep the fund and its manager together in led managers to consider extending funds for one or two years, and a single location. No doubt the looming shadow of Brexit helped

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focus the government’s mind on the need to ensure that the UK is an As jurisdictions seek to make their vehicles more competitive, the attractive and competitive place to do business. This may, though, regulatory oversight that was ushered in in response to the 2008 create tensions between competing interests on the world stage. financial crisis may be inadvertently loosened.

Stephen G. Sims Greg Norman Skadden, Arps, Slate, Meagher & Flom LLP Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates and Affiliates 40 Bank Street, Canary Wharf 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 Sims is the European Practice Leader of Skadden’s Investment Greg Norman is an Associate in Skadden’s Investment Management Management Group. Mr. Sims has experience in investment Group. His practice includes advising fund managers and investors on management and funds formation, advising fund managers and the structuring, marketing, establishment and operation of investment investors on the structuring, establishment and operation of investment funds, especially private equity and hedge funds, as well as advising funds, especially private equity and real estate funds. His work involves: on associated regulatory issues and other in-house queries (such as fund formation and capital raising; fund-related mergers and acquisitions commercial and employment arrangements). His experience also at manager/group level and ongoing ‘house’ work; and secondary includes mergers and acquisitions of fund management businesses transactions in fund interests. and secondary transactions in fund interests. Mr. Norman is actively involved in a number of pro bono projects, including a project being Mr. Sims is recommended as a leading lawyer in Who’s Who Legal and set up in London to assist and represent victims of domestic violence. Chambers UK and he was also recommended as one of the top 40 lawyers under 40 in Financial News in 2013. He is the Senior Vice Chair of the IBA’s Private Funds Subcommittee.

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

Introduction Structural Evolution

The Subscription Credit Facility (each, a “Facility”) and related Last year was very muted in terms of structural evolution in the Fund Finance markets continued their expansion in 2016, extending Facility market. Frankly, very little changed. At the 7th Annual the long-standing industry trend. Mirroring our recent experience Global Fund Finance Symposium on March 14, 2017 in New both during and after the financial crisis, Facility credit performance York (the “2017 Global Conference”) hosted by the Fund Finance remained pristine, with no monetary defaults having become public Association (the “FFA”), panelists had to stretch a bit to come up last year. This chapter summarizes the key trends in the Facility and with concrete examples of how Facility structures evolved in the Fund Finance markets in 2016 and forecasts developments for the last year. For sure, from a Lender’s viewpoint, private equity fund coming year. (each, a “Fund”) limited partnership agreements (“Partnership Agreements”) continued to improve, which has led to a reduction in asset-level mitigants such as periodic clean downs or net asset value Credit Performance (“NAV”) floors. Facility borrowing bases (“Borrowing Bases”), while holding remarkably stubborn to the traditional Included To our knowledge, there were again no payment events of default Investor/Designated Investor structure (particularly in the United in the Facility or related Fund Finance markets in 2016. Similar States), have inched upward incrementally. Advance Rates moved to the past three years, we were not consulted on any funding slightly higher in the last year and concentration limits were relaxed delinquencies by limited partners (“Investors”) on their capital calls moderately, at least for high credit quality Investors. But these (“Capital Calls”), other than a few by high-net-worth Investors changes were really at the fringe; Facility structures remain quite (“HNW Investors”). This positive credit performance again consistent with where they have been in recent years. extended to our hybrid and asset-level facilities, which have ticked upward (slightly) as a percentage of our overall deal portfolio. Interestingly, we have for the first time been consulted on a pre- Industry Developments and Press Coverage default analysis for a Facility facing uncertainty as a result of real credit and liquidity deterioration of the key Investor. While the The Facility and Fund Finance markets and industry continue to details of this Facility are of course confidential, we are comfortable mature and 2016 was very active in this regard. Over 700 people that the underlying factual circumstances are highly unique and registered for the 2017 Global Conference, with 55 different market isolated and not reflective of any systemic issue or risk. participants formally sponsoring. Despite a major snow storm, over 400 people actually attended. The FFA also formed a Women in Fund Finance subgroup, which had a very successful inaugural Resilient Growth event in March in New York that was followed by a companion event in London the following week. The events included a Despite the Brexit vote and the unexpected result in the United States screening of the movie Equity and a discussion panel with several presidential election, 2016 was another healthy year for private of the producers and actresses in the film. Global Legal Group Ltd., equity generally and the Facility markets specifically. According the publisher of this Legal Guide, published the inaugural edition of to Preqin research, private capital raised in 2016 hovered around Global Legal Insights – Fund Finance 2017, a comprehensive legal the $600 billion mark for the fourth straight year and private equity guide on the Fund Finance markets. The guide includes 14 product- 1 dry powder climbed to an all-time high. Coupled with increased oriented chapters and 17 jurisdictional updates contributed by many interest and acceptance of the Facility product in the buyout and of the world’s preeminent Fund Finance law firms.2 Fund Finance venture capital asset classes, many of the major lending institutions has clearly matured from a product category into an industry in its in the market (each, a “Lender”) again report portfolio growth in own right. excess of 20% last year, exceeding our forecasts. While there are certain Lenders that have reached their institutional lending limits The Facility market was also covered more extensively in both for particular Fund sponsors (each, a “Sponsor”) and even for the mainstream and private equity press in 2016, sometimes fairly and Facility product itself (and even a small handful of Lenders that sometimes frankly in an alarmist and inflammatory way. On October exited the market in 2016), this self-imposed constraint has done 20, 2016, the Financial Times published an article about the Facility 3 little to slow industry-wide growth. market titled “Financing ‘trick’ boosts lucrative private equity fees”. While the article begins by quoting a professor who characterizes

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Facilities as a “trick” to enhance Sponsor fees, it does go on to provide pronounced. The number of Funds in the market is at an all- some balanced reporting, explaining that Facilities offer utility to both time high at 2,965.6 Cash distributions made to Investors in 2015 Funds and Investors and in actuality are unlikely to materially impact and 2016 again meaningfully exceeded Capital Calls, requiring Sponsor fees over the entirety of most Fund lifecycles. The article Investors to re-up with Funds at current or greater levels to maintain also goes somewhat astray paraphrasing another purported expert their asset allocations. As a result, we forecast a healthy 2016 for who indicated that Facilities could be adding “inappropriate leverage” Fund formation. Dry powder (i.e., Borrowing Base availability) into buyout transactions and that as a result, in the event of a financial again increased meaningfully in 2016. And interest rates have crisis, it could “force fund managers to sell their liquid equity and bond remained low and pricing margins have trended downward. We holdings first, exacerbating market instability”. Of course, Facilities also think there is additional market growth from new Sponsors; are not leverage at all in the traditional sense, in that they do not allow we continue to work on transactions for a Sponsor’s first Facility a Fund to invest a single dollar more than the Fund’s committed equity despite having multiple prior Funds. Thus, market growth, while capital from Investors. Further, with Facilities’ expected source perhaps somewhat more modest than that sustained in recent years, of repayment being Investor Capital Calls, suggesting Facilities is likely to exceed double digits once again in 2017. are likely to lead to forced liquidations of Investments also seems somewhat off the mark. Private Equity International also published two articles on Facilities early this Spring, both casting a somewhat Hot Button Issues negative light on Facilities from the vantage point of the Investor. Both articles, however, did note many of the benefits of Facilities as Two issues we see drawing increased attention in 2017 involve well and pointed out that many Investors are benefitted by, and are anti-terrorism provisions in Facility credit agreements and “Know supportive of, Facilities.4 Investment advisor TorreyCove Capital Your Customer” documentation and information requests. While Partners also recently published a thoughtful academic analysis of Lenders are optimistic that the new presidential administration in the Facility product, which provided mathematical examples of the the United States will be helpful at reducing or at least improving the interplay between Facility usage, IRR and Sponsor fees. This press regulatory environment generally, there is near universal agreement attention, while new to the Fund Finance market, is further evidence amongst Lenders that terrorism is one area where regulation is likely of the industry’s maturation. to intensify. As a result, virtually every Lender is closely examining their sanctions, anti-money laundering, anti-corruption and KYC policies and provisions. Updates are coming. And the combination 2017 Market Forecast of greater use by Funds of alternative investment vehicles with heightened KYC deliverables is likely to lengthen the new borrower From a Facility structural perspective, we expect evolution to onboarding process. continue to be limited to the margins in 2017. Credit performance of Facilities during the financial crisis validated current structures and Lenders have expended significant institutional resources the past Upcoming Events several years developing their Facility product programs and policies. We believe wholesale revisions and exceptions to these programs On June 19, 2017, the FFA is hosting the inaugural Asia-Pacific and policies are quite unlikely and thus, structural change will be Fund Finance Symposium at the Four Seasons Hotel in Hong Kong. incremental. Outside of the Facility space, we do note discussions in This will be the first industry-wide event held in Asia and it will be rd the market about Funds structuring NAV-based facilities in the form exciting to see the level of interest and attendance. The 3 Annual of preferred equity. While non-tenured leverage certainly has an European Fund Finance Symposium is scheduled for October 11, inherent appeal to Funds seeking to optimize their financing options, 2017, this year moving to a new venue, the Landmark Hotel in th we think this new product offering will only expand slowly in London. And the 8 Annual Global Fund Finance Symposium has 2017. Sponsors are highly focused (rightfully) on thorough Investor been scheduled for March 21, 2018, again at the Grand Hyatt Hotel 7 disclosure at present, and many older vintage Partnership Agreements in New York City. were of course unable to foresee this financing innovation. So while in many cases Sponsors may be comfortable going to Investors for Conclusion amendments to Partnership Agreements to permit the innovations, our expectation is that growth in this product segment has a longer The Facility market appears poised for another solid year in terms term horizon. One area where we do think NAV-based and hybrid of portfolio growth in 2017. While Facility structures have been structures are likely to grow significantly in the coming year is with trending ever so modestly in favor of Fund borrowers, we continue private debt Funds. Over the last few years, the number and size of to believe that the credit profile of market-structured Facility private debt Funds has grown significantly. And Investors are widely transactions forecasts well for Facility performance in the coming forecasted as likely to increase their allocations to debt Funds in year. 2017.5 This asset class is in many cases seen by Investors as entirely appropriate for traditional leverage, and the Fund’s strategy may simply require leverage to meet the expected return targets. Further, Endnotes levering at the Fund level makes complete sense for a debt Fund, as Investment-level financing is unlikely to be attractively available in 1. See Private Capital in 2017, Key Findings from the 2017 most cases. Further, debt, of all asset classes, is where Lenders are Preqin Global Alternatives Reports, Preqin, Christopher Elvin, Head of Private Equity Products, presentation at the 7th going to be the most comfortable (and most competent) adding NAV Annual Global Fund Finance Symposium on March 14, 2017 to a Borrowing Base. Hence, we have seen, and expect to continue in New York, New York (“Preqin FFA Presentation”), pages to see, growth in this area. 6 and 8. While we do expect the rate of Facility growth to slow in 2017 as 2. An electronic copy of Global Legal Insights – Fund Finance compared to the 20+ percent of the past few years, we forecast 2017 2017 can be accessed at https://www.globallegalinsights. growth in Lender portfolios in the 10%–15% range year-over-year. com/practice-areas/fund-finance/global-legal-insights--- The historical factors supporting expansion remain sufficiently fund-finance-2017-1st-ed.

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3. A copy of the article is available at https://www.ft.com/ 6. See Preqin FFA Presentation, page 21. content/c5c24c58-953c-11e6-a80e-bcd69f323a8b. 7. Information on these events is available at the FFA’s website, 4. Copies of the two Private Equity International articles can be http://www.fundfinanceassociation.com/. accessed at http://link.privateequityinternational.com/view/5 82073023f92a457f5e281815c7yb.7k5/a7760b76 and https:// www.privateequityinternational.com/news/europe/2017-03- Acknowledgment 09/walking-the-line/. The authors would like to thank Jeremy Cross, Partner at 5. Preqin research shows that 57% of surveyed Investors report Cadwalader, Wickersham & Taft, for his invaluable assistance in the planning to invest more money into private debt in 2017 and preparation of this chapter. that 62% report expecting to increase their asset allocation to private debt going forward. See Preqin FFA Presentation, pages 22–23.

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 a partner in Cadwalader, Wickersham & Taft’s Capital Wes Misson is a partner in Cadwalader, Wickersham & Taft’s Capital Markets Group. He has extensive experience representing a variety of Markets Group. Wes’s practice focuses on fund finance and he lenders across a range of secured lending transactions, with particular has represented financial institutions as lenders and lead agents in emphasis on the financing of investment funds and financial institutions. hundreds of subscription credit facilities and other fund financings, with He has a globally recognized practice in the subscription Credit Facility his experience encompassing both subscription and hybrid facilities. space, having represented both balance sheet and commercial paper Wes also works with fund-related borrowers on the negotiation of conduit lenders in facilities to real estate and private equity funds third-party investor documents with institutional, high-net-worth and sponsored by many of the world’s preeminent fund sponsors. sovereign wealth investors. Mike has represented the lead arrangers in many of the largest Wes has served as lead counsel on many of the largest and most subscription credit facilities ever consummated. He has been lead sophisticated fund financings ever consummated, notably having counsel on numerous hybrid facilities, and is one of the few attorneys assisted more than 35 banks as lead or syndicate lender during the in the United States with experience in both subscription credit facilities past two years with transaction values totaling in excess of $25 billion. and CLOs. Mike represents lenders on leverage facilities to secondary Many of the transactions he advises on are precedent-setting, carrying funds and other credits looking primarily to fund assets for repayment. unique structures and complex international components – whether Many of his transactions are cross-border in nature, and he is well- that be foreign limited partners or funds, multi-currency advances or versed in the nuances of multi-jurisdictional transactions. foreign asset investment. Mike is the founder of the annual Subscription Credit Facility and Fund Wes has been recognized as a “Rising Star” in the US in the area of Finance Symposium and is a founding member and the Secretary of Banking and Finance in the International Financial Law Review’s the Fund Finance Association. Mike is recognized as a Leading Lawyer IFLR1000 Legal Directory, and is also a frequent speaker and an in the area of Banking and Finance in the International Financial Law accomplished author in the area of fund finance. He has worked Review’s IFLR1000 Legal Directory in 2015. 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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Allocating Fees and Expenses: The SEC Is Paying Close Leor Landa Attention

Davis Polk & Wardwell LLP James H. R. Windels

Standing alone, these areas of concern were fairly unremarkable. I Introduction SEC-registered advisers are already obligated to disclose the material terms of their fund agreements and to avoid hiding fees In May 2014, the Director of the Office of Compliance Inspections and expenses or conflicts of interest from investors. What was and Examinations (“OCIE”) at the Securities and Exchange not immediately apparent at the time, however, was the level of Commission (“SEC”) gave a speech to the Private Fund Compliance scrutiny that the SEC would apply to fee and expense allocations, Forum to “share some insights we have learned from the examinations disclosures, and third-party arrangements to identify what the SEC of private equity advisers”.1 The examinations referred to were part believes to be improper practices. Through the many Enforcement of OCIE’s “presence exam initiative” that began approximately Division settlements described below, the SEC appears particularly two years earlier as a result of the Dodd-Frank Act, and involved focused on making sure that investors are fully aware of fee and inspections and exams of more than 150 private equity advisers. expense allocation practices, whatever they may be, at a relatively The OCIE Director offered a number of observations from the high degree of granularity and before they commit to investing in examiners, but “by far, the most common observation” concerned the funds. The wide variety of scenarios indicates that the SEC is the allocation of fees and expenses by advisers. Specifically, the looking to demonstrate the applicability of this principle to broad OCIE Director noted that examiners had found “violations of law areas of fund activities and finances. Illustrative settlements include or material weaknesses in controls over 50% of the time”. The SEC the following: staff saw improper fee and expense allocation as no accident, but rather as an attempt by private equity advisers to make up for tighter ■ In the Matter of Clean Energy Capital LLC (25 February 2014): margins and industry consolidation that put downward pressures on The SEC charged Clean Energy with improperly charging more than $3 million of the adviser’s expenses to the funds. percentage-based management fees. In addition to charging the funds for adviser expenses such as The 2014 OCIE Director’s speech signalled an increased focus “rent, salaries, and other employee benefits such as tuition costs, by the SEC on issues related to fees and expenses and related retirement, and bonuses”, the adviser’s CEO lent money to the conflicts of interest, which is ongoing and evolving. Subsequent funds “at unfavorable interest rates” when the funds began to comments by SEC officials, as well as a number of enforcement run low on cash.2 According to the SEC, these constituted wilful actions, demonstrate that the SEC continues to refine its approach violations of federal anti-fraud laws, in addition to violations of as it becomes more familiar with the industry. Set out below is laws related to disclosure, compliance, custody, and reporting. Respondents were ordered to disgorge more than $2 million an overview and analysis of the current enforcement landscape and pay civil fines in the amount of $225,000.3 and some general recommendations on how to manage the risk of increased scrutiny. ■ In the Matter of Lincolnshire Management, Inc. (22 September 2014): The SEC charged Lincolnshire, the adviser, for failing to implement or follow a clear allocation policy for fees and II Enforcement Trends expenses related to two merged portfolio companies held by parallel funds. While “[t]he two companies integrated a number of business and operational functions, including payroll The OCIE Director in 2014 identified several specific areas of and 401(k) administration, human resources, marketing, and concern with respect to fees and expenses and related conflicts of technology”, and “shared numerous annual expenses”, there interest: were times when one company (or the other) would bear the ■ Fee and expense shifting: adviser fees and expenses, such entirety of what should have been a shared cost – e.g., third- as back office functions, charged to the funds, or generally party payroll expenses, certain shared overheads, and salaries applicable fees and expenses charged only to the main fund, and bonuses for certain shared employees.4 This ad hoc, and and not other fund vehicles, such as co-investment vehicles. often undocumented, allocation of expenses led to more than ■ Hidden fees and expenses: undisclosed fees and expenses $1.8 million in disgorgement and prejudgment interest and a charged directly to portfolio companies, often in the form of civil penalty of $450,000 for failures “to adopt and implement “operating partner”, consulting, and monitoring agreements. written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 (the ■ General lack of disclosure: poorly or vaguely described “Advisers Act”) arising from the integration of the two portfolio expense and fee shifting arrangements, as well as poorly or companies”.5 vaguely described potential conflicts of interest between the adviser and its funds regarding the amounts and types of fees ■ In the Matter of Alpha Titans, L.L.C. (29 April 2015): The SEC and expenses. charged Alpha Titans and its auditor for improperly charging the funds for adviser-related expenses and operational costs,

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such as salaries, health benefits, parking and technology obligations (“CDOs”) that Taberna managed. According to services. While the offering memoranda disclosed that the the SEC: “Taberna secretly diverted funds owed to CDO funds would “bear[] all the expenses incurred by it or by others clients, and concealed that diversion and the conflicts it on its behalf or for its benefit, including ordinary operational created.”11 Exchange fees were paid by the issuer upon the and administrative expenses”, the SEC noted that it disclosed exchange of the CDO’s assets, but Taberna would classify nothing about the “cost of any of Alpha Titans’ operational these fees as “third party costs incurred” despite the fact that and administrative expenses”.6 This cursory language stood there were few actual third-party costs incurred. The SEC in contrast to the more exhaustive disclosures that had stated that this reflected a deliberate attempt to “obscure been made to the funds’ earlier investors. Similarly, Alpha the nature of the fees”.12 The SEC further pointed out that Titans’ Forms ADV did not disclose operational expenses by retaining exchange fees, the adviser had an undisclosed as part of its compensation or fees and instead referred only conflict of interest in pursuing exchange transactions, to its management fee, based on the percentage of assets. whether or not they were in the best interests of the CDO. According to the SEC: “Alpha Titans did not make the proper Taberna agreed to pay disgorgement of $13 million (on top disclosures for clients to decipher that the funds were footing of $2 million it had already paid), pre-judgment interest of the bill for many of the firm’s operational expenses.”7 Over $2 million, and a penalty of $6.5 million, and not to act as the course of four years, the adviser misallocated more than an investment adviser for three years. Taberna’s former $450,000 towards its own operational and administrative managing director and chief operating officer also paid fines expenses and was ordered to disgorge around $500,000 and for violations of the Advisers Act.13 8 pay $200,000 in civil fines. ■ In the Matter of Blackstone Management Partners L.L.C., ■ In the Matter of Kohlberg Kravis Roberts & Co., L.P. (29 June et al. (7 October 2015): The SEC charged Blackstone with 2015): The SEC charged Kohlberg Kravis Roberts & Co., violations of the Advisers Act in connection with accelerating Inc. (“KKR”) with violations of the Advisers Act for failing certain fees payable from its portfolio companies upon a sale or to disclose that certain co-investment vehicles did not bear a initial public offering (“IPO”) of a portfolio company.14 As is portion of “broken deal expenses” that were generally borne common industry practice, Blackstone entered into monitoring by KKR’s other funds. According to the SEC order, KKR’s agreements with certain of its portfolio companies under “Flagship” funds are entitled to invest a minimum amount which it charged the portfolio companies a monitoring fee. in any portfolio investment within the applicable strategy as Upon the sale or IPO of a portfolio company, the agreements defined in the fund’s organic documents. Certain “KKR Co- provided that the remaining years of annual fees would be Investors”, consisting of funds holding investments by KKR accelerated and paid to Blackstone in a lump sum. The relevant executives, consultants and “others”, as well as co-investment fund agreements provided that the fees Blackstone received vehicles, were generally offered the opportunity to invest (or would partially offset the management fees on the funds paid in certain cases, committed to invest) in KKR’s portfolio to Blackstone, and as a result, the funds gained some of the investments alongside the Flagship funds. Finally, from economic benefits of the accelerated fees. According to time to time, KKR would syndicate additional investment the SEC, while the relevant fund agreements disclosed that opportunities on a transaction-by-transaction basis from Blackstone charged monitoring fees, Blackstone’s practice additional third-party investors. of accelerating monitoring fees was not disclosed until after The limited partnership agreements of KKR’s funds required the fact, in various distribution notices, quarterly reports, and the funds to bear all “broken deal expenses” incurred “on Form S-1 filings for IPOs. The SEC noted that Blackstone had or behalf of” the fund in sourcing and making investments. cooperated in the staff’s investigation and had taken remedial (Such investments include research, travel, and professional measures, including additional disclosures and limits regarding costs incurred in connection with transactions that are not accelerated fees. Blackstone agreed to pay disgorgement in the consummated.) Generally speaking, KKR’s funds bore 80% amount of $28,911,756 (including both principal and interest) 15 of broken deal expenses, while KKR bore 20% of broken and a civil monetary penalty of $10,000,000. deal expenses. However, until 1 January 2012, the “KKR ■ In the Matter of Fenway Partners, LLC, et al. (3 November Co-Investors” that invested alongside the KKR funds in the 2015): The SEC charged Fenway Partners, a registered ordinary course were not allocated, and generally did not bear, investment adviser, three of its controlling members, and its broken deal expenses, other than about $333,500 in broken chief compliance officer with violations of Sections 206(2) deal expenses allocated to such vehicles in December 2011. and 206(4) of the Advisers Act for entering into conflicted In the course of an OCIE inspection in 2013–2014, KKR transactions that allowed the controlling members of Fenway determined to refund its Flagship funds about $3.26 million Partners to benefit from portfolio company monitoring fees in broken deal expenses. According to the SEC, KKR without sharing the benefit of the fees with the private funds. misallocated to the Flagship funds a net total of $17.4 According to the SEC: “Fenway Partners and its principals million in expenses that should have been borne by the breached their fiduciary obligation to fully and fairly disclose KKR Co-Investors in accordance with the post-January conflicted arrangements to a fund client, and compounded 2012 methodology. The SEC stated that this misallocation the breach by omitting material facts about the arrangements 16 flowed from KKR’s failure to establish a written policy when communicating with fund investors.” governing allocation of expenses to co-investors prior to 1 Like other private equity funds, Fenway Partners received January 2012, and lacking “[a] robust compliance program monitoring fees from its portfolio companies. The [that] helps investment advisers ensure that clients are not organisational documents of its funds provided that 80% of disadvantaged and receive full disclosure about how fund such fees received would offset the management fees the expenses are allocated”.9 The SEC ordered KKR to cease funds owed to Fenway Partners. Beginning in 2011, Fenway and desist from violations of Sections 206(2) and 206(4) of caused its portfolio companies to terminate their monitoring the Advisers Act, pay a total of $18,677,409 ($14,165,968 fee arrangements with Fenway Partners, and enter into new in principal and $4,511,441 in interest) in disgorgement to arrangements with Fenway Consultants, an affiliated entity the Flagship funds to compensate them for the misallocated owned by Fenway Partners’ controlling members. Unlike expenses, and a civil monetary penalty of $10 million.10 the fees paid to Fenway Partners, the fees paid to Fenway ■ In the Matter of Taberna Capital Management, L.L.C. Consultants (totalling $5.74 million) were not offset against (2 September 2015): The SEC charged Taberna Capital the management fees that the funds owed to Fenway Partners. Management for fraudulently retaining over $15 million The conflict of interest posed by Fenway Consultants being in “exchange fees” that belonged to the collateralised debt owned by the owners of Fenway Partners was not disclosed

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to the funds or their limited partners. Fenway also caused a taken a number of actions without the consent of the private portfolio company to issue a capital call in part to pay a $1 equity funds’ advisory boards, despite clear requirements in million fee to Fenway Consulting, and a portfolio company the applicable partnership agreements to obtain consent. For paid to Fenway Partners’ controlling members a substantial example, JH Partners loaned approximately $62 million to cash incentive payment (totalling $15 million) not to offset portfolio companies that effectively gave the adviser a senior against management fees the funds owed to Fenway Partners interest in those companies. The adviser also caused certain or disclosed to the funds. funds to invest in the same portfolio company at differing The SEC charged Fenway Partners and the controlling levels in the company’s capital structure and at differing members with wilful violations of the Advisers Act by valuations, both of which created the possibility of a conflict engaging in transactions that “operated as a fraud or deceit”, of interest. The adviser also exceeded certain concentration and the chief compliance office with “causing” a violation limits disclosed in the private equity funds’ partnership of the Advisers Act. The SEC ordered Fenway Partners and agreements. Direct loans, cross-investments, and investments the individuals to cease and desist from violations of the in excess of concentration limits all required the consent of the Advisers Act, pay a total of $8,716,471.10 in disgorgement advisory boards, which the adviser did not obtain. and a total of $1,525,000 in civil penalties.17 Following an SEC examination, JH Partners “agreed to ■ In the Matter of Cherokee Investment Partners, LLC and subordinate (or place in equal footing) the direct loans to the Cherokee Advisers, LLC (5 November 2015): The SEC Funds’ investment interests [...], forego any rights to pursue charged Cherokee with violations of Sections 206(4) and repayment under the security agreements on certain loans 206(6) of the Advisers Act for allocating certain legal and [...] and waive[] $24 million in management fees and carried 21 compliance expenses of the adviser to its private equity funds. interest”. JH Partners also obtained the necessary consents In connection with Cherokee’s initial registration under the of the advisory boards. While the SEC did not allege that the Advisers Act and compliance with the Act’s requirements, adviser benefited from these conflicts of interest, it nonetheless Cherokee caused its funds to bear more than $170,000 in charged the adviser with violations of Section 206, because legal and consulting fees. Cherokee also caused its funds the adviser’s actions violated the partnership agreements, and 22 to bear over $239,000 in expenses which Cherokee incurred ordered JH Partners to pay a civil fine of $225,000. in connection with an SEC staff review, and over $45,000 ■ In the Matter of Apollo Management V, L.P., et al. (23 in expenses flowing from the SEC staff’s enforcement August 2016): The SEC charged Apollo with violations of investigation. While the applicable partnership agreements the Advisers Act in connection with accelerating certain fees disclosed that the funds “would be charged for expenses that payable from its portfolio companies either upon private sale in the good faith judgment of the general partners arose out or IPO of portfolio companies, a loan between an Apollo of the operation and activities of the funds”, they did not management company and one of its managed funds, and in disclose that the funds would bear a portion of the adviser’s connection with a former senior partner’s improper charging legal and compliance expenses.18 The SEC also alleged of personal expenses to the fund. that Cherokee failed to adopt written policies or procedures Following common industry practice, Apollo entered into reasonably designed to prevent violations of the Advisers Act monitoring agreements with certain of its portfolio companies through such expense allocations, and that Cherokee failed to under which it charged the portfolio company a monitoring review its policies to ensure their adequacy and effectiveness. fee. When a portfolio company was sold or completed an In March 2015, Cherokee ceased allocating these expenses IPO, the monitoring agreements provided that the remaining to its funds, and, in April 2015, reimbursed them for “the years of annual fees would be accelerated and that the present full amount of the [misallocated] expenses”. The SEC noted value of the remaining fees would be paid as a lump sum. that it “considered remedial acts taken by Respondents and Under the relevant fund agreements, fees paid to Apollo cooperation afforded the Commission staff” in agreeing to would partially offset a percentage of the management fees accept Cherokee’s offer to pay a civil monetary penalty of that the funds would otherwise pay to Apollo, meaning that $100,000 to the SEC, and to cease and desist from violations the funds also received some of the benefit of the accelerated of Sections 206(2) and 206(4) of the Advisers Act and rules fees. While the SEC noted that Apollo had disclosed that it thereunder. received monitoring fees, the SEC alleged that Apollo had ■ In the Matter of Cranshire Capital Advisors, LLC (23 not adequately disclosed the practice of receiving accelerated November 2015): The SEC charged Cranshire Capital monitoring fees until after Apollo had already taken the Advisors, a registered advisor, for negligently allocating accelerated fees. management company expenses to its private equity fund. Separately, certain Apollo funds extended an approximately The offering memoranda disclosed that “operating expenses $19 million loan to Apollo Advisors VI, L.P., the funds’ (such as rent for office space and telephone lines)” would management company, with the effect of deferring taxes be borne by the advisor, while the fund would “pay all its owed on carried interest due to the management company other expenses, including [...] legal and accounting fees”.19 from the funds. The loan required the management company Cranshire used about $118,000 in fund assets to cover to pay interest to the lending funds at the applicable federal overhead expenses and about $158,000 in fund assets to pay rate of 3.45% per year. According to the SEC, while the loan the fees of a compliance consultant. The SEC alleged that and interest accrued was reflected on the funds’ financial the improper allocation was caused by Cranshire’s failure to statements, Apollo failed to disclose that the interest received adopt and implement an adequate compliance programme, on the loan would be allocated solely to the account of the and to adequately monitor allocation of expenses. Cranshire management company. Finally, the SEC charged Apollo with engaged a new compliance consultant in 2014, and reimbursed deficiencies in its written policies and procedures that failed the funds for the misallocated expenses. to prevent a former senior partner from improperly charging The SEC mandated that Cranshire continue to employ the certain personal expenses to the funds. compliance consultant, cease and desist from violations of The SEC noted that Apollo had cooperated in the staff’s Sections 206(2) and 206(4) of the Advisers Act, and to pay investigation, had commenced an investigation into the a civil money penalty of $250,000. The SEC noted that it former partners’ improper expenses, that the former partner “considered [Cranshire’s] remedial acts [...] and cooperation had reimbursed Apollo for the improper expenses, and that 20 afforded the Commission staff”. Apollo had voluntarily reported to the SEC that the former ■ In the Matter of JH Partners, LLC (23 November 2015): The partner had charged personal expenses to the fund. Apollo SEC found that JH Partners and certain of its principals had agreed to pay disgorgement in the amount of $40,254,552

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(including both principal and interest) for the amounts of that its enforcement priority is unaffected by the relative accelerated monitoring fees and to compensate the funds that sophistication of the parties. Indeed, part of the problem, according had extended the loan to Apollo Advisors VI for the interest to the SEC, is that partnership agreements and disclosure documents allocated to the fund, as well as a civil monetary penalty of provide insufficient insight into fund operations, making oversight 23 $12,500,000. difficult even for sophisticated investors. In addition, the SEC has ■ In the Matter of WL Ross & Co. LLC (24 August 2016): The not been persuaded by the argument that sophisticated investors SEC charged WL Ross with omitting material information might view certain allocation issues as immaterial or that they might regarding its allocation of transaction fees in violation of have gained actual knowledge of the adviser’s practices. Rather, Section 206(2) and 206(4) of the Advisers Act. Under the the SEC has focused on fund agreements and disclosure documents applicable fund agreements, WL Ross’s managed funds paid WL Ross a management fee, which fee would be offset by reviewed by investors at the time they decided to make their initial 50% of any of a number of transaction fees (e.g., break-up commitments to a fund – and far less on disclosures issued after fees or monitoring fees) received by WL Ross. Beginning commitments are already made. In a May 2016 speech, the then in 2001, WL Ross allocated transaction fees to its managed director of the Enforcement Division, Andrew Ceresney, explained funds pro rata based upon the funds’ investment in the that it was “critically important that advisors disclose all material relevant portfolio company, while WL Ross retained the information, including conflicts of interest, to investors at the time portion of fees attributable to co-investors’ investment in a their capital is committed”.25 In particular, Ceresney noted that the portfolio company, with the effect of providing WL Ross long capital commitments – in some cases 10 years or more – limit with approximately $10.4 million in additional fees from investors’ ability to change course based on information learned 2001 through 2011. According to the SEC, WL Ross failed after an initial investment decision. This corresponds to Bowden’s to disclose to the funds, their advisory boards, or their limited partners that WL Ross was so allocating transaction fees. observation that “[w]hile investors typically conduct substantial due diligence before investing in a fund, [staff] have seen that investor In the course of a 2014 OCIE investigation, WL Ross oversight is generally much more lax after closing”,26 and has been revisited its transaction fee allocation methodology and, in August 2014, brought its allocation methodology to reiterated by the SEC’s finding that advisory boards and investors the attention of OCIE staff. The SEC noted that WL Ross cannot give effective consent unless allocation practices are known voluntarily proposed and adopted a new methodology that before the fees are received or expenses are incurred. allocated all transaction fees across its managed funds, Second, the language of the disclosure really matters. Although retroactively applied this methodology to past transaction industry practices are evolving, many firms’ limited partnership fees, and voluntarily reimbursed the funds for approximately agreements delegate substantial discretion to a general partner to $10.4 million of transaction fees and $1.4 million in interest. determine the kinds of expenses that will be borne by the private WL Ross also voluntarily enhanced its internal controls and compliance functions, including by hiring a new Chief equity funds, and some provide a “catch-all” provision that gives Compliance Officer. WL Ross agreed to pay a civil monetary the general partner discretion to adjust the allocation among penalty of $2.3 million. funds or between the manager and funds. In our experience, the ■ In the Matter of First Reserve Management, L.P. (14 September overwhelming majority of managers have sought to allocate 2016): The SEC charged First Reserve Management, a expenses equitably and these broad provisions may continue to serve registered investment advisor and manager of a series of private a helpful function in private equity fund partnership agreements. equity funds, for causing its managed funds to bear certain Nonetheless, the SEC has signalled that investors must be given expenses on behalf of the management company and failing greater detail regarding the mechanics of how, when, why and in to share the benefit of a discount offered to the management what amounts fees and expenses are allocated between the funds company. In 2013, a First Reserve affiliate caused certain First and the adviser, and between the funds themselves. That includes Reserve funds to form and bear approximately $7.4 million operating expenses, reimbursements, offsets, broken deal expenses, in expenses of certain advisor entities that the management consulting fees, compliance expenses, and any fee or expense that company would otherwise have borne, and to pay $733,012 in insurance premiums for First Reserve’s liability insurance could plausibly be construed as an expense properly borne by the for risks that do not arise from its management of the funds. adviser rather than the funds. Whether in the partnership agreement First Reserve also, between 2010 and 2014, negotiated a or in private placement memoranda, the mechanics of allocation fee discount from an outside law firm for work done for the should be disclosed upfront and in as much detail as is reasonably management company, on the basis of work that the firm had practicable. On a related note, allocation mechanisms or expense- done and would continue to do for the managed funds. First sharing rules may well vary across funds or during a fund’s lifecycle Reserve did not obtain a similar discount for the work done for business reasons. While this is not at all impermissible per se, for the managed funds, and did not disclose to the funds or it will be important to develop a clearly articulated reason for any the funds’ investors that it had obtained a discount which disparities or changes and to disclose such potential disparities and benefited the management company. In the course of a 2014 OCIE investigation, First Reserve voluntarily reimbursed the changes to investors (and gain their consent, when necessary). expenses improperly charged to the funds, and approximately Potential conflicts of interest should also be precisely disclosed, $179,466 attributable to the legal fee discount. First Reserve particularly where the conflict includes an opportunity to shift fees agreed to pay a civil monetary penalty of $3.5 million. and expenses to portfolio companies and out of investors’ direct line Looking back, several key lessons emerge from these settlements. of sight. The SEC has put the burden on advisers to inform investors, First, the SEC does not limit its review to smaller shops or firms with rather than wait until investors discover these issues on their own. primarily “unsophisticated” investors; indeed, the SEC has reached As the Acting Director of OCIE remarked in March 2015, “[m]any settlements with some of the largest firms in the industry. The private managers still seem to take the [erroneous] position that if investors equity sector had long avoided intense regulatory scrutiny because have not yet discovered and objected to their expense allocation private equity investors were considered sophisticated enough to methodology, then it must be legitimate and consistent with their 27 police advisers themselves. The SEC signalled at the outset of this fiduciary duty”. enforcement push that it is no longer operating on that assumption, Third, compliance with established procedures really matters. pointing out that “‘Mom and Pop’ are much more invested in these Policies and procedures must be followed closely, even where funds than people realize”.24 The SEC’s actions have demonstrated investors have not necessarily been harmed. If a written fee income

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or expense allocation policy is not yet in place, now is the time to different regional offices and is designed to share information and prepare such a policy, ensuring that it precisely tracks the operative expertise across the agency and with other examiners. agreements and can be followed as a matter of course. The actions There are a number of steps that advisers can take to manage the risk described above suggest that advisers run into danger when non- of inspections and improve compliance going forward: ordinary course income or expenses arise and employees are forced ■ Offering Documents: If there is one lesson the SEC wants to make ad hoc allocation decisions without prior disclosure or a pre- the private equity industry to learn, it is that the industry existing policy to justify these decisions in a later SEC examination. must improve its disclosures with respect to fee and expense Moreover, the SEC is enforcing policies strictly even though it is allocation, and potential conflicts of interest. The disclosure cognizant of the fact that it is asking advisers to thread the needle bar has been raised, especially when fees and expenses between exhaustive disclosures and adhering to those disclosures, involve third parties, and/or where fees and expenses are even in the face of changing or unexpected circumstances. In borne by portfolio companies. While these arrangements the context of co-investment allocations, the Acting Director of are not per se problematic, disclosures must be clear about OCIE in 2015 noted: “[M]any in the industry have responded to what these expenses are and whether, and to what extent, they will be paid by the funds. If the fee structure or third- our focus by disclosing less [...] rather than more under the theory party arrangement creates any incentives for the adviser to that if an adviser does not promise their investors anything, that pursue a particular approach, or otherwise creates a potential adviser cannot be held to account [...]. [However,] I believe that conflict, such as acceleration payments, differential rates, the best way to avoid this risk is to have a robust and detailed co- or transaction costs, these must also be clearly disclosed. investment allocation policy which is shared with all investors [...] If there is a co-investment vehicle involved, or other side- all investors deserve to know where they stand in the co-investment by-side investments, any differential treatment or offset priority stack.”28 The same could also be said about fee and expense arrangement must similarly be spelled out. allocation procedures, generally.29 ■ Other Disclosures: While it is critical to include adequate Fourth, the SEC is taking a risk-weighted approach to determine disclosures in the fund documents, the Form ADV can also its exam targets. Certain practices have invited more scrutiny than be used to help inform investors regarding policies and procedures. Similarly, limited partner advisory committees others, and the SEC has aggressively pursued issues that arise on can be actively engaged, and it may also make sense to exam. The Acting Director of OCIE in 2015 acknowledged the expand approval rights of these committees to obtain investor SEC’s “risk-based exam selection process” but did not offer much consent on certain allocation decisions that deviate from detail, noting only that “we identify situations or behaviors which established practices. pose significant risk to investors or which, we believe, may violate ■ Compliance: Precisely described policies and procedures will 30 federal securities laws and regulations”. In 2016, the then Director require robust compliance programmes to ensure that policies of the Enforcement Division grouped actions against private equity and procedures are documented and followed. A robust advisors into three categories: “undisclosed fees and expenses”; compliance function will also help detect undisclosed potential “impermissibl[e] shift[s] in fees and expenses” and “fail[ing] to conflicts of interest that may require additional policies and adequately disclose conflicts of interest, including conflicts arising procedures, investor approvals, or disclosures. It is critical from fee and expense issues.”31 Based on these public statements that compliance be sufficiently independent, knowledgeable and Enforcement’s track record in the private equity space over and engaged to fulfil its responsibilities. As former SEC the past several years, it appears these issues often relate to co- Chair Mary Jo White commented: “[Registrants] can draw on external [compliance] assistance, but [they] cannot outsource investments (and related expenses), and third-party arrangements [their] obligations. Regardless of the structure, each registrant (and related expenses), such as operating partner agreements, is ultimately responsible for adopting and implementing an monitoring agreements, and outside counsel (and related expenses). effective compliance program and is accountable for its own The Acting Director of OCIE in 2015 stated explicitly that the SEC deficiencies.”37 had become more focused on co-investment allocation because ■ Back Office: Policies and procedures – particularly those 32 it had “becom[e] a key part of an investor’s thesis”. Fee and with complex fee or cost allocation arrangements – must be expense allocation for co-investment vehicles is often complex, supported by a robust back office that is capable of allocating and the SEC has indicated that it has little patience for policies costs correctly and consistently, as well as maintaining the and procedures that do not reflect that complexity. With respect to proper documentation of allocations. This is especially third-party arrangements, the SEC has been focused on the potential critical when similarly situated funds or groups of investors for “back-door” and other unseen fees and expenses charged to the seem to be treated differently. portfolio companies and/or shifted from the adviser. The SEC has ■ Preparation for Exams: Advisers should carefully prepare for recently referred to these kinds of shifted or hidden fees as front- exams by OCIE, which are increasingly comprehensive and and back-office “outsourcing”.33 These issues are particularly ripe thorough. Advisers should expect that OCIE examiners will in vertically integrated advisory firms, such as real estate advisers, carefully review provisions in fund agreements and policies where “it is not unusual for [...] [an] owner-operator investment and procedures relating to expense and fee allocations. The OCIE team will also inquire into instances where allocations adviser to provide property management, construction management, 34 may not have been made consistent with disclosures or in a way and leasing services for additional fees”. which disadvantages fund investors. In the course of its work, OCIE may request from the adviser categories of emails and other internal communications, as well as conduct interviews III Moving Forward with personnel of all seniority levels, to test compliance with the securities laws and regulations. Given the nature of the Increased oversight of private equity firms will continue for the exam process, advisers should prepare carefully to ensure a 35 foreseeable future. The SEC continues to invest resources to smooth process and positive outcome. learn about the industry, and its approach will evolve accordingly. ■ Self-Reporting: The SEC has stressed that it has no desire to The SEC has established a Private Funds Unit (“PFU”) that “plays play “gotcha”, even while its enforcement focus on private a critical role in targeting and selecting exam candidates, scoping equity firms persists and evolves, and the SEC has made risk areas, executing examinations, and analyzing data gleaned a pointed effort to reach out to the industry and seek its from those examinations”.36 The PFU is unique in that it straddles cooperation and input.38 Similarly, in its various enforcement

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actions, the SEC has cited with approval the cooperation of 15. In re Blackstone Management Partners L.L.C., et al., File No. respondents and any proactive remedial actions. One open 3-16887 (7 October 2015). question, however, is whether and to what extent the SEC 16. Press Release 2015-250 available at https://www.sec.gov/ will alter its approach in the event of a self-reported issue. In news/pressrelease/2015-250.html. announcing one settlement described above, the SEC stated 17. In re Fenway Partners, LLC, et al., File No. 3-16938 (3 that “[t]he Division of Enforcement’s Asset Management November 2015). Unit [...] encourages private equity fund advisers [...] to self-report [fee and expense issues] to the staff. As noted 18. In re Cherokee Investment Partners, LLC, et al., File No. in the Division of Enforcement’s Enforcement Manual, self- 3-16945 (5 November 2015). reporting is one factor that the Commission considers when 19. In re Cranshire Capital Advisors, LLC, File No. 3-16969 (23 evaluating cooperation and determining whether and to November 2015). 39 what extent to extend credit in settlements”. It should be 20. Id. noted that self-reporting may not result in the avoidance of a charge altogether, but rather, based on the circumstances, in 21. In re JH Partners, LLC, File No. 3-16968 (23 November a mitigation of the charges and/or penalties, as was observed 2015). in the settlement involving WL Ross. Thus, a decision to 22. Id. self-report should be taken after careful consideration and 23. In re Apollo Management V, L.P., et al., File No. 3-17409 (23 consultation with counsel. August 2016). 24. Bowden Speech. IV Conclusion 25. Securities Enforcement Forum West 2016, Keynote Address: Private Equity Enforcement, Andrew Ceresney (12 May As the SEC continues its enhanced examination and enforcement 2016). activity in the private equity sector, fund managers have been 26. Id. grappling with redefined expectations and practice in the disclosure 27. Private Equity: A Look Back and a Glimpse Ahead, Marc of allocations of fees and expenses and conflicts of interest generally. Wyatt (13 May 2015) (“Wyatt Speech”) available at https:// While the ground is still shifting, there are a number of concrete www.sec.gov/news/speech/private-equity-look-back-and- steps managers can take to bolster their compliance, including glimpse-ahead.html. reviewing and improving relevant disclosures, ensuring robust 28. Id. compliance policies and procedures, and beefing up compliance 29. The potential conflicts of interest arising from fee and infrastructure and resources. expense allocation are an issue of broader SEC enforcement focus. For example, in 2016 the SEC charged James Caird Asset Management LLP and its principal with violations of Endnotes Section 206(2) of the Advisers Act for failing to follow a disclosed investment policy of a multi-strategy fund and a 1. Spreading Sunshine in Private Equity, Andrew J. Bowden (6 distressed opportunities fund by allocating to the distressed May 2014) (“Bowden Speech”) available at https://www.sec. fund portions of certain investments of the muti-strategy gov/News/Speech/Detail/Speech/1370541735361. fund, against the backdrop of the management company 2. Press Release 2014-41 available at https://www.sec.gov/ principal’s significant ownership stake in the distressed fund News/PressRelease/Detail/PressRelease/1370540849548. and relatively smaller stake in the multi-strategy fund. See In the Matter of James Caird Asset Management LLP and 3. In re Clean Energy Capital, L.L.C., et al., File No. 3-15766 Timonthy G. Leslie, File No. 3-17276 (2 June 2016). (24 February 2014). 30. Id. 4. Press Release 2014-205 available at https://www.sec.gov/ News/PressRelease/Detail/PressRelease/1370543006673. 31. Securities Enforcement Forum West 2016, Keynote Address: Private Equity Enforcement, Andrew Ceresney (12 May 5. In re Lincolnshire Management, Inc., File No. 3-16139 (22 2016). September 2014). 32. Id. 6. Press Release 2015-76 available at https://www.sec.gov/ news/pressrelease/2015-76.html. 33. Compliance Outreach Program – 2016 National Seminar for Investment Adviser and Investment Company Senior Officers 7. Id. (7 April 2016) (“2016 Compliance Outreach Program”) 8. In re Alpha Titans, LLC et al., File No. 3-16520 (29 April available at https://www.sec.gov/info/complianceoutreach/ 2015). compliance-outreach-program-national-seminar-2016.htm. 9. Press Release 2015-131 available at https://www.sec.gov/ 34. Wyatt Speech. news/pressrelease/2015-131.html. 35. 2016 Compliance Outreach Program. 10. In re Kohlberg Kravis Roberts & Co. L.P., File No. 3-16656 36. Wyatt Speech. (29 June 2015). 37. Opening Remarks at the Compliance Outreach Program 11. Press Release 2015-177 available at https://www.sec.gov/ for Investment Companies and Investment Advisers, Mary news/pressrelease/2015-177.html. Jo White (19 April 2016) available at https://www.sec.gov/ 12. In re Taberna Capital Management, L.L.C., et al., File No. news/statement/chair-white-statement-compliance-outreach- 3-16776 (2 September 2015). ic-ia-041916.html. 13. Id. 38. Bowden Speech. 14. Press Release 2015-235 available at https://www.sec.gov/ 39. Press Release 2015-235 available at https://www.sec.gov/ news/pressrelease/2015-235.html. news/pressrelease/2015-235.html.

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Acknowledgment includes advising numerous private funds and private fund sponsors and advisers as to the regulatory considerations applicable to their The authors would like to thank Yukako Kawata for her assistance in ongoing operations and investment activities, as well as compliance preparing this chapter. Ms. Kawata is a partner in, and co-head of, reviews of hedge fund managers and private equity fund managers Davis Polk’s Investment Management Group. She advises clients on under the Investment Advisers Act (Tel: +1 212 450 4896 / Email: the formation and operation of investment funds and other vehicles [email protected]). The authors would also like to exempt under the Investment Company Act, including private equity thank Davis Polk litigation associates Marc Tobak and Daniel Magy funds, hedge funds, venture capital funds, funds of funds, and who assisted in the preparation of this chapter. funds investing in particular sectors or countries. Her practice also

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

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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 advice and corporate directors and officers. 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 several (Europe), Metalmark Capital Partners, Morgan Stanley & Co. and 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.

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Bringing Foreign Investment Funds into Japan Yasuzo Takeno

Mori Hamada & Matsumoto Fumiharu Hiromoto

be established by a bilateral trust agreement between a 1 Overview of Regulations for Foreign management company and a trustee. As a result, most Investment Funds in Japan foreign investment trusts publicly offering units in Japan are established by bilateral trust deeds, as opposed to While there are many varieties of investment vehicles in the world, unilateral declarations of trust. in this chapter we discuss unit trust-type investment funds and ■ Japanese courts must have jurisdiction over lawsuits relating partnership-type investment funds, as these are frequently used in to any transaction where a Japanese investor has acquired bringing foreign investment funds into Japan. trust units. ■ An agent company for the fund must be appointed in Japan. 1.1 Foreign unit trust-type investment fund ■ Usually, one of the distributors of the fund in Japan (i.e., a Japanese securities company) is appointed as the agent company for the offer. The agent company is required to When conducting an offer in Japan, a foreign unit trust that is similar check whether the JSDA requirements have been satisfied to a Japanese investment trust fund (toshi shintaku) is treated as a before making the public offering, and will disclose the foreign investment trust in Japan and is subject to Japanese securities net asset value of the fund to the public after the public laws; specifically, the Financial Instruments And Exchange Act of offering. Japan (the “FIEA”) in respect of marketing, and the Investment ■ The amount of securities sold short must not exceed the net Trust and Investment Corporation Act of Japan (the “ITICA”) in asset value of the fund. respect of regulatory filings with the Financial Services Agency of ■ As a general rule, the borrowings by the fund must be less Japan (“FSA”). than 10% of the net asset value of the fund. 1.1.1 Public offering of a foreign investment trust in Japan ■ The fund and other funds managed by the management Based on a survey conducted by the Japan Securities Dealers company of the fund must not have voting rights in excess of Association (“JSDA”), among foreign unit trust-type investment 50% of the total voting rights in any company. funds that publicly offered units in Japan, those domiciled in ■ The exposure to derivative transactions must be calculated Luxembourg or the Cayman Islands had an aggregate market share using a reasonable method determined in advance by the of more than 80% in the first half of 2016 on a net asset value basis. management company or the investment manager, and must These are followed by unit trusts domiciled in Ireland. not exceed the net asset value of the fund. When units of a foreign investment trust are publicly offered in ■ This requirement was introduced on December 1, 2014 Japan, they must satisfy certain requirements imposed by JSDA, as with no grandfather provision. detailed below. ■ The credit concentration risks borne by the fund must be managed using a reasonable method determined in advance JSDA requirements by the management company or the investment manager. JSDA is a self-regulating body of securities companies acting as ■ This requirement was introduced on December 1, 2014. distributors of foreign investment trusts. A member of JSDA cannot There is a grandfather provision, whereby the requirement engage in a public offering of units of a foreign investment trust will not apply, for a period of five years, to existing funds that does not satisfy the JSDA requirements, the so-called standards publicly offering units in Japan on or prior to December 1, of selection. The JSDA requirements do not apply to a private 2014. placement of units of a foreign investment fund. When a foreign investment trust is a master-feeder fund and units The JSDA requirements for the public offering of units of a foreign of the feeder fund are publicly offered in Japan, the question arises investment trust include the following: as to whether the JSDA requirements will be applicable only to the ■ The net asset value of the fund must be – or, after the public feeder fund or also to the master fund – in other words, whether the offering in Japan, is expected to be – greater than JPY 100 JSDA will look through to the master fund. Currently, the general million. practice is to apply the JSDA requirements to the feeder fund only, ■ The net asset value of the management company of the fund, and not to look through to the master fund. The exception is the which is the issuer of units of the fund, must be greater than credit concentration restriction, which cannot be complied with JPY 50 million. without looking through to the master fund, due to all of the assets ■ It appears the JSDA requirements assume that the foreign of the feeder fund being invested or concentrated in the master fund. investment trusts publicly offering units in Japan will

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Disclosure – securities registration statement and prospectus trustee of a unilateral declaration of trust-type unit trust), is regarded The issuer of a foreign investment trust, i.e., the management as self-solicitation (jiko boshu) under the FIEA. The issuer will be company of the fund, must file a securities registration statement required to register as a Type 2 financial instruments transaction with the regulator in advance of the public offering via EDINET, business. However, if the issuer retains a distributor (usually a a web-based disclosure system managed by FSA. The securities securities company) for the securities it will issue, and the issuer registration statement is a disclosure document under the FIEA, for itself does not conduct any solicitation, registration will not be securities that are publicly offered in Japan, and is disclosed to the required. public through the Internet. The securities registration statement Issuer – manager or trustee becomes effective 15 days after filing. Solicitation of investments in Under Japanese law, the issuer of units of a Japanese investment the securities can be made before the securities registration statement trust is the trust settlor and, in that capacity, will also act as the trust becomes effective, but the investment cannot be made until the manager. securities registration statement becomes effective and a mandatory prospectus (kofu mokuromisho) is delivered to the investor. As for the issuer of a foreign investment trust, it will be classified on the basis of the applicable governing law and documents. If The prospectus of an investment trust consists of a mandatory prospectus and a prospectus upon request (seikyu mokuromisho). a foreign investment trust is established by a bilateral trust deed The contents of the prospectus upon request are substantially similar between the manager and the trustee, and the governing law or to those of the securities registration statement, but with minor document provides that the units of the trust are issued by the adjustments and omissions. The mandatory prospectus is a summary manager, the manager will be the issuer of the investment trust. If of the prospectus upon request. The mandatory prospectus needs to a foreign trust is established by a unilateral declaration of trust by a be delivered to investors on or prior to the purchase of securities. trustee, the trustee will be the issuer. The prospectus upon request is delivered to investors only when the investors specifically request. 1.2 Foreign partnership type investment fund FSA filing Pursuant to the ITICA, the issuer of units of a foreign investment Public offering/private placement trust that is publicly offered in Japan must file an FSA statement A foreign partnership-type investment fund, such as a limited with FSA immediately before the securities registration statement partnership, is usually treated as a collective investment scheme becomes effective. Most of the contents of the FSA statement under the FIEA. Interests in a collective investment scheme are Type overlap with those of the securities registration statement and, as 2 securities under the FIEA, while ordinary securities, such as units a result, the FSA statement is usually prepared by extracting the of an investment trust, are Type 1 securities. necessary information from the securities registration statement. A different standard applies to determine if an offer of Type 2 The FSA statement is for administrative purposes only, and is not securities in Japan is a public offering or private placement. An disclosed to the public. offering of Type 2 securities constitutes a public offering if the 1.1.2 Private placement of units of a foreign unit trust in Japan number of the investors that actually acquire the securities is 500 or Types of private placement in Japan more. In contrast, the limit of 49 investors for a private placement There are two categories of private placement of securities in Japan of Type 1 securities is based on the number of investors who are (minor variations aside): private placement to qualified institutional solicited, including those who do not acquire the securities. The investors (“QIIs”) only; and private placement to a small number reason for this is that a fund issuing Type 2 securities (such as a of investors. limited partnership) is usually formed through discussions with potential investors. As far as we know, most foreign partnership-type In a private placement to QIIs only, investors are limited to QIIs. investment funds are offered in Japan through private placement. There is no limit on the number of QIIs who can invest in a private placement. However, QIIs are prohibited from selling their securities Self-solicitation (jiko boshu) to non-QIIs. Solicitation by an issuer of interests in a foreign collective investment In a private placement to a small number of investors, the number scheme, such as limited partnerships, is regulated as self-solicitation of investors is limited to 49. These investors are prohibited from (jiko boshu) under the FIEA. selling securities acquired in the private placement unless all such An issuer of interests in a foreign collective investment scheme who securities held by a transferor are transferred to a single investor. solicits investments in its own securities is required in principle to This restriction ensures that the cap on the total number of investors be registered as a Type 2 financial instruments transaction business. will not be breached. However, if the issuer retains a distributor for the securities it issues, No securities registration statement or prospectus and the issuer itself does not conduct any solicitation, registration Neither a securities registration statement nor a prospectus is will not be required. required if units of a foreign investment trust are offered in Japan by In foreign collective investment schemes, the general partner of a way of a private placement. limited partnership will be the issuer of the securities. FSA filing Self-management (jiko un-yo) An FSA statement needs to be filed in the case of a private placement. The management of assets by operators of foreign collective Unlike an FSA statement in a public offering, which is filed after investment schemes, such as limited partnerships, is regulated as the securities registration statement is filed, (i.e., where solicitation self-management (jiko un-yo) under the FIEA. A person offering has begun but before the securities registration statement becomes collective investment scheme management services is required to effective), the FSA statement in a private placement must be filed register if the fund to be managed invests more than 50% of its prior to any solicitation in Japan. assets in securities or derivatives. Registration requirement for self-solicitation Prior to the enactment of the FIEA, which replaced the Securities A solicitation of units in Japan by the issuer of a foreign investment and Exchange Act of Japan in 2007, the management of assets by trust (i.e., the manager of a bilateral trust deed-type unit trust, or the such fund operators was regarded as management of the operator’s

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own assets, and was outside the scope of the regulation. However, included in the filing. It is believed that limited partnership-type the FIEA now recognise this as management of investors’ assets, collective investment schemes can be organised through discussions extending the law to cover the management activities of fund with candidate large investors; such discussions are not considered operators. solicitation because details are not yet fixed. Qualified institutional investors exemption (tekikaku kikan toshika Some information in the filing will be disclosed to the public by the to tokurei gyomu) – general regulator (and the applicant will also be required to do so), including The registration requirements for carrying out: (i) a Type 2 financial the number, but not the names, of the QIIs. The applicant is also instruments transaction business (for self-solicitation); and (ii) required to file with the regulator an annual management report, and discretionary investment management (for self-management), are disclose such report or its summary to the public. These can be waived if the qualified institutional investors exemption (the “QII written in English. Exemption”) under the FIEA is available. De minimis exception to self-management for foreign partnership- The QII Exemption is available if the investors of a collective type investment funds investment scheme consist of one or more QIIs and up to 49 non- If investments from Japan into a foreign partnership-type investment qualified institutional investors. QIIs include banks, insurance fund are limited, the management activity of the general partner of companies, securities companies, and other operators carrying out the foreign partnership investment fund is excluded from the scope a financial instruments transaction business. Business corporations of the collective investment scheme management services subject can be QIIs if they: (i) have securities investments greater than JPY to regulation in Japan. Specifically, the exclusion applies if the 1 billion; and (ii) make an additional filing with FSA. following requirements are met: The rationale for this exemption is that a QII usually has enough ■ all Japanese investors investing in the foreign partnership- financial expertise and bargaining power against fund managers type investment fund are QIIs; to prevent them from setting up and managing a fund that is one- ■ the number of Japanese investors is less than 10; and sidedly disadvantageous to the investors. A QII under the QII ■ the total contributions from such Japanese investors are less Exemption is expected to monitor the fund manager on behalf of than one-third of the total contributions of all investors in the the non-QII investors. foreign partnership-type investment fund. The QII Exemption has been widely used for not only domestic Exception to self-management by delegation of entire management collective investment schemes, such as nin-i kumiai partnerships authority and tokumei kumiai partnerships, but also foreign partnerships. If a general partner of a collective investment scheme delegates its However, it has sometimes been abused, by putting in a sham QII, entire investment authority to a discretionary investment manager such as an affiliate of the general partner or another investment registered under the FIEA, the management activity of that general partnership managed by the general partner, which could not be partner will be excluded from the scope of collective investment expected to monitor the general partner. The FIEA was amended, scheme management services subject to regulation in Japan and the and the requirements for the QII Exemption were strengthened, registration requirement for discretionary investment managers will effective March 1, 2016. not apply. This exception would not be a viable option for a foreign Under the amended requirements: (i) if the QIIs only consist of limited partnership managed outside Japan. (a) a limited liability investment partnership with assets under management, less the amount of borrowings, of less than JPY 500 1.3 Investment from Japan into a foreign investment fund million, or (b) an affiliate of the general partner, the QII Exemption without any solicitation in Japan is not available; (ii) non-QIIs must be sophisticated investors, such as listed companies, corporations with a capital amount or net assets If a Japanese investor, usually a sophisticated institutional investor, of more than JPY 50 million, foreign corporations, and individuals approaches a foreign investment fund (regardless of whether it with investment financial assets of more than JPY 100 million (and having a securities/derivatives account for more than one year); is a unit trust-type or partnership-type) that has not conducted and (iii) if the general partner is a foreign entity, it must appoint a any solicitation in Japan, and makes an investment in the foreign representative in Japan. investment fund, the fund is not subject to Japanese private placement regulations, as there is no solicitation in Japan. For unit trust-type Where the QII Exemption is used to avoid registration as a Type foreign investment funds, an FSA statement is not required. 2 financial instruments transaction business, additional transfer restrictions apply so that: (i) the QIIs are prohibited from selling Whether or not there has been any solicitation in Japan is a factual their interests in the collective investment scheme to non-QIIs; and matter; however, it should be emphasised that if the foreign (ii) the non-QIIs are prohibited from selling their interests unless all investment fund has any involvement in Japan through a subsidiary, such interests held by a transferor are transferred to a single investor. or an affiliate or representative office, there may be a risk that the In order to take advantage of the QII Exemption, a filing with the activities of such entities will be regarded as soliciting investments regulator needs to be made in advance. In a self-solicitation, the in the foreign investment fund. issuer of the collective investment scheme will make this filing, while in a self-management, the manager of the collective investment 2 Taxation scheme will make the filing. 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. 2.1 Taxation of individual investors in Japan investing in The filing must identify all QIIs investing in the collective investment a foreign investment trust scheme so the regulator can check for abuse of the QII Exemption by putting sham QIIs. It may seem inconsistent to require QIIs to be Foreign stock investment trust identified in the filing, which is filed prior to solicitation. However, As to individual investors of a foreign stock investment trust for practical reasons, the candidate QIIs need to be consulted publicly offering units in Japan, distributions are treated as dividend in a manner not constituting a solicitation, so their names can be income and subject to withholding tax at the rate of 20%, which

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

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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 practice in practice 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, 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; 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 tax and labour law.

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Andorra

Cases & Lacambra Miguel Cases

■ 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 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” (OICVMs), which are aligned with the UCITS Directive, the 1.3 Are Alternative Investment Funds themselves definition of AIFs comprises other open-ended and closed-ended required to be licensed, authorised or regulated by a collective investment schemes (“organismes d’inversió col·lectiva” regulatory body? – OICs), such as alternative funds per se (also known as hedge funds), real estate funds and other OICs as a catch-all term for The INAF is responsible for authorising the establishment of private equity entities or those which, because of the composition Andorran AIFs. They acquire the condition of OICs when they are of their assets and diversification risk policies, cannot be included in registered before the INAF. The distribution of foreign AIFs, if this any other regulated categories. is considered active commercialisation, will also trigger registration obligations. Obtaining a specific performance objective and fundraising are the distinguishing elements of AIFs. In addition, the Andorran National Institute of Finance (INAF) – 1.4 Does the regulatory regime distinguish between 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) and if so how? recommendations in order to develop regulations and standards regarding activity related to OICs. Furthermore, its constitutive There is no specific distinction between open-ended and closed- law grants the INAF the ability to set the applicable fall-back ended AIFs under Andorran legislation. The only categorisation of international standards for interpretational and prudential regulated by Law 10/2008 and the INAF’s technical communications supervision purposes. The most relevant technical communications is as follows: (i) money market funds; (ii) fixed-income funds; (iii) regarding AIFs are the following: 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 subsumed within two general categories: (i) OICVMs; and (ii) other classification of OICs.

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undertakings for collective investment schemes (Altres OICs), Furthermore, in September 2013, the International Organization which includes real estate OICs, alternative OICs and other OICs. of Securities Commissions (IOSCO) protocol for multilateral agreement on consultations was signed.

1.5 What does the authorisation process involve? A Memorandum of Understanding (MoU) was signed between Andorra and Spain on 4 April 2011. The MoU: (i) constitutes Prior to the distribution of Andorran AIFs and their subscription, an agreement for consolidated cooperation in the supervisory they must be registered before the INAF. Indeed, the regulation framework between the INAF and the Bank of Spain; (ii) establishes of funds is subject to the INAF’s approval in the authorisation and the terms of the protocol for the relationship and collaboration registration process of the OIC. between both authorities; and (iii) enables the supervisory authority of the country of origin to request information on consolidated risks

The documentation which is required in order to obtain authorisation, Andorra of banking groups from the relevant authority of the country where prior to the establishment of an Andorran AIF, is the following: the entity has subsidiaries. ■ The prospectus. Andorra signed, on 12 February 2016, the Multilateral Competent ■ The agreement between the management company and the Authority Agreement with the European Union to automatically depositary entity. exchange information under the Common Reporting Standard. ■ A technical document detailing the particular features of the AIF and the specific investment programme. ■ The depositary entity of the OICs being invested in (only for 2 Fund Structures subordinated funds). ■ An explanatory memorandum of the control levels conducted by the management company (only for alternative funds). 2.1 What are the principal legal structures used for Alternative Investment Funds? ■ A service delegation agreement.

The authorisation also requires the INAF’s approval regarding the It can be either an investment fund or an investment company. management company and the choice of the depositary entity. Investment funds can only be managed by a management company, whereas an investment company can be managed directly or by 1.6 Are there local residence or other local qualification delegating management to an authorised institution, provided that requirements? the shareholders’ meeting or the board of directors, by delegation, decides it. As mentioned above, only Andorran financial entities which are authorised to manage OICs can be management companies of 2.2 Please describe the limited liability of investors. Andorran AIFs. Investors are liable for the debts of the AIF to the extent of their 1.7 What service providers are required? contributions. Consequently, under normal circumstances, an AIF’s creditors cannot claim against the investors’ assets. According to applicable law, there must be a depositary entity with which the securities, cash or any other asset, subject to the activity 2.3 What are the principal legal structures used for of any AIF, are deposited. managers and advisers of Alternative Investment In the case of investment funds, they must be managed by a Funds? management company (in the case of investment companies, the appointment of a management company is optional). Functions Investment funds of management, administration and control can be provided by the As mentioned above, only Andorran financial entities which are management company itself or by a third party. authorised to manage OICs can be management companies of Investment companies must also have a suitable administrative Andorran AIFs. Such entities must be established as an Andorran and accounting system and internal control procedures, including limited company. Management companies must have a minimum risk management procedures, together with IT control and safety equity share capital of EUR 300,000, fully subscribed and paid-in. procedures, money laundering bodies and procedures. In addition, they must have a board of directors of at least three An AIF must be audited and can be marketed by the management members. Management companies are obliged to comply with company or by a local licensed distributor. specific solvency and core capital ratio provisions. Investment companies 1.8 What co-operation or information sharing agreements An investment company must be established as an Andorran limited have been entered into with other governments or company and can be self-managed or delegate to a management regulators? company the management of all or part of the assets of the institution. Both the management company and the investment company may In June 2011, Andorra signed a Monetary Agreement with the contract intermediaries or financial agents, who must have the European Union. The Monetary Agreement not only recognises relevant authorisation for rendering such services. the euro as the official currency of the Principality of Andorra, the right to issue euro coins and the obligation to grant euro banknotes and coins with legal tender status issued by the Eurosystem and 2.4 Are there any limits on the manager’s ability to the Member States which have adopted the euro, but represents the restrict redemptions in open-ended funds or transfers cornerstone of the legal changes envisaged for the next 10 years. This in open-ended or closed-ended funds? is because the Monetary Agreement requires that the Principality of Andorra adopt, within certain timeframes, a substantial part of all In general, both subscriptions and redemptions are made on the the EU financial legislation. basis of the net asset value, which is subject to the subscription/

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redemption fees and other possible costs borne by the investor. Moreover, subscriptions and redemptions (which set the value date 3.3 Do the marketing or legal documents need to be of the request) are made through contributions or charges to the registered with or approved by the local regulator? OIC. These circumstances must be set out in the prospectus. All marketing materials shall be registered before the INAF prior Both the management company and the investment company can to its publication. Any marketing materials shall include the fund’s justifiably limit redemptions, according to the prospectus, which may registration number before the INAF. establish certain limitations, including the provisional suspension of redemptions, in exceptional cases, in the investors’ interests. In addition, the INAF may temporarily suspend subscription and 3.4 What restrictions are there on marketing Alternative redemption when value determination is not possible. Investment Funds? Andorra Regarding real estate funds, investors may subscribe or request the redemption of their units at least twice a year. Alternative Investment Funds for well-informed investors cannot be made available by any disclosure means not specifically addressed to this investor profile. 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? 3.5 Can Alternative Investment Funds be marketed to There are no Andorran legislative restrictions on transfers of retail investors? investors’ interests in AIFs. According to Law 10/2008, the INAF can restrict the marketing of AIFs to well-informed investors, in case of a low liquidity 3 Marketing 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 3.1 What legislation governs the production and offering Instruments Directive (MiFID). of marketing materials?

The production and offering of marketing materials are governed by 3.6 What qualification requirements must be carried out Law 10/2008 and the Technical Communication 7/SGOIC, 27 May in relation to prospective investors? 2011, on rules for ethics and behaviour. Investment in an AIF reserved for well-informed investors requires a limited level of protection. Pursuant to Law 10/2008, “well- 3.2 What are the key content requirements for marketing informed” investors are those which meet the criteria of being materials, whether due to legal requirements or either: (i) institutional investors; (ii) professional investors; or (iii) customary practice? other investors who confirm in writing that they adhere to the status of “well-informed” investors and who either: (a) invest a minimum Advertising must be clear, sufficient, objective and not misleading of EUR 50,000; or (b) have been assessed by a credit institution, and must state explicitly that it is an advertisement. an investment firm or a management company which certifies the Prior to the investment, the latest published reports and the simplified investors’ ability to understand the risks associated with investing prospectus – and, if requested, the full prospectus – must be delivered in the AIF. free of charge to the investors. With the exception of those limited to well-informed investors, AIFs Marketing materials should contain: (i) a reference to the full can be marketed to retail investors. prospectus and where it can be consulted; (ii) information regarding the managing company, the custodian and their authorisations to operate; and (iii) relevant information about the product’s main 3.7 Are there additional restrictions on marketing to public bodies such as government pension funds? characteristics, which must not lead to confusion regarding its content. There are no restrictions in the Andorran jurisdiction. National and Marketing materials may also contain past performance information, regional governments, the INAF, public institutions, central banks in which case they should: (i) include a disclaimer stating that past and other international institutions are expressly recognised as performance does not condition future performance, or similar; professional investors. and (ii) designate where and how to access quarterly and annual reports. They should avoid any expression or argument that may lead the investor to believe that there is a guaranteed positive return, 3.8 Are there any restrictions on the use of intermediaries unless there is a minimum return guaranteed, in which case all its to assist in the fundraising process? elements should be clearly exposed (object, duration, conditions, commissions, etc.). There are no specific restrictions in the Andorran jurisdiction. Also, the typography, format and content of marketing materials should be transparent, clear and accurate; and should not be 3.9 Are there any restrictions on the participation in comparative or estimative. Alternative Investments Funds by particular types of investors, such as financial institutions (whether as When marketing activities are conducted through the internet, sponsors or investors)? information shall be displayed in such a manner that the investors have access to the full prospectus prior to subscription. There are no specific restrictions on the participation of particular types of investors other than those that may be imposed by the investors’ applicable regulation.

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Management companies and investment companies must report to 4 Investments the INAF any decrease in net assets (if it is less than 10%). Finally, as mentioned above, prior to the marketing of AIFs, 4.1 Are there any restrictions on the types of activities management companies and investment companies must send to the that can be performed by Alternative Investment INAF a copy of the marketing materials. Funds?

AIFs in Andorra are divided into three categories: (i) real estate 5.3 Is the use of side letters restricted? investment funds; (ii) common Alternative Investment Funds; and (iii) Alternative Investment Funds only for qualified investors. There are no Andorran provisions regarding the use of side letters.

However, using specific language to determine obligations and Andorra A real estate investment fund shall invest at least 90% of its annual duties, mentioning their binding character, as well as their signing average of monthly balances of its real estate assets. Additionally, by the parties, is advisable. (i) any asset, including rights on such asset, can represent more than 35% of the total assets in the acquisition moment; (ii) real estate assets being part of the asset state of the fund, rented to legal entities 6 Taxation that are part of the same group, cannot represent more than 35% of the assets of the AIF; and (iii) entities belonging to the same group can only acquire a real estate asset when it is a new construction, it is 6.1 What is the tax treatment of the principal forms of permitted by its bylaws, the managing company informs about it on Alternative Investment Funds? the prospectus and periodical information, and it does not represent more than 25% of real estate investment fund assets. Andorran AIFs are subject to a special regime foreseen by Andorran The rest of the AIFs under Andorran legislation cannot invest more Corporate Income Tax, which establishes a 0% tax rate. than 20% of their assets in securities or financial instruments from the same issuer. 6.2 What is the tax treatment of the principal forms of investment manager / adviser?

4.2 Are there any limitations on the types of investments that can be included in an Alternative Investment Under Andorran Corporate Income Tax, the investment managers or Fund’s portfolio whether for diversification reasons or advisers are subject to the general tax rate of 10%. otherwise? 6.3 Are there any establishment or transfer taxes levied Please see question 4.1 above. in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the investor’s interest? 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? No, there are not. However, further analysis would be required as Under Andorran legislation, there are no restrictions on borrowing to the tax implications derived from the transfer of the participations by AIFs. in a fund with more than 50% of its assets in real estate located in Andorra.

5 Disclosure of Information 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative Investment Funds? 5.1 What public disclosure must the Alternative Investment Fund make? Residents The management company of an AIF must publish a prospectus of Resident individuals will be subject to tax at a 10% rate in Andorra each of the AIFs it manages, as well as quarterly reports (for Altres for the capital gains derived from the difference between acquisition OICs it is not necessary to report on a quarterly basis, according to value and transfer value of the units. Notwithstanding, there is a the INAF criteria). The simplified prospectus and annual reports participation exemption if the resident investor has held less than must also be disclosed. 25% of the units during the 12 months prior to its sale or if the investor has maintained the investment for more than 10 years. In Such information must be published in accordance with the case of distributive AIFs, the dividends would be fully exempt if prospectus. the AIF is resident in Andorra, or subject to tax at a 10% rate if the Andorran AIFs and foreign AIFs which are going to be distributed in AIF is non-resident. However, the internal tax law regulates the full Andorra must be registered with the special INAF registry. elimination of the double taxation through an exemption method over the amounts withheld at the source. 5.2 What are the reporting requirements in relation to Resident companies will be subject to tax at a 10% rate. Nevertheless, Alternative Investment Funds? collective investment vehicles are subject to a privileged tax rate of 0% for either capital gains or dividends. In case of distributive AIFs Management companies (for each of their managed AIFs) and paid to ordinary companies, the dividends would be subject to a investment companies are obliged to prepare annual reports which 10% tax rate. shall be published and submitted to the INAF and to the investors. Non-residents In addition, it is also compulsory to prepare quarterly reports which Non-resident individuals are neither subject to personal income must be submitted to the INAF. tax nor to any withholding for the capital gains or dividends in

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Andorra. Special analysis of the tax treatment should be carried out depending on the tax regime on dividends or capital gains in 6.8 What steps are being taken to implement the OECD’s the resident country of the individual and the Double Tax Treaties. Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they Pension Funds affect Alternative Investment Funds’ operations? Pension funds are collective investment vehicles and consequently, the privileged tax rate of 0% is applicable either to capital gains or Andorra announced on 19 October 2016 that it had been admitted as dividends. member of the BEPS OECD project on 14 October 2016. Andorra is currently in process of implementing the standards but, to date, no particular measures have been taken in relation to Actions 6 and 7 6.5 Is it necessary or advisable to obtain a tax ruling from

Andorra the tax or regulatory authorities prior to establishing which may affect Alternative Investment Fund operations. an Alternative Investment Fund? 7 Reforms No, it is not necessary. However, it would be advisable to file a tax ruling in order to foresee the tax treatment of a specific AIF. 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?

There are no Andorran provisions which develop any particular measure to implement FATCA. However, the Andorran financial reporting entities, following a non-IGA reporting model, comply with the general obligation to report information on financial Miguel Cases accounts directly to the US Internal Revenue Service (IRS). Cases & Lacambra Andorra has already implemented the standard for automatic C/ Manel Cerqueda i Escaler 3–5 AD700 Escaldes-Engordany exchange of financial accounts in tax matters (CRS) approved by Andorra the Organization for Economic Co-operation and Development (OECD). In particular, Andorra executed an International Tax Tel: +376 728 001 Email: [email protected] Treaty with the European Union on 12 February 2016, which URL: www.caseslacambra.com entered into force on 1 January 2017, and approved the internal Act on Automatic Exchange of Tax Information on 30 November 2016, which entered into force on 1 January 2017. Miguel Cases is the Managing Partner of Cases & Lacambra and leads the Corporate and Banking & Finance practice. He has extensive experience advising credit institutions and investment services firms, 6.7 Are there any other material tax issues? being the legal counsel of several national and international financial institutions, public authorities and investment funds. No, there are not.

Cases & Lacambra is a client-focused boutique law firm with a 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. Cases & Lacambra has offices in Spain and the Principality of Andorra.

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Angola Pedro Simões Coelho

VdA Vieira de Almeida Alexandre Norinho Oliveira

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

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must also include the AIF’s regulation, subscription form, and an announcement on the beginning and ending of the subscription 1.8 What co-operation or information sharing agreements period. have been entered into with other governments or regulators? In addition, the CMC must also be given copies of the agreements to be executed between the management company and (i) the There is no specific protocol or sharing agreement signed by the CMC depositary, (ii) the distributors or entities that will market the AIF, with other governments or regulators in respect of AIFMs or AIFs. and (iii) any other entities that will render services to the AIF or to the AIF manager. However, the CMC signed a general (low-detail) understanding protocol with the Portuguese Securities Exchange Commission Documents evidencing the acceptance of the rendering of the (Comissão do Mercado de Valores Mobiliários or CMVM) on Angola relevant services by all entities involved in the AIF’s activities must September 2006, including some information sharing provisions. also be delivered to the CMC. Furthermore, in the case of a closed-ended AIF, if applicable, the authorisation application for the public placement of the units/shares 2 Fund Structures 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, 2.1 What are the principal legal structures used for in an amount no less than 20% of the AIF’s NAV, in order to secure Alternative Investment Funds? the necessary liquidity to pay potential redemption requests placed by the investors. An AIF may take one of two forms or structures, both subject to the An authorisation is given within 45 days of the receipt of either licensing procedures described in question 1.5 above: the application, with all necessary documentation having been ■ Contractual structure with no legal personality. This is the provided in attachment thereto, or of any additional information or classic structure and requires that the AIF is managed by a amendments to the documents required by the CMC. If at the end separate fund manager. The investors’ or participants’ interests of such a period the applicants have not yet been notified of the in these funds are called units (unidades de participação). deferral of their application, the authorisation is considered to have ■ Collective investment company endowed with legal personality been tacitly refused. (sociedade de investimento). Collective investment companies The CMC may refuse the authorisation, inter alia, if the applicant which mainly invest in securities are classified as SIMs does not submit the required documentation or if the AIF manager (sociedades de investimento mobiliários), while those which at stake engages in irregular management of other investment funds. mainly invest in real estate are classified as SIIs (sociedades de investimento imobiliário). Both SIMs and SIIs may be After the authorisation has been granted, an AIF will be fully set up self-managed or have appointed a third party as their manager, from the moment the first subscription is settled. which must be a duly authorised investment fund manager. Participants in these collective investment companies will hold shares (ações). 1.6 Are there local residence or other local qualification requirements? In Angola, AIFs are usually set up under the contractual structure with no legal personality. Considering that the vast majority of AIFs in Angola are set up In an overall assessment of the pros and cons of both structures, it under the contractual form with no legal personality, it is required is possible to verify that the contractual structure has a longer track that such AIFs be managed by a separate fund manager, which needs record in Angola, being the preferred choice for the setting up of to be incorporated and have its centre of main interests and effective AIFs as it offers an affordable, simple and well-known model for management located in Angola. AIFs in Angola. Furthermore, the fund manager must have in place several internal Conversely, the collective investment company endowed with legal policies aimed at addressing the risk of its activity, remuneration personality is clearly a more complex model that allows, however, issues, outsourcing, internal control and evaluation of the assets greater control for the investors over the management of the AIF. pertaining to the AIFs under management, all being subject to the control of the CMC and, to a certain extent, the depository, and 2.2 Please describe the limited liability of investors. entailing permanent record-keeping by the fund manager.

Lastly, the employees of the fund manager with technical functions, Legally, the assets of an AIF are only liable for its debts, thus it will as well as the management, shall have the proper qualification not be liable for the investors, fund manager, depository, distributors and professional aptitude in accordance with high-level standards. or other AIFs’ debts. Likewise, investors are not personally liable Pursuant to Regulation no. 4/14, it shall be assumed that persons for the AIF’s debts and will therefore not, under any circumstances, that have held office with similar functions within the financial be burdened by any of the AIF’s debts. sector have the necessary professional competence. As regards collective investment companies endowed with legal personality, they are also subject to the limited liability provisions 1.7 What service providers are required? applicable to commercial companies by special law.

An AIF is legally required in Angola to have: a fund manager, except 2.3 What are the principal legal structures used for if it is endowed with legal personality, in which case such an AIF managers and advisers of Alternative Investment may perform its own management; a depository; an auditor; and, in Funds? the case of real estate AIFs, real estate appraisal experts. Furthermore, the AIF may also have, but is not legally compelled to AIFs, which are not self-managed, will need to be managed by a: have, distributors or entities that will market the AIF, the existence ■ fund manager (non-credit financial institution) authorised to of such entities being more usual in the case of open-ended AIFs. manage AIFs investing in securities and other financial assets

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or real estate investment funds (sociedade gestora de fundos Pursuant to Regulation no. 4/14 the marketing material shall contain de investimento mobiliário); or the following warnings: ■ real estate fund manager (non-credit financial institution), ■ “Reading of the prospectus and regulation of the AIF is which may only manage real estate funds (sociedade gestora recommended, before investing in it.” de fundos de investimento imobiliário). ■ In cases where the marketing material discloses return figures, “past returns do not guarantee future returns” and “the disclosed 2.4 Are there any limits on the manager’s ability to returns are subject to taxation”. restrict redemptions in open-ended funds or transfers ■ In cases where the figures have a reference period of less than in open-ended or closed-ended funds? a year, “[t]his UCI has less than 12 (twelve) months. In order to analyse the performance of an UCI, it is recommended the Angola The UCI Law is silent in respect of the ability of the fund manager analysis of at least 12 (twelve) months”. to restrict redemptions in open-ended funds, but considering that Lastly, as a general note, in accordance with Regulation no. 4/14, the such types of AIFs in general target retail investors, the CMC will information contained in the marketing materials must comply with most certainly scrutinise this matter. In fact, such a possibility the following principles: objectivity; identification; truthfulness; would need to be clearly set out in the AIF’s regulation, which is transparency; balance; timeliness; and comparability. analysed during the authorisation procedure.

Moreover, the minute of the AIF regulation, approved by Regulation 3.3 Do the marketing or legal documents need to be no. 4/14, contains a field where the conditions set out for redemptions registered with or approved by the local regulator? need to be described, but only seems to refer to the applicable fees, settlement dates and the criteria for the determination of which units/ Yes. All marketing materials are subject to the CMC’s prior approval. shares will be redeemed. Likewise, Regulation no. 4/14 only seems to foresee conditions under which redemptions may be suspended, but not restricted. 3.4 What restrictions are there on marketing Alternative As regards the restriction of transfers in open-ended funds, the same Investment Funds? rationale described above in respect of the redemption shall apply. The marketing or distribution (comercialização) of AIFs under the Conversely, regarding closed-ended AIFs, mainly those targeting UCI Law occurs when there is collection of funds with the public professional investors, we trust that it is possible to establish in the in order to be channelled to the investment in the AIF, provided that AIF’s regulation restrictions on the transfer of units from investors the activity is: (i) addressed to undetermined investors; (ii) preceded to third parties. or followed by prospection or gathering of investment intentions with undetermined investors; and (iii) addressed to at least 150 2.5 Are there any legislative restrictions on transfers of addressees. investors’ interests in Alternative Investment Funds? Therefore, only this kind of marketing will be caught by the regime set out in the UCI Law and Regulation no. 4/14. No. However, the limitations established on foreign investment, which place constraints on transfers abroad of profits or dividends Furthermore, the concept of reverse solicitation is not an official obtained in Angola, should be borne in mind. Therefore, prior to exemption from the UCI Law requirements, but rather a tolerated the investment in an Angolan AIF being performed, the thresholds practice, which consists in the investor, on its own initiative and and requirements to be met by such an investment shall be assessed, without any previous engagement on the part of the distributor, on a case-by-case basis, as well as the provisions applicable to the requesting information on the AIF at stake. However, a case-by- transfer abroad of the profits or dividends obtained pursuant to the case assessment needs to be conducted, considering that the use of redemption of the units/shares or liquidation of the AIF. the reverse solicitation expedient may come under the scrutiny of the CMC. Closed-ended AIFs shall register the performance of marketing/ 3 Marketing distribution activities with the CMC. Lastly, the marketing/distribution of foreign AIFs in Angola is 3.1 What legislation governs the production and offering subject to the prior authorisation of the CMC. of marketing materials?

3.5 Can Alternative Investment Funds be marketed to Please refer to question 1.1 above, plus the General Marketing Law, retail investors? approved by Law no. 9/02 of 30 July 2002. Yes. However, it must be noted that special AIFs investing in 3.2 What are the key content requirements for marketing transferable securities or financial instruments (organismos materials, whether due to legal requirements or especiais de investimento coletivo em valores mobiliários) are customary practice? distributed within specific segments of the market. If it is intended for the distribution to be carried out with non-institutional investors, The UCI Law and Regulation no. 4/14 provide minutes that the legal the fund manager shall provide the CMC with a training plan of the documents of the AIF (prospectus and regulation) must abide by. entities in charge of such distribution. Notwithstanding, the CMC In respect of marketing materials, there are no minutes available; may refuse to grant the authorisation for the AIF to be distributed however, it is customary for the fund manager and other distribution with certain segments of the market, in case it considers that the entities to provide information on the investment policy, markets investors are not sufficiently protected. targeted, main features (identification of the relevant entities, terms and conditions of the investment, links to the legal documents) and historic returns of the AIF.

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referred to in (i) and (ii) above; (vi) derivatives traded in OTC, 3.6 What qualification requirements must be carried out provided that CMC regulations are complied with; (vii) money in relation to prospective investors? market instruments, which issue or issuer is subject to regulation for the purposes of investors’ protection or savings schemes; and (viii) There is no particular requirement to be fulfilled in relation to other instruments provided in the CMC’s regulations. investors in AIFs. The derivatives may only be used for hedging purposes and naked Nonetheless, the fund manager shall ensure that the “know your short-selling is forbidden. customer and investment adequacy analysis” is properly carried out As regards real estate investment funds, they may invest the in relation to the investor, as well as that the anti-money laundering majority of their assets in real estate, but may also invest in shares and terrorism financing procedures are respected. Angola of real estate investment companies (sociedades de investimento imobiliário), derivatives, mainly for hedging purposes, units/shares 3.7 Are there additional restrictions on marketing to of other real estate investment funds and liquidity instruments. The public bodies such as government pension funds? extent to which the investment in the referred assets is limited will depend on whether the AIF is closed-ended, open-ended or targeting There are no additional restrictions. a specific scope, i.e. real estate investment funds investing in house renting, agriculture, livestock, industrial exploration, etc. 3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process? 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? No. However, the relationship established between the intermediaries and the AIF shall be put in a written agreement and disclosed in the Fund managers may obtain loans on behalf of AIFs under their AIF’s legal documents. management, but the loan period cannot exceed 120 days, consecutive Furthermore, the intermediary, when carrying out the fundraising or not, within a period of one year and up to the maximum of 10% process, needs to act within its authorised scope of activities, i.e. of the AIF’s NAV. if the fundraising process corresponds to marketing of the AIF The loan to be granted under the terms described above shall be under the UCI Law, the intermediary will need to be an authorised previously authorised by the CMC and the fund manager shall ground institution under the applicable legal terms to carry out the the reasoning for the loan, as well as provide the CMC with the loan’s distribution of securities. contractual conditions.

3.9 Are there any restrictions on the participation in Alternative Investments 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 make? No. However, the holding of units/shares in AIFs may have an impact, that needs to be assessed on a case-by-case basis, on the The AIF’s legal documents and their updates shall be available in a own funds and reserves of the credit and financial institutions. durable means or on an internet website. Considering that the legal documents shall describe the fund manager’s identity, depository, 4 Investments auditor, distributors and other services providers to the AIF, the majority of the data in connection with the AIF will be made available to the public. 4.1 Are there any restrictions on the types of activities However, the identity of the investors in the AIF is not mandatorily that can be performed by Alternative Investment Funds? subject to public disclosure.

Yes. AIFs can only focus on investment activities and their 5.2 What are the reporting requirements in relation to management and investment shall comply with the general rules Alternative Investment Funds? applicable to the financial instruments markets. The fund manager must prepare and publish annual and biennial accounts. These must be made available free of charge on request 4.2 Are there any limitations on the types of investments that can be included in an Alternative Investment by the investors. Fund’s portfolio whether for diversification reasons or Moreover, the fund manager must publish and send to the CMC: otherwise? ■ The annual accounts within four months after the end of the financial year. Yes. The assets eligible for the portfolio of the AIF will depend on ■ The biennial accounts within two months after the end of the its specific type. relevant semester. Therefore, in general terms, an AIF investing in securities or financial assets may have in its portfolio: (i) securities admitted 5.3 Is the use of side letters restricted? to trading in an Angolan regulated market; (ii) securities admitted to trading in a third country regulated market, provided that such The use of side letters that set out particular terms and conditions in is foreseen in the law, the AIF’s legal documents or approved by respect of governance, investment, etc. of the AIF is not specifically the CMC; (iii) units/shares in other UCIs; (iv) bank deposits with addressed by the UCI Law. a term of up to a year; (v) derivatives traded in regulated markets

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However, in the case of open-ended AIFs, considering that they usually target retail investors and/or a broader unrestricted scope of 6.4 What is the tax treatment of (a) resident, (b) non- investors, the use of side letters which alter any relevant provision resident, and (c) pension fund investors in Alternative Investment Funds? of the legal documents shall be deemed illegal, considering that, as a general principle, fund managers need to abide by the AIF’s legal documents during the provision of their services. Income obtained by an AIF’s resident and non-resident or pension funds unit holders is exempt from Investment Income Tax and In closed-ended AIFs, notably in AIFs targeting only professional Industrial Tax on any income obtained, namely those from redemption investors, we trust that there is a wider margin to set out, namely or distribution of income, as well as gains from the sale of units. through a side letter, specific provisions in respect of certain matters.

However, in general terms, as the provisions of the UCI Law are Angola imperative; any side letter providing for actions in breach of such 6.5 Is it necessary or advisable to obtain a tax ruling from legal provisions will be deemed illegal and may subject the fund the tax or regulatory authorities prior to establishing manager to administrative offence proceedings. an Alternative Investment Fund?

Yes, it is advisable, because the tax regime is quite new and there 6 Taxation 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 6.1 What is the tax treatment of the principal forms of Alternative Investment Funds? finance-structured investments.

The Angolan tax regime for UCIs set up under the contractual 6.6 What steps have been or are being taken to implement structure with no legal personality and the collective investment the US Foreign Account and Tax Compliance Act company endowed with legal personality has been enacted by 2010 (FATCA) and other similar information reporting Decree no. 1/14 of 13 October 2014. regimes such as the Common Reporting Standard? An AIF is subject to Corporate Income Tax (CIT or “Imposto On 9 November 2015, the Intergovernmental Agreement (IGA) Industrial”) on the annual profit obtained on a worldwide basis in under Model I to improve international tax compliance with respect compliance with the accounting rules, including rents from real to the U.S. Foreign Account Tax Compliance Act (FATCA) was estate and investment income. Capital gains and losses which signed between Angola and the USA, although it is not yet in effect. are not realised will not be taxed. The CIT rate is 7.5% for AIFs investing in securities or financial assets and 15% for AIFs investing in real estate. 6.7 Are there any other material tax issues? An AIF will be exempted from any other income tax, namely Investment Income Tax and Urban Property Tax. An AIF is also There are no other material tax issues. exempt from Stamp Duty and Consumption Tax on bank commissions, and Stamp Duty on capital increases. 6.8 What steps are being taken to implement the OECD’s Additionally, opened-ended real estate AIFs are exempt from Action Plan on Base Erosion and Profit-Shifting Property Transfer Tax and Stamp Duty on acquisition of real estate. (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations?

6.2 What is the tax treatment of the principal forms of Please note that Angola is not an OECD member country. Despite investment manager / adviser? this, we are not aware of any initiative from the Angolan Tax Authorities regarding this subject. There is no special tax treatment or rules applicable in Angola for investment managers or advisers. Therefore, as Angolan-resident entities, they will be subject to the general taxation regime: (i) 7 Reforms 30% Industrial Tax on income obtained on a worldwide basis; and (ii) capital gains, interest and dividends are subject to Investment Income Tax under a withholding mechanism (rates may vary from 7.1 What reforms (if any) are proposed? 5% up to 15%). Dividends paid between resident companies in Angola may be At the time of writing, the Angolan legal UCI framework is in the exempt from Investment Income Tax provided that a 25% stake is consolidation stage, considering that the legal documents at issue held for a minimum holding period of one year. have been recently enacted. Nevertheless, depending on the economic environment and political circumstances in the upcoming years, it may be necessary to update 6.3 Are there any establishment or transfer taxes levied certain aspects of the Angolan legislation in light of developments in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the and international experience, namely those stemming from the investor’s interest? Alternative Investment Fund Managers Directive’s implementation in EU Member States and new approaches adopted in the international There are none. AIF market.

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Pedro Simões Coelho Alexandre Norinho Oliveira VdA Vieira de Almeida VdA Vieira de Almeida Av. Duarte Pacheco, 26 Av. Duarte Pacheco, 26 1070-110 Lisbon 1070-110 Lisbon Portugal Portugal

Tel: +351 21 311 3677 Tel: +351 21 311 3677 Email: [email protected] Email: [email protected] URL: www.vda.pt URL: www.vda.pt Angola Law Degree, Universidade Livre de Lisboa, Faculty of Law. Law degree, University of Porto, Faculty of Law. Areas of practice: banking and finance; collective investment Postgraduate degree in European Human Rights, University of schemes; capital markets; and private equity. Coimbra. Pedro is currently head of the firm’s investment funds practice and LL.M. in European Legal Studies, College of Europe, Belgium. a partner in the Banking & Finance Group. He is also responsible Postgraduate degree in Securities Law, Universidade de Lisboa, for the Agency & Trust practice and for the firm’s aviation finance Faculty of Law. team. He has been actively involved in several transactions, mainly focused on the advising, structuring and setting up of collective Alexandre joined VdA in 2011. He is an associate in the firm’s Banking investment schemes such as mutual funds and real estate investment & Finance practice, where he has been actively involved in several funds, infrastructure vehicles, venture capital funds and private equity transactions, involving securities laws, banking and insurance sectors. structures. Alexandre has been actively involved in securitisation transactions, debt and other instruments issuances, structuring of covered bonds Languages: Portuguese; English; French; and Spanish. programmes and complex financial products placement, restructuring Admitted to the Portuguese Bar Association as a specialist in financial of loans and acquisition finance. His experience includes providing law. legal advice to credit institutions with regard to the above and compliance matters, to investment funds and to some of the leading Among other articles, Pedro Simões Coelho has published the players in the banking and financial sector, as well as to borrowers. following: Previously, he was also a trainee in VdA’s competition and EU practice ■■ Portugal chapter, The International Comparative Legal Guide to: area, where his practice focused on cases of abuse of dominant Alternative Investment Funds 2016. position, merger control and state aid proceedings. ■■ The AIFMD Passport and non-EU Alternative Investment Funds, He is the author and co-author of articles such as: Funds People, 2016. ■■ The Lending and Secured Finance Review: Portugal chapter (co- ■■ Mozambique chapter, The International Comparative Legal Guide author), Law Business Research, 2nd edition, 2016; to: Alternative Investment Funds 2016. ■■ Angola chapter, The International Comparative Legal Guide to: ■■ Angola chapter, The International Comparative Legal Guide to: Alternative Investment Funds 2016 (co-author); Alternative Investment Funds 2016. ■■ “Da Diretiva dos Gestores de Fundos de Investimento Alternativo ■■ Fund Management – Portugal, Getting the Deal Through, 2016. ao Regime Geral dos Organismos de Investimento Coletivo: Regime Atual e Perspetivas Futuras” (From the Alternative ■■ Hedge Funds in Portugal – The European Lawyer Reference Investment Fund Manager Directive to the Portuguese Collective Series, 2011 (first edition) and 2014 (second edition). Investment Undertakings Legal Framework: current regime ■■ Investment Funds in Portugal: Regulatory overview – Practical and future prospects), published in the Portuguese Securities Law Company Investment Funds Handbook 2012, 2013, 2014, Commission Review, Portuguese Securities Market Commission, 2015 and 2016. no. 52, December 2015, available at www.cmvm.pt; and ■■ Fusão Transfronteiriça de Organismos de Investimento Coletivo ■■ collaborated in the preparation of “Contratos Privados, das Noções em Valores Mobiliários – Funds People, 2015. à Prática Judicial” (Private Contracts: from the general principles to judicial practice) – Volumes I, II and III, 1st and 2nd editions, author: Fernando Baptista de Oliveira, Coimbra Editora, Coimbra, 2014.

VdA is an independent Portuguese law firm with 350-plus staff and strong experience in various industries. Over the past 40 years, VdA has been involved in a significant number of pioneering transactions in Portugal and abroad, in some cases together with the most relevant international law firms, with whom we have a strong working relationship. The recognition of VdA’s work is shared with our team and clients, and is reflected in the awards achieved, such as: the “Financial Times 2015 Game Changing Law Firm in Continental Europe”; the “Financial Times Innovative Lawyers in Continental Europe 2013 and 2016”; the “Most Active Law Firm” awarded to VdA by Euronext for five consecutive years; the “Portuguese Law Firm of the Year 2015 and 2016” awarded by the IFLR; the “Portuguese Law Firm of the Year 2016” and “Client Service Law Firm of the Year 2017” awarded by Chambers & Partners; the “Iberian Firm of the Year 2017” awarded by The Lawyer; and the “International Firm of the Year 2017” awarded by Legal Business. VdA, through its VdA Legal Partners (which encompasses all lawyers and independent law firms associated with VdA Vieira de Almeida for the provision of integrated legal services), is actively present in 11 jurisdictions that include all African members of the Community of Portuguese- Speaking Countries (CPLP), as well as Timor-Leste and some of the francophone African countries. Angola – Cape Verde – Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau – Mozambique – Portugal São Tomé and Príncipe – Timor-Leste

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Bermuda Jonathan Betts

Taylors (in Association with Walkers) Ariane West

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 in Bermuda. Managers and The establishment and operation of investment funds in Bermuda advisors can be organised anywhere and act as managers and (“investment funds” or “funds”) is governed by: advisors to all forms of funds. There is no requirement for a manager ■ the Companies Act 1981 (the “Companies Act”); or adviser to be licensed in Bermuda unless they have physical ■ the Investment Funds Act 2006 (the “IFA”); premises and employees in Bermuda. All managers and advisors of ■ the Fund Prospectus Rules 2007 (the “Fund Prospectus Rules”); authorised and exempt funds (as described below), however, will be and required to act in accordance with the IFA in all dealings concerning ■ the Fund Rules 2007 (collectively with the Fund Prospectus the fund. The BMA will evaluate whether the manager is a fit and Rules, the “Fund Rules”). proper person and will take into account the manager’s experience The Bermuda Monetary Authority (the “BMA”) is the principal and expertise in relation to the fund. body responsible for the regulation of investment funds, including For managers domiciled in Bermuda, there are exemptions available those listed on the Bermuda Stock Exchange. from the licensing regime if they fall within the scope of the Investment funds in Bermuda may be structured and organised Investment Business (Exemptions) Order 2004 (the “Exemption under Bermuda law in the following ways: Order”) further described below. (i) a company registered under the Companies Act and stated to Investment business services are very broadly defined and include be a mutual fund (“mutual fund company”); dealing in investments, arranging deals in investments, managing (ii) an investment company that is a closed-ended fund (“Closed- investments, providing investment advice and safeguarding and Ended Fund”); administering investments. To be deemed to be carrying on investment (iii) a unit trust scheme; and business “in or from” Bermuda, a person must carry on investment business from a place of business maintained by such person in (iv) a limited partnership. Bermuda with employees. Therefore, unless the manager maintains An investment fund is defined in the IFA to include any arrangements an office in Bermuda with employees or has an arrangement that the with respect to property of any description, including money, the Minister of Finance by order determines will constitute the carrying purpose or effect of which is to enable persons taking part in the on of business in Bermuda, the IBA will not apply. arrangements to participate in or receive profits or income arising Under the Exemption Order, if a person (not being a market from the acquisition, holding, management or disposal of the intermediary) carries on investment business with persons in the property or sums paid out of such profits or income. The IFA only categories listed below, it is exempt from the requirement to obtain a applies to those arrangements where investors are entitled to have licence under the IBA if it provides investment services exclusively to: their shares/units/interests redeemed in accordance with the fund’s constitution and prospectus at a price determined in accordance with (i) a high-income private investor: an individual who has had a 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 and partnerships funds in expectation of reaching the same income in the current year; Bermuda (collectively “Open-Ended Funds”) are all governed by current year meaning the year in which he or she purchases the IFA and the Fund Rules. The IFA and the Fund Rules are not an investment; 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 fall under the domain 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 criteria merits and risks of a prospective purchase of an investment, and who, in respect of each investment transaction, deals in applicable to the establishment and operation of the Open-Ended amounts of not less than US$100,000; Funds, with a view of protecting investors. The IFA requires that Open-Ended Funds, which do not qualify for exemption or exclusion (iv) collective investment schemes approved by the BMA under the IFA (or any provision of law amending or replacing the from authorisation, are classified by the BMA as (i) an institutional IFA); fund, (ii) an administered fund, (iii) a specified jurisdiction fund, or (iv) a standard fund. (v) bodies corporate, each of which has total assets of not less than US$5 million where such assets are held solely by the Authorised Funds Bermuda body corporate, or held partly by the body corporate and A. Institutional funds. These funds are open only to qualified partly by one or more members of a group of which it is a participants or each participant must invest a minimum of member; US$100,000. The funds must have both: (vi) unincorporated associations, partnerships or trusts, each of ■ an investment manager, fund administrator, registrar, which has total assets of not less than US$5 million where auditor, custodian or prime broker, who may be based such assets are held solely by such association, partnership or anywhere; and trust or held partly by it and partly by one or more members ■ a service provider, director or secretary with a link to of a group of which it is a member; Bermuda. (vii) bodies corporate, all of whose shareholders fall within one or A qualified participant is defined in the IFA as: more of the categories of this list, except category (iv); (i) a high-income private investor – an individual who (viii) partnerships, all of whose members fall within one or more of has had a personal income in excess of $200,000 in the categories of this list, except category (iv); or each of the two years preceding the current year or has (ix) trusts, all of whose beneficiaries fall within one or more of the a joint income with that person’s spouse in excess of categories of this list, except category (iv). $300,000 in each of those years, and has a reasonable A market intermediary is defined as “a person who engages or holds expectation of reaching the same level of income in himself out as engaging in the business of dealing in investments as the current year; principal or agent on an investment exchange”. (ii) a high-net-worth private investor – an individual whose net worth or joint net worth with that person’s spouse in Fund administrators are required to obtain a licence under the IFA the year in which he purchases an investment exceeds to carry on the business of a fund administrator in or from Bermuda. $1,000,000; Incentives are currently being offered by the Bermuda Government (iii) a sophisticated private investor – an individual who to attract asset managers to domicile in Bermuda, such as: has such knowledge of, and experience in, financial ■ new business work permits: new companies to Bermuda will and business matters as would enable him to properly receive up to five work permits for senior positions; evaluate the merits and risks of a prospective purchase ■ no term limits (that is, restrictions on the length of time an of investments; employee may stay in Bermuda); (iv) a body corporate which has total assets of not less than ■ reduced fees on the purchase of qualified property for $5 million held either solely by the body corporate or expatriates; partly by the body corporate and partly by one or more members of the same group of which it is a member; ■ key executive exemptions from work permit requirements and the opportunity for these individuals to eventually (v) an unincorporated association, partnership or trust receive long-term residency for themselves, their spouse and which has total assets of not less than $5 million held their children; and either solely by such association, partnership or trust or partly by it and partly by one or more members of ■ payroll tax holidays for employers who hire Bermudians to the same group of which it is a member; new positions. (vi) a body corporate whose members fall within one or more of the above; 1.3 Are Alternative Investment Funds themselves (vii) a partnership whose members fall within one or more required to be licensed, authorised or regulated by a of the above; and regulatory body? (viii) a trust whose beneficiaries fall within one or more of the above. Whether a fund is required to be authorised or regulated will depend B. Administered funds. These funds require each participant on whether the fund is structured as: to invest a minimum of US$50,000 or be listed on a stock ■ a Closed-Ended Fund; or exchange that is recognised by the BMA. The funds must ■ an Open-Ended Fund, have both: ■ if the fund is an Open-Ended Fund, whether it will be ■ an investment manager, registrar, auditor, custodian or structured as: prime broker, who may be based anywhere; and (i) an authorised fund, classified as: ■ an administrator licensed under the IFA. ■ an institutional fund; C. Specified jurisdiction funds. These funds are available if both: ■ an administered fund; ■ the Minister by order recognises the jurisdiction, outside ■ a specified jurisdiction fund; or Bermuda, in which the fund operates and a particular law, ■ a standard fund, or particular set of laws, of such jurisdiction as applicable (ii) an exempt fund; or to such; and (iii) an excluded fund.

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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 registration and the provisions jurisdiction. of the IFA. An excluded fund is an open-ended “private fund” in D. Standard funds. These funds are those that do not fall within which the number of participants does not exceed 20 persons and any other class of fund. There is no minimum investment or the investment fund does not promote itself by communicating investor qualification test but it must both: an invitation or inducement to the public generally. No consent ■ have an investment manager, registrar and auditor, all of is required from the BMA for such a fund. Excluded funds must which can be located anywhere; and serve notice on the BMA of the fact that the fund is a private fund ■ have a Bermuda-based administrator or custodian. and therefore qualifies for exclusion as soon as practicable after the Exempt Funds establishment of the fund. Bermuda Class A Exempt Funds and Class B Exempt Funds are exempt from Closed-Ended Funds authorisation under the IFA: Closed-Ended Funds are structured as investment companies. The A. Class A Exempt Funds. These funds do not require approval incorporation of Closed-Ended Funds in Bermuda is governed by from the BMA. To be eligible for Class A Exempt Fund status, the Companies Act and is subject to the approval of the Registrar the Open-Ended Fund must: of Companies (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 investment manager who: Closed-Ended Funds offering shares to the public are subject to the (i) is licensed under the IBA; prospectus provisions of the Companies Act. (ii) is authorised or licensed by a foreign regulator recognised by the BMA (currently only the US and the EU); or 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment (iii) for the purpose of the IFA, is carrying on business Funds (or otherwise differentiate between different in or from Bermuda or in a jurisdiction recognised types of funds) and if so how? by the BMA, is a person who has gross assets under management of not less than US$100 million or is Yes. Whereas Open-Ended Funds are regulated by the IFA as a member of an investment management group that has consolidated gross assets under management of detailed in question 1.3, the IFA does not regulate Closed-Ended not less than US$100 million; Funds. The establishment of a Closed-Ended Fund is governed by the Companies Act. Closed-Ended Funds offering shares to the ■ have appointed an officer, trustee or representative resident in Bermuda who has authority to access the public are subject to the prospectus provisions of the Companies books and records of the fund; Act. As the IFA does not apply: ■ have appointed the following persons to provide services ■ there are no IFA fees or reporting requirements; to the fund: a fund administrator; a registrar; an auditor; ■ there are no prescribed service providers; and and a custodian or prime broker; and ■ there is no requirement for a prospectus or offering document ■ prepare financial statements in accordance with any of the unless the offer is being made to the public as defined in the following standards: International Financial Reporting Companies Act. Standards (“IFRS”); the Generally Accepted Accounting The incorporation of Closed-Ended Funds in Bermuda is subject Principles (“GAAP”) in Bermuda, Canada, the UK or the to the approval of the Registrar and the BMA. The Registrar and US; or any other GAAP that the BMA may recognise. the BMA have discretion to refuse to permit the incorporation or If the Open-Ended Fund does not qualify for Class A Exempt the formation if the proposed beneficial owners are persons that the Fund status, it can submit an application for Class B Exempt BMA considers undesirable. Fund status. B. Class B Exempt Funds. These are Open-Ended Funds that must: 1.5 What does the authorisation process involve? ■ only be open to qualified participants (high-income, high- net-worth, sophisticated private investors or institutional The authorisation process, as detailed below, will depend on the investors); classification of the fund: ■ have appointed an officer, trustee or representative resident ■ Excluded Funds – a notice is served on the BMA confirming in Bermuda who has authority to access the books and that the fund is a private fund and qualifies for exclusion as records of the fund; soon as practicable after the establishment of the investment ■ have appointed the following persons to provide services fund. Once notification is filed, exclusion is automatically to the fund: an investment manager; a fund administrator; granted. a registrar; an auditor; and a custodian or prime broker. ■ Class A Exempt Funds – a certification is submitted to These persons must be, in the BMA’s view, fit and the BMA confirming that the investment fund meets the proper (BMA may on application waive any of the above requirements for exemption prior to commencement of the requirements if it is satisfied that appropriate arrangements fund’s business (including a copy of the fund’s prospectus). are in place to safeguard the interest of investors); and Once notification is filed, exemption is automatically granted. ■ prepare financial statements in accordance with any of the ■ Class B Exempt Funds – an application is submitted to following standards: IFRS; GAAP in Bermuda, Canada, the BMA for exemption (including a copy of the fund’s the UK or the US; or any other GAAP that the BMA may prospectus). Exemption is granted within 10 days if the fund recognise. meets the requirements.

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After the appropriate filings detailed above, Excluded Funds, Class (c) unit trusts – a unit trust fund is a fund under which the A Exempt Funds and Class B Exempt Funds are required, under property is held on trust for participants. The formation and the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist operation of unit trust funds is governed by the trust deed by Financing Supervision and Enforcement) Act 2008, to register with which it is established and the IFA; and the BMA as a Non-Licensed Person. (d) partnership funds – a partnership fund is a fund under which ■ Authorised Funds – an application is submitted to the BMA, the participants contribute funds to the partnership to be held on including (a) the corporate name and registered or principal behalf of participating partners of the partnership. The funds are office of each service provider, (b) a certificate signed by the managed by the manager for the benefit of the participants. The operator confirming the fund complies (or will comply) with formation and operation of partnership funds is governed by the section 14 of the IFA, and (c) a copy of the fund’s prospectus Limited Partnership Act 1883, the Exempted Partnerships Act 1992, the IFA and the applicable partnership agreement.

Bermuda containing all the information required by the prospectus rules as the BMA may reasonably require for considering the application. Authorisation is granted within 5–7 days if the 2.2 Please describe the limited liability of investors. investment fund meets the requirements. Closed-Ended Funds are not authorised or licensed but are required An investor in a limited liability investment fund is liable in the to comply with the provisions of the Companies Act. amount of any unpaid capital on the investor’s shares. An investor in limited partnership funds is liable to the amount of its capital 1.6 Are there local residence or other local qualification contribution to the fund. requirements? 2.3 What are the principal legal structures used for Bermuda investment funds must have: managers and advisers of Alternative Investment ■ either a director, trustee, officer or resident representative Funds? who is ordinarily resident in Bermuda, and who has access to the books and records of the investment fund; and Managers and advisers of investments funds are primarily structured ■ a registered office in Bermuda with certain records relating to as companies or limited partnerships established in Bermuda or in the investment fund. other jurisdictions.

1.7 What service providers are required? 2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers See question 1.3 with respect to each type of fund and the service in open-ended or closed-ended funds? providers required. Any restrictions on redemptions of investment funds would be imposed by the investment fund and provided for in its bye-laws 1.8 What co-operation or information sharing agreements and prospectus. have been entered into with other governments or regulators? 2.5 Are there any legislative restrictions on transfers of To date, Bermuda has 91 treaty partners around the world, has investors’ interests in Alternative Investment Funds? signed 41 bilateral tax information exchange agreements (TIEAs) and has 87 co-signatories under the multi-lateral Convention on There is no legislative approval required for the transfer of investors’ Mutual Administrative Assistance in Tax Matters. interests (non-voting) in investment funds. Any transfer of interests in the fund with voting rights requires an application to the BMA unless the fund is classified under the IFA and therefore has had a 2 Fund Structures general permission granted pursuant to the Notice to the Public of June 2005 under the Exchange Control Act 1972 and the Regulations thereunder. 2.1 What are the principal legal structures used for Alternative Investment Funds? 3 Marketing As noted in question 1.1, investment funds in Bermuda may be structured and organised under Bermuda law in four different ways: (a) mutual fund companies – a mutual fund company is a 3.1 What legislation governs the production and offering of marketing materials? company limited by shares and incorporated with mutual fund objects for the purpose of investing the moneys of its members for their mutual benefit and with both the company The Companies Act, the IFA and the IBA govern the production and and the members having the power to redeem or purchase for offering of marketing materials. cancellation its shares without reducing its authorised share capital and stating in its memorandum that it is a mutual fund. The formation and operation of mutual fund companies is 3.2 What are the key content requirements for marketing governed by the Companies Act, as amended, and the IFA; materials, whether due to legal requirements or customary practice? (b) investment fund companies – an investment fund company is a company limited by shares and incorporated without mutual fund objects, where investors do not have the right to demand The IFA provides that the prospectus is required to disclose facts which redemption of their shares. The formation and operation of would be considered material to a prospective investor, such as: investment companies is governed by the Companies Act. (a) the name of the fund and the address of its registered or The IFA is not applicable; principal office in Bermuda;

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(b) a statement as to whether the fund is registered or licensed, (c) the minimum subscription which, in the opinion of the in any jurisdiction or with any supervisory or regulatory promoters, directors or provisional directors, must be raised; authority, outside Bermuda; (d) any rights or restrictions on the shares that are being offered; (c) the date of incorporation or establishment of the fund (indicating (e) all commissions payable on the sale of the shares referred whether the duration is limited); to in the prospectus and the net amount receivable by the (d) where applicable, an indication of stock exchanges or markets company in respect of the sale; where the securities are, or are to be, listed or dealt in; (f) the name and address of any person who owns five per cent (e) the names, address, and other relevant particulars of directors, or more of the shares of the company: provided that this officers, resident representatives, auditors, fund administrators, paragraph shall not apply to an exempted company or a custodians, registrars, promoters, legal advisers, investment permit company;

managers, and other persons having significant involvement (g) any shareholding in the company of an officer of the company; Bermuda 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 and (j) a description of the intentions with respect to the declaration an annual declaration; and of dividends or distribution of profits; ■ for limited partnerships – a certificate of limited partnership, a (k) the procedures and conditions for the redemption and sale of certificate of exempted partnership and a notice of registered units and the circumstances in which such redemption may office. be suspended; Thereafter, companies that offer shares to the public are required to (l) the procedures and conditions for the issue of units; publish a prospectus and file the same with the Registrar (unless they (m) a description of the bases for the determination of the issue fall within any of the circumstances for which it is not necessary and redemption prices (including the frequency of dealings) under the Companies Act). and an indication of the places where information as to the prices may be obtained; The IFA contains further filings requirements for Open-Ended Funds with the BMA at authorisation. See question 1.5. (n) a description of the basis and frequency of valuation of the fund’s assets; (o) particulars of any material provisions of any contact engaging 3.4 What restrictions are there on marketing Alternative the services of any and all directors, trustees, partners, service Investment Funds? providers, and any other third parties receiving or likely to receive fees from the fund; Any person marketing funds in Bermuda is subject to the provisions (p) a description of the potential conflicts of interest between the of the Companies Act. There are no laws in Bermuda that restrict the fund, its directors, trustees, partners, and its service providers; marketing of shares of a foreign fund in Bermuda. However, there (q) the date of the financial year end of the fund; is a general prohibition against exempted and overseas companies (r) information on the nature and frequency of financial reports “carrying on business in Bermuda” under the provisions of the to be distributed to participants; Companies Act and the IBA, which restricts the marketing of shares (s) a statement of the place where copies of the constitution and of a foreign fund in Bermuda by an exempted Bermuda company any annual or periodic report may be inspected and obtained; owned by non-Bermudians or an overseas company. However, there are limited means through which the marketing of a foreign (t) particulars relating to the main business activity of the custodian and any co-custodian; and fund in Bermuda can be achieved. Where the shares are offered in Bermuda on a private basis by a foreign fund that does not have a (u) particulars of the experience of investment managers. place of business in Bermuda, that foreign fund is not required to The Fund Rules also contain disclaimers in favour of the BMA. obtain a licence under the Companies Act, provided the foreign fund The Companies Act provides that companies that are offering shares does not market or travel to Bermuda. While there is a “travelling to the public are required to publish and file a prospectus with the salesman” exception, which permits limited marketing in Bermuda, Registrar (unless they fall within any of the circumstances where it is reliance on this exception is not advisable as even limited contact in not necessary to publish and file a prospectus under the Companies Bermuda may be considered to be carrying on business in Bermuda Act). The prospectus should contain information showing: and inadvertently violate the IBA. (a) the names, descriptions and addresses of the promoters, It is not easy to be specific as to the permitted marketing activities officers or proposed officers; of a foreign fund, and in many cases the issue will turn on the facts (b) the business or proposed business of the company; and circumstances. Examples of activities that should be permitted (depending on the circumstances) include external marketing,

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unsolicited requests, Bermuda Stock Exchange (“BSX”) listing, permit funds, internet marketing, local brokers and foreign funds 4.3 Are there any restrictions on borrowing by the with a permit to carry on business in Bermuda. Alternative Investment Fund? Due to an exemption available under the Companies Act, a Bermuda Any restrictions would form part of the investment fund’s fund is exempted from the prohibition on marketing its shares in memorandum of association, bye-laws and/or prospectus. Bermuda.

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

Bermuda 5.1 What public disclosure must the Alternative Standard funds or investment companies (as detailed above in Investment Fund make? questions 1.1 and 1.3) can be marketed to retail investors. At the Registrar: 3.6 What qualification requirements must be carried out ■ the certificate of incorporation and memorandum of in relation to prospective investors? association; ■ the address of the registered office; See question 1.3 above. Due diligence must also be carried out ■ any prospectus or offer document required to be filed pursuant on prospective investors. This task is normally delegated to the to the Companies Act; and administrator. ■ certain other filings required pursuant to the Companies Act. At the Registered Office: 3.7 Are there additional restrictions on marketing to ■ details of directors and officers. The register of directors and public bodies such as government pension funds? officers is open for inspection during business hours; and ■ register of members*. The register of members is open for There are no additional restrictions. inspection by the members only in respect of its shareholding in the fund. 3.8 Are there any restrictions on the use of intermediaries (*Only in respect of authorised funds.) to assist in the fundraising process?

Except as discussed in question 3.4, there are no restrictions. 5.2 What are the reporting requirements in relation to Alternative Investment Funds?

3.9 Are there any restrictions on the participation in Exempt funds must: Alternative Investments Funds by particular types of ■ file a certificate with the BMA annually (before 30 June) investors, such as financial institutions (whether as certifying that the fund satisfies the requirements for sponsors or investors)? exemption and will continue to satisfy them, and also file both: There have been no restrictions imposed. (i) a statement of any material changes to its prospectus; and 4 Investments (ii) a copy of its audited financial statements for the preceding year. Institutional and administered funds must: 4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment ■ file a report to the BMA on its operations on a quarterly basis, Funds? including information on the fund’s price per share, or unit, net asset value and amounts subscribed and redeemed during the quarter; There are no restrictions on the types of activities that can be ■ submit to the BMA, within six months of the financial year end, performed by investment funds, subject to the fund not engaging in a statement confirming that the fund has at all times during the activity which is: preceding financial year been in compliance with the provisions (i) prohibited under the Companies Act; of the IFA, as well as applicable fund and prospectus rules, or (ii) not otherwise illegal or in breach of public policy; setting out the particulars of any breach; and (iii) outside the powers of the fund’s memorandum of association, ■ prepare annual financial statements audited by an auditor that bye-laws and prospectus; and is acceptable to the BMA. (iv) not compliant with the requirements of the IFA. Standard funds must: ■ file a report to the BMA on its operations on a monthly basis, including information on a fund’s price per share (or unit), 4.2 Are there any limitations on the types of investments net asset value and amounts subscribed and redeemed during that can be included in an Alternative Investment the month; Fund’s portfolio whether for diversification reasons or otherwise? ■ submit to the BMA, within six months of the financial year end, a statement confirming that the fund has at all times during the Any limitations would form part of the investment fund’s preceding financial year been in compliance with the provisions of the IFA, as well as applicable fund and prospectus rules, or memorandum of association, bye-laws and/or prospectus. setting out the particulars of any breach; and

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■ prepare annual financial statements audited by an auditor that on profits, income, any capital assets, gain or appreciation, or any is acceptable to the BMA. tax in the nature of estate duty or inheritance, such tax will not apply Specified jurisdiction funds must: to such fund or any of its operations, securities, debentures, or other ■ submit to the BMA, within six months of the financial year obligations until 31 March 2035. end, a statement confirming that the fund has at all times during the preceding financial year been in compliance with 6.6 What steps have been or are being taken to implement the provisions of the IFA, as well as applicable fund and the US Foreign Account and Tax Compliance Act prospectus rules, or setting out the particulars of any breach; 2010 (FATCA) and other similar information reporting and regimes such as the Common Reporting Standard? ■ prepare annual financial statements audited by an auditor that

is acceptable to the BMA. Bermuda is committed to being an integral part of the global Bermuda A Closed-Ended Fund must file an annual return with the Registrar financial services sector and has reacted quickly to FATCA. each year confirming its amount of assessable capital. Bermuda negotiated a Model II Inter-Governmental Agreement (“IGA”) with the US Government and has also signed a similar Model II IGA with the United Kingdom. Bermuda also passed 5.3 Is the use of side letters restricted? amendments to its legislation in July 2015 to adopt the OECD’s Standard for Automatic Exchange of Financial Account Information There are no restrictions on the use of side letters but the ability for (or Common Reporting Standard (“CRS”)). CRS came into effect the investment fund to enter into side letters must be disclosed in the in Bermuda on 1 January 2016. prospectus. The terms of the side letters must not contravene any of the provisions in the bye-laws or prospectus. 6.7 Are there any other material tax issues?

6 Taxation The stamp duties regime applies to Bermudian residents and local companies (owned and controlled by Bermudians 60/40). It does not apply to non-residents, exempted companies or exempted partnerships. 6.1 What is the tax treatment of the principal forms of Alternative Investment Funds? 6.8 What steps are being taken to implement the OECD’s Bermuda is fiscally neutral. There are no corporation, profits, or Action Plan on Base Erosion and Profit-Shifting capital gains taxes payable in Bermuda by an investment fund or its (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? investors. After incorporation the investment fund may apply for, and is likely to receive, an undertaking from Government that in the event of any such taxes being imposed by Bermuda in the future, Bermuda continues to work on next steps for OECD standards for those taxes shall not apply to the fund until 31 March 2035 (the “Tax Base Erosion and Profit-Shifting (BEPS) compliance. In 2016, Assurance Certificate”). Bermuda became a signatory to the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports, which puts in place an automatic exchange framework for exchanging 6.2 What is the tax treatment of the principal forms of country-by-country reports. It is anticipated that the first exchanges investment manager / adviser? will start in 2017–2018 in respect of 2016 information.

See question 6.1. 7 Reforms

6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an 7.1 What reforms (if any) are proposed? Alternative Investment Fund or the transfer of the investor’s interest? The Bermuda Government continues to consider various initiatives as it is committed to working closely with the private sector and There are no establishment or transfer taxes payable in Bermuda. the BMA to further develop Bermuda’s fund industry. The aim is to create an environment which is favourable for the quick, cost- 6.4 What is the tax treatment of (a) resident, (b) non- effective and efficient establishment of investment enterprises to resident, and (c) pension fund investors in Alternative strengthen Bermuda’s position in the international funds market. Investment Funds? This collaborative effort is demonstrated by recent amendments to Bermuda’s partnership legislation that came into effect in December See question 6.1. There are no taxes payable in Bermuda in relation 2015 to provide for greater flexibility in how partnerships conduct to such investors. business in Bermuda, with a view to strengthening the appeal of Bermuda partnerships for use in private equity fund structures. 6.5 Is it necessary or advisable to obtain a tax ruling from The changes included, among other things: the tax or regulatory authorities prior to establishing ■ safe harbour provisions: an extension of the list of “safe an Alternative Investment Fund? harbour” activities that a limited partner can carry out without taking part in the management of a limited partnership (and, Upon the incorporation of an investment fund company as noted in therefore, without losing its limited liability status); question 6.1, an application should be submitted for a Tax Assurance ■ duty of good faith: providing that a general partner shall at Certificate to the Registrar. This certificate, once granted, confirms all times act in good faith and in the interests of the limited that in the event Bermuda enacts legislation imposing tax computed partnership (unless there is an express provision in the

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partnership agreement to the contrary) and that a limited those members will now have the benefit of indemnity and partner does not owe any fiduciary duties to the limited exculpation clauses expressly contained in the partnership partnership or to any other partner when exercising its rights agreement. or performing its obligations under the partnership agreement; In addition, a new LLC Act was introduced in October 2016 enabling and the formation of limited liability companies (“LLCs”). LLCs are ■ board and committee members: permitting members of hybrid entities commonly used in the US for private-equity funds boards and/or committees of a limited partnership to have the and other asset-management structures. The Bermuda legislation benefit of provisions expressly contained in the partnership is closely modelled on Delaware law so will be very familiar to US agreement in favour of such members (even if they are not party to the partnership agreement) so that, for example, fund managers and legal counsel. Bermuda

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

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

Jonathan Betts is a Partner and head of the corporate and finance Ariane West is a Partner in the corporate and finance practice at Taylors. practice at Taylors, a full-service law firm which works in exclusive Ariane advises Bermuda-based and international clients on a range association with Walkers and provides advice on all aspects of of corporate and transactional matters, with a focus on structured risk Bermuda law. products, including insurance-linked securities and catastrophe bonds, He advises Bermuda-based and international clients on a broad range private equity and investment funds. of corporate matters, focusing primarily on mergers and acquisitions, Prior to returning to Bermuda, Ariane was a Vice President at Goldman private equity and banking and finance transactions. He also advises Sachs in New York and a member of the bank’s Structured Products in relation to the formation of investment funds and insurance matters. Trading Group, where she worked on all aspects of the development, Jonathan has over 20 years of legal experience, having commenced structuring, marketing and distribution of collateralised debt and loan his career in London with leading City law firms Clifford Chance and SJ obligations, special investment vehicles, bespoke structured trades and Berwin and then practised in Bermuda since 2004. derivative products. He is widely recognised as a leading corporate and commercial lawyer Ariane began her career as a lawyer with Clifford Chance, where she in Bermuda and is ranked as such by a number of the premier legal was a member of the Financial Products Group. Before joining Taylors, publications, including Chambers Global, The Legal 500 and IFLR Ariane was senior counsel at a Bermuda-based law firm, where she 1000. Chambers Global identifies Jonathan as one of the top seven advised international clients, including major private equity funds and corporate and finance lawyers currently practising in Bermuda. investment managers, on all aspects of their Bermuda domiciled entities and investments.

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.

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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 also fall within the scope of SIBA. Managers and (c) a person who is a partner in a partnership and conducts such advisors holding a full licence under SIBA are regulated by the investment business for the purposes of, or in connection Commission and are subject to the Regulatory Code, 2009 (the with, the partnership; and “Code”); managers and advisors approved under the Investment (d) a person who is a director of a company and conducts such Business (Approved Managers) Regulations, 2012, as supplemented investment business for the purposes of, or in connection by the Approved Managers (Amendment) Regulations, 2013 with, the company, (the “Approved Managers Regulations”), are regulated by the in each case, provided that the person does not otherwise carry on Commission, but are 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 SIBA. relevant capacity specified. Those activities include managing investments belonging to another person on a discretionary basis, acting as the manager or investment advisor of a mutual fund and advising in relation to investments, 1.3 Are Alternative Investment Funds themselves if the advice is given to someone in their capacity as investor or required to be licensed, authorised or regulated by a regulatory body? potential investor or in their capacity as agent for an investor or a potential investor and the advice is on the merits of that person (whether acting as principal or agent) buying, selling, subscribing Only BVI Alternative Investment Funds that fall under the for or underwriting a particular security or exercising any right definition of a “mutual fund” require to be regulated under SIBA. conferred by a security to buy, sell, subscribe for or underwrite Traditional private equity and other closed-ended structures are not a security. “Investments” are defined in Schedule 1 to SIBA and regulated, although a BVI manager or advisor to such a fund would include most forms of shares and stock, debt instruments, options, require to be regulated. SIBA defines a mutual fund as a company futures, contracts for differences, and derivatives. incorporated, a partnership formed, a unit trust organised or other

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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 to the assets of the fund, but does not include a debt) that as an initial investment, and a net asset value of US$20 million. entitle the holder to receive on demand, or within a specified The fund is authorised to operate for an incubation period of two 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 British Virgin Islands ii. a fund which has a single investor which is a mutual fund to have an offering document; however, it must issue written risk not registered or recognised under SIBA. warnings to investors in a form prescribed by the implementing There are five main categories of mutual funds under SIBA; private, legislation. At the end of the incubation period, it must either: (i) professional, public, incubator and approved funds. In addition, convert into a different type of regulated fund; (ii) cease to be an foreign mutual funds may be registered as Recognised Foreign Funds open-ended fund; or (iii) liquidate. provided for under SIBA. Of the five main categories of mutual The Approved Fund fund, the overwhelming majority are private or professional funds. An approved fund is a mutual fund which is limited to having no The Professional Fund more than 20 investors and a net asset value of US$100 million. The A professional fund is a mutual fund the constitutional documents fund is authorised to operate for an unlimited period, without the of which specify that the fund interests shall only be issued to need to appoint external managers, custodians or auditors. It must professional investors and the initial investment by each investor in have an external administrator based in a recognised jurisdiction, the fund, other than exempted investors, is not less than US$100,000 an authorised representative in the BVI and at least two directors. or its equivalent in any other currency. A “professional investor” is It must make a return regarding its assets and number of investors defined in SIBA as a person: (a) whose ordinary business involves, and submit financial statements, which need not be audited, to whether for that person’s own account or the account(s) of others, the Commission annually. It is not required to have an offering the acquisition or disposal of property of the same kind as the document; however, it must issue written risk warnings to investors property, or a substantial part of the property of the fund; or (b) in a form prescribed by the implementing legislation. who has signed a declaration that he, whether individually or jointly with his spouse, has a net worth in excess of US$1,000,000 or 1.4 Does the regulatory regime distinguish between its equivalent in any other currency and that he consents to being open-ended and closed-ended Alternative Investment treated as a professional investor. Exempt investors include the Funds (or otherwise differentiate between different investment manager and promoter of the fund and its employees. types of funds) and if so how? The Private Fund Yes; closed-ended funds are not subject to regulation under SIBA. A private fund is a mutual fund the constitutional documents of The key distinction between open-ended and closed-ended funds is which specify either: (a) that it will have no more than 50 investors; the ability of investors to require the redemption or repurchase of or (b) that the making of an invitation to subscribe for, or purchase, some or all of their investment by reference to the net asset value fund interests issued by the mutual fund is to be made on a private of the interest they have prior to winding up. Where long lock- basis only. An invitation to subscribe for, or purchase, shares issued up periods, commonly in excess of five years, are part of a fund’s by a mutual fund on a private basis includes an invitation which terms, BVI practitioners and the Commission generally consider is made: (i) to specified persons (however described) and is not such investment funds to be closed-ended funds, although this will calculated to result in fund interests becoming available to other be fact-specific. persons or to a large number of persons; or (ii) by reason of a private or business connection between the person making the invitation and the investor. 1.5 What does the authorisation process involve? The Public Fund (a) The authorisation process for all funds involves the submission A public fund is recognised by the Commission, provided that the of an application form, together with supporting documents Commission is satisfied with the following: and the requisite fee. (a) the fund is a BVI business company or unit trust that is Documents required to be filed for private and professional governed by the trust laws of the BVI and has a trustee based funds are: in the BVI; (i) an offering memorandum; (b) the fund satisfies the requirements of SIBA and, where (ii) the Application Form F100 (Parts 1, 4, and 6); applicable, the Public Funds Code with respect to its application; (iii) the certificate of incorporation of the fund; (c) the fund will, on registration, be in compliance with SIBA and any practice directions issued by the Commission and (iv) the constitutional documents of the fund (which must applicable to the fund; contain the applicable fund disclosure required by SIBA); and (d) the fund’s functionaries satisfy the Commission’s “fit and proper” criteria; (v) a written consent of each of the fund’s lawyer and the fund’s auditor confirming acceptance of each of their (e) the fund has, or on registration will have, an independent appointments by the fund. custodian;

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(b) Where an offering document is required, offering documents fund or at any subsequent time. However, no exemption is available of BVI mutual funds must contain certain investment in respect of the requirement to have an administrator. warnings required by SIBA and such information as is A public fund must at all times have a manager, an administrator necessary to enable a prospective investor to make an informed decision as to whether or not to invest. The and a custodian (unless the fund is exempted by the Commission subscription documents must contain an acknowledgment from the requirement to appoint a custodian). Each functionary of by investors that each investor has been provided with an a public fund must be functionally independent from every other investment warning and, in the case of a professional fund, a functionary of the fund. confirmation that the investor is a “professional investor”. An incubator fund is not required to have any functionary appointed; (c) Incubator and approved funds must, at a minimum, submit: an approved fund must have an administrator appointed at all times, (i) Form IB-A2-IAF; but is not required to have any other functionary appointed. (ii) the constitutional documents of the fund; The Commission will recognise and accept any functionary of a (iii) the offering document, inclusive of investment warning fund that is established and located in a “Recognised Jurisdiction”.

and investment strategy (optional); The current list of Recognised Jurisdictions is as follows: British Virgin Islands (iv) an investment warning (required in the absence of an Argentina France Mexico offering document); and (v) a written description of investment strategy (required in Australia Germany Netherlands the absence of an offering document). Bahamas Gibraltar New Zealand (d) Public funds require a prospectus to be approved in advance Belgium Greece Norway of the registration being granted. The prospectus must have Bermuda Guernsey Panama been prepared in accordance with the Public Funds Code. In addition, the public fund must satisfy the Commission Brazil Hong Kong Portugal concerning the matters identified in question 1.3 above. Canada Ireland Singapore (e) Once the documents have been filed, the Commission will Cayman Islands Isle of Man South Africa generally recognise a private or professional fund within five to seven business days of submission of the application, Chile Italy Spain provided the requisite documentation is complete and no China Japan Sweden exemptions have been applied for. A professional fund may commence business up to 21 days prior to receiving formal Curaçao Jersey Switzerland confirmation of recognition, provided it complies with all Denmark Luxembourg United Kingdom other requirements of SIBA and submits an application for Finland Malta United States recognition within seven days of commencing business. Incubator and approved funds may commence trading two business days after a completed application is submitted to Where a functionary of a fund is not established and located in the Commission. a recognised jurisdiction, the Commission may recognise and accept the functionary if they are satisfied that the functionary’s (f) The fee payable on submitting an application for recognition jurisdiction of establishment and location has a system for the of a professional or private fund is US$700 and, once recognised, there is an annual recognition fee of US$1,000 effective regulation of investment business. payable upon recognition and annually by 31 March until the Directors fund’s certificate of recognition is cancelled. The application A private, professional, incubator and approved fund must at all fee payable by an incubator or approved fund is US$1,500 times have at least two directors, at least one of whom must be and, once approved, there is a fee of US$1,000 payable upon an individual. A public fund must at all times have at least two approval and due annually by 31 March until the fund is no longer approved as an incubator or approved fund. directors. Only individuals can serve as directors of public funds. Although not required, it is becoming market practice for regulated funds to appoint independent directors. Directors of regulated funds 1.6 Are there local residence or other local qualification are not required to be based in the BVI. requirements? Authorised representative All entities subject to approval, recognition, registration or licensing There are no local residence requirements. Each approved, under SIBA are required to appoint an authorised representative recognised or registered mutual fund must, however, appoint an in the BVI in order to represent them in their dealings with the authorised representative in the BVI to represent it when dealing Commission, save where the entity has a substantial presence in the with the Commission. BVI.

1.7 What service providers are required? 1.8 What co-operation or information sharing agreements have been entered into with other governments or Private and professional funds must, at all times, have a fund regulators? manager, a fund administrator, and a custodian (collectively described, together with investment advisors and prime brokers, as The BVI has Tax Information Exchange Agreements (“TIEAs”) and “functionaries”). The custodian of a private fund or a professional similar bilateral and multilateral arrangements with 28 countries as fund must be a person who is functionally independent from the at 1 May 2017 and is on the OECD “white list” with respect to fund manager and the fund administrator. The Commission may, on the exchange of tax information. In addition, the Commission has written application made by or on behalf of a private or professional entered into bilateral regulatory co-operation agreements pursuant fund, exempt the fund from the requirement to appoint a custodian to the EU Directive on Alternative Investment Fund Managers or a fund manager, and an application for such an exemption can be (“AIFMD”) with the competent authorities of 26 of the EU and EEA made together with the application for recognition as a BVI mutual Member States.

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Limited Partners (“LPs”) of an ILP are not liable for the debts 2 Fund Structures or obligations of the ILP under the Partnership Act, 1996 (the “Partnership Act”), (a) save as provided by the terms of the 2.1 What are the principal legal structures used for applicable partnership agreement, and (b) subject to the provisions Alternative Investment Funds? of the Partnership Act (i) providing that an LP who takes part in the conduct of the business of the ILP may lose its limited liability Three types of vehicle are most commonly utilised by BVI with respect to a third party who deals with that ILP and who investment funds: BVI Business Companies limited by shares; reasonably believes such LP to be a general partner of such ILP, International Limited Partnerships; and Unit Trusts. and (ii) providing for clawback of capital distributions (together with interest) made to LPs within six months of the ILP becoming The BVI Business Company insolvent. The most common vehicle for open- or closed-ended funds formed Investors who are unitholders of an exempted trust must look to the in the BVI is a BVI Business Company limited by shares. wording of the relevant declaration of trust to provide them with British Virgin Islands Shares of the same class in a company rank equally with each limited liability status and protection. other. It is also possible to create separate share classes or Despite the limited liability nature of an equity interest purchased separate series within the same share class to distinguish between by an investor, it is common practice for the subscription and different fee terms, strategies or asset pools; or to calculate, for offering documents of BVI investment funds to impose payment example, performance fees payable on a “per investor basis” to obligations on investors over and above the obligation to pay for mirror the capital account concepts found in US funds. The BVI their investment. Such additional obligations regularly include Business Companies Act 2004 is a flexible and modern corporate indemnification for misrepresentations and the requirement to repay statute, which provides a clear corporate structure ideally suited to excess redemption or withdrawal proceeds which were calculated structuring investment funds. In addition, BVI Business Companies and paid on the basis of unaudited data. may be formed as Segregated Portfolio Companies when used as a regulated investment fund, providing separate legally protected asset and liability cells within one corporate vehicle. 2.3 What are the principal legal structures used for The International Limited Partnership managers and advisers of Alternative Investment Funds? The other major form of investment vehicle available in the BVI is the International Limited Partnership (the “ILP”). The principal structures used are BVI Business Companies. The limited partnership concept is similar to that which applies in various states of the United States, but a BVI ILP does not have 2.4 Are there any limits on the manager’s ability to a separate legal personality distinct from its partners. Limited restrict redemptions in open-ended funds or transfers partnership structures are popular with United States promoters in open-ended or closed-ended funds? and their advisors. The general partner of a limited partnership does not need to be a BVI company or person, nor is a non-BVI Not as a general matter of BVI law; the ability to redeem or transfer corporate entity required to be registered as a foreign company to equity interests in a fund and any restrictions on such activity will be act as general partner. The general partner is liable for any shortfall governed by the constitutional, subscription and offering documents. between the assets and liabilities of the limited partnership and so it is common to form a special purpose vehicle to act as general partner to a limited partnership. 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? The ILP is commonly used for venture capital and private equity funds with a limited number of investors. No, there are no such restrictions. The Unit Trust The concept of a Unit Trust is that subscribers contribute funds to a trustee, who holds those funds on trust whilst they are managed 3 Marketing by the investment manager for the benefit of the subscribers, known as unitholders. Each unitholder is entitled to a pro rata share of the 3.1 What legislation governs the production and offering trust’s assets. of marketing materials? Unit Trusts are relatively uncommon in the BVI and are used (in place of companies) for investors in jurisdictions where participation There is no obligation to issue an offering document for a private, in a Unit Trust is more acceptable or attractive than owning shares in professional, incubator or approved fund but, where a fund does not a company, for example, for regulatory or tax reasons. do so in the case of private and professional funds, it is required to provide to the Commission an explanation as to why it will not 2.2 Please describe the limited liability of investors. issue an offering document and explain, to the satisfaction of the Commission, how relevant information concerning the fund and The limited liability of investors in a BVI investment fund depends any invitation or offer will be provided to investors or potential upon the nature of the vehicle used and whether the investor has investors. Where an offering document is issued, it is required to agreed to contribute additional funds to that vehicle pursuant to the be filed with the application for recognition or approval, andan terms of the constitutional and offering documentation. updated offering document or supplement must be filed within 14 days of any change being made to the filed offering document. With BVI business companies limited by shares, the liability of the investors is limited to the amount unpaid on their shares or as SIBA and the MFR require that a public fund have a prospectus otherwise provided in the company’s constitutional documents. which complies with and is updated in accordance with the terms of the Public Funds Code, 2010.

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Closed-ended funds are not regulated and, as such, there are no specific requirements as to the contents of any offering materials; 3.4 What restrictions are there on marketing Alternative however, the issuer must ensure that its terms are not misleading and Investment Funds? the information disclosed does not constitute a misrepresentation. Approved, recognised or registered mutual funds, including Recognised Foreign Funds, incorporated as a company are not 3.2 What are the key content requirements for marketing subject to any restrictions on marketing under BVI statute other materials, whether due to legal requirements or than those required for it to qualify for recognition or registration, customary practice? as the case may be. Closed-ended funds incorporated as a company are not currently subject to any restriction on marketing under BVI The customary minimum disclosure requirements for private and statute. ILPs are restricted from being marketed to the public in the professional funds include the following: BVI. All BVI Alternative Investment Funds do, however, remain (a) details of the date of establishment of the fund, its registered subject to any securities laws or marketing laws in the jurisdictions office, fiscal year, and its directors (or the directors ofthe in which they are distributed or marketed and the promoters of such British Virgin Islands general partner or trustee) together with biographies; funds are subject to SIBA. (b) a description of the fund’s investment objectives, policy, and restrictions; 3.5 Can Alternative Investment Funds be marketed to (c) a description of the fund’s investment manager or advisor, retail investors? together with biographies of portfolio managers and information regarding remuneration, management and performance fees or allocations; Yes, subject to the US$100,000 minimum investment and “professional 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 remuneration; noted above. (e) the classes of interests available for investment or issue, together with descriptions of any minimum investment, 3.6 What qualification requirements must be carried out eligibility requirements, and subscription procedures; in relation to prospective investors? (f) details of the principal rights and restrictions attaching to the fund’s equity interests, including with respect to currency, None, save for the requirement that investors in professional funds voting, rights to participate in all or some of the assets of qualify as “professional investors” as described above and that all 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; (g) the net asset value calculation policy; and 3.7 Are there additional restrictions on marketing to (h) details of the fund’s material risks and potential conflicts of public bodies such as government pension funds? interest.

The Public Funds Code sets out the content requirement for Public No, there are not. Funds, which broadly codify the above details. Incubator and approved funds are not required to have an offering 3.8 Are there any restrictions on the use of intermediaries document and are required only to issue the statutory risk warnings to assist in the fundraising process? prescribed in the implementing legislation. Where they do issue an offering document, the Commission would expect that document No, there are no such restrictions. to describe the investment strategy of the fund and contain the risk warning, as a minimum. In practice, it is common for such offering documents to look similar to those issued by private and 3.9 Are there any restrictions on the participation in professional funds. Alternative Investments Funds by particular types of investors, such as financial institutions (whether as sponsors or investors)? 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? No, there are not.

The offering document of a private or professional fund and any offering document issued by an incubator or approved fund would 4 Investments usually be filed with the Commission as part of the initial application, but no pre-approval is required. In the case of a public fund, the 4.1 Are there any restrictions on the types of activities that prospectus would be required to be approved by the Commission can be performed by Alternative Investment Funds? prior to its registration as a public fund. Offering documents of a closed-ended fund do not need to be filed or approved. No, there are not. Where a filed offering document of a private, professional, incubator or approved fund is amended, the amended offering document must be filed with the Commission within 14 days of any change 4.2 Are there any limitations on the types of investments where there is a continuing offering. Proposed amendments to the that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or prospectus of a public fund must be submitted to the Commission at otherwise? least 21 days prior to the issue of the revised prospectus. No, there are no such limitations.

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Taxes Act 2004 does not apply to a fund except to the extent that 4.3 Are there any restrictions on borrowing by the the fund has employees (and deemed employees) rendering services Alternative Investment Fund? to the fund wholly or mainly in the BVI. No estate, inheritance, succession or gift tax, rate, duty, levy, or other charge is payable There are no statutory or regulatory restrictions; however, the fund’s with respect to any shares, debt obligation or other securities of constitutional and/or offering documents may restrict leverage for the fund. All instruments relating to transfers of property to or by the fund or a class of shares, as determined appropriate. the fund and all instruments relating to transactions in respect of the shares, debt obligations or other securities of the fund and all instruments relating to other transactions relating to the business of 5 Disclosure of Information the fund are exempt from the payment of stamp duty in the BVI, provided they do not concern BVI situate land. There are currently 5.1 What public disclosure must the Alternative no withholding taxes or exchange control regulations in the BVI. Investment Fund make? British Virgin Islands 6.2 What is the tax treatment of the principal forms of Funds constituted as BVI Business Companies are required to file investment manager / adviser? their memorandum and articles of association with the Registry of Corporate Affairs (the “Registrar”). They are also required to The tax treatment for managers and advisors is the same as for maintain a statutory register of members but that register is not funds. Please see question 6.1 above. required to be filed with the Registrar. In addition, they must maintain a register of directors which must be filed on a private basis with the Registrar. Lenders can take advantage of the priority 6.3 Are there any establishment or transfer taxes levied regime for security by making a public filing with the Registry of in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the any charge over assets of a company entered into by a BVI Business investor’s interest? Company. No; see question 6.1 above. 5.2 What are the reporting requirements in relation to Alternative Investment Funds? 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative Private, professional and public mutual funds are required to file, in Investment Funds? electronic format, audited financial statements within six months of the fund’s financial year end, and all mutual funds are required to There are no differences in tax treatment between the three. See file a Mutual Fund Annual Return (“MFAR”) within six months of question 6.1 above. the calendar year end. The MFAR provides general, operating and financial information relating to such regulated funds. For filing obligations of incubator and approved funds, see question 1.3 above. 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing In addition, most Alternative Investment Funds will be required to an Alternative Investment Fund? report certain details regarding their investors on an annual basis to the International Tax Authority of the British Virgin Islands No, it is not. (the “ITA”), in accordance with the provisions of legislation implementing the intergovernmental agreements (known as “IGAs”) entered into between the BVI and the US to implement the US 6.6 What steps have been or are being taken to implement FATCA legislation, and the BVI and the UK to implement similar the US Foreign Account and Tax Compliance Act obligations, as well as under the Common Reporting Standard. 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard?

5.3 Is the use of side letters restricted? The BVI has signed two intergovernmental agreements to improve international tax compliance and the exchange of information – No. Side letters are commonly used by BVI investment funds. one with the United States and one with the United Kingdom (the However, certain considerations should be borne in mind in order to “US IGA” and the “UK IGA”, respectively). The BVI has also ensure that such letter agreements are compliant with BVI law and signed, along with over 90 other countries, a multilateral competent consistent with the constitution of the fund, a discussion of which is authority agreement to implement the OECD Standard for Automatic outside the scope of this chapter. Exchange of Financial Account Information – Common Reporting Standard (the “CRS” and together with the US IGA and the UK IGA, “AEOI”). 6 Taxation Amendments have been made to the Mutual Legal Assistance (Tax Matters) Act 2003 and orders have been made pursuant to this act to 6.1 What is the tax treatment of the principal forms of give effect to the terms of the US IGA and the UK IGA under BVI Alternative Investment Funds? law (the “BVI legislation”). Guidance notes were published by the government of the BVI in March 2015 to provide practical assistance A fund and all dividends, interest, rents, royalties, compensations, to entities and others affected by the US IGA and/or UK IGA and and other amounts paid by the fund are exempt from the provisions the BVI legislation. Further amendments have been made to the of the Income Tax Act in the BVI and any capital gains realised BVI legislation to give effect to the terms of the CRS, which took with respect to any shares, debt obligations, or other securities of the effect on 1 January 2016. The BVI legislation makes it clear that fund are exempt from all forms of taxation in the BVI. The Payroll the CRS commentary published by the Organization for Economic

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Cooperation and Development is an integral part of the CRS and BEPS. As a BVI fund will not be claiming access itself to a tax applies for the purposes of the automatic exchange of financial treaty, Action 6 is not directly relevant to it. However, a BVI fund account information although additional guidance may be issued to can be set up in a variety of different legal forms, either as legally aid with compliance with the BVI legislation relating to CRS. transparent or opaque, which facilitate cross-border fund structures, All BVI “Financial Institutions” will be required to comply with the whereby either the fund investors may rely on their own treaty or registration, due diligence and reporting requirements of the BVI through investment entities that may be able to rely on their own legislation, except to the extent that they can rely on an exemption treaty. Further, the “Global Streamed Fund” proposal identified in that allows them to become a “Non-Reporting Financial Institution” the OECD’s Public Discussion Draft dated 24 March 2016 on the (as defined in the relevant BVI legislation) with respect to one or Treaty Entitlement of Non-CIV Funds, if adopted, may be of benefit more of the AEOI regimes. to BVI funds, as the question of whether the fund had treaty access would be irrelevant. The BVI legislation requires the fund 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

7 Reforms British Virgin Islands diligence on its accounts to identify whether any such accounts are considered “Reportable Accounts”; (iii) enrol on the BVI Financial Account Reporting System where it identifies Reportable Accounts; 7.1 What reforms (if any) are proposed? and (iv) report information on such Reportable Accounts to the BVI ITA. The BVI ITA will transmit the information reported to it to the The broad scope and extra-territorial effect of the AIFMD captures overseas fiscal authority relevant to a reportable account (i.e. the most types of BVI Alternative Investment Funds, regardless of IRS in the case of a US Reportable Account, HMRC in the case of a whether they are open-ended or closed-ended and regardless of their UK Reportable Account, and the relevant tax authorities in relation legal structure and investment strategy, with very few exceptions. to CRS) annually on an automatic basis. There are a number of provisions in the AIFMD that require co- operation agreements to be established between the European 6.7 Are there any other material tax issues? Securities and Markets Authority (“ESMA”) and the supervisory authorities from the country of origin of non-EU Alternative No, there are not. Investment Funds or Alternative Investment Fund Managers. The Commission has signed 26 co-operation agreements with EU Member State regulators and is actively taking steps to sign 6.8 What steps are being taken to implement the OECD’s co-operation agreements with the remaining EU Member State Action Plan on Base Erosion and Profit-Shifting regulators. Accordingly, the BVI will continue to offer benefits (BEPS), in particular Actions 6 and 7, insofar as they to new and existing Alternative Investment Funds and Managers affect Alternative Investment Funds’ operations? seeking access to Europe in line with the AIFMD. There are currently no legislative provisions in the British Virgin Islands which provide for specific measures in connection with

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

Tel: +1 284 852 3027 Tel: +44 20 7466 1651 Fax: +1 284 852 3097 Fax: +44 20 7466 1700 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 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 offices are located 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 services 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

Other Laws 1 Regulatory Framework In contrast to securities laws, tax laws applicable to AIFs apply at both the federal and provincial levels. Securities and tax laws will 1.1 What legislation governs the establishment and always be engaged in the formation and operation of AIFs. It is also operation of Alternative Investment Funds? typical that corporation law, limited partnership law, anti-money laundering law, terrorist financing law and privacy law will apply. Securities Laws

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

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outside Canada who provides portfolio management services to an category of registration involves the filing of a Form 33-109F4 AIF domiciled outside Canada but offered to Canadian investors. for the firm and a Form 33-109F4 for applicable individuals. There are minimum capital, financial statement, insurance and proficiency requirements associated with the authorisation process. 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a The Securities Regulator reviews the filed materials and provides regulatory body? comments or questions on the applications for registration that usually take between eight and 12 weeks to resolve. For investment The AIF is not itself licensed or registered but, as a market fund managers, advisers and broker-dealers located outside Canada, participant, an AIF is regulated by the Securities Regulator. there are exemptions from the applicable registration requirements that permit these firms to do business with Canadian clients that Canada AIFs that distribute their securities in Canada must either qualify qualify as “permitted clients”, which is a category of client that is the distribution pursuant to a prospectus prepared and filed in similar to, but slightly more restricted than, the accredited investor accordance with applicable Canadian securities laws or conduct the category of client discussed above. distribution in reliance upon a prospectus exemption. AIFs do not usually qualify their securities for distribution in Canada pursuant to a prospectus, because the prospectus clearing process would require 1.6 Are there local residence or other local qualification the AIF to adhere to rules that would materially restrict the ability requirements? to engage in numerous activities that AIFs ordinarily engage in, such as short selling, leveraging and investing in illiquid positions. Each of the investment fund manager, adviser and dealer categories Accordingly, AIFs typically distribute their securities to investors of registration is available to non-residents of Canada. Non-residents in reliance upon one of two private placement exemptions from the are usually required to satisfy Canadian proficiency requirements Prospectus Requirement described below. and will have to submit to the jurisdiction of the Securities Canadian securities laws provide an exemption from the Prospectus Regulator. Some categories of registration, such as investment Requirement where a security is distributed to an accredited investor dealer, require (pursuant to the rules of the Investment Industry who acquires the AIF security as principal (the “Accredited Regulatory Organization of Canada – the Canadian equivalent of Investor Exemption”). Accredited investors are purchasers who FINRA) the applicant to be incorporated pursuant to Canadian law are considered to be sophisticated because of their status or financial but are not otherwise required to be resident in Canada. well-being. Like the US version, Canadian accredited investors include: financial institutions; governments; pension funds; securities 1.7 What service providers are required? dealers and advisers; corporations, partnerships and trusts with net assets of $5 million; individuals who, alone or with a spouse, have Most AIFs will utilise the services of an investment fund manager, net assets of at least $5 million; and individuals who meet a financial adviser, dealer or prime broker, registrar and transfer agent, fund net worth test of $1 million or an income test of $200,000 in each of accountant, custodian, auditor and lawyer. the last two years (or, together with their spouse, of $300,000) and a reasonable expectation of exceeding that amount in the current year. Another exemption from the Prospectus Requirement is available 1.8 What co-operation or information sharing agreements where a purchaser is not an individual and purchases an AIF security have been entered into with other governments or regulators? as principal and the AIF security has an acquisition cost to the purchaser of not less than $150,000 paid in cash at the time of the trade (the “Minimum Investment Exemption”). The Securities Regulator has, for many years, entered into different forms of reciprocal regulatory oversight arrangements with foreign securities regulatory bodies. These arrangements, frequently called 1.4 Does the regulatory regime distinguish between memoranda of understanding or “MOUs”, are intended to facilitate open-ended and closed-ended Alternative Investment the sharing of information about firms and individuals under common Funds (or otherwise differentiate between different regulatory oversight, support collaboration on investigation and types of funds) and if so how? enforcement matters, and generally assist in the global integration of securities regulatory oversight. The pace of entering into, and the Yes, there are significant differences between the regulation of general interest in, MOUs has increased considerably since the onset open-ended and closed-ended funds. Closed-ended funds are of the 2008 financial crises. Today, the Securities Regulator has usually publicly offered funds that have qualified their securities by approximately 20 MOUs in place with foreign regulators including prospectus and are traded over a stock exchange and available to the United States Securities and Exchange Commission (“SEC”), retail investors. Accordingly, closed-ended funds tend to be much Commodity Futures Trading Commission (“CFTC”), Financial more regulated by securities laws and stock exchange requirements Industry Regulatory Authority (“FINRA”), United Kingdom than open-ended funds unless the open-ended funds are also Financial Conduct Authority and Bank of England, European Union, qualified by prospectus and available to retail investors, which is International Organization of Securities Commissions (“IOSCO”) and not usually the case for an AIF. securities regulators in Australia, China, France, Hong Kong and Italy. Closed-ended funds that operate as private equity funds can be structured to avoid the Investment Fund Manager Registration Requirement, the Adviser Registration Requirement and the Dealer 2 Fund Structures Registration Requirement.

2.1 What are the principal legal structures used for 1.5 What does the authorisation process involve? Alternative Investment Funds?

The authorisation process differs for the registration of each of The principal legal structures used in the formation of AIFs are the investment fund manager, adviser and dealer. However, each corporations, limited partnerships and unit trusts.

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2.2 Please describe the limited liability of investors. 3.2 What are the key content requirements for marketing materials, whether due to legal requirements or Investors in a corporation have liability limited to the value of their customary practice? investment. Investors in a limited partnership also have liability limited to the value of their investment, provided they do not take If an offering document is to be used to solicit sales of AIF part in the control of the business of partnership. Investors in a trust securities that are to be distributed in Canada in reliance upon either are likely to have limited liability but there may be some uncertainty the Accredited Investor Exemption or the Minimum Investment which may be addressed by providing where possible, in contracts Exemption, the offering document will probably be considered an of the trust, that no recourse is to be had to the personal assets of offering memorandum under Canadian securities laws. Generally investors. Some provinces have adopted a statutory limited liability speaking, any material prepared in connection with such a private Canada regime for investors in certain public trusts. placement, other than a “term sheet” that is limited to describing the terms of the securities being issued rather than describing the business and affairs of the issuer, will be considered an offering 2.3 What are the principal legal structures used for memorandum. Purchasers who receive an offering memorandum managers and advisers of Alternative Investment have a statutory right of action for rescission or damages for any Funds? misrepresentation in the offering memorandum. The statutory right of action must be described in the offering memorandum. The Managers and advisers of Canadian AIFs are usually organised as term “misrepresentation” is broadly defined to mean: (a) an untrue corporations but are sometimes organised as partnerships. 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 2.4 Are there any limits on the manager’s ability to not misleading in light of the circumstances in which it was made. restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? Provided the AIF is not offered by prospectus, there are usually no limits on the manager (other than, in certain cases, for tax reasons) The offering memorandum must be delivered to the relevant to restrict redemptions in open-ended funds or transfers in closed- Securities Regulator within 10 days of the distribution of an AIF ended funds. security. If a foreign prospectus is used as an offering memorandum, it is common to attach a stand-alone Canadian “wrapper” to describe 2.5 Are there any legislative restrictions on transfers of the statutory rights of action and to address other related disclosure investors’ interests in Alternative Investment Funds? requirements. The Securities Regulator does not review or approve the offering memorandum. Yes, most investors acquire AIF securities pursuant to exemptions If the securities of an AIF are distributed into a province or territory from the Prospectus Requirement. Any resale of the AIF security of Canada in reliance upon either the Accredited Investor Exemption would also have to comply with an exemption from the Prospectus or the Minimum Investment Exemption, the AIF must file a Requirement such as the Accredited Investor Exemption or the completed Form 45-106F1 exempt trade report with the applicable Minimum Investment Exemption (these exemptions are discussed Securities Regulator within 10 days of the distribution, and the filing above). of the report must be accompanied by the payment of a prescribed filing fee that varies from jurisdiction to jurisdiction. Alternatively, 3 Marketing an AIF can comply with the exempt trade reporting requirements, and filing fee requirements can be addressed by filing theForm 45-106F1 and the related filing fee with the Securities Regulator(s) 3.1 What legislation governs the production and offering within 30 days of the end of the AIF’s fiscal year end, in lieu of the of marketing materials? 10-day period noted above.

All marketing activities intended to solicit purchase orders of an AIF 3.4 What restrictions are there on marketing Alternative security would likely be considered an act in furtherance of a trade of Investment Funds? a previously unissued security under applicable securities laws and would therefore be subject to the Prospectus Requirement and the Provided the marketing of the AIF is done pursuant to an offering Dealer Registration Requirement. The exemptions from the Dealer memorandum in accordance with the Accredited Investment Registration Requirement are not generally available to intermediaries Exemption or Minimum Investment Exemption through registered in the business of selling AIF securities. Accordingly, the marketing dealers, there are no other material restrictions applicable to the intermediary must ordinarily become registered in one of the three marketing of AIFs. dealer categories: investment dealer; exempt market dealer; or mutual fund dealer (if the AIF is an open-ended mutual fund). Generally, securities law of the provinces and territories of Canada 3.5 Can Alternative Investment Funds be marketed to retail investors? does not differentiate between oral, electronic or documentary communication. As matter of procedure, electronic and documentary communication is to be preferred and oral communications are to be Retail offerings in Canada are usually made by way of prospectus. made only in a manner entirely consistent with the electronic and Most AIFs are offered pursuant to exemptions from the Prospectus documentary materials. Requirement. Some AIFs are offered to higher-net-worth retail clients in reliance upon the Accredited Investor Exemption or Minimum Investment Exemption.

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3.6 What qualification requirements must be carried out 4.3 Are there any restrictions on borrowing by the in relation to prospective investors? Alternative Investment Fund?

When relying on the Accredited Investor Exemption, AIFs and Provided the AIF is not offered by way of prospectus and the intermediaries should require prospective investors to certify that adviser is properly licensed, there are no restrictions on borrowing they are accredited investors. by the AIF.

3.7 Are there additional restrictions on marketing to 5 Disclosure of Information public bodies such as government pension funds? Canada

Some institutional investors such as regulated pension funds have 5.1 What public disclosure must the Alternative internal and statutory restrictions that restrict the level of investment Investment Fund make? in, and control over, an AIF. Provided the AIF is not offered by way of prospectus, the only public disclosure that an AIF must make is annual audited financial 3.8 Are there any restrictions on the use of intermediaries statements and semi-annual unaudited financial statements. It is to assist in the fundraising process? possible to obtain an exemption from the requirement to file these financial statements with the Securities Regulator provided that the Intermediaries assisting in the fundraising process will usually be financial statements are delivered to investors. subject to the Dealer Registration Requirement.

5.2 What are the reporting requirements in relation to 3.9 Are there any restrictions on the participation in Alternative Investment Funds? Alternative Investments Funds by particular types of investors, such as financial institutions (whether as sponsors or investors)? Provided the AIF is not offered by way of prospectus, the key reporting requirements in relation to AIFs are: While there have not been any specific initiatives coming out of ■ audited annual and unaudited semi-annual financial the 2008 financial crisis intended to restrict the role of financial statements of the AIF discussed above; institutions in AIFs, like most jurisdictions around the world, ■ Form 45-106F1 trade reports to the Securities Regulator by Canadian regulators have responded to the financial crisis with the AIF discussed above; numerous macro-prudential and micro-prudential initiatives and ■ trade confirms from the dealer to the investor reporting on the measures designed to address various systemic risks revealed as a trade of the AIF security to the investor; result of the financial crisis. In particular, in Canada, we have seen ■ alternative monthly reports (the “AMR System”) from the a mixture of federal and provincial initiatives, that have resulted adviser to the Securities Regulator where the adviser exercises in, for example, designation of domestically significant financial control or direction over 10% or more of a class of securities institutions, new bank capital rules, higher bank capital thresholds, of a Canadian public company and subsequent reports when investment goes above or below 10%, 12.5%, 15% or 17.5%; proposed requirements relating to the clearing and reporting of OTC derivatives, new residential mortgage insurance rules, new ■ early warning reports (the “EWR System”) from the AIF to the Securities Regulator where the AIF acquires 10% (and on regulation of the government mortgage insurer and proposed bail-in any 2% increases or decreases thereafter) or more of a class policies. of securities of a Canadian public company; and ■ insider reports to the Securities Regulator where the AIF 4 Investments acquires 10% or more of a class of securities of a Canadian public company.

4.1 Are there any restrictions on the types of activities 5.3 Is the use of side letters restricted? that can be performed by Alternative Investment Funds? There are no prescriptive restrictions on the use of side letters, but Provided the AIF is not offered by way of prospectus and the investment fund managers and advisers are subject to a fiduciary adviser is properly licensed, there are no restrictions on the types duty of care and side letters must be examined carefully to ensure that the arrangements contemplated thereby do not breach the fiduciary of activities that can be performed by the AIF other than, in certain duty of care owed to all investors. The Securities Regulator has cases, to comply with tax requirements. 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. 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 6 Taxation otherwise?

Provided the AIF is not offered by way of prospectus and the 6.1 What is the tax treatment of the principal forms of adviser is properly licensed, there are no restrictions on the types of Alternative Investment Funds? investments that can be included in the AIF’s investment portfolio other than, in certain cases, to comply with tax requirements. Canada imposes tax on the worldwide income of persons that are resident in Canada.

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Canada imposes tax on 50% of capital gains, while 50% of capital interest. In such case, a share of income and gains of the partnership losses are deductible but only against the taxable portion of capital would be allocated to the manager or affiliate and the character of gains. Dividends received from a Canadian corporation are subject the allocated amount as ordinary income or capital gain is expected to special tax treatment to reflect the fact that they are paid out of 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 6.3 Are there any establishment or transfer taxes levied income, while those received by an individual are “grossed up” and in connection with an investor’s participation in an a dividend credit is given. Other forms of income (interest, income/ Alternative Investment Fund or the transfer of the loss from transactions in derivatives that are not considered to be investor’s interest? hedges of capital property, etc.) are taxed at regular rates. Income Canada or loss must generally be computed in Canadian dollars. No establishment or transfer taxes are imposed. The disposition An AIF that is a Canadian corporation is treated as a taxpayer and pays of an investor’s interest may give rise to a capital gain or capital tax on its taxable income. If it qualifies as a “mutual fund corporation” loss (or to ordinary income/loss if not capital property) that must be for tax purposes which, among other conditions, requires that its taken into account in computing income. activities be limited to investing its funds in property (but which, in practice, is given a broad meaning), tax on capital gains is refundable to 6.4 What is the tax treatment of (a) resident, (b) non- the corporation. Dividends from Canadian corporations received by a resident, and (c) pension fund investors in Alternative mutual fund corporation are subject to a 38⅓% tax which is refundable Investment Funds? when the corporation pays taxable dividends to its investors. An AIF that is a Canadian corporation will generally be treated as a resident of (a) A resident investor in an AIF that is a Canadian-resident Canada and beneficial owner of income for the purposes of Canada’s corporation must include, in computing income, dividends tax treaties, subject to limitation on benefits provisions. received from the corporation. If the investor is a Canadian An AIF that is a Canadian-resident trust is also treated as a taxpayer corporation, such dividends are generally deductible in but, in computing its income, is generally entitled to deduct that computing taxable income. Dividends received by an individual are “grossed up” and a dividend credit is given. portion of its income that is payable in the year to its investors who If the AIF is a “mutual fund corporation” for tax purposes, are required to include such amounts in income. A special tax may it may pay dividends that it elects to pay out of capital gains be payable by a Canadian-resident trust (other than a “mutual fund which are taxed as capital gains in the hands of investors. trust” for tax purposes which, among other conditions, requires that A resident investor in an AIF that is a Canadian-resident its activities be limited to investing its funds in property) if it has trust must include in income its share of the trust’s income non-resident investors and “designated income” (comprising income that is payable in the year to the investor. The tax character from Canadian real property, resource property and businesses of capital gains, dividends from Canadian corporations and carried on in Canada and capital gains from the disposition of income from foreign sources and related foreign tax credits “taxable Canadian property” (see below)). While a trust should be will generally be preserved in the hands of the investor if treated as a resident of Canada for the purposes of Canada’s tax appropriate tax designations are made by the trust. treaties subject to limitation on benefits provisions, some countries A resident investor in an AIF that is a partnership, whether in the past have denied treaty benefits. established in Canada or a foreign jurisdiction, must take into An AIF that is a partnership is generally fiscally transparent for account its share of the income or loss of the partnership that is allocated to it in accordance with the partnership agreement. Canadian tax purposes. Canadian-resident partners should be The partnership must calculate its income or loss as if it were entitled to treaty benefits on a look-through basis. a separate person resident in Canada. The “at-risk” rules Canada also imposes tax on non-residents that carry on business restrict the deductibility of losses from a business or property in Canada, that dispose of certain capital properties referred to as allocated to a limited partner to the limited partner’s “at-risk “taxable Canadian property” (generally Canadian real property and amount”. resource property and certain securities that derive more than 50% of A resident investor that invests in an AIF that is, or is treated their value from such properties) or that derive certain income from for Canadian tax purposes as, a non-resident corporation Canadian sources (dividends, rents, royalties, etc.). A non-resident will be required to include dividends received in income. If AIF that engages a Canadian investment adviser with authority such an AIF is treated as a “foreign affiliate” of the investor to trade on its behalf would be considered to carry on business in (because the investor and/or certain connected persons own more than 10% of the shares of any class or series) and the Canada unless the requirements of a safe-harbour rule are satisfied. AIF is a “controlled foreign affiliate” of the investor (because the AIF is controlled by the investor and/or certain specified 6.2 What is the tax treatment of the principal forms of persons with a connection to Canada) the investor must investment manager / adviser? include in income, on an accrual basis, the investor’s share of the AIF’s “foreign accrual property income”. A manager that is a Canadian corporation is treated as a taxpayer and If this rule does not apply, it is necessary to consider whether pays tax on its taxable income. Management fees and performance the resident investor’s investment in shares of the AIF is an “offshore investment fund property”. In general, two fees will be treated as ordinary business income. conditions must be satisfied. First, the share must reasonably A manager that is a partnership must calculate its income or loss as be considered to derive its value, directly or indirectly, if it were a separate person resident in Canada. Management fees primarily from portfolio investments of the corporation or and performance fees will be treated as ordinary business income. any other non-resident entity in certain properties including Income or loss of the partnership is allocated in accordance with shares, indebtedness, interests in one or more corporations, the partnership agreement to its partners, who include or deduct the trusts, partnerships, organisations, funds or entities and real relevant amounts as if they earned them directly. estate or any combination thereof. Secondly, it is necessary that it can reasonably be concluded, having regard to all If the AIF is a partnership, the manager or an affiliate of the manager the circumstances, that that one of the main reasons for the may be a partner of the partnership in order to be entitled to a carried investor acquiring, holding or having the share was to derive

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a benefit from portfolio investments in such assets in such a through basis. In the case of an AIF structured as a Canadian- manner that the taxes, if any, on the income, profits and gains resident trust, there would be no relief from withholding tax from such assets for any particular year are significantly less on distributions of income to a non-resident pension plan than the tax that would have been applicable under Part I of the even if the income were derived from Canadian-source Income Tax Act (Canada) (the “ITA”) if the income, profits interest and dividends. and gains had been earned directly by the investor. If so, the investor must include a notional amount in income calculated with respect to the “designated cost” of its investment less 6.5 Is it necessary or advisable to obtain a tax ruling from dividends actually received. the tax or regulatory authorities prior to establishing an Alternative Investment Fund? Special rules apply in relation to investments by Canadian

Canada residents in non-resident trusts. Depending on the structure of the trust, the trust could be treated as a resident of Canada No. Rulings are generally not sought unless there is a specific tax for certain purposes of the ITA and liable to tax in Canada. concern. Alternatively, the trust could be an “exempt foreign trust”, in which case the interest in the trust could be an “offshore 6.6 What steps have been or are being taken to implement investment fund property”; if not, the investor would generally the US Foreign Account and Tax Compliance Act be subject to tax on the income of the trust (calculated in 2010 (FATCA) and other similar information reporting accordance with the ITA) as is payable to the investor. regimes such as the Common Reporting Standard? A resident investor must also take into account the gain or loss arising on a disposition of an interest in the AIF which, Canada entered into an Intergovernmental Agreement (“IGA”) if the interest is a capital property, will be a capital gain or with the United States relating to the implementation of FATCA capital loss. which is substantially in the form of the Model 1 IGA, and the (b) A non-resident investor in an AIF that is a Canadian-resident ITA was amended to provide for the due diligence and reporting corporation will be subject to a 25% withholding tax on regime contemplated by the IGA. The CRA has published extensive dividends paid or credited to the investor by the corporation (other than “capital gains dividends” paid by a mutual fund guidance. The definition of “Canadian financial institution” in the corporation). ITA is narrower than that in the IGA. An AIF that is managed by a Canadian financial institution will generally itself be a Canadian A non-resident investor in an AIF that is a Canadian-resident trust will be subject to a 25% withholding tax on distributions financial institution. Canadian financial institutions (other than those of income (including 50% of capital gains) by the trust. If that are treated as non-reporting Canadian financial institutions) will the trust is a “mutual fund trust” for tax purposes, capital report information about US account holders to the CRA, which will gains distributed by the trust will generally not be subject to exchange such information with the US Internal Revenue Service withholding tax. (“IRS”). Withholding agents will not be required to withhold the A non-resident investor in an AIF that is a partnership will be 30% tax on payments to reporting Canadian financial institutions liable to tax on the investor’s share of the partnership’s income (and certain “exempt beneficial owners” such as registered pension from a business carried on in Canada and the investor’s share plans). A variety of registered accounts are excluded from the of capital gains from the disposition by the partnership of definition of “financial account” and do not have to be reported on. “taxable Canadian property” (generally Canadian real property The rules in FATCA relating to recalcitrant accounts are suspended. and resource property and certain securities that derive more The new reporting regime came into effect starting in July 2014. than 50% of their value from such properties). By reason of Information was first exchanged in 2015. having a non-resident investor, the partnership will be subject to a 25% withholding tax on certain income from Canadian Canada has signed the Organisation for Economic Co-operation sources (dividends, rents, royalties, etc.). Under the current and Development (“OECD”) Multilateral Competent Authority administrative policy of the Canada Revenue Agency (“CRA”), Agreement and Common Reporting Standard (“CRS”), which the 25% withholding tax need only be applied in respect of the provides for the implementation of the automatic exchange of tax non-resident partner’s share of the relevant income. information. The ITA has been amended to provide for the due A non-resident investor is liable to tax on the gain arising on diligence and reporting regime contemplated by the CRS and the a disposition of an interest in the AIF held as capital property CRA has published extensive guidance. The CRS will be effective if more than 50% of the value of the interest at any time in in Canada as of July 1, 2017 with the first exchanges of financial the 60-month period ending at the time of the disposition account information beginning in 2018. is derived from certain property (Canadian real property and resource property). A tax clearance certificate may be required from the CRA in advance of the disposition in 6.7 Are there any other material tax issues? order that a purchaser does not withhold a prescribed amount (currently 25%) from the purchase price. Canada imposes a Goods and Services Tax (“GST”) (essentially a Canada’s ability to impose tax on a non-resident may be value-added tax) on certain supplies. Management and performance affected by a bilateral tax treaty between Canada and the non- fees for services provided to a Canadian AIF will generally be resident’s country of residence. subject to 5% federal GST and no refund will be available to the (c) A Canadian pension plan that is a “registered pension plan” AIF. Certain provinces also impose a similar sales tax harmonised under the ITA is generally exempt from income tax under with the federal GST. the ITA on income derived from, and gains derived from the disposition of an interest in, an AIF. In the case of non-resident pension investors, certain of 6.8 What steps are being taken to implement the OECD’s Canada’s tax treaties provide exemptions from Canadian Action Plan on Base Erosion and Profit-Shifting withholding tax on interest and dividends. In such cases, (BEPS), in particular Actions 6 and 7, insofar as they dividends from a Canadian AIF structured as a corporation affect Alternative Investment Funds’ operations? would not be subject to withholding tax. In the case of an AIF structured as a partnership, Canada would view the Canada has amended the ITA to provide for country-by-country partnership as transparent and grant treaty benefits on a look- reporting for large multinational enterprises. The CRA is applying

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revisions to the OECD Transfer Pricing Guidelines recommended as part of the BEPS project. Canada is pursuing signature of 7 Reforms the multilateral instrument implementing treaty-related BEPS recommendations. 7.1 What reforms (if any) are proposed?

No significant reforms have been proposed. Canada

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] Fax: +1 416 868 0673 URL: www.mccarthy.ca Email: [email protected] URL: www.mccarthy.ca

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 appears in in establishing or restructuring investment funds in jurisdictions outside the 2015 Canadian Legal Lexpert Directory, a guide to the leading law Canada, including Bermuda, the British Virgin Islands, the Cayman firms and practitioners in Canada, as a leading lawyer in the area of Islands and Mauritius. He is a special lecturer in various securities investment funds and asset management and in the area of corporate law topics at several Canadian Universities. Sean is a co-editor tax. He also appears in the 2016 edition of Chambers Global: Guide of LexisNexis’ Annotated Ontario Securities Legislation and a co- to the World’s Leading Lawyers for Business, as a leading lawyer in author of LexisNexis’ Canadian Securities Regulatory Requirements the area of tax. He is a member of the Taxation Working Group of the Applicable to Non-Resident Broker-Dealers, Advisers and Investment Investment Funds Institute of Canada and of the Industry Regulation Fund Managers. He is a contributor to the Practising Law Institute’s and Taxation Committee of the Portfolio Management Association of (“PLI”) Broker-Dealer Regulation and Investment Adviser Regulation. Canada. He was a member of the “Informal Consultative Group on He appears in the current edition of Chambers Canada as a leading the Taxation of Collective Investment Vehicles” and of the “Pilot Group lawyer in the area of investment funds, the 2015 edition of The Best on Improving Procedures for Cross-Border Tax Claims” organised by Lawyers in Canada in the areas of mutual funds law, private funds the OECD’s Centre for Tax Policy and Administration. He was called law and securities law, in the 2014 International Who’s Who of Private to the 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 he appears in the 2014 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.

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Cayman Islands Grant Dixon

Maples and Calder Andrew Keast

on the merits of that person (whether acting as principal or agent) 1 Regulatory Framework buying, selling, subscribing for or underwriting a particular security or exercising any right conferred by a security to buy, sell, subscribe 1.1 What legislation governs the establishment and for or underwrite a security. “Securities” are defined to include operation of Alternative Investment Funds? most forms of shares and stock, debt instruments, options, futures, contracts for differences, and derivatives. The Mutual Funds Law (2015 Revision) (the “MF Law”) provides Schedule 3 to SIBL specifically excludes certain activities from for the regulation of open-ended investment funds and mutual fund the definition of securities investment business, although those administrators. Responsibility for regulation under the MF Law exclusions are unlikely to apply to a person conducting discretionary rests with the Cayman Islands Monetary Authority (“CIMA”). investment management or investment advisory activities. In addition, the Retail Mutual Funds (Japan) Regulations (2007 Any person within the scope of SIBL conducting securities investment Revision) as amended by the Retail Mutual Funds (Japan) business must be licensed by CIMA, unless that person is exempt from (Amendment) Regulations, 2012 (together, the “Japan Regulations”), holding a licence. A licence may be restricted (meaning that securities provide a regulatory regime for retail mutual funds that are marketed investment business may only be transacted with particular clients) 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 extended to the Cayman Islands. The new AIFMD regulations will be An “Excluded Person” includes: brought into force by way of a separate commencement order, which (a) a company carrying on securities investment business is anticipated to be published and take effect sometime this year. exclusively for one or more companies within the same group; (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 regulated by a regulatory body? following classes of person: (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 conducts “securities investment business”, whether or not that financial and business matters is reasonably tobe securities investment business is carried on in the Cayman Islands, regarded as capable of evaluating the merits of a will fall within the scope of the Securities Investment Business Law proposed transaction and participates in a transaction (2015 Revision) (“SIBL”). with a value or in amounts of at least US$100,000 in “Securities investment business” is defined as being engaged in the each single transaction); or course of business in any one or more of the activities set out in (ii) a high-net-worth person (an individual whose net worth Schedule 2 to SIBL. Those activities include managing securities is at least US$1,000,000 or any person that has any belonging to another person on a discretionary basis and advising assets of not less than US$5,000,000); or in relation to securities, but only if the advice is given to someone (iii) a company, partnership or trust of which the shareholders, in their capacity as investor or potential investor or in their capacity limited partners or unitholders are all sophisticated as agent for an investor or a potential investor and the advice is persons or high-net-worth persons; or

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(c) a person who is regulated by a recognised overseas regulatory (i) the minimum investment per investor is at least authority in the country or territory (other than the Cayman US$100,000; or Islands) in which the securities investment business is being (ii) the equity interests are listed on a recognised stock conducted. exchange. 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 2016, 2,840 of the 10,586 regulated regulated under the MF Law if: section 4(3) funds were registered as master funds. Cayman Islands (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 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 receive profits or gains from investments. 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment There are three categories of mutual funds: Funds (or otherwise differentiate between different 1. a licensed fund under section 4(1)(a) of the MF Law; types of funds) 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 that funds is the ability of investors to voluntarily redeem or repurchase the promoter is of sound reputation, there exist persons of sufficient some or all of their investment prior to winding up. Cayman Islands expertise to administer the fund, who are of sound reputation, and practitioners and CIMA generally consider that a lock-up period that the business of the fund and any offer of equity interests will must be at least five years for an investment fund to be regarded as be carried out in a proper way. Detailed information is required closed-ended at the outset. concerning the directors, trustee or general partner (“GP”) of the mutual fund (as the case may be) and the service providers. 1.5 What does the authorisation process involve? However, few investment funds are fully licensed under the MF Law, as this is generally only necessary for retail funds. From the CIMA has established an online e-business portal, CIMAConnect, statistics published on CIMA’s website, at the end of 2016 there which enables the online submission of mutual fund applications were only 90 licensed funds. and documentation. An application for a section 4(3) fund involves 2. Registration as an administered fund requires the designation of the submission of: a Cayman Islands licensed mutual fund administrator as the fund’s (a) the fund’s offering document, other than in the case of a principal office. The administrator must satisfy itself that the fund’s master fund, which will often not have an offering document promoters are of sound reputation, that the fund’s administration separate from that of its feeder fund(s); will be undertaken by persons with sufficient expertise who are also (b) the relevant statutory application form; of sound reputation and that the fund’s business and its offering of (c) consent letters from the fund’s auditor and administrator; equity interests will be carried out in a proper way. The administrator (d) the relevant fee (currently US$4,268, initially and annually, is obliged to report to CIMA if it has reason to believe that a mutual other than in the case of a master fund which is currently fund for which it provides the principal office (or any promoter, US$3,049 initially and annually); director, trustee or GP thereof) is acting in breach of the MF Law or (e) an affidavit relating to the authorisation of submission of the may be insolvent or is otherwise acting in a manner prejudicial to its online application; and creditors or investors. This imposes a quasi-regulatory role and an obligation to monitor compliance on the administrators themselves, (f) certain information regarding the fund’s operator (the directors, GP or trustee, as the case may be). and generally higher fees charged by administrators in relation to this category of investment fund. Administered funds have declined CIMA’s practice with section 4(3) funds is to make the effective date in popularity over recent years, from 510 in 2008 to 363 at the end of the application the date on which all application requirements of 2016. have been submitted and applications must be completed prior to a fund launching in order to be compliant with the MF Law. 3. Mutual funds registered under section 4(3) of the MF Law are divided into three sub-categories: The authorisation process is more involved for licensed and (a) where the minimum investment per investor is at least administered fund applications. US$100,000; (b) where the equity interests are listed on a recognised stock 1.6 Are there local residence or other local qualification exchange; or requirements? (c) where the mutual fund is a “master fund” (as defined in the MF Law) and either: A Cayman Islands regulated mutual fund must appoint a local auditor approved by CIMA.

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The Directors Registration and Licensing Law, 2014 (the “DRLL”) Exempted companies are by far the most common vehicle for open- requires that the directors (both natural persons and corporate ended funds (including master funds). Based on statistics published directors) of a corporate mutual fund regulated by CIMA under by CIMA, 92 per cent of reporting funds were exempted companies the MF Law or a certain type of “Excluded Person” registered with (including segregated portfolio companies) in 2016. Based on CIMA under SIBL be either registered or licensed with CIMA. The Maples and Calder’s statistical analysis, the exempted company was registration process is undertaken online at the “CIMA Director used as the principal fund vehicle in 83 per cent of North American Gateway”. managed funds, 88 per cent of European managed funds and 93 per cent of Asian managed funds in 2016. 1.7 What service providers are required? However, it is not common to see closed-ended funds established in the Cayman Islands as exempted companies. The ELP is usually the Every regulated mutual fund must have an approved local auditor vehicle of choice for closed-ended or private equity funds.

Cayman Islands and will generally have an investment manager/adviser and an The Cayman ELP concept is similar to that which applies in the administrator (which, for an administered mutual fund, must be a United States and indeed the Exempted Limited Partnership Law, licensed mutual fund administrator). 2014 (the “ELP Law”) is based substantially on the Delaware Although not required, it is becoming market practice for corporate equivalent (although a Cayman Islands partnership is not a separate regulated investment funds to appoint independent directors. Such legal person). Whilst exempted companies are extremely flexible independent directors are not required to be based in the Cayman in the extent to which voting and economic rights can be mixed and Islands but often are, due to the depth of the Cayman fiduciary matched across separate classes of shares, companies have certain services industry. Based on statistical analysis conducted by Maples limitations that do not apply to ELPs. Fewer statutory rules govern and Calder, 89 per cent of funds launched in 2016 by managers the approvals processes within an ELP, which makes them generally based in North America had at least one independent director. The more flexible and suitable for closed-ended vehicle purposes. trend is lower for Asia-based managers, where 62 per cent had at Unit trusts are the vehicle primarily used for investors in Japan, least one independent director. The trend is higher for funds with where the demand is driven by familiarity with the unit trust Europe-based managers, with 84 per cent of the funds launched in structure and historical local tax benefits relating to trust units as 2016 having at least one independent director. opposed to other forms of equity interest. Such investment funds The statistics compiled by Maples and Calder reflect a snapshot can elect to comply with the Japan Regulations when applying for a of the regulated funds established during the relevant period for licence under the MF Law that, under current guidelines set by the which Maples and Calder acted as Cayman Islands legal counsel. Japan Securities Dealers Association, permit them to be marketed to Although this represents a significant sample size, it is inevitable the public in Japan. that these statistics would vary if they were based on all funds established during the relevant period. 2.2 Please describe the limited liability of investors.

1.8 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 regulators? fund depends upon the nature of the vehicle used and whether the 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 May 2017 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 (2016 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 2 Fund Structures to the provisions of the ELP Law (i) providing that an LP who takes 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 2.1 What are the principal legal structures used for who reasonably believes such LP to be a GP of such ELP, and Alternative Investment Funds? (ii) providing for clawback of capital distributions (together with interest) made to an LP within six months of the ELP becoming Three types of vehicle are most commonly utilised by Cayman Islands insolvent where the LP had actual knowledge of the insolvency. 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 Cayman Islands. obligation to pay for their investment. Such additional obligations 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. limited liability companies. Whilst such vehicles may be used in fund structures, we have not seen them used extensively to date.

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(g) the NAV calculation policy; and 2.3 What are the principal legal structures used for (h) details of the fund’s material risks and potential conflicts of managers and advisers of Alternative Investment interest. Funds?

The principal structures are exempted companies and ELPs. 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator?

2.4 Are there any limits on the manager’s ability to The offering document of a regulated mutual fund must be filed with restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? CIMA as part of the initial application; however, it is not technically subject to approval by CIMA prior to its circulation to prospective investors. An amended offering document or supplement must be Not as a general matter of Cayman Islands law; the ability to redeem

filed with CIMA within 21 days in the event of material changes, Cayman Islands or transfer equity interests in a fund and any restrictions thereon will where there is a continuing offering. be governed by the governing documents.

3.4 What restrictions are there on marketing Alternative 2.5 Are there any legislative restrictions on transfers of Investment Funds? investors’ interests in Alternative Investment Funds?

Generally, no offer or invitation to subscribe for equity interests in No, subject to restrictions on the assignment of certain liabilities by a Cayman Islands investment fund may be made to the “public in LPs pursuant to the ELP Law. the Cayman Islands”. The range of persons that may be considered excluded from the “public in the Cayman Islands” will depend upon 3 Marketing the fund’s legal structure and whether or not the fund is regulated 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 offering document which must describe the equity interests in all 3.5 Can Alternative Investment Funds be marketed to 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), 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 exchange. is generally applied to the offering documents of all regulated funds. The Japan Regulations also set out additional disclosure requirements for the prospectus of a retail mutual fund, which are 3.6 What qualification requirements must be carried out more onerous. in relation to prospective investors?

None, although potential investors will generally be subject to 3.2 What are the key content requirements for marketing screening in accordance with the Cayman Islands’ anti-money materials, whether due to legal requirements or laundering regime. customary practice?

The minimum disclosure requirements include the following: 3.7 Are there additional restrictions on marketing to (a) details of the date of establishment of the fund, its registered public bodies such as government pension funds? office, fiscal year and its operator together with biographies; (b) a description of the fund’s investment objectives, policy, and No. 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; (d) the names and addresses of the fund’s other service providers, No. together with details of the services to be performed and remuneration; 3.9 Are there any restrictions on the participation in (e) the classes of interests available for investment or issue, Alternative Investments Funds by particular types of together with descriptions of any minimum investment, investors, such as financial institutions (whether as eligibility requirements and subscription procedures; sponsors or investors)? (f) details of the principal rights and restrictions attaching to the fund’s equity interests, including with respect to currency, No. voting, circumstances of winding up or dissolution and the procedures and conditions for repurchases, redemptions or withdrawals of such equity interests, including suspensions;

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gains of investment funds or their investors and no transfer taxes on 4 Investments the transfer of interests in investment funds. As discussed above, “exempted” companies, limited partnerships, unit trusts and LLCs 4.1 Are there any restrictions on the types of activities that can obtain undertakings from the Cayman Islands government that can be performed by Alternative Investment Funds? if any taxation is introduced during the period of the undertaking, such taxation will not apply to the entity to which the undertaking There are no such restrictions on investment strategy subject to is given. applicable local regulatory laws. 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? that can be included in an Alternative Investment

Cayman Islands Fund’s portfolio whether for diversification reasons or Please see question 6.1 above. otherwise?

6.3 Are there any establishment or transfer taxes levied No. in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the 4.3 Are there any restrictions on borrowing by the investor’s interest? Alternative Investment Fund? No. No, there are no such restrictions. 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative 5 Disclosure of Information Investment Funds?

5.1 What public disclosure must the Alternative This is not applicable. Investment Fund make? 6.5 Is it necessary or advisable to obtain a tax ruling from There are no public disclosure requirements for exempted companies the tax or regulatory authorities prior to establishing or trusts. Although such vehicles are required to maintain statutory an Alternative Investment Fund? registers and make certain filings with the Cayman Islands Registrar and CIMA, those registers and filings are not available to inspection No. by the general public. The register of limited partnership interests of an ELP is required by 6.6 What steps have been or are being taken to implement the ELP Law to be open to inspection during all business hours by the US Foreign Account and Tax Compliance Act all partners, subject to any express or implied term to the contrary of 2010 (FATCA) and other similar information reporting the limited partnership agreement, or by any other person with the regimes such as the Common Reporting Standard? consent of the GP. The Cayman Islands has signed two inter-governmental agreements 5.2 What are the reporting requirements in relation to to improve international tax compliance and the exchange of Alternative Investment Funds? information – one with the United States and one with the United Kingdom (the “US IGA” and the “UK IGA”, respectively). The Regulated mutual funds are required to file, in electronic format, Cayman Islands has also signed, along with over 80 other countries, a audited financial statements, an annual Key Data Elements Form multilateral competent authority agreement to implement the OECD (containing a summary of the basic information about the fund) and Standard for Automatic Exchange of Financial Account Information a Fund Annual Return (“FAR”), in each case within six months of – Common Reporting Standard (the “CRS” and together with the the financial year end. The FAR provides general, operating and US IGA and the UK IGA, “AEOI”). financial information relating to such regulated funds. Cayman Islands regulations were issued on 4 July 2014 to give effect to the US IGA and the UK IGA, and on 16 October 2015 to give effect 5.3 Is the use of side letters restricted? to the CRS (collectively, the “AEOI Regulations”). Pursuant to the AEOI Regulations, the Cayman Islands Tax Information Authority (the “TIA”) has published guidance notes on the application of the No. Side letters are commonly used by Cayman Islands investment US and UK IGAs and the CRS. funds although certain legal considerations should be borne in mind in order to ensure that such letter agreements are compliant with All Cayman Islands “Financial Institutions” will be required to comply Cayman Islands law. with the registration, due diligence and reporting requirements of the AEOI Regulations, except to the extent that they can rely on an exemption that allows them to become a “Non-Reporting Financial 6 Taxation Institution” (as defined in the relevant AEOI Regulations) with respect to one or more of the AEOI regimes, in which case only the registration requirement would apply under CRS. 6.1 What is the tax treatment of the principal forms of Alternative Investment Funds? The AEOI Regulations require funds to, amongst other things (i) register with the Internal Revenue Service (“IRS”) to obtain a Global The Cayman Islands imposes no taxation on the income or capital Intermediary Identification Number (in the context of the US IGA

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only), (ii) register with the TIA, and thereby notify the TIA of its status Country by Country Reporting aspects as to whether the Cayman as a “Reporting Financial Institution”, (iii) adopt and implement Islands could become a signatory. As a Cayman Islands fund will written policies and procedures setting out how it will address its not be claiming access itself to a tax treaty, Action 6 is not directly obligations under CRS, (iv) conduct due diligence on its accounts relevant to it. However, a Cayman Islands fund can be set up in to identify whether any such accounts are considered “Reportable a variety of different legal forms, either as legally transparent or Accounts”, and (v) report information on such Reportable Accounts opaque, which facilitate cross-border fund structures, whereby either to the TIA. The TIA will transmit the information reported to it to the the fund investors may rely on their own treaty or through investment overseas fiscal authority relevant to a reportable account (e.g. the IRS entities that may be able to rely on their own treaty. in the case of a US Reportable Account) annually on an automatic basis. 7 Reforms

6.7 Are there any other material tax issues? Cayman Islands 7.1 What reforms (if any) are proposed? No. In the Funds context, the Cayman Islands anti-money laundering regime currently applies to section 4(3) mutual funds and Cayman 6.8 What steps are being taken to implement the OECD’s Action Plan on Base Erosion and Profit-Shifting Islands funds carrying out activities in Schedule 2 to the Money (BEPS), in particular Actions 6 and 7, insofar as they Laundering Regulations (2015 Revision). It is expected that affect Alternative Investment Funds’ operations? investment funds that are closed-ended and not otherwise carrying out activities in Schedule 2 to the Money Laundering Regulations It is not currently proposed that the Cayman Islands introduce specific (2015 Revision) will be subject to the Cayman Islands anti-money measures in connection with BEPS; however, it is considering the laundering regime later this year.

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 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 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 offices are located 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 services requirements, the firm provides a seamless, “one stop shop” capability through its affiliate, MaplesFS.

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China

FenXun Partners Sue Liu

equity investment funds. A “securities investment fund” generally 1 Regulatory Framework refers to a fund investing in publicly traded securities in the secondary market. On the other hand, an “equity investment fund” refers to a 1.1 What legislation governs the establishment and fund investing in securities of private companies and privately offered operation of Alternative Investment Funds? securities of public companies. In practice, securities investment funds could be open-ended or closed-ended, while equity investment An Alternative Investment Fund established in China is directly funds are normally closed-ended. Both private securities funds and governed by the Securities Investment Fund Law (as amended in private equity funds are regulated by the CSRC, and managers of 2015, the “Securities Fund Law”). The Securities Fund Law applies both types of funds are required to be registered with the AMAC. to both privately offered funds and publicly offered funds, and the However, certain aspects of regulatory requirements, such as senior discussions herein are directed at privately offered funds. management qualification requirements and reporting items, differ in Different aspects of the operation of an Alternative Investment Fund respect of these two different types of Alternative Investment Funds. may also be governed by other legislation, such as the Securities Law (as amended in 2014), the Company Law (as amended in 1.5 What does the authorisation process involve? 2014) and the Partnership Law (as amended in 2006). In addition, foreign investment into Alternative Investment Funds and related Alternative Investment Fund management entities meeting enterprises is subject to applicable foreign investment legislation. qualification requirements prescribed by the CSRC and the AMAC are required to complete registration with the AMAC as private fund 1.2 Are managers or advisers to Alternative Investment managers. Substantively, qualification requirements of private fund Funds required to be licensed, authorised or managers include: regulated by a regulatory body? (i) Establishment and business scope. The applicant shall have been duly established and validly existing in China. In Management entities of Alternative Investment Funds are regulated addition, the applicant’s name and business scope, as indicated by the China Securities Regulatory Commission (the “CSRC”). on its business licence, shall reflect that it conducts private Alternative Investment Fund managers are required to complete fund investment management business. The operative terms registration with, and submit periodic reports to, the Asset may include “fund management”, “investment management”, Management Association of China (the “AMAC”), an industry self- “asset management”, “equity investment”, “venture capital investment” and other terms closely relating to the business regulatory body recognised by the CSRC. The AMAC is currently of private fund management. In addition, an applicant shall in charge of administering the registration of, and reporting by, not conduct other business that may conflict with its fund Alternative Investment Fund managers. management business. Examples of such conflicting business include private and peer-to-peer lending, crowd-funding, 1.3 Are Alternative Investment Funds themselves factoring, real estate development and Internet commerce. required to be licensed, authorised or regulated by a (ii) Facilities and conditions for operation. The applicant shall regulatory body? have the necessary personnel, premises and registered capital to conduct its operation. Although no minimum registered Alternative Investment Funds are regulated by the CSRC. A fund capital is imposed on an applicant, it should have enough capital to cover its payroll, office rent and other business manager is required to complete an online filing with the AMAC for operation expenses for a reasonable period of time. each Alternative Investment Fund it manages; in each case, within 20 business days following the completion of the fundraising. (iii) Risk management and internal control systems. The applicant shall have established necessary risk management and internal control systems in accordance with its business operation, 1.4 Does the regulatory regime distinguish between which may comprise procedures and policies relating to open-ended and closed-ended Alternative Investment operational risk control, disclosure obligations, internal trading, Funds (or otherwise differentiate between different insider trading, conflicts of interest, and fund offering. types of funds) and if so how? (iv) Management qualification. In respect of a securities investment fund, the senior management personnel, including The regulatory regime governing Alternative Investment Funds the legal representative/executive partner (representative), distinguishes between private securities investment funds and private manager, vice manager, and persons in charge of risk control

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and compliance, shall have professional fund management invested Alternative Investment Funds are normally established qualifications. In respect of a private equity investment as foreign-invested joint-venture companies and foreign-invested fund or a venture capital investment fund, at least two senior limited partnerships. management persons, including its legal representative/ executive partner (representative) and persons in charge of risk control and compliance, shall have obtained professional 2.2 Please describe the limited liability of investors. fund management qualification. The application to be registered as a private fund manager needs to The liability of a shareholder of a limited liability company is be accompanied by an opinion letter issued by a Chinese law firm, limited by the committed capital of such shareholder. Clause 36 of which should address, in addition to the qualification requirements the Company Law provides that the authority of a limited liability listed above, whether the applicant and its senior management company rests with the shareholders’ meeting. Shareholders of the China have, within the past three years, been subject to criminal penalties, company are entitled to make key decisions, and select directors and administrative penalties, AMAC sanctions, or been negatively supervisors, for the company. recorded in the national integrity file database, etc. The liability of a limited partner of a limited partnership is limited by The procedural registration requirements of private fund managers its capital commitment. Clause 68 of the Partnership Law provides involve the submission of the required information and documentation that limited partners shall not execute partnership affairs and shall through an online platform administered by the AMAC. The AMAC not represent the partnership. will process an application for registration within 20 business days An investor’s rights and obligations in a contractual fund would be following a completed submission and post on its website basic provided for in the fund agreement. The liability of an investor would information on such registered manager. During the process, the normally be limited to its invested/committed investment amount. AMAC may review application materials, request supplementary documentation and conduct on-site inspections and in-person interviews of managerial personnel to verify the application. 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment Funds? 1.6 Are there local residence or other local qualification requirements? Alternative Investment Fund managers and advisers are commonly established as limited liability companies and limited partnerships. Pursuant to Clause 12 of the Securities Fund Law, Alternative Foreign-invested managers and advisers may be established as Investment Fund managers should be companies or partnerships wholly foreign-owned enterprises, foreign-invested joint-venture established under Chinese law. Foreign entities and natural persons companies and foreign-invested limited partnerships. are not allowed to be registered as Alternative Fund managers or raise their own funds. On the other hand, Alternative Investment 2.4 Are there any limits on the manager’s ability to Funds duly formed in China are not prohibited from retaining the restrict redemptions in open-ended funds or transfers service of foreign investment managers or advisers. in open-ended or closed-ended funds?

1.7 What service providers are required? There are no statutory requirements, prohibitions or restrictions in respect of redemptions or transfers. Such restrictions can be Pursuant to Clause 88 of the Securities Fund Law, unless otherwise provided for in the constitutional documents and other agreements provided in the fund agreement, the fund’s assets should be placed of the fund. in the custody of a custodian. Qualified fund custodians include commercial banks and securities companies approved by the CSRC. 2.5 Are there any legislative restrictions on transfers of Other service providers routinely involved in the formation and investors’ interests in Alternative Investment Funds? operation of Alternative Investment Funds include placement agents, auditors and legal counsel. There is no express statutory restriction against the transfer of investors’ interests. However, such transfers may be subject to other laws and 1.8 What co-operation or information sharing agreements regulations, such as requirements relating to investor qualification, have been entered into with other governments or foreign investment, or the transfer of state-owned assets. regulators?

The CSRC has entered into memorandums of understanding on 3 Marketing enforcement cooperation with capital markets regulators of over 60 jurisdictions, including the U.S. and major European jurisdictions. 3.1 What legislation governs the production and offering In addition, China has undertaken to make its first exchanges of marketing materials? under the global standard on Automatic Exchange of Information (“AEOI”) by 2018. The Securities Law and the Securities Fund Law generally govern the offering of fund interests in China. The Interim Measures for the 2 Fund Structures Administration of Alternative Investment Funds, as promulgated by the CSRC on 21 August 2014 (the “Fund Administration Measures”), and the Measures for Administration of the Fundraising of Privately 2.1 What are the principal legal structures used for Offered Investment Funds, as promulgated by the AMAC on 15 Alternative Investment Funds? April 2016 (the “Fundraising Measures”), provide more specific rules and restrictions on Alternative Investment Fund offering and Alternative Investment Funds may be established as limited liability marketing materials. companies, limited partnerships or through contracts. Foreign-

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3.2 What are the key content requirements for marketing 3.6 What qualification requirements must be carried out materials, whether due to legal requirements or in relation to prospective investors? customary practice? Prior to directing marketing efforts to a potential investor, a Pursuant to the Fund Administration Measures and the Fundraising questionnaire needs to be provided to such potential investor in order Measures, the content of the marketing materials for an Alternative to determine its identity, investment experience, risk profile and Investment Fund shall include, but is not limited to, the following qualification. Alternative Investment Fund interests may only be information: (i) the name and type of the fund; (ii) the name, offered to qualified investors. A qualified investor should: (i) have, if registration number and fund management team of the fund an entity, net assets of not less than RMB 10 million; or, if an individual, China manager; (iii) information publicly disclosed or to be publicly financial assets (including bank deposits, stocks, bonds, fund interests disclosed on the AMAC website; (iv) custody of fund assets, other and investments in asset management, insurance and futures products) service providers and retention of the investment advisor; (v) of not less than RMB 3 million or annual income of not less than RMB outsourcing of fund services; (vi) the investment scope, investment 500,000; and (ii) invest at least RMB 1 million in a single fund. strategies and investment restrictions of the fund; (vii) matching of profits and risks; (viii) risk disclosures; (ix) fund account and account supervisor (to be differentiated from the custodian, the roll 3.7 Are there additional restrictions on marketing to of an account supervisor can be performed by commercial banks and public bodies such as government pension funds? securities companies); (x) fees to be borne by investors and fee rates, key investor rights, e.g. subscription, redemption and transfer rights, Investments by government pension funds are regulated separately. and the relevant restrictions, timing and requirements; (xi) major For example, investments by the national social security fund are fees to be borne by the fund and fee rates; (xii) content, methods governed by the Interim Measures on Investment by the National and frequency of reporting of fund information; (xiii) a clear Security Fund, which impose certain allocation, approval and statement that the document may not be transmitted or circulated to reporting requirements on its investments. third parties; (xiv) for funds established as limited partnerships or limited liability companies, a clear statement that the subscription 3.8 Are there any restrictions on the use of intermediaries agreement may not replace the limited partnership agreement or the to assist in the fundraising process? company charter, and that the limited partnership agreement or the company charter shall be entered into and amended in accordance Fund managers may directly carry out fundraising for the funds they with the Partnership Law or the Company Law, respectively. manage or retain qualified placement agents to conduct fundraising The fund manager shall be responsible for the truthfulness, activities. Alternative Investment Fund placement agents are completeness and accuracy of the marketing materials. The marketing required to register with the CSRC. materials shall not provide for minimum investment returns or projected returns. In addition, fund marketing materials may only be provided to specific qualified investors who have completed the 3.9 Are there any restrictions on the participation in relevant qualification questionnaire and risk evaluation. Alternative Investments Funds by particular types of investors, such as financial institutions (whether as sponsors or investors)? 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? Regulation of financial institutions in China is segmented. Amongst the main market participants, commercial banks are regulated by The marketing materials and legal documents of an Alternative the People’s Bank of China and the China Banking Regulatory Investment Fund are not subject to registration or review by Commission (the “CBRC”), trust companies are regulated the CBRC, regulators. However, company charters and partnership agreements insurance companies are regulated by the China Insurance Regulatory will need to be filed with the applicable offices of the Administration Commission, and securities companies are regulated by the CSRC. for Industry and Commerce. As such, in addition to the generally applicable Alternative Investment Fund rules and regulations promulgated by the CSRC and the AMAC, financial institutions participating in the private fund industry need to 3.4 What restrictions are there on marketing Alternative comply with the respective rules and regulations promulgated by their Investment Funds? respective regulators in respect of fund management and investment. Participation in Alternative Investment Funds by regulated financial Marketing of Alternative Investment Funds may only be conducted institutions is commonly conducted through subsidiaries or affiliated privately by registered fund managers or registered fund placement entities established for the purposes of carrying out investment and agents, and be directed at specific qualified investors. In addition, asset management operations. an investor will be entitled to a cooling-off period of at least 24 hours before its subscription to the fund interest becomes effective. During the cooling-off period, the fund manager or placement agent 4 Investments may not initiate contact with the investor.

4.1 Are there any restrictions on the types of activities 3.5 Can Alternative Investment Funds be marketed to that can be performed by Alternative Investment retail investors? Funds?

Alternative Investment Fund interests may only be marketed to The business operation of Alternative Investment Funds shall be specific qualified investors. Before initiating marketing efforts in conducted within the scope of business reflected in its business respect of a potential investor, the fund manager and placement licence. The constitutional documents and other fund agreements agent shall confirm the suitability and qualification of such investor. may also prescribe restrictions on fund activities.

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4.2 Are there any limitations on the types of investments 6 Taxation that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or otherwise? 6.1 What is the tax treatment of the principal forms of Alternative Investment Funds? The types of investment which may be made by an Alternative Investment Fund include purchase and sale of stocks, shares, bonds, An investment fund may be established in the form of a limited futures, fund interests, and other investment products as agreed in its liability company or a limited partnership, or through contracts. A investment agreement. There are no generally applicable regulatory limited liability company is subject to entity-level value-added tax requirements on diversification. at 6% for securities trading and other taxable operations, and income China tax at the rate of 25% (certain types of income are taxed at lower rates). A limited partnership is subject to entity-level value-added tax 4.3 Are there any restrictions on borrowing by the at 6% for securities trading and other taxable operations. However, Alternative Investment Fund? a limited partnership is not a taxable entity for income tax purposes. Instead, the partners of a limited partnership would recognise income There is no express regulatory restriction against borrowings by and be subject to income tax at the partner level. A contractual fund Alternative Investment Funds. Leverage is commonly utilised in does not have an entity form and is not currently taxed. securities trading. However, Chinese banks are not in the business of providing subscription credit facilities and regular commercial bank loans are not considered a viable source of financing for fund 6.2 What is the tax treatment of the principal forms of investment manager / adviser? investment due to high cost and the funds’ inability to provide security. An investment manager/adviser is normally established in the form of either a limited liability company or a limited partnership. A 5 Disclosure of Information limited liability company is subject to entity-level value-added tax at 6% and income tax at the rate of 25% (certain types of income are taxed at lower rates). A limited partnership is subject to entity- 5.1 What public disclosure must the Alternative level value-added tax at 6%. However, a limited partnership is not Investment Fund make? a taxable entity for income tax purposes. Instead, the partners of a limited partnership would recognise income and be subject to Fund managers are responsible for making certain filings with the income tax at the partner level. AMAC in respect of the Alternative Investment Funds it manages. The AMAC publicly discloses on its website basic information regarding each Alternative Investment Fund (such as the names of 6.3 Are there any establishment or transfer taxes levied the fund, the manager and the custodian, main investment areas, and in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the whether the fund is in operation) that has completed such filing. investor’s interest?

5.2 What are the reporting requirements in relation to There are no special establishment taxes levied on Alternative Alternative Investment Funds? Investment Funds. Income derived from transfers of fund interests will be subject to income tax. Fund managers are required to complete initial, periodical and key event filings with the AMAC. An initial filing in respect of an 6.4 What is the tax treatment of (a) resident, (b) non- Alternative Investment Fund shall be completed within 20 business resident, and (c) pension fund investors in Alternative days following the completion of its fundraising. Thereafter, a fund Investment Funds? manager of a private securities investment fund shall make monthly filings in respect of the fund to report information such as assets Resident investors are taxed based on their respective tax status. under management, net asset value, and the number of investors, Subject to tax treaty benefits, non-resident investors are generally and a fund manager of a private equity investment fund shall subject to a 10% withholding tax on income derived from an make quarterly filings to report the committed capital, contributed onshore fund. Pension funds are entitled to special tax treatment. capital, number of investors and investment focus of the fund. In addition, fund managers are required to report the following events to the AMAC within five business days following their occurrence: 6.5 Is it necessary or advisable to obtain a tax ruling from (i) substantial changes to the fund agreement; (ii) the number of the tax or regulatory authorities prior to establishing an Alternative Investment Fund? investors exceeds the legal or regulatory requirement; (iii) the liquidation or winding up of the fund; (iv) a change of fund manager or fund custodian; and (v) other events that materially affect the State and local-level tax authorities do not, as a general practice, continued operation, investor rights and net asset value of the fund. issue advance tax rulings on Alternative Investment Funds.

5.3 Is the use of side letters restricted? 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 The use of side letters is not expressly permitted or prohibited, regimes such as the Common Reporting Standard? and side letters are quite common between fund managers and institutional investors. China has signed up to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (as amended by the 2010

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Protocol) and will undertake its first exchanges in 2018. On 28 October 2016, the State Administration of Taxation (the “SAT”) 7 Reforms concluded its public consultation on draft administrative measures on the due diligence of non-resident financial account information 7.1 What reforms (if any) are proposed? on tax matters. The measures are expected to be finalised in 2017. The Alternative Investment Fund regulatory system has being going 6.7 Are there any other material tax issues? through a reform process since 2014. The development of more elaborated Alternative Investment Fund rules and regulations is In addition to fund-level taxes, fund participants may have different expected to continue. Furthermore, the anticipated reform of China’s China structuring preferences due to their respective tax statuses. financial and securities regulatory system will most likely affect the fund industry.

6.8 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 affect Alternative Investment Funds’ operations? Sue Liu FenXun Partners Suite 1008, China World Office 2 China has been actively participating in global taxation cooperation. 1 Jianguomenwai Ave. The approach outlined in Action 6 (treaty abuse) is, in general, in line Beijing with the practice of the SAT. On 27 August 2015, the SAT issued China Announcement 60 on the Administration of Treaty Benefits to Non- Tel: +86 10 6505 4996 residents, and brought the claim and reporting procedure more into Email: [email protected] line with international practice. The SAT had also been vocal about URL: www.fenxunlaw.com its support for Action 7 (permanent establishment), and had been reported to be in the process of updating the relevant tax treaties. Ms. Sue Liu has been a partner of FenXun Partners since 2010. Her practice focuses primarily on the asset management industry, advising The implementation of the OECD action plans is not expected to have clients on a wide spectrum of legal issues and considerations relating an immediate effect on the operation of Alternative Investment Funds to the establishment and operation of onshore and offshore private in China. However, the complexity of tax planning by multinational investment funds. Prior to joining FenXun Partners, Ms. Liu had been enterprises has intensified, which will affect foreign-invested funds practising in the U.S., focusing on private fund formation and mergers, acquisitions, equity offerings and public listings involving investment and fund managers. 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 in the Shanghai Free Trade Zone. Baker & McKenzie FenXun (FTZ) Joint Operation Office brings together FenXun Partners’ 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 Christina Sofocleous

Andreas M. Sofocleous & Co LLC Antigoni Hadjiyianni

(i) is an AIFM authorised in accordance with the AIFM 1 Regulatory Framework Law; (ii) where subparagraph (i) does not apply, may operate as a 1.1 What legislation governs the establishment and management company authorised in accordance with the operation of Alternative Investment Funds? Open-ended Undertakings for Collective Investments Law; or The legislation that governs the establishment and operation (iii) operates as an Investment Firm authorised in accord- of Alternative Investment Funds in Cyprus is the Alternative ance with the Investment Services and Activities and Regulated Markets Law, as amended. Investment Funds Law of 2014 (the “AIF Law”) and the Alternative Investment Fund Managers Law of 2013 (the “AIFM Law”). Each self-managed AIF and each external manager of an AIF, Alternative Investment Funds are authorised and regulated by the where they are not authorised AIFMs, are subject to registration in Cyprus Securities and Exchange Commission (“CYSEC”). accordance with the provisions of section 4(3) of the AIFM Law, in the Special Register of sub-threshold AIFMs which is maintained In addition, the adoption of the EU Alternative Investment Fund by CYSEC. Managers Directive (“AIFMD”) has led to the modernisation of the legal framework governing investment funds in Cyprus. A Variable Capital Company and a Fixed Capital Company can be self-managed or externally managed; however, a Limited Partnership and Common Fund should always appoint an external 1.2 Are managers or advisers to Alternative Investment manager. Funds required to be licensed, authorised or regulated by a regulatory body? In the case that an AIF is self-managed, the application to CYSEC shall also be accompanied by its programme of activities, which Fund Manager shall include, inter alia, the organisational structure of the AIF. As per section 6 of the AIF Law, an AIF may be either: Administrator (a) self-managed, where it does not appoint an external manager, Does not require a licence to act as an outsourced administrator of a if it is established as an investment company and one of the fund. The administrator is responsible for keeping the fund’s books following applies: and records, accounting, reporting filing, share issue and other (i) the assets of the portfolio of the AIF, including any services. assets acquired through use of leverage, do not exceed a Depositary threshold of EUR 100,000,000 in total; As per the provisions of the AIF Law, the assets of the AIF shall (ii) the assets of the portfolio of the AIF, where the AIF be entrusted for safe-keeping to a depositary which (a) has its does not employ leverage and its unitholders have no registered office in Cyprus or in another Member State of the EU or redemption rights exercisable during a period of five years following the date of initial investments in each in a third country, provided that CYSEC has signed a Memorandum AIF, do not exceed a threshold of EUR 500,000,000; of Understanding and Exchange of Information with the competent and authorities of the third country, and (b) is either a credit institution (iii) the persons that sign the instruments of incorporation or investment firm or another category of institution which is subject of the investment company under incorporation or the to prudential regulation and ongoing supervision and which falls members of the board of directors, in the case of an within the categories of institution which have been defined by their incorporated company, decide not to appoint an external home state as eligible to be a depositary. manager, but to exercise internal management according to the provisions of the AIFM Law, either because it is obligatory in the case that the assets of the portfolio of 1.3 Are Alternative Investment Funds themselves the investment company exceed the thresholds of points required to be licensed, authorised or regulated by a (i) or (ii) above, respectively, or by choice because they regulatory body? choose to opt into the AIFM Law, then the investment company is considered as an AIFM and falls within the As per section 12 of the AIF Law, the commencement of operations scope of the AIFM Law; or of an AIF requires the prior authorisation and communication of the (b) externally managed, where it appoints an external portfolio authorisation by CYSEC, in accordance with the provisions of the manager who: AIF Law.

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1.4 Does the regulatory regime distinguish between 1.8 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) and if so how? The AIF Law and AIFM Law, through a number of directives, have Section 7 of the AIF Law provides that an AIF can be established as: adopted EU and OECD standards in respect of the supervision and (a) an open-ended Alternative Investment Fund, where its prevention of money laundering and insider dealing. unitholders have the right to redeem or repurchase their units Under Regulation 1287/06, the Competent Authorities have the upon request (i) at any time, or (ii) at regular intervals which obligation to protect market integrity, report transactions to the

Cyprus do not exceed one year and are defined in the fund rules or the European Securities and Markets Authority (“ESMA”), maintain instruments of incorporation of the AIF; or records and collaborate with other Member States. (b) a closed-ended Alternative Investment Fund, where its unitholders have the right to redeem or repurchase their units In addition, as per Directive 2011/61, if units are to be marketed upon request: (i) at regular intervals that exceed one year but in a third country, that country must: (i) not be listed as non- shall not extend to more than five years and are defined in the cooperative FATF; (ii) have signed an agreement of understanding rules or instruments of incorporation of the AIF (however, in with the Member State; and (iii) if non-EU units are to be marketed the case of an AIF that is constituted as a venture capital fund in the home Member State of the AIFM, a notification to the home in accordance with Regulation (EU) No. 345/2013, the initial Member State must be made. The competent authority of the home period of redemptions may be extended up to 10 years from Member State will inform ESMA. the date of its incorporation); or (ii) at a specific time that is defined in the fund rules or the instruments of incorporation of the AIF. 2 Fund Structures

1.5 What does the authorisation process involve? 2.1 What are the principal legal structures used for Alternative Investment Funds? CYSEC shall grant authorisation to the AIF once it is satisfied that the application – including the information on the fund manager, or An AIF can be set up under the following legal structures: board of directors in the case that there is no external manager of the (a) as a mutual fund; fund, the custodian, the prospectus and all necessary incorporation documentation – has been submitted as per the requirements of the (b) as an investment company in the form of a variable capital AIF Law. CYSEC shall inform the external manager of the AIF, investment company or/and a fixed capital investment company; or or the AIF itself in the case that it is self-managed, within three months of the submission of the filing of the complete application, (c) as a limited liability partnership. in accordance with section 12 of the AIF Law, whether or not the authorisation has been granted. 2.2 Please describe the limited liability of investors. In the case that CYSEC refuses to grant the authorisation, the reasons for such a decision must be justified. The liability of investors of an AIF should be examined with respect to the legal structures of the AIF. 1.6 Are there local residence or other local qualification In the case of a limited liability partnership, the liability of a limited requirements? liability partner is limited to the amount that the partner undertakes to contribute or is committed to contribute in the capital of the An AIFM of the Republic of Cyprus (the “Republic”) must have partnership and, without prejudice to the cases provided for by the its registered office and central management in Cyprus; an AIF AIF Law, is not liable for the debts or the obligations of the limited licensed by CYSEC must also have its registered office in Cyprus. liability partnership beyond the amount that the partner contributed or is committed to contribute. The depositary shall have its registered office in the Republic or in another Member State of the EU or in a third country, provided that In the case of a common fund, the unitholders are co-owners of CYSEC has signed a Memorandum of Understanding and Exchange each of the assets that comprise the portfolio of the common fund, of Information with the competent authorities of the third country. and are liable only up to the amount of their contribution, which is expressed in units of the common fund. The investment company has the legal form of a limited liability 1.7 What service providers are required? company with shares, whose liability is limited to the amount, if any, unpaid on its shares. The service providers appointed by an AIF managed by an external manager will include the external manager and a depositary, as per section 20 of the AIF Law. 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment The service providers appointed by a self-managed AIF will Funds? include the directors responsible for the management of the AIF, the administrator and the depositary (subject to the depositary not Managers and advisers are generally set up as private limited being appointed in accordance with section 23(2) of the AIF Law). liability companies. The self-managed AIF shall also appoint a Compliance Officer, an Internal Auditor, an External Auditor and a Risk Manager.

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the fund, therefore the AIF Law provides that all announcements 2.4 Are there any limits on the manager’s ability to from an AIF to investors shall be precise, clear and not misleading. restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? In addition, section 77 of the AIF Law provides that the prospectus of an AIF shall include, at least, the information referred to in section 30(1) of the Alternative Investment Fund Managers Law. The subscriptions and redemptions of units shall take place in The prospectus shall also include a statement in a distinct section on accordance with the conditions included in the instruments of its first page, to the effect that the AIF is targeted at professional and/ incorporation and the prospectus of the AIF. or well-informed investors or retail investors, accordingly. In addition, in an open-ended fund, the unitholders have the right to redeem or repurchase their units upon request (i) at any time, or (ii) at regular intervals which do not exceed one year and are defined in 3.3 Do the marketing or legal documents need to be Cyprus the fund rules or the instruments of incorporation of the AIF. registered with or approved by the local regulator? In closed-ended funds, the unitholders have the right to redeem or AIFs should have a prospectus, which has to be submitted to CYSEC repurchase their units upon request: (i) at regular intervals which for prior approval; any changes made to the prospectus should also exceed one year but shall not extend to more than five years and are be sent to CYSEC for prior approval. defined in the rules or instruments of incorporation of the AIF; or (ii) at a specific time that is defined in the fund rules or the instruments of incorporation of the AIF. 3.4 What restrictions are there on marketing Alternative Investment Funds?

2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? An AIFM of the Republic, authorised by CYSEC, may market units of any EU AIF to professional investors across the EU, subject to the requirements of the AIFM Law. The AIFM which intends to market In its incorporation documents, an AIF with a limited number of units of an EU AIF shall submit a notification to CYSEC in respect persons shall: (a) specify that the relevant fund is only addressed to of the relevant AIF, as well as the necessary documentation as per professional and/or well-informed investors as per the provisions the provisions of the AIFM Law. CYSEC shall, within 20 days from of the law; (b) limit the number of its unitholders, including the co- receipt of the notification, inform the AIFM as to whether it may holders, to a maximum of 75 persons; and (c) not allow the issue of start marketing the AIF identified in the notification. bearer shares. In addition, restrictions on the transfer of shares may be included in the partnership agreement of the limited liability partnership or the 3.5 Can Alternative Investment Funds be marketed to incorporation documentation of the AIF. retail investors?

The AIF Law provides that an AIF, which is either self-managed 3 Marketing or externally managed by an AIFM, may market its units to retail investors in the Republic in accordance with section 67 of the AIFM Law. This is subject to CYSEC’s authorisation, which may impose 3.1 What legislation governs the production and offering obligations on the AIFM or the AIF in addition to those requirements of marketing materials? applicable to AIFs marketed to professional investors in the Republic.

The production and offering of marketing materials are governed by the following: 3.6 What qualification requirements must be carried out in relation to prospective investors? ■ The Alternative Investment Fund Managers Law of 2013 (the “AIFM Law”). The AIF Law and AIFM Law distinguish between the following ■ The Alternative Investment Funds Law of 2014 (the “AIF Law”). categories of investor: ■ The Prospectus Law 114(I)/2005 as amended. ■ A well-informed investor is defined as any investor who is not a professional investor and fulfils the following conditions: a) the investor confirms in writing that he is a well-informed 3.2 What are the key content requirements for marketing investor and that he is aware of the risks related to the materials, whether due to legal requirements or proposed investment; and customary practice? b) either his investment in the AIF amounts to at least EUR 125,000, or he is assessed as a well-informed investor, Section 30 of the AIFM Law provides the information that the AIFM either by a credit institution that falls within the scope of should disclose to the investors of the AIFs that they market. This the Banking Laws as amended, or by an Investment Firm, information includes, among others: information on the investment or by a UCITS management company, and the above- strategy; ways in which the investment strategy may change; the mentioned assessment shows that he has the necessary identity of the AIFM, the AIF’s depositary, auditor and any other experience and knowledge to be able to evaluate the service providers; and a description of their duties and the investors’ appropriateness of the investment in the AIF. rights. It should also include a description of the AIF’s valuation ■ A professional investor is an investor who possesses the procedure and the pricing methodology for valuing assets, a experience, knowledge and expertise to make its own description of how the AIFM ensures the fair treatment of investors, investment decisions and properly assess the risks that etc. it incurs, and who complies with the criteria of Law 144(1)/2007 on the provision of investment services, the The main purpose of giving this information to investors is to exercise of investment activities, the operation of regulated provide them with sufficient information as to their investment in markets and other related matters.

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■ A retail investor is defined as an investor who does not meet the conditions required in order to be included in the 5 Disclosure of Information “professional investor” or “well-informed investor” category. 5.1 What public disclosure must the Alternative 3.7 Are there additional restrictions on marketing to Investment Fund make? public bodies such as government pension funds? There is no public disclosure that the AIF must make, except in cases There are no additional restrictions. where the AIF is listed on the stock exchange or other regulated markets.

Cyprus 3.8 Are there any restrictions on the use of intermediaries Please see question 3.2 above with regard to the disclosure to assist in the fundraising process? obligations on investors of AIFs as per section 30 of the AIFM Law.

No, there are no such restrictions, except if the services that they 5.2 What are the reporting requirements in relation to provide fall within the scope of regulated services, which will Alternative Investment Funds? require a licence. The reporting requirements of an AIF as per section 74 of the AIF 3.9 Are there any restrictions on the participation in Law, are that the external manager of the AIF or the self-managed Alternative Investments Funds by particular types of investment company shall prepare and submit to the Securities investors, such as financial institutions (whether as and Exchange Commission: (a) the prospectus of the AIF and any sponsors or investors)? amendments thereto; (b) the annual report of the AIF for each fiscal year; and (c) the half-yearly report of the AIF for the first six months No, there are no such restrictions. of the fiscal year. The annual and half-yearly report of the AIF shall be communicated 4 Investments to CYSEC and made available to the investors at the points of distribution of its units within the following deadlines: (a) six months from the end of the fiscal year, in the case of the annual report; and 4.1 Are there any restrictions on the types of activities (b) two months from the end of the first six-month period, in the case that can be performed by Alternative Investment of the half-yearly report. Funds?

5.3 Is the use of side letters restricted? The AIF can perform only the activities listed in the incorporation documentation of the AIF, and should not be engaged in other activities, since CYSEC has granted the licence for the operation There are no restrictions on the use of side letters. of the AIF on the basis of the activities listed in the incorporation document of the same. 6 Taxation There are also some additional restrictions imposed on self- managed AIFs as per section 6 (2) of the AIF Law, which states that an AIF can be considered self-managed when it does not appoint an 6.1 What is the tax treatment of the principal forms of external manager, if it is established as an investment company and Alternative Investment Funds? one of the following applies: (i) the assets of the portfolio of the AIF, including any assets acquired through the use of leverage, do not In general, there are no specific provisions regarding the taxation exceed a threshold of EUR 100,000,000 in total; and (ii) the assets of AIFs under the Cyprus tax laws. AIFs that are formed as private of the portfolio of the AIF, where the AIF does not employ leverage limited liability companies and are managed and controlled from and its unitholders have no redemption rights exercisable during a Cyprus, are taxed like any other Cyprus tax-resident company. period of five years following the date of initial investment in each Cyprus-resident companies are subject to a flat Income Tax rate of AIF, do not exceed a threshold of EUR 500,000,000. 12.5% on their taxable profit. The tax treatment of the main source of income of AIFs is detailed 4.2 Are there any limitations on the types of investments below: that can be included in an Alternative Investment ■ Dividend Fund’s portfolio whether for diversification reasons or otherwise? Dividend income will be taxed under Income Tax in Cyprus only if the payment of the dividend is a tax-deductible expense for the company paying the dividend under the laws of the CYSEC may specify by directive any investment restrictions country in which it is resident. Such dividends will be taxed regarding AIFs according to the nature of the assets in which they as normal business income subject to income tax and will be invest and the investors to which they are addressed. exempt from the Special Contribution for Defence (“SCD”). Dividend income will be exempt from SCD when it is 4.3 Are there any restrictions on borrowing by the derived from trading activities (directly or indirectly) or the Alternative Investment Fund? underlying tax rate is significantly greater than the tax rate in Cyprus. There are no restrictions on borrowing; however, the AIFM has to ■ Interest demonstrate that the leverage limits set for each AIF are reasonable Interest earned during the ordinary course of business is and that the AIF complies with these limits at all times. CYSEC taxable under the Income Tax Law at 12.5% and is exempt may impose limitations on the use of leverage if necessary. from SCD.

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■ Capital Gains Tax Capital Gains Tax (“CGT”) is imposed at the rate of 20% 6.6 What steps have been or are being taken to implement on gains from the disposal of immovable property situated the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting in Cyprus, including gains from the disposal of shares in regimes such as the Common Reporting Standard? companies which directly own such immovable property. Profits from the disposal of shares and other financial Cyprus and the US signed an Intergovernmental Agreement (“IGA”) instruments are exempt from tax. (Model 1) on 2 December 2014 in order to implement the US Foreign There is no withholding tax on interest and dividend payments made Account Tax Compliance Act (“FATCA”) in Cyprus. Under the to non-Cyprus tax residents, as a result of Cyprus law and the double IGA, Cypriot financial institutions having a reporting obligation are tax treaties which Cyprus has entered into. required to collect and disclose details of their US-reportable accounts Cyprus AIFs are exempt from the provisions of the Stamp Duty Law. to the competent Cypriot authority (the Ministry of Finance). The competent Cypriot authority will then forward this information to the competent US authority (the Internal Revenue Service – “IRS”). 6.2 What is the tax treatment of the principal forms of investment manager / adviser? Cyprus, as a European Union Member State, must implement Directive 2014/107/EU in its national legislation. Thus, the Investment managers and advisers are liable to tax at the rate of authorised credit institutions and other financial institutions in 12.5%, provided they are Cyprus tax-resident entities. There Cyprus are required to collect information and submit it to the Tax are no special provisions under Cyprus tax law regarding the Department of Cyprus, which will in turn forward the information aforementioned. annually, on an automatic basis, to the tax authorities of the countries of tax residence of each account-holder, provided the account- holders are tax residents of countries that implement the Common 6.3 Are there any establishment or transfer taxes levied Reporting Standard (“CRS”). In addition, on 29 October 2014 the in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the Republic signed the Multilateral Competent Authority Agreement investor’s interest? on Automatic Exchange of Financial Account Information.

No establishment or transfer taxes are levied in Cyprus in connection 6.7 Are there any other material tax issues? with an investor’s participation in an AIF or the transfer of the investor’s interest. There are no other material tax issues that need to be taken into consideration. 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative 6.8 What steps are being taken to implement the OECD’s Investment Funds? Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they The tax treatment of a resident investor is different from that of a affect Alternative Investment Funds’ operations? non-resident investor. A non-resident investor is not subject to any tax in Cyprus unless the Cyprus announced its intention to sign the Multilateral Convention profit or gain arises from a direct or indirect interest in immovable to Implement Tax Treaty Related Measures to Prevent Base Erosion property located in Cyprus. In such case, the profit or gain will be and Profit-Shifting (“Multilateral Instrument”) of the OECD. The subject to Cyprus Capital Gains Tax. Ministry of Finance has issued a press release stating that, on 5 April 2017, the Council of Ministers approved the signing of the A Cyprus tax resident (company or individual) will be liable to tax Multilateral Instrument, which is scheduled to take place in Paris in Cyprus on the whole income generated. Profits from the disposal on 7 June 2017. of shares will be exempt from any tax. Dividends distributed to Cyprus tax residents are subject to SCD at 3% (as opposed to 17%, The ratification of the Multilateral Agreement will pave the way which normally applies). Cyprus tax residents that are not domiciled for updating all existing Double Tax Agreements by incorporating in Cyprus are exempt from the payment of SCD. the two minimum standards of Action 6 (Treaty Abuse) and the minimum standard of Action 14 (Making Dispute Resolution The income of the pension fund is exempt from income tax. Interest Mechanisms More Effective) of the BEPS project, in the context received, however, is taxed at the rate of 30% SCD. Dividends are of the safeguarding and orderly application of the existing Double exempt from SCD. Tax Agreements.

6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing 7 Reforms an Alternative Investment Fund?

There is no requirement to obtain a tax ruling in Cyprus before the 7.1 What reforms (if any) are proposed? establishment of an AIF, but it is common practice to do so. Please refer to question 6.8 above.

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Christina Sofocleous Antigoni Hadjiyianni Andreas M. Sofocleous & Co LLC Andreas M. Sofocleous & Co LLC 155 Archiepiskopou Makariou III Avenue 155 Archiepiskopou Makariou III Avenue Proteas House Proteas House 3026 Limassol 3026 Limassol Cyprus Cyprus

Tel: +357 25 849 000 Tel: +357 25 849 000 Email: [email protected] Email: [email protected] URL: www.sofocleous.com.cy URL: www.sofocleous.com.cy Cyprus Advocate Mrs. Antigoni Hadjiyianni was born in Nicosia, Cyprus in 1983. She graduated from York University in Toronto, Canada with a degree in Mrs. Christina Sofocleous was born in Moscow, Russia in 1990. She Administrative Studies with Specialized Honours in Accounting in graduated in Law with Honours from the University of Kent and she 2006. She then worked for four years in KPMG Limassol, Cyprus obtained her LL.M. with Merit at University College London. She where she also qualified as a Chartered Accountant in 2009. After then completed the Russian language course at Peoples’ Friendship working for two years as a financial controller in a small company, University of Moscow. Mrs. Sofocleous was admitted to the Cyprus Mrs. Hadjiyianni joined Andreas M. Sofocleous & Co LLC in 2012 as a Bar in 2014. In March 2015, she obtained the advanced Cyprus Tax Manager. She has experience in the provision of tax advice, tax Securities and Exchange Commission Certification and registered in compliance and international tax planning. the Public Register of Certified Persons. Languages: Fluent in English and Greek. Languages: English; Greek; Russian; and Spanish. Memberships: Institute of Chartered Accountants of England and Memberships: International Tax Planning Association; Cyprus Bar Wales, Institute of Certified Public Accountants of Cyprus. Association. Publications: “Establishing a business in Cyprus”, published by Practical Law Co. in 2014. Areas of Practice: ■■ Corporate and Commercial Law. ■■ Tax Planning. ■■ Funds. ■■ Trust Law.

Andreas M. Sofocleous & Co LLC is one of the most successful Corporate and Commercial law firms in Cyprus. Headquartered in Limassol, and with offices in Eastern Europe and the UK, the firm provides legal services for individuals and companies at both the national and multinational level across a wide range of industries, dealing with mergers and acquisitions, cross-border transactions, joint ventures and intellectual property licensing, as well as company formation and management and other business arrangements. Since 1995 our firm has been working successfully in the market of legal and consulting services. The skills and experience of our partners and staff, along with the use of modern technology, enable us to deliver high quality and rapid results for the benefit of our clientele, which include multinational corporations, public companies, small and medium-sized enterprises, as well as individuals.

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Denmark

Horten Advokatpartnerselskab Claus Bennetsen

TC-AIFMs to manage Danish AIFs as well. However, following 1 Regulatory Framework a delayed process from the EU Commission, the Danish FSA is yet to lay down the executive order needed and specify the regulatory 1.1 What legislation governs the establishment and framework and applicable provisions of the AIFMA with respect to operation of Alternative Investment Funds? TC-AIFMs’ management of Danish AIFs, as it has already done for TC-AIFM marketing activities in Denmark. The EU Commission The principal legislation governing AIFs is the Danish Alternative is expected to reach a decision on the application of the EU passport Investment Fund Managers Act (the “AIFMA”). Primarily, the to third-country managers during 2017. If the Commission decides AIFMA governs AIF Managers (“AIFMs”), although its provisions to enact a delegated act with the introduction of a so-called third- also apply to self-managing AIFs, and it provides some structural country passport, the Danish FSA will be expected to follow suit by guidelines on the establishment and operation of capital funds issuing the necessary executive order. (typical Danish open-ended AIFs). AIFMs are subject to supervision by the Danish Financial Supervisory Authority (the “Danish FSA”), 1.3 Are Alternative Investment Funds themselves whereas AIFs are not. The legislation makes a distinction between required to be licensed, authorised or regulated by a AIFs established in an EU/EEA country (“EU-AIFs”) and AIFs regulatory body? established in a third country (“TC-AIFs”). As regards the establishment and operation of closed-ended AIFs Danish capital funds (e.g. professional, special or restricted associations structured as limited liability companies, the Danish Companies Act or hedge funds) are required to be registered with the Danish Business (the “DCA”) applies besides the AIFMA. Authority. Such capital funds, which meet the conditions for being AIFs, are required to be licensed or registered with the Danish FSA only if they are self-managing AIFs. 1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body? 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment The AIFMA does not explicitly distinguish between managers and Funds (or otherwise differentiate between different advisers. However, an extended authorisation is required to provide types of funds) and if so how? investment advisory services. The AIFMA distinguishes between open-ended and closed-ended As regards Danish AIFMs, depending on the volume of assets under AIFs in relation to cash management. We note that the definition of management, licensing or registration is a prerequisite for managing closed-ended AIFs within the AIFMA is different from the definition AIFs. of closed-ended funds under the Prospectus Directive. However, the For EU-AIFMs licensed by competent authorities within the EU/ Danish Securities Trading Act (the “DSTA”) distinguishes between EEA which intend to manage Danish AIFs in Denmark, no licensing open-ended and closed-ended AIFs in relation to prospectus or registration is required with the Danish FSA, provided that the requirements, in accordance with the scope of application of the AIFMs are authorised to manage the particular type of AIFs. Such Prospectus Directive. EU-AIFMs may initiate management of the AIFs, when the AIFMs AIFMs are required to have and utilise appropriate liquidity have received a notification from their competent authorities stating management systems and procedures to control the cash risk of that information has been forwarded to the Danish FSA for either AIFs, except when the AIFs are closed-ended and not leveraged. direct managing or managing through a branch. If the EU-AIFMs Further, AIFMs must make decisions as to the adequacy of the are simply registered with their competent authorities, and hence frequency of valuations for open-ended AIFs. AIFMs do not have are not licensed to manage AIFs, they are not entitled to manage to make such decisions for closed-ended AIFs. Danish AIFs. As regards open-ended AIFs, AIFMs are required to align the At this point in time, TC-AIFMs can only obtain authorisation for investment strategies, liquidity profiles and redemption policies of marketing activities (see section 3 below) under the AIFMA. But such AIFs, to ensure the investors’ ability to redeem their investments recent amendments to the AIFMA, in line with Directive 2011/61/ and that all investors are treated fairly and in accordance with the EU (the “AIFM Directive”), have introduced the possibility for particular AIF’s redemption policy and obligations.

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The AIFMA requires AIFMs of open-ended AIFs or standard AIFs to undertake stress tests if they are leveraged. The results of these 2 Fund Structures tests shall form part of the risk assessment of the AIFs and shall be used to clarify the appropriate liquidity management system and 2.1 What are the principal legal structures used for control procedures. AIFMs must ensure that the AIFs maintain cash Alternative Investment Funds? resources to meet redemptions, to the extent AIFs are obliged to redeem. AIFs may be limited liability companies (“A/S” or “ApS”), limited partnerships (“K/S”), limited partnership companies (“P/S”) or 1.5 What does the authorisation process involve? capital funds. The main principle in relation to companies limited by shares is that the shareholders are liable only to the extent of their

Denmark contribution to the company. AIFMs to be licensed in Denmark must satisfy the conditions set forth in the AIFMA, including certain requirements on capital, P/S and K/S companies are transparent companies, which means management (including fit and proper tests, experience, reputation), that taxation takes place with each investor, based on each investor’s etc. The initial capital required is EUR 125,000 for AIFMs and EUR ownership share. Thereby, a tax loss/deduction is set off in the 300,000 for self-managing AIFs. The application for authorisation investors’ personal income. Unlike K/S companies, P/S companies must contain information on the AIFM and the AIFs which the are subject to the procedures and requirements under the DCA. AIFM intends to manage. Within three months of the filing of a complete application, the Danish 2.2 Please describe the limited liability of investors. FSA will notify an applicant in writing as to whether authorisation has been granted. This time limit may be extended by three months As noted, the main rule is that investors’ liability is limited to the if the Danish FSA finds it necessary due to the circumstances. The amount invested. In cases where capital to the company need not AIFMs may initiate management of the AIF(s) in accordance with be paid in full, such as ApS, A/S, K/S and P/S companies, investors the application when the licence has been granted. may be required to pay the residual capital (the callable capital) if As regards EU-AIFMs, which are licensed according to the AIFM needed for the proper operation of the company. Furthermore, the investors could lose their limited liability by agreements, e.g. by regulation in another Member State within the EU, reference is guaranteeing for the company, or – in the case of active investors – made to question 1.2 above. by becoming liable to the company or its creditors according to the general principles of tort law. 1.6 Are there local residence or other local qualification An investor’s ability to participate in the management of an AIF is requirements? governed by the AIFMA and the DCA, which include no statutory restrictions. In general, AIFMs must have a good reputation, If a Danish capital fund is established and the appointed AIFM does sufficient experience to hold their positions and be capable of not have its registered office in Denmark, the capital fund must ensuring the sound and proper operation of the AIF. Furthermore, enter into an agreement with a local representative regarding the AIFMs must ensure that reasonable steps are taken to prevent representation of the capital fund in Denmark. The capital fund will conflicts of interest, e.g. between the AIFM, including its managers, have its registered office where the representative has its registered and the AIFs managed by the AIFM or the investors in those AIFs. office. Foreign AIFMs must comply with other sections of the AIFMA, which, however, imply no further restrictions on an investor’s 1.7 What service providers are required? ability to participate in the management of AIFs.

Danish AIFMs must ensure that a depositary is selected in 2.3 What are the principal legal structures used for compliance with the AIFMA for each AIF under management. managers and advisers of Alternative Investment Furthermore, each AIF and the AIFMs are required to have a certified Funds? auditor. As regards TC-AIFMs marketing TC-AIFs in Denmark, the TC-AIFMs must ensure that one or more entities are appointed, in Danish-licensed AIFMs must be structured as legal persons compliance with the AIFMA for each AIF marketed in Denmark, to according to the DCA, i.e. as limited liability companies or limited undertake the relevant depositary duties. The depositary(ies) must partnership companies. be a different entity from the AIFM, i.e. a separate entity. EU-AIFMs are allowed to manage AIFs either directly or through a branch in Denmark. If the AIFMs want to establish a branch, 1.8 What co-operation or information sharing agreements the DCA applies and requires the branch to be registered with the have been entered into with other governments or Danish Business Authority. Otherwise, the AIFMD simply requires regulators? the EU-AIFMs to be legal persons. TC-AIFMs which will have Denmark as their Member State of According to the table (Ref. 2013/1491) last updated 16 September reference under the forthcoming TC-AIFM passporting regime must 2015 and published by the European Securities and Markets have the legal structure of a limited liability company. Authority (“ESMA”), which shows the status of the Memoranda of Understanding (“MoUs”) signed by EU national supervisors, 2.4 Are there any limits on the manager’s ability to the Danish FSA has entered into co-operation agreements with 43 restrict redemptions in open-ended funds or transfers non-EU regulators or governments. Currently it only remains for in open-ended or closed-ended funds? the Danish FSA to enter into a co-operation agreement with the Maldives’ regulators. No, with the exception of section 36 of the Danish Contracts Act All the signed co-operation agreements are based on the template stipulating the possibility to modify or set aside – in whole or in MoU negotiated by ESMA. part – any contract term considered unreasonable.

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The Danish FSA may, in addition, lay down rules on the mandatory If the TC-AIFM marketing passport regime comes into force, cash management systems and redemption policies. the intention is that TC-AIFMs which are licensed in another EU Member State as managers of the types of AIFs which the AIFMs intend to market in Denmark, may initiate marketing as soon as 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? the AIFMs have been notified by the competent authorities in the relevant Member State, of the fact that a complete application and a statement have been submitted to the Danish FSA. As regards There are no legislative restrictions on the transfers of investors’ marketing of TC-AIFs, some more stringent requirements must be interests in AIFs. Such restrictions may, however, be imposed by met, e.g. appropriate co-operation agreements must exist between the funds’ articles of association or in contractual terms. the Danish FSA and the competent authorities of the TC-AIF’s

home state. Denmark 3 Marketing 3.2 What are the key content requirements for marketing materials, whether due to legal requirements or 3.1 What legislation governs the production and offering customary practice? of marketing materials?

The content requirements for marketing materials on each AIF Besides the AIFMA, the Executive Order on Form and Content of marketed by AIFMs can be found in the AIFMA, which faithfully Documents Containing Key Investor Information of Alternative implements the AIFMD. Key items are information on the AIF’s Investment Funds (the “KIIDO”), the Executive Order on investment strategy and objectives, asset investment specifications, Authorisation for Alternative Investment Fund Managers to Market the AIF’s historical performance, fees and costs, leverage permitted, the Alternative Investment Fund Established in Third Country in identification of the AIFM, custodian, auditor and other service Denmark (the “TCMO”), the Executive Order on Authorisation for providers, etc. Third Country Alternative Investment Fund Managers to Market EU/EEA Alternative Investment Funds in Denmark, the DSTA and Content requirements may be stricter when units or shares are the Danish Marketing Act (the “DMA”) regulate the marketing and marketed towards retail investors, e.g. some key investor information offering of units or shares in AIFs. may be provided. We notice that in case of an overlap between the AIFMA requirements and the Prospectus Directive, only the Public offerings of units or shares in closed-ended AIFs in Denmark information not included in the prospectus needs to be published. are subject principally to prospectus requirements – in accordance with the DSTA and the relevant Danish executive orders on prospectus requirements, form and content – unless specific exemptions apply. 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? EU-AIFMs, which are licensed to manage AIFs in accordance with the AIFMD, are holders of a marketing passport. Such AIFMs may initiate marketing of EU-AIFs (including Danish AIFs) towards Marketing must be notified to the Danish FSA by the competent professional investors in Denmark, when the AIFMs have received authorities of the AIFMs, as specified in question 3.1 above. The a notice from the competent authorities in the home state declaring Danish FSA has 20 working days to verify the content of the that a notification letter and a statement have been submitted to the notification and to inform – in writing – the authorities in the AIFM’s Danish FSA. EU-AIFMs can be authorised by the Danish FSA home state in this regard. to market TC-AIFs and EU-Feeder funds with TC-Master funds EU-AIFMs and TC-AIFMs that intend to market TC-AIFs in Denmark towards professional investors in Denmark, if certain requirements must comply with the authorisation procedure and requirements laid are satisfied. down in the TCMO. Following the TCMO, the AIFMs must provide EU-AIFMs which are only registered with their competent the Danish FSA with several documents and general information authorities, and hence are not licensed to manage AIFs, do not on the AIF in addition to the main application. All documents and have a marketing passport. Such AIFMs are not entitled to market information must be provided in Danish or English. The documents units or shares in Denmark, whether towards professional or retail and information will be reviewed by the Danish FSA prior to the investors, unless specific authorisation is granted by the Danish granting of the marketing licence in Denmark but the documents and FSA. At this stage, such specific marketing authorisation is not information are not subject to actual review and approval. available to registered EU-AIFMs in Denmark because the Danish If a prospectus is required according to the DSTA, the prospectus FSA is yet to lay down the specific rules and provisions governing must be approved by the Danish FSA prior to any public offering. marketing of AIFs in Denmark by registered EU-AIFMs. TC-AIFMs may obtain a special marketing authorisation with the 3.4 What restrictions are there on marketing Alternative Danish FSA to market units or shares in managed TC- or EU-AIFs Investment Funds? towards Danish professional investors. Such authorisation requires a TC-AIFM to meet certain conditions, including: requirements Besides the restrictions set forth above in questions 3.1 to 3.3 for annual reports; a reciprocity statement; investor information; and below in question 3.5 concerning (active) marketing as such disclosures to the Danish FSA; and co-ordination agreements term is defined in the AIFMA and the AIFMD, AIFMs may not between the Danish FSA and the competent authorities in the AIFM’s supply misleading or incorrect statements or withhold substantial home state. In addition, TC-AIFMs can apply for a retail marketing information if this is capable of distorting customer behaviour. authorisation with the Danish FSA to allow the TC-AIFM to market Passive marketing (i.e. reverse solicitation) does not require shares in managed AIFs towards retail investors in Denmark. This authorisation, and can be relied upon by both Danish and foreign requires, inter alia, that the TC-AIFM be authorised with respect to AIFMs and AIFs. However, the AIFM must be able to document retail marketing in the country where it has its registered office, as at all times that the commitment of the investor was initiated solely well as in the country in which the AIF is established. by the investor.

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There is no specific mention of pre-marketing in the AIFMA. However, the Danish FSA has provided some guidance on the scope 3.7 Are there additional restrictions on marketing to of marketing and pre-marketing. In the Danish FSA’s Q&A, the FSA public bodies such as government pension funds? stipulates that introductory meetings held with potential investors prior to establishing an AIF and in advance of any PPM, prospectus or the No. Pension funds may invest in AIFs in accordance with the Danish like, are not considered by the Danish FSA to be marketing activities Financial Business Act, which sets out requirements as regards the under the Danish AIFMD regulation, subject to the condition that the articles of association of the capital funds in which pension funds investor is unable to undertake any commitment to acquire shares/units are allowed to invest. in the AIF, e.g. by a letter of intent or similar at such meeting. 3.8 Are there any restrictions on the use of intermediaries Denmark 3.5 Can Alternative Investment Funds be marketed to to assist in the fundraising process? retail investors? Yes, the brokering of any securities is subject to having a brokerage Marketing of AIFs is allowed principally towards professional licence either in Denmark or validly passported into Denmark from investors. The Danish FSA may, however, grant TC-AIFMS and EU- another EU/EEA country (in accordance with MiFID). Acting as an AIFMs licensed under the AIFMD permission to market one or more introducer also requires a brokerage licence. AIFs towards retail investors according to the rules implementing the AIFMD. Neither Danish nor EU-AIFMs which are only registered 3.9 Are there any restrictions on the participation in can obtain a licence to market towards retail investors. Alternative Investments Funds by particular types of The Danish FSA has issued stricter marketing procedures and content investors, such as financial institutions (whether as requirements for marketing towards retail investors in the Executive sponsors or investors)? Order on Authorisation for Alternative Investment Fund Managers to Market to Retail Investors in Denmark (the “Retail Executive Order”). No, there are not. The definition of “retail investors” follows the term applicable under the Markets in Financial Instruments Directive (“MiFID”) regime. 4 Investments According to the Retail Executive Order, a simplified process applies if the AIFM markets the AIF only to managers, management executives and other employees involved in the management of the 4.1 Are there any restrictions on the types of activities that AIF. In such situations, the AIFM must provide the Danish FSA with can be performed by Alternative Investment Funds? a declaration stating that the AIFM has informed the retail investors in question about the risks related to the product. Furthermore, in order In principle, there are no restrictions, but if the activities do, in to benefit from the simplified procedure, the AIFM must provide the effect, amount to activities that require a licence, e.g. discretionary Danish FSA with a declaration in which the retail investors clearly portfolio management, such activities would not be permitted. state that they are familiar with and informed of the risks related to the AIF being marketed. 4.2 Are there any limitations on the types of investments The Danish FSA does not consider it to constitute indirect marketing that can be included in an Alternative Investment to retail investors if pension funds include units in AIFs in their Fund’s portfolio whether for diversification reasons or unit-link schemes. Note that this is a special indirect marketing otherwise? exemption. The AIFMA includes an exemption to the general prohibition on Generally, no. However, the Danish FSA may lay down further rules marketing to retail investors in Denmark. Certain types of investors on what securitisation positions can be included in an AIF’s portfolio. are not considered retail investors and should therefore be treated If an AIFM is licensed to perform discretionary portfolio management, as professional investors. Consequently, no retail marketing it is not permitted to invest all or part of the client’s portfolio in units or authorisation is required in order to market shares or units in AIFs shares of the AIFs it manages, unless approved by the client. to these types of investors. The retail investor prohibition does not apply to investments made by: 4.3 Are there any restrictions on borrowing by the (i) managers, executives or other employees employed by the Alternative Investment Fund? AIFM in an Alternative Investment Fund, in which the specific individual is involved in the management of the fund; or No. The only limitations with regard to borrowing are that an AIFM (ii) other investors, which (a) undertake to invest at least EUR is obliged to stipulate proper individual leverage limits for each AIF 100,000, and (b) declare in a written document other than the it has under management. Note that in the event of leverage above subscription contract, that they are aware of and understand 4:1, interest tax deductions may be reduced. the risks linked to the intended undertaking or investment.

3.6 What qualification requirements must be carried out 5 Disclosure of Information in relation to prospective investors? 5.1 What public disclosure must the Alternative AIFMs must ensure that their AIFs are offered only to professional Investment Fund make? investors (unless retail marketing authorisation is obtained); that is, investors who possess the experience, knowledge and expertise to Unless AIFs are self-managing, the AIFMA does not require any make their own investment decisions and properly assess the risks public disclosures from the AIFs, but rather from the AIFMs. that they incur as set forth in the MiFID Directive. In this respect, a AIFMs are obliged to disclose information to their AIF investors simple warning on a webpage is not sufficient. on a regular basis regarding leverage and, specifically, information

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about the percentage share of illiquid assets, new arrangements for income at a flat rate of 22%. However, the effective rate is less, as controlling the AIF’s liquidity and the AIF’s current risk profile and business expenses and depreciations are tax-deductible. risk controlling systems. Furthermore, AIFMs must inform AIF Open-ended funds that comply with a complex system can avoid investors and other relevant parties of potential conflicts of interest. taxation of distributed funds. The Danish Business Authority may stipulate rules governing an Investments in taxable funds AIFM’s duty to disclose information based upon the Danish FSA’s If the AIFM/AIF is an entity liable to Danish company income tax, evaluation of the AIFM. resident investors will, generally, be taxed on gains derived from AIFMs are required to publish on their website any supervisory their investments as an investment in shares. Consequently, tax will reactions/statements made to them by the FSA. generally apply to capital gains and dividends at a rate of 15.3%

for pension funds (whether managed by life insurance companies Denmark 5.2 What are the reporting requirements in relation to or individually), at 22% for companies and at 27% or 42% for Alternative Investment Funds? individuals. Pension funds and companies will, generally, be taxed on the income on an accrual basis. Unless AIFs are self-managing, the AIFMA does not require any Non-resident investors will be subject to tax in their home country annual reports from the AIFs, but rather from the AIFMs. The on gains, while dividends may be subject to a Danish withholding reporting provisions require AIFMs to make available an annual tax of 27% (of which 5% is refundable for companies), which is report no later than six months following the end of the financial often reduced or eliminated under a double taxation treaty or tax year. The annual reports shall be prepared in accordance with the information agreement. accounting rules and standards in the AIF’s home state and must be Investments in tax-transparent funds audited by an authorised auditor. If the AIFM/AIF is a tax-transparent entity, resident as well as non- AIFMs are further obliged to report to the Danish FSA on a regular resident investors will be subject to tax in Denmark on the basis basis. Those reports shall contain information on the AIFMs’ of the nature of the income (capital gains, dividends, financial most important markets and the instruments used in portfolio instrument gains) that the fund generates. management, as well as information on substantial risk exposures and concentrations for each AIF managed. At the end of each Resident investors will generally be subject to Danish tax on the quarter, AIFMs shall, if requested, submit to the FSA a list of the income at the rates indicated above. Resident pension funds and AIFs under management. companies will generally be subject to tax on the income. For all EU-AIFs individually, the AIFM must submit information Non-resident investors will generally only be subject to Danish tax covering, inter alia, the current risk profile and the market risk on the income to the extent that the income is dividend income. Such controlling systems, specifications on the important asset categories income is subject to Danish withholding tax at 27% (of which 5% in which the AIF has invested, the results of the appropriate stress is refundable for companies), which is often reduced or eliminated tests, all new arrangements for controlling the liquidity and the under a double taxation treaty or tax information agreement. percentage share of illiquid assets. Furthermore, the AIFM must make available to the FSA certain 6.2 What is the tax treatment of the principal forms of information in the event that an AIF acquires control over a non- investment manager / adviser? listed company. The same applies to AIFs which use substantive leverage. Please see question 6.1 above.

5.3 Is the use of side letters restricted? 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an No, there are no restrictions on the use of side letters. The AIFMA, Alternative Investment Fund or the transfer of the investor’s interest? however, stipulates that no investors in AIFs shall obtain preferential treatment, unless such treatment is disclosed in the relevant AIF’s Denmark levies no capital duties, share transfer taxes or wealth articles of association or fund provisions. taxes (except on real property).

6 Taxation 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative Investment Funds? 6.1 What is the tax treatment of the principal forms of Alternative Investment Funds? As a starting point, Danish companies are taxed at the statutory corporate income tax rate of 22% on both capital gains and dividends. An important distinction in relation to taxation is whether an AIFM or AIF is structured as a taxable entity (such as a Danish limited Danish companies may pay dividends to other foreign companies free liability company – A/S or ApS) or as a tax-transparent entity (such of any withholding taxes, provided that the shares in the distributing as a Danish limited partnership or limited partnership company – company qualify as subsidiary shares (i.e. shareholdings of 10% or K/S or P/S). more of the share capital) or group shares (i.e. shareholdings in which the shareholder and the issuing company are subject to mandatory If the AIFM/AIF is structured as a tax-transparent entity, the fund Danish joint taxation) and the foreign company is domiciled in will be disregarded for Danish corporate income tax purposes and an EU/EEA country or another state with which Denmark has the investors will, generally, be subject to tax as if they had invested concluded a double taxation treaty, and the receiving company is directly in the underlying assets and obligations. If the AIFM/AIF able to claim a reduction of the taxation on the dividends under a is structured as a taxable entity, the fund is likely to be subject to double tax treaty or under the EU Parent-Subsidiary Directive. ordinary corporation tax in Denmark, which generally entails taxing

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In regard to unlisted portfolio shares (shareholdings of less than January 2014, and Executive Order no. 8 of 4 March 2013. The 10% of the share capital), the dividend tax is reduced to 70% of Danish Ministry of Taxation considers the IGA to be a supplement to the corporate income tax rate, corresponding to a tax rate of 15.4%. the existing double taxation treaty with the United States of America If the shares in the distributing company do not qualify as subsidiary in relation to the provisions on mutual exchange of information. shares or group shares and the receiving company is domiciled in Act no. 1634 of 26 December 2013 implements the required a country with which Denmark has entered into a double taxation legislative amendments to ensure an effective implementation of agreement, the final tax may be reduced, typically to 15%. Generally, the equivalent EU reporting regime as laid out in Council Directive such dividends are subject to 27% withholding tax. 2011/16/EU of 15 February 2011 on administrative co-operation in As regards capital gains on shares for resident corporate shareholders, the field of taxation and repealing Directive 77/799/EEC. taxes are exempted provided that the shares are group shares, Denmark signed the agreement on the Common Reporting Standard Denmark subsidiary shares or unlisted portfolio shares. Other capital gains for (the “CRS”) on 29 October 2014. The first responsibilities under the resident corporate shareholders are taxed at the corporate tax rate of CRS came into effect on 1 January 2016, and the first exchange of 22%. Such gains are generally taxed annually, on an accrual basis. information under the CRS agreement is due to be carried out in 2017. Resident investors in taxed funds are taxed on gains at realisation, at rates of 15.3% for pension funds (whether managed by life 6.7 Are there any other material tax issues? insurance companies or individually), 22% for companies and up to 42% for individuals. It is noteworthy that losses may be carried forward indefinitely up to Non-resident investors (companies and individuals) are taxed in certain thresholds, and that losses on listed shares can be set off only their home country on gains, while dividends may be subject to a against gains, etc. on other listed shares. withholding tax of 27% (of which 5% is refundable for companies), Investors holding units or shares in AIFs via pension schemes which is often reduced or eliminated in double taxation treaties. are taxed at a rate of 15.3% on the return, pursuant to the Danish Resident as well as non-resident investors in tax-transparent funds Pensions Tax Act. are taxed in Denmark based on the underlying assets of the fund (capital gains, dividends, financial instrument gains, etc.). 6.8 What steps are being taken to implement the OECD’s Action Plan on Base Erosion and Profit-Shifting 6.5 Is it necessary or advisable to obtain a tax ruling from (BEPS), in particular Actions 6 and 7, insofar as they the tax or regulatory authorities prior to establishing affect Alternative Investment Funds’ operations? an Alternative Investment Fund? In regard to BEPS, Denmark has introduced a general anti-abuse It is neither necessary nor advisable to obtain a binding tax ruling rule aimed at cross-border transactions. Further, Denmark has from the Danish Tax Administration or the Danish Tax Assessment adopted the first part of the stricter transfer pricing documentation Council. Nonetheless, if desired, a binding ruling from the tax requirements, i.e. country-by-country reporting. The new transfer authorities can be obtained for a fee of DKK 400 but with some pricing documentation requirements have effect for fiscal years considerable waiting time involved. starting on or after 1 January 2016. In regard to Action 7, it is worth mentioning that the OECD Model 6.6 What steps have been or are being taken to implement Tax Treaty and the OECD Commentary thereto are recognised as a the US Foreign Account and Tax Compliance Act source for interpretation of specific double taxation treaties. 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard? 7 Reforms The Government of the United States of America and the Government of the Kingdom of Denmark entered into a reciprocal FATCA Intergovernmental Agreement (the “IGA”) on 15 November 2012 7.1 What reforms (if any) are proposed? based on the US Treasury’s Reciprocal Model 1A Agreement. There are no significant reforms proposed at the moment that In Denmark, the signed IGA and the required changes and amendments would have a material impact on the regime governing Alternative in the Danish taxation legislation have been implemented through Investment Funds. Act no. 1634 of 26 December 2013, which came into force on 1

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Claus Bennetsen Horten Advokatpartnerselskab Philip Heymans Allé 7 DK-2900 Hellerup Copenhagen Denmark

Tel: +45 3334 4163 Email: [email protected] URL: www.horten.dk

Claus Bennetsen (b.1964) specialises in banking and finance law. Denmark Claus has more than 25 years of law firm experience advising banks, financial institutions, fund managers and their customers. His practice provides advice within fund management to, inter alia, Danish and foreign fund managers, investment funds, hedge funds, etc., and he also advises on the regulation of the financial sector, including on the establishment and operation of fund management companies and funds in Denmark and abroad. The practice also covers debt financing and reorganisation, including acquisition finance, financing of real estate portfolios and other major assets such as wind turbines, and in the preparation of standard documentation for financial institutions often assisting debt funds in connection with new financings or upon the acquisition of existing portfolios. Claus has special knowledge of and wide experience in the structuring of cross-border financial transactions and is an active advisor to the Danish subsidiaries of foreign groups.

Horten is one of the five largest law firms in Copenhagen and offers a full range of legal services. The investment funds practice has many years of in-depth experience advising foreign funds and their managers on their activities in the Danish market and advising the pension fund industry in Denmark on its fund management contracts. The group undertakes both regulatory and contract work.

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England & Wales Jeremy Elmore

Travers Smith LLP Emily Clark

the fact that UCITS funds are subject to mandated investment and 1 Regulatory Framework borrowing powers means that they are likely to lack the investment flexibility which is available to private funds. 1.1 What legislation governs the establishment and AIFMD has been implemented in the UK by various implementing operation of Alternative Investment Funds? measures – primarily the Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773), the Alternative Investment Fund The UK is regarded as one of the leading global asset management Managers (Amendment) Regulation 2013 (SI 2013/1797) and the centres, with an investment funds industry covering both traditional Alternative Investment Fund Managers Order 2014 (SI 2014/1292). and alternative asset classes. The majority of these implementing measures have been introduced Within Europe, London currently dominates the hedge fund market, by way of updates to the FCA Handbook. The FCA created a both in terms of the number of fund managers and by share of hedge new investment fund sourcebook, called “FUND”, as part of its fund assets. Unlike in the context of many private equity, real estate Handbook and this contains most of the FCA’s rules and guidance and infrastructure funds, where both the fund manager and the fund for UK AIFMs, which adds an additional component to the general itself tend to be domiciled in the UK, a classic hedge fund structure regulatory framework set out under FSMA. in the UK would not include the actual hedge fund being domiciled The European Venture Capital Funds Regulation (VCF Regulation) in the UK. Instead, hedge fund structures will invariably include an provides what is essentially “AIFMD Lite” for EU venture capital off-shore company or off-shore limited partnership established in a fund managers. jurisdiction such as the Cayman Islands. A UK entity would then be appointed as the discretionary investment manager to, or investment adviser of, the hedge fund. 1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or Prior to the Alternative Investment Fund Managers Directive regulated by a regulatory body? (AIFMD), supplemented by its Level 2 Delegated Regulation (Delegated Regulation) and guidelines from the European Securities Many Alternative Investment Funds will be AIFs for the purposes of Markets Authority (ESMA), the framework for Alternative AIFMD. An AIF is a collective investment undertaking which raises Investment Funds was derived from the Financial Services and Markets Act 2000 (FSMA) and the principal regulatory authority, capital from a number of investors, with a view to investing it in the Financial Conduct Authority (FCA). However, AIFMD has accordance with a defined investment policy for the benefit of those ushered in a new regulatory environment for many investment fund investors. Even if a vehicle does not fall within the definition of an managers, including private equity firms and managers of hedge AIF, it may be categorised as a collective investment scheme (CIS) funds. under FSMA (a CIS is similar, but not identical, to the European concept of a collective investment undertaking). An example of AIFMD offers the lofty ideal of pan-European harmonisation of this is likely to be carried interest arrangements structured through the regulatory and supervisory framework for the non-UCITS a limited partnership, which are unlikely to be AIFs due to the (undertakings for collective investment in transferable securities) employee participation scheme exclusion from AIFMD, but which fund sector, together with the associated freedom to passport management and marketing activities on a cross-border basis. are likely nevertheless to be unregulated CISs for the purposes of However, no passport is ever free and for Alternative Investment domestic legislation. Fund managers (AIFMs) there will be significant costs and burdens; The FCA authorises and regulates persons carrying out specific and in common with other Directives, the creation of freedoms “regulated activities” in the UK. Acting as the manager of an AIF within Europe can come at the price of newly erected barriers to is a regulated activity, as is establishing, operating (which includes truly international business. managing) and winding up an unregulated collective investment As noted above, AIFMD applies to the non-UCITS sector. Broadly scheme. A suitably authorised person must therefore be appointed speaking, UCITS funds have not been used to implement alternative to carry out these activities on behalf of an Alternative Investment investment strategies and therefore are generally outside the scope Fund. of this chapter. Some hedge fund managers may be able to launch In the UK, only appropriately authorised persons can carry on a products under the UCITS brand if the proposed investment strategy regulated activity by way of business. It is a criminal offence to fits into the framework and the UCITS requirements will offer breach this requirement. Any agreement entered into by a person investors greater regulatory safeguards and protections. However, carrying on a regulated activity in contravention of this provision

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is unenforceable against the other party and the other party is This will not be the case if the fund manager is looking to implement entitled to recover any money paid and to compensation for any an alternative investment strategy through a retail fund (meaning loss sustained. those which are approved by the FCA to be marketed to identified AIFMD contains a partial exemption for AIFMs whose total assets categories of investors, including, in the case of UCITS and non- under management do not exceed certain thresholds. These sub- UCITS retail schemes, the general public) – in this case the listing threshold firms will not have to comply with the full provisions of on the London Stock Exchange of any such fund itself, as well as the AIFMD, unlike those firms which are “full-scope” AIFMs. The manager, would need to be authorised by the FCA. relevant thresholds are: (i) €500 million, provided the AIF is not leveraged and investors have no redemption rights for the first 1.4 Does the regulatory regime distinguish between five years; or (ii) €100 million (including assets acquired through open-ended and closed-ended Alternative Investment leverage). The exemptions do not remove the requirement for Funds (or otherwise differentiate between different authorisation, and sub-threshold firms will need to apply to the types of funds) and if so how? FCA to become a “small authorised AIFM” or, in certain limited England & Wales circumstances, a “small registered AIFM”. The latter category The UK regulatory regime, broadly speaking, does not differentiate imposes the lowest regulatory burden on firms, but is only available between open-ended and closed-ended private funds, assuming that for internally managed AIFs and certain types of real estate scheme. the fund is domiciled within the UK, although, as noted above in the Sub-threshold AIFMs can opt into AIFMD to be treated the same context of sub-threshold firms, the partial exemption from AIFMD as full-scope AIFMs, so as to benefit from the AIFMD passporting will bite at a higher level for non-leveraged closed-ended funds. regime. However, the regulatory categorisation of UK fund managers A regulated entity which conducts all of its activities in its capacity advising or managing off-shore structures may be different to that as the manager/operator of an Alternative Investment Fund – which would apply if the entire structure is on-shore. whether an authorised AIFM or not – will be exempt from the EU Other regulatory requirements which might apply to a manager Markets in Financial Instruments Directive (MiFID). of Alternative Investment Funds are linked with the investment Historically, though, many UK resident managers or advisers of strategy being pursued, rather than whether the fund is open-ended off-shore hedge funds would have been subject to MiFID as the or closed-ended (although the relevant strategy might be linked with manager/operator of the fund was off-shore and the UK regulated a particular type of fund). For example, further requirements of UK entity was merely its delegate in respect of relevant investment legislation which are particularly relevant to hedge funds include: management services. This analysis, however, has been somewhat rules relating to market abuse and insider dealing; disclosures of muddied by the “letterbox” test imposed under AIFMD. The interests in shares and related derivatives above certain levels; and consequence of this test is that in some cases the entity which is disclosures of net economic short exposures to certain financial- designated as the manager of an AIF under the fund documentation sector companies and companies subject to a rights issue. is not regarded as the AIFM for the purposes of AIFMD (because it is a letterbox). The exact analysis of the letterbox test applicable 1.5 What does the authorisation process involve? to any situation is very fact-specific, but the risk is likely to arise from one of the tests set out in the Delegated Regulation, which An application for authorisation under FSMA involves the applicant provides that a manager of an AIF is likely to be deemed a letterbox submitting a considerable volume of information to the FCA. This if it delegates the performance of investment management functions will include information on the proposed business activities of the (i.e. investment management and risk management) to an extent applicant, its controllers and individuals who will be undertaking that exceeds by a substantial margin the investment management certain core controlled functions, its systems and controls including functions performed by the manager itself. The consequence of this those relating to the manner in which the applicant monitors its is that an on-shore manager of a hedge fund may, depending on the compliance with applicable FCA Rules, its group structure and exact structure and division of powers, now find itself as the AIFM reporting lines and financial projections for the first year of trading. for the purposes of the Directive even if it feeds its services into an For those applicants applying for authorisation to manage an AIF, off-shore manager. the FCA will require further information about the AIF itself (such as details of the AIF’s risk profile and its use of leverage). 1.3 Are Alternative Investment Funds themselves Once a complete application has been submitted (together with required to be licensed, authorised or regulated by a the requisite application fee), the FCA currently has six months to regulatory body? review the application (this is reduced to three months in the context of applications by AIFMs). During the review process, the FCA Generally speaking, under the current UK framework an Alternative is likely to raise additional queries in relation to the information Investment Fund itself is not required to be authorised or licensed submitted. by the FCA. AIFMD broadly supports the traditional position that it is the manager (or AIFM), rather than the Alternative Investment The FCA has made available a suite of forms for use by UK AIFMs Vehicle, which is subject to regulation. However, whilst historically in order to apply for the various permissions and authorisations a UK there have been very few operational requirements imposed at the AIFM is required to apply for. Further applications will also need level of the fund itself, to the extent AIFMD applies, the AIFM must to be made in relation to any “material changes” to the information now ensure that certain requirements are imposed upon the fund, submitted as part of the authorisation application. such as: the appointment of a depositary to have custody of certain Following authorisation, a successful applicant will need to comply assets and/or verify title to privately held assets; organisational with the applicable conduct of business and prudential rules of the controls (relating to risk management, compliance and valuation); FCA which are relevant to its business. In the context of AIFMs, conduct-of-business rules (relating to due diligence, execution of particular focus is likely to be given to the capital adequacy orders and reporting); and rules relating to companies in which the requirements of, and remuneration principles imposed by, AIFMD. fund has a substantial stake.

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remains an attractive and competitive location for private funds 1.6 Are there local residence or other local qualification in comparison to other jurisdictions. The reforms apply only to a requirements? limited partnership that is “designated” as a Private Fund Limited Partnership (PFLP). The new regime is not mandatory: it is open A fund manager applying for authorisation under FSMA (whether to a limited partnership that satisfies the conditions to be a PFLP to or not as an AIFM) must meet certain threshold conditions. One choose not to apply to be designated as a PFLP, in which case the of these is that the head office of the applicant must be in the UK. pre-existing limited partnership will apply. Although the FCA will judge each application on a case-by-case In common with other jurisdictions, the limited partnership basis, the key issue in identifying the head office of a firm is the (including the PFLP) will have one or more general partners and one location of its central management and control. or more limited partners. The general partner is responsible for the management of the limited partnership (although whether it fulfils 1.7 What service providers are required? this role will largely depend on the regulatory issues described

England & Wales above), but has unlimited liability for the debts and obligations of Historically, there have been no formal requirements to appoint the partnership over and above the partnership assets. Conversely, external service providers to private funds domiciled in the UK the liability of a limited partner will be limited to the amount it (although a manager may have engaged service providers as a contributes to the partnership (and, in the case of PFLPs, there is matter of choice). However, this is another area of change under no requirement for a limited partner to make a capital contribution), AIFMD. One of the most significant changes under AIFMD is the provided such limited partner takes no part in the management of requirement to have a depositary, who will have the responsibilities the partnership: to the extent the limited partner does take part in management, it will be treated as a general partner and will lose set out under AIFMD (which include custody, cash movement the protection of limited liability. The LPA contains a white list reconciliations and monitoring certain processes such as issues and of matters (“white list”) which limited partners of a PFLP can take redemptions of units and valuations). Independent valuers may also part in without jeopardising their limited liability status. A limited be appointed pursuant to the provisions of AIFMD. partnership (including a PFLP) registered in England & Wales does not have any legal personality separate from its partners and is not 1.8 What co-operation or information sharing agreements a body corporate. have been entered into with other governments or One of the fundamental attractions in the UK of a limited partnership regulators? 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 The statutory framework in the UK requires that a limited marketing takes place and the jurisdiction in which the fund manager partnership is registered as such. This entails providing an and the fund itself are established. The information exchange application for registration to the Registrar for Limited Partnerships, arrangements that the FCA has entered into can be found at https:// providing certain details including the name of each limited partner www.esma.europa.eu/document/aifmd-mous-signed-eu-authorities- and the amount of capital contributed by each limited partner. updated, but this includes all of the primary fund jurisdictions Any changes to these details during the continuance of the limited including the British Virgin Islands, the Cayman Islands, the partnership must be similarly registered within seven days of the Channel Islands and the United States. relevant change. There are also formalities that must be followed on assignments of limited partnership interests, such as advertising the 2 Fund Structures transfer in specific publications. In respect of the new PFLP regime, either a new or an existing limited partnership may choose to apply for PFLP status if it fulfils the criteria to qualify as a PFLP. Unlike 2.1 What are the principal legal structures used for limited partnerships, there is no obligation to provide details of the Alternative Investment Funds? partnership’s general nature, capital contribution amounts or term of the partnership (or to notify of any changes to such details). There are a wide variety of fund vehicles available in the UK. Certain In respect of PFLPs, as there is no requirement for a limited partner of these are only available for retail funds, such as the authorised to contribute any capital, the entire funding to be contributed by a unit trust and the open-ended investment company. Others, such as limited partner in a PFLP can be in the form of capital which can be the investment trust company, are likely to be used for closed-ended contributed and repaid at any time without affecting the extent of the structures implementing a traditional investment strategy. liability. This removes the need for the capital/loan split described However, a private fund domiciled in the UK and implementing an above. alternative investment strategy will usually take one of two forms. It is also possible for a private closed-ended fund in the UK to be Closed-ended private funds (in particular, those investing in asset structured as a unit trust. The English law concept of a trust has classes such as private equity, real estate and infrastructure) are no equivalent in some other jurisdictions. It is a structure under most commonly structured as limited partnerships. This is a form of which title to the fund’s assets is held by a person with legal partnership governed by statute under the Limited Partnerships Act personality (the trustee) for the benefit of the fund’s investors (the 1907 (LPA). In April 2017, the LPA was the subject of extensive beneficiaries). The document constituting the trust (the Trust Deed) reform by the UK Government in respect of private funds by way governs the relationship between the trustee and the beneficiaries of the legislative Reform (Private Fund Limited Partnerships) and, in addition, strict fiduciary duties are owed by the trustee as a Order 2017 (PFLP Order). The reforms have been introduced with matter of law. a view to simplifying the pre-existing law, reducing uncertainty As noted above, although the UK is the primary European hedge and administrative costs and burdens, and ensuring that the UK fund centre, the usual hedge fund structure will generally not

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include the actual hedge fund being domiciled in the UK, because to set up the fund on-shore would lead to tax inefficiencies since 2.4 Are there any limits on the manager’s ability to the fund would be treated as “trading” rather than “investing” for restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? UK tax purposes. Instead, hedge fund structures will invariably include a company or limited partnership established in an off-shore jurisdiction. Generally there are no statutory or regulatory limitations on the ability of managers of private funds to restrict redemptions or transfers in either open-ended or closed-ended funds, although 2.2 Please describe the limited liability of investors. contractual restrictions may be imposed.

In respect of funds structured as limited partnerships, under statute 2.5 Are there any legislative restrictions on transfers of the liability of a limited partner for the debts and obligations of the investors’ interests in Alternative Investment Funds? partnership is limited to the amount of capital it contributes to the England & Wales partnership, subject always to the caveat that the investor does not There are no legislative restrictions on the transfer of investors’ become involved in the management of the structure. interests. However, in the case of UK limited partnerships, This does not relieve the investor of its contractual obligation certain filing requirements will need to be met, and details of the to advance money, and therefore Alternative Investment Funds transfer advertised, before it is deemed to be effective. These filing operating “just-in-time” drawdown structures will be able to draw requirements do not apply to PFLPs. the full amount the investor has committed to advance to the fund, notwithstanding the statutory limitation on liability. The UK limited partnership will generally be structured so that the commitment of 3 Marketing investors comprises a nominal amount of capital contribution, with the balance being advanced by way of a loan. This structure should avoid amounts distributed to investors being subject to return in the 3.1 What legislation governs the production and offering of marketing materials? event of the insolvency of the limited partnership. The other fund vehicles available will provide for the limited liability Following the implementation of AIFMD, marketing has become of investors, such that they will not be required to contribute more one of the more difficult issues a manager of Alternative Investment than the amount which they have committed to invest in the fund. Funds has to grapple with, as managers need to consider both domestic and pan-European legislation. 2.3 What are the principal legal structures used for Under FSMA, the communication of financial promotions is managers and advisers of Alternative Investment restricted. Generally, financial promotions are permitted if they are Funds? made or approved by an entity authorised by the FCA. However, in the context of unregulated collective investment schemes (which will There are no formal requirements as to the legal structure used for catch most private funds), there are further restrictions which limit managers and advisers of Alternative Investment Funds. However, even the scope for authorised persons to make financial promotions. the two most common structures seen in the market are the private Units in unregulated collective investment schemes will, to the limited company and the limited liability partnership (LLP). LLPs extent made by an entity which is not authorised by the FCA, have been seen as the preferred structure for asset managers for need to be marketed in accordance with the Financial Services and some time now, as they offer the tax transparency of a traditional Markets Act 2000 (Financial Promotion) Order 2005 (FPO) or, to partnership whilst giving limited liability to the members of the LLP. the extent made by an entity which is authorised by the FCA, need Although an LLP is a body corporate, it is inherently a more flexible to be marketed in accordance with either the Financial Services and vehicle than a limited company and therefore can be adapted to suit Markets Act 2000 (Promotion of Collective Investment Schemes) the particular circumstances of the fund manager’s business and Order 2001 or the provisions of the conduct-of-business rules preferred governance structure. Since April 2016, LLPs (together contained as a component part of the FCA Rules. wih UK unlisted companies) are subject to a new requirement to maintain a register of people with significant control; such register In addition to the domestic regime, additional marketing restrictions is to be available for public inspection at their registered offices. are imposed by AIFMD and the Delegated Regulation. UK AIFMs wishing to market a UK AIF or EEA AIF to retail or professional Historically, each member of an LLP has been treated as being self- investors in the UK are required to apply to the FCA to do so. The employed for tax purposes. This has meant that LLPs have not FCA permits the marketing of a private fund to a wider group of needed to pay employer’s national insurance contributions (NICs) participants than the category of “professional investors” referred to on the remuneration of members, and it has also kept members of in AIFMD, provided the financial promotion rules referred to above an LLP outside of the UK employment-related securities (ERS) are complied with throughout the entire marketing process. legislation. Since the introduction of the “salaried member” rules in 2014, however, the position is no longer quite so straightforward. Under 3.2 What are the key content requirements for marketing these rules, a member of an LLP will be treated as an employee if materials, whether due to legal requirements or customary practice? they: (a) perform services for the LLP in return for a “disguised salary” (broadly, remuneration which is not dependent on the firm’s profitability); (b) do not have “significant influence” over the LLP’s Under domestic legislation, there are limited content requirements affairs; and (c) make a capital contribution to the LLP which is less applicable to marketing materials, although there is an overarching than 25% of their annual “disguised salary”. If a member meets all obligation to ensure that marketing materials are “clear, fair and not three conditions, they will be deemed to be an employee, the LLP misleading”. AIFMD has changed the rules somewhat, by including will need to pay employer’s NICs on their remuneration, and the prescribed pre-investment disclosures which must be made to member will be brought within the scope of the ERS legislation. prospective investors. Whilst many of these disclosures (set out in

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Article 23 of AIFMD) are largely consistent with information that has historically been included in marketing materials for private 3.5 Can Alternative Investment Funds be marketed to funds, there are specific components of the disclosure regime which retail investors? will either be new or enhance the level of detail previously provided. AIFMD effectively leaves the question of marketing to retail The requirements of the EU Prospectus Directive which catch investors to the discretion of Member States. The UK has retained “offers to the public” will generally not apply to the marketing of provisions which allow marketing to retail investors. If an AIFM Alternative Investment Funds on the basis that the requirements is permitted to market to professional investors, it can also market can be avoided if, broadly, the minimum subscription per investor to certain types of retail investors (effectively qualifying high-net- is €100,000 or if the fund is offered to fewer than 150 investors worth or sophisticated investors), provided it does so in accordance per EEA state (with higher thresholds proposed by the European with the UK financial promotion regime. The financial promotion Commission as part of the draft Prospectus Regulation which is due regime has changed recently with the effect that, where the to come into force during 2017 and with most of its articles to apply promotion is being made in accordance with the conduct-of-business England & Wales 24 months after it comes into force). The EU Prospectus Directive rules contained in the FCA Rules, in addition to the investors having will also not catch open-ended vehicles, so most hedge funds, for to fall within the terms of the exemptions themselves, the issuer example, would not be caught in any event. of the financial promotion must undertake a suitability assessment to ensure that the investment is appropriate for the prospective 3.3 Do the marketing or legal documents need to be investor. This suitability assessment needs to be undertaken prior to registered with or approved by the local regulator? the point at which the financial promotion is issued.

Outside of AIFMD, there is no requirement to register marketing 3.6 What qualification requirements must be carried out or legal documentation with the FCA. However, an AIFM must in relation to prospective investors? submit certain marketing information to the FCA (through the FCA’s AIFMD marketing notification form and/or the Management There are no “across the board” qualification requirements which Passporting Forms) 20 working days prior to marketing, and must apply in relation to prospective investors, although certain of the obtain pre-clearance for any material planned changes to the bases on which marketing is made under the financial promotion information provided (the AIFM must give at least one calendar regime (or, where applicable, AIFMD) will require an analysis of month’s notice of the changes). Material unplanned changes must the circumstances of the prospective investor. be notified to the FCA immediately. AIFMD introduces a passport which facilitates marketing to professional investors on a pan-European basis. For the purposes 3.4 What restrictions are there on marketing Alternative of AIFMD, a professional investor is one who could be so regarded Investment Funds? under MiFID. Although most institutional investors are likely to be professional investors per se, it may prove difficult to opt people For the purposes of AIFMD, marketing is a direct or indirect into professional status (it is a higher bar than most UK managers offering or placement at the initiative or on behalf of the AIFM to or are used to). Investors who are not professional investors will be with investors domiciled within the EU. This is a narrower concept retail investors. than that of a financial promotion under domestic regulation, which is an offer or inducement to engage in investment activity. The 3.7 Are there additional restrictions on marketing to FCA has provided guidance on when it considers an AIFM to be public bodies such as government pension funds? marketing in the UK. There are two situations when an AIFM may not be regarded as marketing an AIF: (i) pre-marketing; and (ii) There are no additional restrictions to those which otherwise apply reverse solicitation. The pre-marketing will be permissible where under the financial promotion regime. it is based on draft documentation and the offer document, or other information, is not sufficiently detailed to enable the recipient to make an investment decision or submit a subscription request; for 3.8 Are there any restrictions on the use of intermediaries example, a pathfinder document should not amount to marketing. to assist in the fundraising process? In addition, “marketing” does not include general public statements, the issuance of capital calls or secondary trading. There are no restrictions on the use of intermediaries, although if the intermediary is itself carrying on regulated activities for the In respect of reverse solicitation, the FCA guidance states that a purposes of the UK regulatory regime, it will need to be authorised confirmation from the investor that the approach was made at its by the FCA. own initiative should be sufficient to rely on this approach. The guidance, however, also states that it must be received prior to making the offer or placement. 3.9 Are there any restrictions on the participation in From 22 July 2014, an authorised AIFM is able to market to Alternative Investments Funds by particular types of professional investors only on the basis of the AIFMD passport. investors, such as financial institutions (whether as sponsors or investors)? Marketing by small AIFMs (i.e. sub-threshold firms) will be subject to a lighter-touch regime; broadly, UK small AIFMs will be able Under the current legislative and regulatory regime, there are no to market all sub-threshold AIFs in accordance with the domestic firm restrictions on the participation in Alternative Investment financial promotion regime. Funds – however, there may be regulatory capital costs to financial Off-shore managers of off-shore Alternative Investment Funds may institutions in respect of their investment positions. market into the UK on the basis of the financial promotion regime. Under AIFMD, AIFMs are limited in terms of the additional However, they will be required to comply with the transparency and activities they are able to undertake, and therefore certain financial (if relevant) private equity disclosure requirements imposed under institutions may need to restructure their operations to ensure that AIFMD. they are compliant with the provisions of AIFMD.

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4 Investments 5.2 What are the reporting requirements in relation to Alternative Investment Funds?

4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment AIFMD and the Delegated Regulation require AIFMs to comply Funds? with a range of detailed regulatory reporting obligations. Reporting obligations also apply to non-EEA AIFMs seeking to market their Generally speaking, there are no restrictions, although the fund funds under national private placement regimes. manager will need to ensure that the activities it is carrying out in Broadly, AIFMs will be required to make periodic reports to the FCA respect of the Alternative Investment Fund are consistent with the in accordance with AIFMD using a set of prescribed forms set out in scope of permission it has to carry out regulated activities (and with the Delegated Regulation and in line with ESMA’s final guidelines. the contractual investment policy of the Alternative Investment Fund). The EMSA guidelines, published in November 2013 and finalised in

However, AIFMD does impose certain restrictions relating to asset August 2014, were accompanied by a number of electronic reporting England & Wales stripping, whereby there are limitations on some distributions templates in XML format, together with guidance on the preparation or deemed distributions from a non-listed company in relation to of systems capable of generating XBRL reports. In addition to the which the AIFM has acquired control within 24 months following annual reports in respect of each managed AIF, AIFM will need to the acquisition of control. provide periodic reports relating to the AIFM itself and in respect of each AIF that it manages (including information in relation to In addition, although not restrictions, there are certain deal disclosure investment strategies, main instruments traded, principal exposures, requirements under AIFMD. In this regard, an AIFM must notify the risk profiles and (where relevant) leverage). FCA when an AIF’s voting interest in an unlisted company passes through certain thresholds. There are additional disclosure obligations The FCA has published various guidance papers and Q&As on when an AIF acquires “control” of an EU company (the test as to control periodic reporting, setting out what information is required and how, varies according to whether the investee company is listed or unlisted). and when, it should be reported. The FCA has an online reporting Investments by an AIF may also trigger a requirement to make certain system, GABRIEL, which assists UK AIFMs with meeting their information available to the FCA, the investee company and remaining requirements. shareholders (including, for unlisted companies, intentions as to the company’s future business and the likely repercussions on employees). 5.3 Is the use of side letters restricted? In the context of unlisted companies, relevant information must be passed to employee representatives (subject to limited exceptions). There are no firm restrictions on the use of side letters. However, AIFMD requires disclosures as to how AIFMD ensures the fair 4.2 Are there any limitations on the types of investments treatment of investors and, if side letters are used to provide that can be included in an Alternative Investment preferential treatment to investors, a description of the preferential Fund’s portfolio whether for diversification reasons or treatment and the type of investors to whom the treatment is made otherwise? available will need to be disclosed. If the AIFM operates a general most-favoured nations (MFN) mechanism, this is unlikely to There are no such limitations. 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 4.3 Are there any restrictions on borrowing by the disclosure requirements under AIFMD. Alternative Investment Fund? 6 Taxation In the context of private funds, there are currently no statutory or regulatory limitations on borrowing, although contractual restrictions are common. In the context of AIFs covered by AIFMD, certain 6.1 What is the tax treatment of the principal forms of of the pre-investment disclosures relate to the use of leverage. In Alternative Investment Funds? particular, an AIFM must disclose: the circumstances in which the AIF may use leverage; the types and sources of leverage permitted UK limited partnerships are not taxable entities for UK direct tax and the associated risks; any restrictions on the use of leverage and purposes and are instead fiscally transparent. This fiscal transparency any collateral and asset re-use arrangements; and the maximum level means each limited partner is treated for UK tax purposes as owning of leverage the AIFM is entitled to employ on behalf of the AIF. his proportionate share of the assets of the partnership and is subject to tax on the income and gains allocated to it under the limited partnership agreement (whether or not they are distributed). 5 Disclosure of Information

6.2 What is the tax treatment of the principal forms of 5.1 What public disclosure must the Alternative investment manager / adviser? Investment Fund make? The tax treatment of the manager or adviser will depend on whether Alternative Investment Funds structured as limited partnerships it is constituted as a company or an LLP. If a company, it will be will need to comply with the registration requirements under the subject to corporation tax on the fees paid by the fund (at 20% from 1907 Limited Partnerships Act. Limited partnerships designated as 2015, but due to drop to 19% from 1 April 2017 and 17% from 1 PFLPs need only disclose basic details (essentially the fund’s name April 2020). The management team takes its remuneration in the and address). There may be a requirement on the general partner form of salary (taxed at the highest applicable income tax rates, with of a UK limited partnership to file the partnership’s accounts on the national insurance contributions due too) and the excess profit can basis of the Partnership Accounts Regulations. be extracted as dividend income. If the manager is an LLP, it is

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fiscally transparent, so the profit arising from the fees paid to the duties may be payable on the transfer of limited partnership interests manager is automatically taxed in the hands of its members. As if the partnership property includes stock or marketable securities, noted above, the salaried member rules will be used to ascertain although there are a number of methods of mitigating the effect whether a member should be taxed as a self-employed person or an of such taxes. Stamp duty land tax may be payable where the employee. All of the LLP’s members, regardless of where they are partnership property includes land. resident, must pay UK tax on their share of the LLP’s profits arising from its UK trade as an investment manager/adviser. 6.4 What is the tax treatment of (a) resident, (b) non- Her Majesty’s Revenue and Customs (HMRC) has broad powers, resident, and (c) pension fund investors in Alternative under new anti-avoidance rules, to tax amounts arising to an Investment Funds? individual involved in fund management as trading income, unless such amounts are already taxed as trading income or employment The use of tax-transparent limited partnerships as the primary income or fall into exceptions for carried interest or co-investments. vehicle for Alternative Investment Funds means that income and England & Wales In terms of funds structured as limited partnerships, where the gains received by the fund are treated as if they had been received general partner appoints a manager to manage the partnership, the by the fund’s investors directly. The taxation of the returns depends fee payable to the manager will in principle attract value-added tax on whether the fund is treated as trading or investing. (VAT). This is most often managed by ensuring that the manager The question of whether or not a fund is carrying on a trade in the and the general partner are in the same VAT group. A recent case UK is largely a question of fact. In practice, this is determined by heard in the Court of Justice of the European Union (CJEU) (the applying various criteria derived from case law – often referred to as Fiscale Eenheid case (C-595/13)) outlined broad criteria for what “badges of trade” – to a fund’s transactions. For example, churning constitutes a “special investment fund” (SIF) for the purposes of the investments and investing and divesting opportunistically would be VAT exemption applicable in relation to SIF management services. likely to be indicative of a trading activity, whereas holding long It was also strongly suggested by the CJEU that AIFs which satisfy for income and capital would be more likely to be considered as an certain qualification criteria can be SIFs. This is a changing area of investment activity. law and it is not clear how the UK’s tax authority will react to this Private equity funds (the main users of the limited partnership judgment, although it is possible that its current position on the VAT structure) usually intend to buy and hold securities for the medium treatment of management services supplied to AIFs, which satisfy to longer term in order to achieve long-term capital appreciation. the relevant SIF criteria, will have to change. Consequently, they are more likely to be considered as investing The UK is not typically used as a domicile for hedge funds, but it rather than trading. is a popular location for investment managers of hedge funds, and If the limited partnership is treated as investing then, as a result of this is in part because of the Investment Manager Exemption (IME). its tax transparency, profit distributions from the limited partnership Provided certain conditions are met, the IME ensures that a UK retain their character as capital gains or investment income and are investment manager managing a non-UK fund will not constitute a taxed accordingly. The tax payable by a particular investor will permanent establishment of the fund in the UK. The IME enables a depend upon its own tax profile. For example, if the fund receives non-UK resident fund that is trading for UK tax purposes to appoint dividend income, this would be taxed in the hands of a UK-resident a UK-based investment manager without the risk of that part of the individual but a UK pension fund investor should not be subject to fund’s profit that is attributable to the activity of the investment UK tax on such investment income. Most non-resident investors manager in the UK becoming subject to UK tax. will only be subject to UK tax on UK-source investment income to The UK rules on the taxation of carried interest have been subject to the extent that it is subject to withholding tax. Withholding taxes are significant change since 2015. Carried interest is currently potentially potentially relevant to both UK interest and UK rental income (but taxed in the hands of the carried interest holder as a capital gain if it not dividends), but there are reliefs from withholding. Generally, arises on the disposal of an asset by the fund. With respect to carried non-resident investors should not be subject to UK tax on capital interest arising on or after 6 April 2016, the income-based carried gains unless: (i) they hold their interest for the purposes of a UK interest rules have introduced a new test that could restrict the capital trade; or (ii) they fall into specific rules relating to UK residential gains treatment of carried interest paid to carried interest holders property holdings (see below). (with the returns instead being taxed as trading income). The test If the limited partnership is treated as trading for UK tax purposes, is complex, but broadly, where the average holding period of fund UK resident investors and non-UK resident limited partners will investments is less than 36 months, then carried interest returns will be subject to income tax (or corporation tax on trading income) be treated as trading income. Where the average holding period is 40 on their share of the partnership’s trading profits. This will be of months or more, then returns will be treated as investment gains or particular concern for UK pension fund investors (who are only income. Where the average holding period is at least 36 months and exempt from UK tax on investment income and gains). Non-UK less than 40 months, the returns are treated as a mix of capital gains resident investors will be caught because the partnership (or the and income. The new rules do not affect the taxation of the fund itself fund manager) will constitute a taxable presence in the UK through or external investors. Carried interest returns are subject to a minimum which the non-resident is carrying on a trade, but in many cases the tax rate of 28%. It is also worth noting that carried interest must satisfy IME may be applicable. certain conditions to be treated in this way and not as trading income, but most carried interest arrangements in the market satisfy these tests. Investors should be aware of the annual tax on enveloped dwellings (ATED) and the extension of the capital gains tax legislation to ATED-related gains. The ATED rules and the capital gains tax rules 6.3 Are there any establishment or transfer taxes levied will need to be considered carefully when a fund invests in UK in connection with an investor’s participation in an residential property. Alternative Investment Fund or the transfer of the 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

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tax treaty in order to obtain relief. Whether such relief is available legislation having effect from 1 January 2017 has been introduced will depend, in part, upon whether that non-UK jurisdiction treats a in order to neutralise the effect of hybrid mismatch arrangements in UK limited partnership as fiscally transparent. accordance with the OECD’s recommendations under BEPS. Draft legislation, which introduces a restriction on the tax deductibility of corporate interest, has also been published and this legislation is 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing expected to take effect from 1 April 2017. In addition, the UK has an Alternative Investment Fund? implemented Country-by-Country reporting. In response to the multilateral instrument (MLI) adopted by the Generally speaking, it is not necessary to obtain tax rulings prior to OECD on 24 November 2016, it is expected that the UK will adopt a establishing an Alternative Investment Fund. “principal purpose test” (PPT) via the MLI in relation to BEPS Action 6 (Treaty Reliance). With respect to BEPS Action 7 (Avoidance of PE Status), the MLI proposes an extension to the definition of

6.6 What steps have been or are being taken to implement England & Wales “permanent establishment”. The definition of “independent agent” is the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting also narrowing. However, as this is not a required minimum standard, regimes such as the Common Reporting Standard? the UK has indicated that it will not be adopting this MLI measure. Funds and asset managers will need to consider the possible impact The UK entered into a Model 1 Intergovernmental Agreement of the proposed BEPS action points on their structures. (IGA) with the US in September 2012 and FATCA has now been implemented in the UK from 15 April 2015. Alternative Investment Funds established in the UK will have to carry out due diligence 7 Reforms to identify US investors and non-FATCA compliant investors, and will then have to report information about such investors to HMRC. 7.1 What reforms (if any) are proposed? Compliant UK funds will not be subject to, nor will they have to operate, FATCA withholding taxes. Since the early hours of 24 June 2016, when it became clear that the The UK has also entered into IGAs with the Crown Dependencies of UK had voted to leave the EU, the impact of Brexit has been ever- Guernsey, the Isle of Man and Jersey and Overseas Territories (UK present as a talking point. There is no doubt that when it comes, in CDOT). The IGAs between the UK and the Crown Dependencies whatever form it eventually takes, it will have an impact – possibly and Gibraltar are “reciprocal”, which means that UK funds will a profound one – on the UK asset management industry. As and have to carry out similar due diligence and reporting exercises in when it starts to become clear precisely what Brexit means, the relation to their investors in those jurisdictions. implications for the industry and the changes likely to be required to In addition, the Organisation for Economic Co-operation and UK financial services regulation will crystallise. Development (OECD) Common Reporting Standard for Automatic With the triggering of Article 50 of the Treaty on European Union Exchange of Financial Account Information (CRS) and the EU by the UK Parliament on 29 March 2017, the EU is now obliged Directive on Administrative Cooperation in the Field of Taxation to negotiate and conclude within two years an agreement with the (DAC) have now also been implemented into UK law. From 2018 UK setting out the arrangements for its withdrawal. At the end of onwards, it is expected that required reporting under UK CDOT will the two-year period (plus any agreed extension), withdrawal takes be made exclusively under the CRS. Accordingly, UK funds will effect even if no agreement is reached. Until the UK leaves the EU, need to consider these rules in order to ensure that they are compliant. however, the UK remains a Member State and remains subject to EU law. 6.7 Are there any other material tax issues? Following the significant regulatory changes introduced by AIFMD, it would be comforting to think that there would now be a pause for The tax position of an investor in a UK Alternative Investment breath in terms of further changes. However, the direction of travel Fund will inevitably depend upon its own tax profile – accordingly in terms of the regulatory requirements imposed on firms operating investors should always seek independent advice on the tax in the Alternative Investment Funds space is clear. There is still implications of participating in the fund, and managers should considerable uncertainty across the UK fund management industry advise investors of this fact. about how many of the AIFMD requirements should be interpreted As discussed under question 6.6, UK Alternative Investment Funds in particular contexts, although broad consensus is starting to will need to ensure that they are compliant with applicable due form in certain areas. At the time of writing, the timetable for the diligence/information reporting requirements under, for example, potential availability of passports under AIFMD for fund managers FATCA and the CRS. Further to the UK’s implementation of in non-EEA jurisdictions (which could include the UK, post-Brexit) FATCA, the CRS and the DAC, UK Alternative Investment Funds remains unclear. will also want to watch the progress of the OECD’s BEPS (Base AIFMD provides that the European Commission must carry out a Erosion and Profit-Shifting) project (discussed under question 6.8 review of the application and scope of the legislation by 22 July below) and its potential impact on their investment structures. 2017. This review must be based on both a public consultation and discussions with relevant national regulators about their experiences of the application of AIFMD. Where the review indicates that it 6.8 What steps are being taken to implement the OECD’s may be necessary, the Commission may propose amendments to Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they AIFMD, with the expected resulting legislation commonly being affect Alternative Investment Funds’ operations? termed “AIFMD II”. In light of the deadline by which the review must be completed, Following the publication of the OECD’s final BEPS reports on the Commission is expected to begin formal consultations on the 5 October 2015, the UK has taken the lead in the development review and AIFMD II during 2017. The potential amendment of and implementation of new rules relating to BEPS. For example, the existing legislation presents potential opportunities to improve

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certain aspects of the current regime, but could also result in the loss detailed points about limited partnership law. The outcome of that of some flexibility and potentially include some developments that consultation may bring further amendments to the regime. are considered unfavourable by the industry. The UK Government, in March 2016, also introduced legislation to MiFID is now being comprehensively revised to improve the bring all UK banks within the scope of a new senior domestic managers functioning of financial markets in light of the financial crisis and and certification regime (SMCR). The aims of the new regime are to to strengthen investor protection by way of a recast directive and ensure greater clarity about the responsibilities of senior individuals regulation, commonly referred to as “MiFID II”, which are due to within firms, as well as greater individual accountability. The FCA take effect on 3 January 2018. The implementation of MiFID rules has indicated that it intends to extend the application of the SACR to in the UK may result in certain MiFID requirements being applied include all non-bank firms, including UK fund managers, authorised more widely to non-MiFID firms (i.e. there are likely to be some under the Financial Services and Markets Act 2000 during 2018. instances of “gold-plating”), meaning that MiFID II is not only In July 2016, the European Commission published a proposed relevant to groups containing MiFID firms. The FCA has, to date, Regulation amending both the Regulation on European Venture England & Wales published four separate consultation papers setting out its proposals Capital Funds (EuVECA) and the Regulation on European Social for implementing MiFID II in the UK. These consultation papers Entrepreneurship Funds (EuSEF) to encourage an increase in uptake. contain details on the modified application of certain MiFID-derived There has been relatively little uptake of EuVECA and EuSEF funds conduct-of-business rules to AIFMs, UCITS managers and operators in the UK to date. In its response to the European Commission’s of residual collective investment schemes. September 2015 consultation on the review of EuVECA and EuSEF, As to English limited partnerships the introduction of the PFLP the FCA had acknowledged that it had “limited experience” with the regime has been welcomed as a positive step and should allow the UK funds so far. It remains to be seen whether the changes introduced to compete with other similar vehicles offered in other jurisdictions. by the amended Regulation, once agreed, will make these funds The UK’s Business, Energy and Industrial Strategy Department more attractive in the UK. (BEIS) held a separate consultation on limited partnership law in early In short, practitioners within the industry will need to ensure that 2017. BEIS conducted the review in light of concerns voiced in the they keep abreast of developments and consider whether they media that some limited partnerships registered in Scotland are being should be engaging with the industry in lobbying to try and ensure used for criminal activity. The consultation also dealt with some more that any proposed regulatory excesses can be curbed.

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 Fax: +44 20 7295 3500 Fax: +44 20 7295 3500 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. 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 management international tax, joint ventures and real estate taxation. Emily is businesses, both in relation to their initial formation and subsequent a member of the British Property Federation’s tax committee, the internal restructurings (covering areas such as LLP conversions, BVCA’s working group on BEPS and Invest Europe’s (formerly the 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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France Florence Moulin

Jones Day Guillaume Cavalin

■ a French investment adviser authorised by the French 1 Regulatory Framework administrative authority responsible for supervising the banking and insurance sectors (Autorité de contrôle prudentiel et de résolution – “ACPR”); or 1.1 What legislation governs the establishment and operation of Alternative Investment Funds? ■ an investment adviser authorised by the competent regulator of a Member State of the European Union; subject, however, to such investment adviser being fully compliant with the The establishment and operation of French Alternative Investment Markets in Financial Instruments Directive (“MiFID”) (and Funds are governed by the following regulations: the French monetary the “investment advice” box being checked) and having and financial code; the general regulation of the French financial successfully carried out the formalities in order to be granted markets regulator (Autorité des Marchés Financiers – “AMF”); the the MiFID passport. AMF’s written doctrine; the French tax code; and the French insurance code. 1.3 Are Alternative Investment Funds themselves For the purpose of this questionnaire, only the following French required to be licensed, authorised or regulated by a Alternative Investments Funds will be addressed: regulatory body? ■ The Professional Private Equity Investment Fund (Fonds Professionnel de Capital Investissement). The French Alternative Investment Funds mentioned in question 1.1 ■ The Professional Specialised Fund (Fonds Professionnel are not authorised by the AMF, but their constitution is notified to Spécialisé), which can take one of the following forms the AMF within one month following the date of their constitution. (please note that the “SICAV” form will not be addressed in this chapter): 1.4 Does the regulatory regime distinguish between ■ as a mutual fund (fonds commun de placement) and in such open-ended and closed-ended Alternative Investment event, its name is: Professional Specialised Investment Funds (or otherwise differentiate between different Fund (Fonds d’Investissement Professionnel Spécialisé); types of funds) and if so how? or

■ as a simple limited partnership (société en commandite The French regulatory regime makes a distinction between open- simple) and in such event, its name is: Société de Libre ended and closed-ended Alternative Investment Funds. Partenariat. Regarding the Alternative Investment Funds mentioned in question 1.1, they are in principle all closed-ended funds. 1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body? 1.5 What does the authorisation process involve?

The French Alternative Investment Funds mentioned in question 1.1 The French Alternative Investment Funds mentioned in question can only be managed by the following entities: 1.1 are not subject to an authorisation process. As explained in ■ a French portfolio management company duly authorised by question 1.3, their constitution must be notified to the AMF, and the AMF; or for that purpose the following documents must be provided to it: a ■ a management company duly authorised by the competent notification form available on the AMF’s website; and a copy of the regulator of another Member State of the European Union; constitutive documentation of the funds (either the by-laws or the subject, however, that such management company is articles of incorporation). fully compliant with the so-called AIFM directive and has Concerning the managers, they must satisfy several criteria in order successfully carried out the formalities in order to be granted to be authorised as portfolio management companies by the AMF with the AIFM management passport. (such process can take six to eight weeks), such as: Regarding the advisers, they can be of three types: ■ being set up under the form of a commercial company (usually ■ either a French financial investment adviser (conseiller en as a joint-stock company (société par actions simplifiée) or a investissements financiers), which must be affiliated with one public limited company (société anonyme)); of the professional organisations authorised by the AMF, and ■ having a share capital of at least EUR 125,000, which must be registered in the ORIAS register; or be fully paid-up;

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■ having an amount of own funds that must be at all times the highest between (i) EUR 125,000 plus 0.02% of the assets 2.2 Please describe the limited liability of investors. under management exceeding EUR 250 millions (within the limit of own funds equal to EUR 10 million), and (ii) 25% of Regarding the French Alternative Investment Funds mentioned in the overhead expenses of the preceding year; question 1.1, their limited partners (which cannot carry out any ■ having at least two accountable directors (dirigeants management activities) cannot be liable for the debts and obligations responsables) of good repute and with sufficient experience of such funds beyond the amount of their commitment. Such rule is in order to ensure sound and prudent management, plus at of public order and cannot be altered. least one additional employee; and ■ having a suitable person in charge of compliance and internal France control functions (responsable de la conformité et du contrôle 2.3 What are the principal legal structures used for interne) (who can be one of the accountable directors). managers and advisers of Alternative Investment Funds? Regarding the advisers’ registration as financial investment advisers, the formalities can be quickly carried out with one of the professional There are mainly two types: organisations which has been authorised by the AMF (such process can take three to four weeks). ■ a joint-stock company (société par actions simplifiée); or Concerning the advisers’ authorisation as investment advisers by the ■ a public limited company (société anonyme). ACPR, the conditions are very similar to the ones required for the However, the joint-stock company is very often used as it is possible portfolio management companies. The process can take three to to provide for very flexible rules in its articles of incorporation, six months. which is not the case in a public limited company.

1.6 Are there local residence or other local qualification 2.4 Are there any limits on the manager’s ability to requirements? restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? A French portfolio management company must have an independent office space dedicated to its business activity. Access to such office There are no such limits, as the rules organising the transfers of space must be strictly controlled. the units of the French Alternative Investment Funds mentioned Regarding the accountable directors (dirigeants responsables) of a in question 1.1 are all provided for in detail in their constitutive French portfolio management company: documentation. ■ they must be based in France as the registered office and the place of effective management of a French portfolio 2.5 Are there any legislative restrictions on transfers of management company must be in France; investors’ interests in Alternative Investment Funds? ■ they must be fully dedicated to the French portfolio management company’s activity. If there are more than two accountable Regarding the French Alternative Investment Funds mentioned in directors, the AMF might accept, on a case-by-case basis, question 1.1, there are no such legislative restrictions. that the third accountable director is not fully dedicated to the activity of the French portfolio management company; and ■ they must have sufficient experience with regard to the 3 Marketing management of Alternative Investment Funds.

3.1 What legislation governs the production and offering 1.7 What service providers are required? of marketing materials?

Regarding the French Alternative Investment Funds mentioned in Regarding the French Alternative Investment Funds mentioned in question 1.1, the following service providers are mandatory: question 1.1, the relevant regulations are as follows: ■ a depositary to safekeep the assets of the fund; and ■ the general regulation of the AMF; and ■ a statutory auditor to certify the accounts of the fund. ■ the AMF’s written doctrine, and especially AMF instruction 2008-04, AMF position 2012-08, AMF instruction 2014-03 and AMF position 2014-04. 1.8 What co-operation or information sharing agreements have been entered into with other governments or regulators? 3.2 What are the key content requirements for marketing materials, whether due to legal requirements or The list of agreements and cooperation actions is available on customary practice? the AMF’s website (http://www.amf-france.org/en_US/L-AMF/ Relations-institutionelles/Accords-et-actions-de-cooperation/ The French regulations provide that marketing materials must be Conventions-bilaterales.html?langSwitch=true). accurate, clear and not misleading.

2 Fund Structures 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator?

2.1 What are the principal legal structures used for Regarding the French Alternative Investment Funds mentioned in Alternative Investment Funds? question 1.1, only their constitutive documentation (either the by- laws or the articles of incorporation) must be communicated to the Please refer to question 1.1 above. AMF.

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3.4 What restrictions are there on marketing Alternative 3.7 Are there additional restrictions on marketing to Investment Funds? public bodies such as government pension funds?

If a French portfolio management company is fully compliant with No, there are not. the so-called AIFMD, it cannot initiate the marketing of the units of the French Alternative Investment Funds mentioned in question 1.1 3.8 Are there any restrictions on the use of intermediaries until it gets a marketing authorisation from the AMF. to assist in the fundraising process? Regarding the marketing act, AMF position 2014-04 defines it as follows: Regarding the French Alternative Investment Funds mentioned in France “[A]n “offering” or “placement”, within the meaning of question 1.1, there are no such restrictions. Article 4, 1, x) of Directive 2011/61/EU, of units or shares of an AIF is considered as being their presentation by different means (advertising, direct marketing, advice…) with a view 3.9 Are there any restrictions on the participation in to encouraging an investor to subscribe to or purchase them. Alternative Investments Funds by particular types of investors, such as financial institutions (whether as In these conditions, the act of marketing units or shares of sponsors or investors)? an AIF consists in presenting them on French territory by different means (advertising, direct marketing, advice…) with a view to encouraging an investor to subscribe to or purchase Regarding the French Alternative Investment Funds mentioned in them. question 1.1, there are no such restrictions. When units or shares of an AIF have been marketed as defined above, those units or shares shall be considered as 4 Investments being marketed in France whenever investors among whom marketing in France was carried out are unit or shareholders in the said AIFs.” 4.1 Are there any restrictions on the types of activities The same AMF position is, however, providing that reverse solicitation that can be performed by Alternative Investment and pre-marketing shall not be considered as a marketing act in France. Funds? Such AMF position provides for a clear definition of such concepts: ■ Reverse solicitation: the purchase, sale or subscription of Regarding the French Alternative Investment Funds mentioned in units or shares of an AIF in response to a client’s unsolicited question 1.1, there are no such restrictions. request to purchase a specifically designated AIF, provided that the investor is authorised to do so. 4.2 Are there any limitations on the types of investments ■ Pre-marketing: the practice of contacting up to 50 prospective that can be included in an Alternative Investment investors – which are either professional investors or non- Fund’s portfolio whether for diversification reasons or professional investors who/which could invest an amount otherwise? equal to or greater than EUR 100,000 – in order to test their appetite prior to the launching of an AIF, without however Regarding the French Professional Specialised Fund (either a providing them with a subscription agreement and/or the final version describing the main characteristics of the fund that Professional Specialised Investment Fund, or a Société de Libre could decide them to invest in the fund. Partenariat), the French regulations do not provide for any kind of restrictions on asset classes, concentration limits or diversification The units of the French Alternative Investment Funds mentioned limits. However, such kinds of restrictions can be decided in question 1.1 can only be marketed to (i) professional investors, by the limited partners and be provided for in the constitutive and (ii) non-professional investors investing an amount equal to or documentation of the fund. greater than EUR 100,000. Regarding the French Professional Private Equity Investment Fund (Fonds Professionnel de Capital Investissement), the French 3.5 Can Alternative Investment Funds be marketed to regulations provide for the following mandatory rules: retail investors? ■ Its assets must be invested as follows:

Regarding the French Alternative Investment Funds mentioned in ■ A minimum of 50% must be invested in particular: question 1.1, their units cannot be marketed to retail investors if they ■ in associative securities, participating securities or do not invest an amount equal or greater than EUR 100,000. equity securities, or securities giving access to the equity securities of unlisted companies; ■ in rights representing a financial investment in an 3.6 What qualification requirements must be carried out entity created in France or abroad, the main purpose in relation to prospective investors? of which is to invest directly or indirectly in unlisted companies; or Regarding the French Alternative Investment Funds mentioned in ■ up to 20% of its assets, in equities securities or question 1.1, the eligible investors are as follows: securities giving access to the equity of companies, the ■ professional investors within the meaning of MiFID; stock market capitalisation of which is less than EUR 150,000,000. ■ investors investing an amount equal to or greater than EUR 100,000; and ■ The balance of its assets can only be invested in: ■ a management team. ■ money market instruments normally dealt in on regulated market, which are liquid and have a value which can be accurately determined at any time;

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■ units or shares (i) of French undertakings for collective The managers of the French Alternative Investment Funds mentioned investment, (ii) of undertakings for collective investment in question 1.1 must provide the investors with the following in transferable securities constituted under a foreign law, information/documents: (iii) of AIFs constituted in another Member State of the ■ the last annual report of the fund; European Union, or (iv) of investment funds constituted under a foreign law, which can be redeemed at the ■ the last net asset value of the fund’s units; and request of the unitholders or of the shareholders; ■ the past performance of the fund (if available). ■ deposits made with French or foreign credit institutions; ■ financial contracts (aka “financial futures”) within the 5.3 Is the use of side letters restricted? meaning of article L. 211-1, III of the French monetary France and financial code); The use of side letters is not restricted as long as their existence is ■ warrants, interest-bearing notes, promissory notes and disclosed to the other investors. mortgage notes; ■ on an ancillary basis, cash; or ■ debts. 6 Taxation ■ It cannot invest more than 50% of its assets in a single UCITS, or in a single French Professional Private Equity Investment 6.1 What is the tax treatment of the principal forms of Fund, or in a single French Professional Specialised Fund. Alternative Investment Funds? However, such limit is not applicable if the French Professional Private Equity Investment Fund is opting for the master-feeder structure. The French Alternative Investment Funds mentioned in question 1.1 are “transparent” for French income tax purposes. In other ■ It cannot hold more than 10% of the units of a UCITS or of a French Professional Specialised Fund. words, they are not themselves subject to any taxation in France and the French tax authorities “look through” them for the purpose of determining the type of income received by their investors. 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? 6.2 What is the tax treatment of the principal forms of investment manager / adviser? While there are no legal restrictions on borrowing by a Société de Libre Partenariat, the French regulations provide that borrowing by a French Professional Private Equity Investment Fund cannot Management and, depending on the services provided, advisory exceed 10% of its assets. fees paid by French Alternative Investment Funds should be VAT- exempted. A list of VAT-exempted funds is provided under French regulations. However, in our view, unlisted French Alternative 5 Disclosure of Information Investment Funds should also be able to require VAT exemption based on ECJ case law in this field. The carried interest derived from a Professional Private Equity 5.1 What public disclosure must the Alternative Investment Fund make? Investment Fund, and also in our view a Société de Libre Partenariat, received by French resident members of the management team can benefit from a favourable tax regime provided that all the The French Alternative Investment Funds mentioned in question 1.1 requirements set forth in article 150-0, II, 8 of the French tax code are not subject to any public disclosure requirement. Therefore, the are complied with (the so-called “Arthuis” conditions). names of their investors, as well as their accounts, are not made public. 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an 5.2 What are the reporting requirements in relation to Alternative Investment Fund or the transfer of the Alternative Investment Funds? investor’s interest?

The managers of the French Alternative Investment Funds No, there are not. mentioned in question 1.1 must provide the AMF with the following information/documents: 6.4 What is the tax treatment of (a) resident, (b) non- ■ the net asset value of the fund’s units, the fund’s net asset resident, and (c) pension fund investors in Alternative amount, and the number of the fund’s units. Such information Investment Funds? must be sent to the AMF each time the net asset value of the fund’s units is calculated; French regulations do not make a distinction between pension fund ■ the half-year report of the fund. Such report must be sent to the AMF within two months as from the end of each first investors and other investors. semester of each year; The basic tax treatment of the limited partners in a Professional ■ the annual report of the fund. Such report must be sent to the Specialised Investment Fund is as follows: AMF within six months following the end of the fiscal year 1) French tax residents of the fund; i) Individuals ■ a copy of all information sent to the investors; and ■ Taxation of dividends paid to investors depends on the ■ at the latest on 15 February of each year, and for statistical type of income received by the fund and distributed: purposes, the data relating to the composition of the net assets ■ Distribution reflecting dividends paid to the fund of the fund must be sent to the AMF. are subject to a progressive income tax rate, after

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application of a 40% tax allowance calculated on the ii) Taxation of capital gains made upon disposal of the gross amount of the dividends. fund units ■ Distribution reflecting interests paid to the fund are No taxation applies in France on capital gains derived subject to a progressive income tax rate. from the disposal of the fund units, unless the unit holder, ■ Distribution reflecting capital gains realised by the his/her spouse and their relatives in the ascending and fund are subject to a progressive income tax rate, after descending line, hold, directly or indirectly, more than a possible allowance which depends on the holding 25% of the rights in one of the French portfolio companies. period of the fund units (i.e., 50% regarding fund units held for at least two years; 65% regarding fund units 6.5 Is it necessary or advisable to obtain a tax ruling from held for at least eight years). the tax or regulatory authorities prior to establishing France ■ Taxation of capital gains made upon disposal of the fund an Alternative Investment Fund? units: ■ Capital gains derived from the disposal of the units are No general tax rulings are granted by the French tax authorities to subject to progressive income tax rate, after a possible secure the tax status of French Alternative Investment Funds. tax allowance which depends on the holding period of the fund units (i.e., 50% regarding fund units held for at least two years; 65% regarding fund units held for at 6.6 What steps have been or are being taken to implement least eight years). the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting In addition to the individual income tax due by any Individual regimes such as the Common Reporting Standard? French tax resident, social contributions are due at the rate of 15.5% assessed on any gain realised (without any allowance). On November 14, 2013, France signed the Model 1 Intergovernmental ii) Companies subject to corporate income tax Agreement (“Model 1 IGA”) with the United States, for the purposes ■ According to the “mark-to-market” rule, companies of implementing the US FATCA regime, with reciprocal reporting. subject to French corporate income tax that hold units FATCA rules have been implemented through the publication of in a fund are subject to tax even in the absence of any actual distribution of income by the fund. The corporate decree n°2015-1 dated January 2, 2015. investors must assess the value of the units in the fund The OECD’s common reporting standard is applicable in France at the end of each tax year and include the difference since January 1, 2016. between the value at the beginning of the tax year and at the end of the tax year in its taxable income (subject to corporate income tax at the ordinary rate of 33⅓%, 6.7 Are there any other material tax issues? excluding additional contributions). ■ Any distribution or capital gains realised upon disposal No, there are not. of the fund units and which has not been already subject to taxation under the mark-to-market rule are subject to corporate income tax at the ordinary rate. 6.8 What steps are being taken to implement the OECD’s Action Plan on Base Erosion and Profit-Shifting Please note that a favourable tax treatment is available for (BEPS), in particular Actions 6 and 7, insofar as they French individual and corporate tax residents, provided affect Alternative Investment Funds’ operations? that several requirements are satisfied by the fund and the investors (including but not only the commitment to hold the Most of the BEPS recommendations have already been implemented fund units at least five years). According to this special tax treatment, the gains derived from the funds may be subject to in France or will be in the near future. France already has anti- a tax exemption or a reduced tax rate. abuse clauses regarding actions 6 (preventing treaty abuse) and 7 (permanent establishment status) in some tax treaties. It is expected 2) Non-French tax residents that more will be added as part of the multilateral instrument. i) Taxation of income received by the fund and distributed to the investors Alternative Investment Funds operating in France or entering into transactions with French entities should carefully consider the Distributions received by individual or corporate investors are subject to: impact of the newly enacted measures. ■ A withholding tax at the rate of 21% for individual investors who are EEA tax residents or 30% for any 7 Reforms other investor if the distribution reflects dividends received by the fund from French companies. However, most of the international tax treaties 7.1 What reforms (if any) are proposed? concluded by France provide for withholding tax rates that vary from 0% to 15% depending on the tax jurisdiction of the investor. There are no pending reforms regarding French Alternative Investment Funds. ■ No taxation generally applies in France on distribution reflecting interest income received by the fund from French companies. Acknowledgment ■ No taxation applies in France on distribution reflecting capital gains realised by the fund from the disposal The authors would like to thank Emmanuel de la Rochethulon for his of shares in a French company unless the unit holder, assistance in preparing this chapter. Emmanuel’s practice covers all his/her spouse and their relatives in the ascending and tax-related aspects of transactions, including mergers and acquisitions, descending line, hold, directly or indirectly, more than private equity, corporate restructurings and real estate transactions 25% of the rights in such underlying company. (Tel: +33 1 56 59 39 39 / Email: [email protected]).

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Florence Moulin Guillaume Cavalin Jones Day Jones Day 2, rue Saint-Florentin 2, rue Saint-Florentin 75001 Paris 75001 Paris France France

Tel: +33 1 56 59 39 39 Tel: +33 1 56 59 39 39 Fax: +33 1 56 59 39 38 Fax: +33 1 56 59 39 38 Email: [email protected] Email: [email protected] URL: www.jonesday.com URL: www.jonesday.com France Florence Moulin advises fund sponsors on the legal, tax and Guillaume Cavalin’s practice involves the legal and tax structuring regulatory aspects of investment fund formation and fundraising. She of investment vehicles (FPCI, FPS, SLP, SCR, and any other type works mainly on: venture, growth, buyout, infrastructure, mezzanine, of Alternative Investment Funds). He works mainly on private equity debt, corporate, and real estate funds; funds of funds; co-investment funds, infrastructure funds, debt funds, funds of funds, dedicated funds; and dedicated funds. In addition, Florence focuses on setting funds, and co-investment funds. up regulated portfolio management companies and carried-interest schemes for management teams. She also assists limited partners, in connection with their investments in Alternative Investment Funds. She is also active on secondary deals.

With its singular tradition and widely recognised record of client service, Jones Day provides formidable legal talent across multiple disciplines and jurisdictions through the seamless collaboration of a true partnership that shares fundamental professional values. Spread across five continents, Jones Day has more than 2,500 lawyers in 44 offices located in major centres of business and finance around the world. The Paris Office has more than 110 lawyers. The Paris Fund Formation team is led by Florence Moulin and comprises four full-time associates: Guillaume Cavalin; Andras Czonka; Marine L’Hostis; and Paul Mergier. The Paris team ranks yearly among the leading fund formation practices in France.

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Germany Steffen Gnutzmann

WTS Tax Legal Consulting Robert Welzel

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) and if so how? operation of Alternative Investment Funds? The KAGB distinguishes between open-ended and closed-ended Since July 2013, Alternative Investment Funds have been governed funds on the one hand and, on the other hand, between retail and by the Capital Investment Code (Kapitalanlagegesetzbuch or special funds. “KAGB”), transposing the Alternative Investment Fund Managers Open-ended AIFs are those pursuant to Art. 1(2) of the Commission’s Directive (“AIFMD”) into German law. Delegated Regulation (EU) No 694/2014 of 17 December 2013, i.e. AIFs the units of which are, at the request of unitholders, 1.2 Are managers or advisers to Alternative Investment repurchased or redeemed directly or indirectly out of the assets of Funds required to be licensed, authorised or the AIF. Closed-ended funds are all funds that are not open-ended. regulated by a regulatory body? Special funds (open- or closed-ended) are AIFs the shares of which may only be purchased by professional investors as defined by Annex Management companies (Kapitalverwaltungsgesellschaft or II of Direction 2004/39/EG (MiFID) or by semi-professional investors. “KVG”), i.e. anyone conducting risk or portfolio management, need Retail AIFs, open- or closed-ended, are open to all kinds of investors. written approval from the German Federal Financial Supervisory Authority, the “BaFin” (Bundesanstalt für Finanzdienstleistungs- Semi-professional investors may gain this status in two different aufsicht). The BaFin at its own discretion may restrict authorisation ways: to certain types of AIFs or impose conditions on it. ■ by committing to invest at least EUR 200,000. Further, the investor needs to declare in written form, its awareness of any There are several partial exemptions for “small AIFMs”, i.e. such risk related to the investment. Finally, in addition, the AIFM managers only need to register with the BaFin. Other entities are has to file a written confirmation with the investor stating that fully exempt. These KAGB exemptions are mostly in line with the AIFM, after adequately assessing the expertise, experience those of Art. 2, 3 AIFMD. and knowledge of the investor in the light of the nature of the An adviser is not required to be licensed, authorised or regulated investment envisaged, is convinced that the investor is able to by a regulatory body. However, an entity that actually takes the make this decision under his own responsibility; or investment decisions on behalf of the KVG (outsourcing) is required ■ by committing to invest at least EUR 10 million into one fund. to be regulated by a regulatory body in its country of domicile; in Semi-professional investors by their nature are executives, directors addition, in the case of a non-EEA domicile, sufficient co-operation or certain employees of an external management company if they of the home country regulator and the BaFin must be ensured. The invest into an AIF managed by this company, or executives and recipient KVG must have economic substance (i.e. it should not be directors of an externally managed AIF if they invest into this AIF. a letter-box entity).

1.5 What does the authorisation process involve? 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a The information required in connection with an application for regulatory body? authorisation as a management company follows Art. 7(2), (3), Art. 8 AIFMD. This includes proof of the initial capital, information on In general, the AIF as such is not subject to isolated regulation, i.e. the persons effectively conducting the business of the AIFM and the AIF participates in the regulation of the AIFM. However, the their sufficiently good reputation and experience, information on the KAGB foresees internally and externally managed AIFs. For AIFs identity of the AIFM’s shareholders or members that have qualifying of authorised external managers, if marketing of the AIF within the holdings and on the amounts of those holdings, a programme of EEA is intended, a notification to the BaFin suffices. In the case of activity setting out the organisational structure of the AIFM, internal management, the AIF itself qualifies as manager and needs including information on how the AIFM intends to comply with to be authorised. its obligations under the KAGB, information on the remuneration

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policy (Art. 13 AIFMD), and information on delegation and sub- ■ The contractual fund, comparable to a Luxembourg fonds delegation to third parties. commun de placement (“FCP”) (Sondervermögen). For each AIF the company intends to manage, it has to provide ■ The joint-stock investment company (Investmentaktien- information about the investment strategy, the risk profile and other gesellschaft or “InvAG”) with either fixed or variable capital. characteristics of the AIF, information on where the master fund is ■ The limited investment partnership (Investmentkommandit- established if the AIF is a feeder fund, the rules or instruments of gesellschaft or “InvKG”). incorporation of each AIF the AIFM intends to manage, information A closed-ended fund may only be structured as a joint-stock on the arrangements made for the appointment of the depositary company with fixed capital or as a limited investment partnership. in accordance and additional information referred to in Art. 23(1) An open-ended fund needs to be structured as a contractual fund, a AIFMD. joint-stock investment company with variable capital or a special Germany The BaFin decides no later than three months after a complete limited investment partnership. application has been handed in. In exceptional cases and upon An open-ended fund of the types named above can be established as notification to the applicant, the BaFin might prolong this period for an umbrella fund with separate sub-funds. another three months. Authorisations granted are published in the e-Gazette (“Bundesanzeiger”). 2.2 Please describe the limited liability of investors. The management company needs to have at least two executives. The persons effectively conducting the business must be reliable By law, all three fund types are governed by a limited liability and experienced. Reliability is judged by their resumé, criminal concept. The investor may become liable for distributions received, record certificate and a statement of good conduct. Experience is but not born from the yield of the fund. judged on the basis of their education and professional career and is generally assumed to be sufficient after three years as an executive in a similar position. 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment The minimum initial capital is EUR 125,000 for an external Funds? management company. Where the value of the portfolio of AIFs managed by the AIFM exceeds EUR 250 million, the AIFM shall An external manager needs to be set up as a management company provide additional capital equal to 0.02% of the amount by which in the legal structure of a joint-stock company (Aktiengesellschaft or the value of the portfolios of the AIFM exceeds EUR 250 million. “AG”), a limited liability company (Gesellschaft mit beschränkter However, the required initial capital shall not exceed EUR 10 million. Haftung or “GmbH”) or as a limited partnership whose sole fully liable partner is a limited liability company (“GmbH & Co. KG”). 1.6 Are there local residence or other local qualification There are no such rules regarding advisers. requirements?

2.4 Are there any limits on the manager’s ability to The registered office of a management company authorised by the restrict redemptions in open-ended funds or transfers BaFin needs to be in Germany. The de facto central management in open-ended or closed-ended funds? and control must be conducted in Germany. The executives of the management company do not have to be German residents. The statutes of open-ended AIFs contain provisions on the red- emption of shares according to the law. Managers may temporarily 1.7 What service providers are required? suspend these redemption rights in extraordinary circumstances. If deemed necessary in the interest of investors or the public, the A depositary is required for each AIF. The financial statement of the BaFin may impose such suspension. AIFM and the AIF must be audited. 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? 1.8 What co-operation or information sharing agreements have been entered into with other governments or regulators? In the case of a special fund, the KAGB requires AIFMs to ensure – either by separate contract with each investor or in the contractual The BaFin has entered into co-operation agreements under the documents of the AIF – that the shares are to be transferred only AIFMD with the following non-EEA regulators as of 10 December to (semi-) professional investors. There are no further restrictions 2015: Australia (ASIC); Bermuda (BMA); Canada (AMF, OSC, in the KAGB. However, the fund’s statutes or other contractual ASC, BCSC, OSFI); the Cayman Islands (CIMA); Guernsey documents may contain such restrictions. (GFSC); Hong Kong (SFC, HKMA); India (SEBI); Japan (JFSA, METI, MAFF); Jersey (JFSC); South Korea (FSS, FSC); Switzerland (FINMA); Singapore (MAS); and the USA (SEC, CFTC, FED/CC). 3 Marketing

3.1 What legislation governs the production and offering 2 Fund Structures of marketing materials?

2.1 What are the principal legal structures used for The production and offering of marketing material is regulated in Alternative Investment Funds? the KAGB. It contains detailed regulations regarding the minimum information (e.g. investment strategy, etc.) and on how and when The KAGB provides three legal structures for AIFs: it has to be provided to (potential) investors. The BaFin may require the manager to include further information as deemed

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necessary. In addition, certain requirements are stipulated in the The marketing of EEA and non-EEA AIFs is widely restricted. The Securities Trading Act (Wertpapierhandelsgesetz or “WpHG”) AIF and the AIFM have to be domiciled in the same state where as shares in AIFs qualify as financial instruments from a German they need to be subject to effective investment supervision by law perspective. In particular, the marketing material must not be governmental authorities willing to co-operate with the BaFin. The misleading, which, in legal practice, is especially relevant as far as management of the AIF has to be in accordance with the AIFMD. retail investors are concerned. The AIFM has to appoint a suitable legal representative in Germany Marketing material of a publicly offered or listed closed-ended performing the compliance function under the AIFMD (cf. Art. retail InvAG are primarily subject to the provisions of the Securities 37(3) AIFMD), a depositary in accordance with Art. 21 AIFMD Prospectus Act (Wertpapierprospektgesetz or “WpPG”). and a German paying agent. Furthermore, the investment objective or statutes of the fund have to meet the requirements for German

retail funds under the KAGB. For example, hedge funds cannot be Germany 3.2 What are the key content requirements for marketing marketed to retail investors. materials, whether due to legal requirements or customary practice? 3.6 What qualification requirements must be carried out Retail funds have to provide a prospectus the required content of in relation to prospective investors? which exceeds the information required by Art. 23 AIFMD. It has to contain additional information such as a clear and easily The KAGB distinguishes between professional, semi-professional understandable explanation of the fund’s risk profile (cf. Art. 69(1) and private investors; qualification requirements to be carried out UCITSD), the legitimacy of leverage and a profile of the investor for by the AIFM exist in relation to (semi-) professional investors (see whom the fund is typically suitable. question 1.4 above). The components of marketing material of special funds correspond with Art. 23 AIFMD. 3.7 Are there additional restrictions on marketing to public bodies such as government pension funds? 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? There are no such restrictions.

The investment strategy and objectives of a German-domiciled AIF 3.8 Are there any restrictions on the use of intermediaries and any changes need to be approved by the BaFin. In general, the to assist in the fundraising process? BaFin has to decide within four weeks. The prospectus has to be provided to the BaFin, who may require Intermediaries require a licence to conduct marketing of shares. The the manager to include additional information as deemed necessary use of intermediaries so licensed is not restricted. for the investors.

3.9 Are there any restrictions on the participation in 3.4 What restrictions are there on marketing Alternative Alternative Investments Funds by particular types of Investment Funds? investors, such as financial institutions (whether as sponsors or investors)? Marketing is generally defined in accordance with Art. 4(1)(x) AIFMD. Certain activities are not considered marketing: the mere German fund regulation and tax law is influenced by the 2008 mentioning of a fund; the publishing of the net asset value (“NAV”); financial crisis, but there are no specific restrictions onthe the issue and redemption prices; the listing of another sub-fund participation by financial institutions besides the measures designed in the prospectus of an umbrella fund; the publishing of fund tax to contain systemic risk. data according to the Investment Tax Act; any legally required data in a prospectus; and any information mandatorily published by management companies. 4 Investments Differing from the general definition, any offering or placement to private investors is considered marketing regardless of whether it 4.1 Are there any restrictions on the types of activities occurs at the initiative of the AIFM. Therefore, reverse solicitation that can be performed by Alternative Investment is widely restricted for private investors. Funds? Any marketing of AIFs requires a notification to the BaFin and may commence only once the BaFin has informed the AIFM of the By definition, AIFs cannot act in an entrepreneurial way. Just like respective permission. The period of the approval process ranges the AIFMD, German law defines certain asset stripping restrictions from 20 days (German AIFM marketing EEA-AIF) to eight months and deal disclosure requirements. The law foresees limitations on (i.e. non-EEA AIFM marketing to semi-professional investors a the use of leverage, depending on the type of AIF. non-German feeder-AIF whose master-AIF is managed by a non- Classical short selling, i.e. the sale of an asset (not limited to EEA AIFM). securities) that the fund does not own at the time of the conclusion The BaFin has issued an English language FAQ on marketing. of the sale contract, is prohibited, except for hedge funds. These are defined as open-ended special funds which need to foresee the use of short selling or the employment of substantial leverage in their 3.5 Can Alternative Investment Funds be marketed to investment objectives. retail investors?

German retail AIFs can be marketed to retail investors. Special funds shall only be marketed to (semi-) professional investors.

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4.2 Are there any limitations on the types of investments 5.2 What are the reporting requirements in relation to that can be included in an Alternative Investment Alternative Investment Funds? Fund’s portfolio whether for diversification reasons or otherwise? AIFMs must notify the BaFin before implementing any material changes regarding requirements of their licence (e.g. change of The KAGB contains extensive provisions on different sets of directors, etc.). Furthermore, they have to adhere to reporting eligible assets and investment limits depending on the type of AIF. obligations pursuant to Art. 24 AIFMD (e.g. the principal markets In general, the investments of special funds are less restricted than and instruments in which they trade, arrangements for managing the those of retail funds. liquidity of the AIFs, current risk profiles, etc.).

Germany Open-ended retail funds may invest in securities, financial market Any of the aforementioned disclosed reports of AIFs have to be instruments, bank deposits, shares of UCITS or of funds with provided to the BaFin. comparable investment restrictions, certain kinds of derivatives, precious metals and loans/bank debt (debt assets not in the legal form of a security). Open-ended retail real estate funds may invest only 5.3 Is the use of side letters restricted? in real estate or comparable assets. Closed-ended retail funds may invest in securities, financial market instruments, tangible assets, There is no explicit restriction on the use of side letters. However, shares of PPPs, unlisted equity, shares of funds with comparable the AIFM is subject to operating conditions pursuant to Art. 12 investment restrictions and bank deposits. AIFMD including the obligation to treat all investors fairly and not to give preferential treatment to any investors unless disclosed in Investments of a closed-ended special AIF are widely unrestricted; the AIF’s statutes. it may invest in any asset of which the market value can be assessed. A feeder fund needs to be invested in the master fund with at least 85% of the feeder NAV, while 15% of the NAV may be invested in 6 Taxation bank deposits or derivatives. Please note, however, that German tax rules define autonomously 6.1 What is the tax treatment of the principal forms of the prerequisites for certain fund and fund investor tax regimes, Alternative Investment Funds? especially certain tax-eligible assets (see question 6.1 below). The current German Investment Tax Act distinguishes between 4.3 Are there any restrictions on borrowing by the Investment Funds, Capital Investment Partnerships and Capital Alternative Investment Fund? Investment Corporations regardless of the domicile of the AIF. These qualifications of the fund vehicle cause different after-tax For open-ended retail funds, borrowing is generally restricted to returns at fund investor level. The current tax rules are applicable short-term credit limited to 10% (“mixed funds”), 20% (“other until and including 31 December 2017. From 1 January 2018 funds”) and 30% (“real estate funds”) of the NAV. Closed-ended onwards, a completely revised German Investment Tax Act, leading retail funds may borrow up to 60% of the NAV and are not limited to substantial changes in the German fund taxation rules, will be to short-term credit. applicable. The borrowing of special AIFs is generally not restricted. Investment Funds As a general rule, the AIFM has to define a maximum level of Under the rules currently in place, some AIFs might qualify as leverage for every AIF and needs to demonstrate that this limit is Investment Funds for tax purposes regardless of the legal structure. appropriate and will be observed. The BaFin assesses the risk and The tax law prerequisites for qualifying as a (privileged) Investment may restrict the level of the fund’s leverage as deemed necessary for Fund are independent from the restrictions and requirements under the stability and integrity of the financial system. investment law. The tax rules applicable to Investment Funds are usually beneficial compared to the other rules, e.g. because the Investment Fund is not subject to any tax and because the fund 5 Disclosure of Information investor is not taxed on certain accumulated capital gains realised at fund level. 5.1 What public disclosure must the Alternative An AIF needs to fulfil certain requirements to qualify as an Investment Fund make? Investment Fund – amongst others: ■ The AIF or its manager is subject to investment supervision All AIFs except for those structured as an open-ended InvKG, in its country of domicile. which needs to be a special fund, must publish an annual report ■ Fund shares are redeemable at least once per year or listed on in the e-Gazette (“Bundesanzeiger”), in accordance with Art. 22 a stock exchange. AIFMD. Joint stock investment companies are required to publish ■ Investments are made according to risk diversification. an additional management report. Contractual funds have to publish ■ 90% of the fund NAV are invested in eligible assets, e.g. semi-annual as well as dissolution and liquidation reports as the securities, money market instruments, derivatives, bank case may be. In addition, reports of contractual funds and closed- deposits, real estate and similar assets, shares of Investment ended InvKGs must be published in further media as named in their Funds, precious metals, loans and bank debt (debt assets not in prospectuses. Joint stock companies and open-ended InvKGs might the legal form of a security) and public-private partnerships. be required to disclose annual and semi-annual financial statements ■ A maximum of 20% of the fund NAV may be invested in under securities law (§§ 37v, 37w WpHG). unlisted equity assets. ■ The AIF holds a maximum of 10% of the statutory capital of a single target company.

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■ Only short-term borrowing is permitted, up to a maximum of equity securities generated at fund level, then such capital gains 30% of the fund NAV. distributed are 95% tax-free at corporate investor level. The same Capital Investment Partnerships 95% tax exemption applies to the extent that the corporate investor, upon sale/redemption of the fund unit, realises capital gains from AIFs structured as partnerships and similar foreign AIFs that do not equity generated at fund level but not yet distributed to the investor qualify as “Investment Funds” are treated as “Capital Investment (holding period related “Aktiengewinn”). Partnerships”. The general tax rules for partnerships including tax transparency apply; a potential exemption is that trade tax may be In the case of a non-reporting Investment Fund, the deemed levied at fund level. distribution is determined on a lump-sum basis (the higher of 70% of the difference between the last and the first redemption price of Capital Investment Corporation the calendar year and 6% of the last redemption price); the corporate AIFs structured as corporations, contractual funds and similar investor loses the 95% exemption described above. However, the Germany foreign AIFs which do not qualify as “Investment Funds” are treated European Court of Justice ruled that parts of this lump-sum taxation as “Capital Investment Corporations”. Corporate tax at 15% and applicable to investors of non-reporting Investment Funds qualify trade tax (10–15%, depending on the municipality) apply at fund as a violation of the free movement of capital (9 October 2014, level for German-resident Capital Investment Corporations and, to C-326/12, “van Caster”). the extent that they are subject to limited taxation in Germany, to Private investors of a Capital Investment Partnership are taxed with similar foreign AIFs. their personal marginal income tax rate varying from 0–45%. The tax rate of 15% (plus local trade tax) applies to corporate investors 6.2 What is the tax treatment of the principal forms of including the 95% tax exemption for capital gains from equity investment manager / adviser? generated at partnership level. In the case of a Capital Investment Corporation, distributions are A German-domiciled AIFM structured as a joint-stock company or subject to 25% income tax at private investor level (corporate as an LLC is subject to corporate tax at 15% (plus local trade tax investor: 15% plus trade tax). In the case of a non-German Capital at varying rates, approx. 10–15%). In general, German-resident Investment Corporation that does not distribute, the German investor shareholders of such companies are subject to income tax at a flat rate might additionally be subject to the add-on taxation (comparable to of 25% (no deduction of expenses). An AIFM set up in partnership the US tax law Passive Foreign Investment Company or “PFIC” form is not subject to income tax; its German-resident partners are concept) on the basis of so-called “passive income” (fictitious taxed at personal marginal rates of up to 45%. The above applies to distribution); the 25% flat tax rate does not apply in this case, instead all forms of management or performance fees. Specific rules exist the private investor is taxed at his personal marginal income tax for carried interest, if the management company in partnership form rate (up to 45%). The corporate investor of the Capital Investment can be regarded as a tax-transparent (non-trading) entity for tax Corporation is taxed at a rate of 15% plus local trade tax (the 95% purposes. tax exemption does not apply). In general, withholding tax (“WHT”) on the income generated by 6.3 Are there any establishment or transfer taxes levied the reporting (privileged) fund and levied on its input side can be in connection with an investor’s participation in an credited by the resident fund investor. The same applies to WHT Alternative Investment Fund or the transfer of the levied on the output side of the fund, i.e. levied on its distribution, investor’s interest? the German fund’s deemed distribution or upon sale/redemption of the fund unit. Establishment or transfer taxes are not levied. Non-resident Investors Non-resident investors of a German AIF that qualifies as a 6.4 What is the tax treatment of (a) resident, (b) non- (privileged) Investment Fund are taxed on German dividend resident, and (c) pension fund investors in Alternative Investment Funds? income, German rental income and capital gains from German real estate generated at fund level. The tax is levied at source (25%). Resident Investors Non-resident investors of a German AIF that qualifies as an Investors of an AIF that qualifies as a (privileged) Investment Investment Partnership are taxed in a manner comparable to the Fund are taxed upon distribution by the fund, under the deemed investor of an Investment Fund (see above), if the partnership distribution concept and upon sale/redemption of the fund unit. The qualifies as asset managing under German tax law. If, however, amount of the tax base depends on whether the Investment Fund the partnership is a trading entity for German tax purposes, then fulfils the reporting obligations under § 5 of the Investment Tax Act. the limited partner would have a taxable presence in Germany and be subject to income tax at personal marginal tax rates (plus local Investors of a reporting Investment Fund are taxed on the basis of trade tax). the distribution. To the extent that the income of the reporting fund is not distributed, certain portions of the fund’s ongoing income Non-resident investors of a German AIF that qualifies as a Capital (minus expenses) are deemed distributed to the investor at the end Investment Corporation (“CIC”) are taxed on dividends distributed; of the business year of the fund (fictitious or deemed distribution); the tax is levied at source (25%). Should the investor hold more than most capital gains generated at fund level are not part of the deemed 1% of the statutory capital of the CIC, then a capital gain realised distribution (accumulation privilege). Upon sale/redemption of the within five years after exceeding the named threshold will also be fund unit, the investor is taxed on the economic capital gain (/loss) subject to tax in Germany; the investor must file a tax declaration. minus holding period related deemed distributions. Pension Fund Investor Private investors of a reporting Investment Fund are taxed at a flat A German investor qualifying as a pension fund can either be a rate of 25%. Corporate investors of a reporting Investment Fund, in tax exempt or a fully taxable investor. In the latter case, the above general, are taxed at the corporate tax rate of 15% (plus local trade description on Resident Investors applies, with specific taxation tax). If the reporting Investment Fund distributes capital gains from details depending on the type of pension fund investor.

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The scope of application of the new German Investment Tax Act 6.5 Is it necessary or advisable to obtain a tax ruling from is wider than before: almost all asset pools, even including fund the tax or regulatory authorities prior to establishing vehicles which limit the number of investors to one, will qualify an Alternative Investment Fund? as Investment Funds under the 2018 rules without having to fulfil further specific requirements. However, fund vehicles in the legal This is neither necessary nor advisable. Further, such rulings by the form of a partnership, except if they are UCITS, do not qualify as German tax administration are uncommon, especially those related Investment Funds. The new 2018 rules provide two substantially to fund investments. distinct fund tax regimes: ■ For 2018 Opaque Funds, an opaque two-tier taxation system 6.6 What steps have been or are being taken to implement is introduced as the general and fall-back regime, with tax

Germany the US Foreign Account and Tax Compliance Act obligations on both fund level as well as investor level, 2010 (FATCA) and other similar information reporting applying a cash-flow based lump sum tax regime. regimes such as the Common Reporting Standard? ■ For 2018 Special-Investment Funds, the current semi- transparent tax regime of 2013 Investment Funds is, with Germany and the USA signed a reciprocal inter-governmental modifications, continued as the exemption if a fund meets agreement (“IGA”) similar to the “Model 1A IGA” on 31 May specific additional prerequisites. 2013 which was approved by Law on 15 October 2013 and became Most AIFs are likely to qualify as 2018 Opaque Funds. It might be effective on 11 December 2013. It was implemented via a decree possible for an AIF to qualify as a 2018 Special-Investment Fund which became effective on 29 July 2014 (“FATCA-USA-UmsV”). if – amongst others – the following prerequisites are met: Germany implemented the EU council directive on administrative ■ The AIF or its manager is subject to investment supervision co-operation in the field of taxation (2011/16/EU) on 26 June in its country of domicile. 2013. Furthermore, the German implementation rules regarding the ■ Fund shares are redeemable at least once per year (a listing on OECD’s common reporting standard (“CRS”) have been applicable a stock exchange does not suffice). since 1 January 2016; the actual reporting shall start in September ■ Investments are made according to risk diversification. 2017. ■ 90% of the fund NAV are invested in eligible assets, e.g. securities as defined by the UCITS directive, money market instruments, derivatives, bank deposits, real estate and 6.7 Are there any other material tax issues? similar assets, shares of Investment Funds and Special- Investment Funds, precious metals, loans and bank debt (debt Germany applies a broad application of the tax concept of permanent assets not in the legal form of a security) and public-private establishment by employing the OECD-accepted stand-alone partnerships. approach. From a German perspective, the VAT exemption for ■ A maximum of 20% of the fund NAV may be invested in investment management services is applicable only to (privileged) unlisted equity assets. Investment Funds and UCITS-like AIFs. ■ The AIF holds a maximum of 10% of the statutory capital of any single target company. 6.8 What steps are being taken to implement the OECD’s ■ Only short-term borrowing is permitted, up to a maximum of Action Plan on Base Erosion and Profit-Shifting 30% of the fund NAV. (BEPS), in particular Actions 6 and 7, insofar as they ■ The number of investors – direct and indirect (via affect Alternative Investment Funds’ operations? partnerships) – is limited to 100 non-natural persons. If a 2018 Special-Investment Fund no longer meets its qualification Germany already has far-reaching anti-abuse legislation. Due to prerequisites, the fund vehicle, from a German tax perspective, is recent developments (e.g. the Panama Papers), there is significant deemed to be liquidated and, if the vehicle still qualifies as a fund political pressure to implement further such measures. The first under German fund tax law, re-established as a 2018 Opaque Fund. details of the legislative implementation of the BEPS Initiative into The 2018 rules introduce a tax liability on fund level for specific German law became effective on 31 December 2016. Especially, German-sourced income (e.g. dividends, income and capital gains the German tax legislator introduced an economic substance test from German real estate or income from a German permanent requiring certain holding periods and unhedged risk exposure for establishment). Such income is taxed at the standard corporate tax a refund or credit claim by the fund investor of WHT suffered on rate of 15%. In order to mitigate tax suffered at fund level, certain German-sourced dividends. Further, in this context, it is worthwhile lump sum partial exemptions apply at German fund investor level if mentioning a February 2016 decision of the German Federal the fund meets specific prerequisites regarding its asset allocation. Constitutional Court that the unilateral double tax treaty override Only 2018 Special-Investment Funds can avoid the tax obligation at does not infringe upon the German Constitution. fund level by exercising certain transparency options which directly attribute the respective income to the investor. 7 Reforms For 2018 Opaque Funds, the tax compliance obligations are rather limited: the ongoing NAV-related tax reporting, as well as the business year-end tax certification, are abolished. The tax 7.1 What reforms (if any) are proposed? compliance obligations of 2018 Special-Investment Funds are similar to those of 2013 Investment Funds, consisting of a business A revision of the current German fund tax law was enacted in year-end reporting (tax filing) and an ongoing NAV-related reporting July 2016, which, in general, leads to a substantial reduction in (Equity Gain, DTT Gain, Partial Exemption Gain). the complexity of the funds’ investor tax reporting compliance The tax efficiency of a fund under the German 2018 taxation regime obligations; an existing soft market entry barrier for many funds is depends on different parameters, such as the portfolio composition, removed. The reform will become effective as of 1 January 2018. asset allocation, interest rates as well as type and residence of the

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fund investor. Due to the lump sum based taxation approach of either as a 2018 Opaque Fund or as a 2018 Special-Investment Fund 2018 Opaque Funds, these vehicles can either be more or less tax have to be implemented and finalised before 1 January 2018. A efficient in certain cases, compared to a semi-transparent 2018 switch from the tax regime of the 2018 Opaque Fund to the Special- Special-Investment Fund. Therefore, it is advisable to analyse Investment Fund status is, by law, not possible at a later point in the individual case in order to set up the fund’s structure and time. However, the switch from the Special-Investment Fund documentation. For example, the holding of a long-only physical regime to the Opaque Fund regime is available, including a fictitious equity portfolio by a German corporate investor via an 2018 Opaque redemption of the fund units at investor level. Fund is disadvantageous compared to a direct holding or a holding via a 2018 Special-Investment Fund (except for German insurers). Acknowledgment There will be a hard cut as of 1 January 2018, irrespective of the fund’s business year-end, regarding the German tax qualification of The authors would like to thank Markus Wrogemann and Tim Germany the fund vehicle and its 2018 tax treatment. Therefore, restructuring Haffmanns for their invaluable assistance in the preparation of this and adjustment measures of existing fund vehicles in order to qualify chapter.

Steffen Gnutzmann Robert Welzel WTS Tax Legal Consulting WTS Tax Legal Consulting Taunusanlage 19 Taunusanlage 19 60325 Frankfurt 60325 Frankfurt Germany Germany

Tel: +49 40 320 86 66 13 Tel: +49 69 133 84 56 80 Email: [email protected] Email: [email protected] URL: www.wts.de URL: www.wts.de

Steffen is a German qualified attorney-at-law, having graduated in Law Robert is a German qualified attorney-at-law and tax adviser. He has from the Freie Universität Berlin. He has a second degree in taxation published several articles in specialised literature and is the co-author from a German government university. Steffen has published widely of a commentary on German fund tax law. Following his law studies on German tax law and the Financial Services industry, especially at the University of Munich, Robert was a judge in a civil law court. focusing on the fund industry. He is the co-author of one of the two Subsequently, he specialised in Mergers and Acquisitions/Corporate leading commentaries on German fund tax law. Steffen started his Restructuring and Financial Services within the Big Four firms. professional career in the Financial Services Investment Management/ Capital Markets department of a Big Four firm in Frankfurt. In 2007, he relocated to WTS as a member of a team of seven advisers.

WTS Tax Legal Consulting, with more than 650 employees in eight German offices and the comprehensive global WTS Alliance network, is one of the leading German companies in the consulting sector. Through our international network, we are represented worldwide in more than 100 countries, providing global consulting services. We focus on tax, legal and consulting; in order to avoid any conflict of interest, WTS deliberately refrains from conducting the audit of annual financial statements. In 2007, Steffen and Robert, together with five team members, founded the Frankfurt branch of WTS Tax Legal Consulting. Currently, the office employs 70 fee-earners. Robert, Steffen and their team focus on regulatory and tax law for the Financial Services industry, including AIFMD and other regulatory compliance issues such as Solvency II. They advise clients, such as mutual and hedge funds, banking institutions, insurers, corporates, and high-net-worth individuals/family offices in connection with asset management topics, capital market products, structured finance and other tax or regulatory matters, including inbound and exit tax and regulatory structuring for foreign funds acquiring a broad range of different asset classes. The team represents private and institutional clients on the German tax and regulatory aspects of corporate acquisitions and restructurings, including German and international mergers and acquisitions, corporate reorganisations, liquidations, and stock and other asset sales and distributions.

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Guernsey Robert Varley

Babbé LLP Chris Dye

A fast-track licence application is available for parties seeking 1 Regulatory Framework to provide management services to Qualifying Investor Funds (“QIFs”) or registered AIFs. All other licence applications will be 1.1 What legislation governs the establishment and assessed under the Commission’s standard application process. operation of Alternative Investment Funds? However, where the manager and/or advisor is located in a different jurisdiction and conducts its business wholly from outside Guernsey, The formation and operation of Alternative Investment Funds it will not require a licence under the POI Law. A common structure (“AIFs”) in Guernsey is regulated by the Protection of Investors is to have a self-managed Guernsey AIF with an unregulated (Bailiwick of Guernsey) Law, 1987 (as amended) (the “POI Law”). investment advisor in, for example, the United Kingdom. The Guernsey Financial Services Commission (“Commission”) is responsible for the regulation of AIFs and the licensing of 1.3 Are Alternative Investment Funds themselves certain service providers such as investment managers and fund required to be licensed, authorised or regulated by a administrators. regulatory body? Under the POI Law, the Commission has made certain AIF rules: ■ the Collective Investment Schemes (Class A) Rules 2002 AIFs must be registered or authorised by the Commission. The and the Authorised Collective Investment Schemes (Class A) Commission’s submission requirements and approval timeframe Rules 2008 (“Class A Rules”); depend on the type of licence being sought. ■ the Collective Investment Schemes (Qualifying Professional Guernsey-based AIF service providers must obtain the consent of Investor Funds) (Class Q) Rules 1998 (“Class Q Rules”); the Commission prior to providing their services to foreign-based, ■ the Authorised Collective Investment Schemes (Class B) open-ended AIFs. Rules 2013 (“Class B Rules”); ■ the Authorised Closed-Ended Investment Schemes Rules 1.4 Does the regulatory regime distinguish between 2008 (“CE Rules”); open-ended and closed-ended Alternative Investment ■ the Registered Collective Investment Scheme Rules 2015, Funds (or otherwise differentiate between different which are applicable to both open-ended and closed ended types of funds) and if so how? registered schemes (“Registered CIS Rules”); ■ the Private Investment Fund Rules 2016 (“PIF Rules”); and The regulatory regime in Guernsey distinguishes between open- ■ the Prospectus Rules 2008 (“Prospectus Rules”), which, inter ended and closed-ended AIFs. The key distinction is that open- alia, set out the disclosure requirements for both open-ended ended AIFs allow investors to require that their investments be and closed-ended registered schemes. redeemed by the scheme or to sell their units on an investment The Commission has also made rules in relation to AIF-related exchange, at a price correlated to the value of the underlying assets; service providers, including: the open-ended fund will retain discretion as to whom it may issue holdings and an investor will be allowed to redeem in line with its ■ the Licensees (Conduct of Business) Rules 2014; and constitutive documents. Investors in closed-ended AIFs do not have ■ the Licensees (Capital Adequacy) Rules 2010. the right to require the scheme to redeem their shareholdings. Guernsey’s anti-money laundering laws, customer due diligence Open-ended AIFs will generally require a Guernsey administrator and data protection laws are also relevant. and a custodian who are licensed to act under the POI Law. Closed- ended AIFs are not required to appoint a custodian. 1.2 Are managers or advisers to Alternative Investment Open-ended AIFs can be authorised under three categories – Class Funds required to be licensed, authorised or A, Class B or Class Q: regulated by a regulatory body? ■ Class A Rules are akin to a UCITS (Undertakings for Collective Investments in Transferable Securities) type If based in Guernsey, AIF managers and advisors are required under structure; the POI Law to be licensed and must make an application to the ■ Class B Rules have been drafted with a view to providing Commission. maximum flexibility for the AIF while ensuring that investor protection is not compromised; and

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■ Class Q Rules, which are aimed at qualifying professional ■ Final authorisation – this follows after the Commission has investors. There are no investment restrictions and it is received a certified copy of the final version of the prospectus, possible to obtain derogations from the Commission regarding evidence that the AIF has been formed and signed or certified the requirements of these rules. copies of all final constitutive documents. Alternatively, an open-ended AIF can be registered, which provides a fast-track process. The Commission typically processes a fast- 1.6 Are there local residence or other local qualification track application in just three days. Registered AIFs must comply requirements? with the Prospectus Rules 2008 and the Registered CIS Rules. Authorised closed-ended AIFs are subject to the CE Rules. The AIF A fund administrator licensed under the POI Law is required for all will be continually supervised by the Commission and it must be set AIFs established in Guernsey. A locally licensed custodian or trustee up with the objective of spreading risk. The designated manager must be appointed to open-ended AIFs. There is no requirement to Guernsey must give notification to the Commission in the event of a material appoint a locally licensed Guernsey custodian or trustee to a closed- change in information particulars or constitutive documentation. ended AIF. There is an alternative fast-track POI Licence application process for Before licensing AIF service providers, the Commission must be authorised open-ended or closed-ended AIFs structured as Qualifying satisfied that they are “fit and proper” persons, which embraces Investor Funds (“QIFs”). Under the QIF guidance notes, “qualified honesty, competence and solvency. The licensee will need to abide investor” means: a professional investor, experienced investor and/ by the Commission’s conduct of business rules, capital adequacy or knowledgeable investor. The administrator will be expected to rules and Code of Corporate Governance for the Finance Sector. confirm that it has performed sufficient due diligence on the promoter. At least one Guernsey-resident director will be required to sit on the The Commission can process a QIF authorisation in just three days. board of a registered or authorised AIF. An AIF must demonstrate In November 2016, Guernsey introduced a Private Investment Fund to the Commission compliance with the “four eyes” principle, (“PIF”) regime through the adoption of the PIF Rules. PIFs may whereby at least two directors will have real control over the day-to- be open-ended or closed-ended. They may have no more than 50 day operations of the AIF. natural or legal persons with an economic interest. However, there is no limit to the number of persons to whom a PIF may be marketed. If a Guernsey-licensed service provider outsources any of its A PIF is required to appoint a Guernsey licensed manager but is not functions, it will retain ultimate responsibility for those functions. required to publish a prospectus or make other public disclosures. The Commission can process a PIF application in one business day. 1.7 What service providers are required?

1.5 What does the authorisation process involve? Open-ended Guernsey AIFs will require at all times a licensed fund administrator and custodian or trustee under the POI Law. The Commission offers a fast-track process where it expects to Registered closed-ended AIFs require only a licensed fund approve QIFs or registered AIFs within three business days, or PIFs administrator. A qualified auditor having a place of business in within one business day, upon receipt of all relevant documents and Guernsey is required for both registered and authorised AIFs in fees. The administrator must make specific declarations to which Guernsey. The fund administrator and custodian or trustee must be the Commission attaches great import. The Commission places an independent entities for Class A open-ended funds; other funds do emphasis on ensuring that the promoter and associated parties are not have this requirement. “fit and proper” and that necessary disclosures have been made in The Commission has published framework guidance for the the offering documentation. authorisation of hedge funds in Guernsey. They adopt a flexible The fast-track application for entities relating to registered AIFs approach in terms of institutional and expert hedge funds, and are (typically investment managers or the general partner if a partnership willing to relax the requirement for a locally licensed custodian. structure is used) will be assessed by the Commission and a POI The Commission will designate a prime broker (“PB”) as custodian licence issued within 10 business days on receipt of fully completed provided they have substantial net worth and are regulated in an documents and fees. acceptable jurisdiction. The PB will not be expected to take on The authorisation process for funds which are neither registered formal duties of oversight over the fund manager. Further, in the AIFs, QIFs nor PIFs has a somewhat longer approval period. case of institutional and expert investor funds, the Commission will Unlike the fast-track process, the Commission will perform the due not require the PB to segregate its own assets from those assets of diligence checks rather than the administrator. Where the promoter the AIFs. is known to the Commission, this will reduce the documentary Normally, hedge funds targeted at retail and sophisticated requirements and application processing times. The authorisation investors will require the appointment of a custodian to AIFs. The process consists of an outline authorisation and final authorisation: Commission is open to the possibility of waiving this requirement ■ Outline authorisation – this entails the completion and in favour of appointing a PB. submission of the prescribed application form (called “Form GFA”) and supporting documentation. The Commission wants to find out the basic details of the scheme structure 1.8 What co-operation or information sharing agreements and objectives, promoters and associated parties, fees to be have been entered into with other governments or charged and any unusual features of the scheme. If all parties regulators? meet the policy of selectivity and the detailed proposals appear acceptable to the Commission, then the scheme will receive a As Guernsey is not a European Economic Area (“EEA”) jurisdiction, letter granting “outline authorisation”. If the scheme involves the Commission has signed 27 bilateral co-operation agreements an incorporated cell company or protected cell company, the under the AIFMD with security regulators in EEA jurisdictions to applicant must separately ask for authorisation to register the facilitate the private placement of Guernsey AIFs in the EEA. company with the Guernsey Registry after obtaining outline authorisation. Frequently, this process is combined with the final authorisation.

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To date, Guernsey has signed 60 tax information exchange agreements, 13 double tax agreements and 12 partial double tax 3 Marketing agreements. 3.1 What legislation governs the production and offering of marketing materials? 2 Fund Structures The primary legislation is the POI Law. For registered AIFs, the 2.1 What are the principal legal structures used for Registered Fund Rules 2015 and the Prospectus Rules 2008 will Alternative Investment Funds? apply. For authorised AIFs, the various rules mentioned in question 1.1 above, as applicable to each class of AIF, will determine the

Guernsey AIFs can be structured as companies (including protected cell production and content of marketing material for AIFs. companies and incorporated cell companies), unit trusts and limited An exemption allows persons from the United Kingdom, Jersey, the partnerships. Isle of Man or the Republic of Ireland to market Guernsey AIFs The particular legal structure of the AIF will depend upon several in their country and allows certain AIFs from the aforementioned factors such as marketing requirements, regulatory obligations, jurisdictions to be promoted in Guernsey without being authorised investors’ preferences and the degree of tax neutrality it offers. or registered. Under the AIFMD (Marketing) Rules 2013, a Guernsey AIFM proposing to market AIFs to professional and/or retail investors 2.2 Please describe the limited liability of investors. in one or more Member States of the EU pursuant to Article 42 and/or Article 43 of the AIFMD must make a notification to the With a Guernsey limited liability company, an investor’s liability Commission. The form of notification is straightforward. is limited to the amount unpaid (if relevant) on the shares held by them. The liability of a limited partner is limited to the amount The second limb of the AIFMD regime in Guernsey is the AIFMD of capital committed to the limited partnership. The liability of Rules, 2013 which operates an equivalent opt-in regime for fund Guernsey unitholders is limited to the amount payable on their units. managers and depositaries.

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?

The majority of managers and advisers to AIFs licensed under the The requirements for marketing materials are set out in the POI Law tend to favour the establishment of corporate vehicles, applicable rules for authorised or registered AIFs as previously although limited partnerships are sometimes used. The factors mentioned in question 1.1 above. There is a general requirement alluded to in question 2.1 above will have a bearing on the particular that all material risks be disclosed so that investors are in a position legal structure chosen. to make an informed decision as to whether to invest.

2.4 Are there any limits on the manager’s ability to 3.3 Do the marketing or legal documents need to be restrict redemptions in open-ended funds or transfers registered with or approved by the local regulator? in open-ended or closed-ended funds? The Commission will review the draft marketing documentation It is a central tenet of an open-ended AIF that investors are entitled submitted as part of the application materials for authorisation to have their shares or units redeemed or repurchased or to sell their or registration of an AIF. They will also seek a confirmation or shares or units on an investment exchange at a price related to the declaration from the administrator of the AIF that documents and value of the property to which they relate. scheme particulars are compliant with the relevant AIF scheme However, the directors or managers of Class B funds have the power rules. to suspend dealings with the consent of the trustee or custodian in accordance with the constitutional documents and the Class B Rules. 3.4 What restrictions are there on marketing Alternative So far as listed AIFs are concerned, The International Stock Investment Funds? Exchange (formerly the Channel Islands Stock Exchange) Rules require that shares or units in AIFs listed on the Exchange be freely The promotion of investment products and services to private transferable (subject to certain minor exceptions). Other exchanges individuals requires a licence from the Commission. Alternatively, typically have similar requirements. the promoter can arrange the promotion under the auspices of a Guernsey entity already holding the required licence under the POI Law. As discussed in question 3.1 above, certain foreign funds may 2.5 Are there any legislative restrictions on transfers of be eligible for licence exemptions. investors’ interests in Alternative Investment Funds? The marketing of authorised QIFs and Class Q schemes is strictly Interests in QIFs or Class Q AIFs may only be transferred to limited to those investors who meet the eligibility criteria. investors qualified to hold them. 3.5 Can Alternative Investment Funds be marketed to retail investors?

The ability to market to retail investors depends on the fund’s licence class. Class A Rules are designed to be compliant with the UK’s

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requirements for retail funds under the UK’s Financial Services and Markets Act. Class B funds, Class Q funds and QIFs are not 4.3 Are there any restrictions on borrowing by the intended to be marketed to retail investors and the Commission Alternative Investment Fund? would not permit this. Registered funds and authorised closed-ended funds may be marketed to retail investors in certain circumstances, See question 4.2 above. although typically Guernsey funds are limited to high-net-worth individuals and institutional investors. 5 Disclosure of Information

3.6 What qualification requirements must be carried out in relation to prospective investors? 5.1 What public disclosure must the Alternative

Investment Fund make? Guernsey Administrators of Class Q schemes or QIFs must take all reasonable steps to ensure that units in such funds are owned by qualifying AIFs are subject to the disclosure requirements set out in the professional investors only. Prospectus Rules applying to them, which in practice means a prospectus or other offering document must be issued. However, Money laundering/due diligence requirements and any restrictions PIFs are not required to prepare the information particulars required found in an AIF’s constitutional documents must also be satisfied. by the Prospectus Rules. Companies and limited partnerships must submit annual validations 3.7 Are there additional restrictions on marketing to to the Guernsey Registry but no details of shareholders or limited public bodies such as government pension funds? partners are furnished. The register of members of a Guernsey company is open for There are no such restrictions under Guernsey law. inspection by any person within business hours. Otherwise, there is no legal requirement for a Guernsey company, limited partnership 3.8 Are there any restrictions on the use of intermediaries or unit trust register of investors to be made public. The list of to assist in the fundraising process? limited partners of a Guernsey limited partnership may be inspected by a partner but not by members of the public. Any intermediaries based in Guernsey would need a licence from There is no general requirement for companies or limited the Commission. partnerships to file accounts with the Guernsey Registry. The Class A Rules and Class B Rules require that half-yearly and annual 3.9 Are there any restrictions on the participation in accounts and reports be made available to any person on request, Alternative Investments Funds by particular types of free of charge. This requirement extends to an AIF’s principal investors, such as financial institutions (whether as documents and scheme particulars. sponsors or investors)?

5.2 What are the reporting requirements in relation to Subject to any restrictions in the AIF’s constitutional documents Alternative Investment Funds? and the discussion above relating to the qualifications of certain investors, there are no particular types of investors, such as financial The administrator of a registered AIF must provide the Commission institutions, which are subject to restrictions on participation in AIFs. with either annual confirmation that there are no changes to the All AIFs are subject to proceeds of crime legislation which require application documents or notify the Commission of changes to the the funds to conduct due diligence on their investors. information contained in the application form. The administrator must make quarterly statistical returns and send audited accounts to 4 Investments the Commission within six months of the financial year end. Authorised open-ended AIFs must give the annual report to investors and the Commission. Annual reports must contain audited accounts 4.1 Are there any restrictions on the types of activities and a report by the trustee or custodian. that can be performed by Alternative Investment Funds? Authorised closed-ended AIFs in Guernsey must give copies of the audited annual report and accounts to the Commission and investors. The investors must be informed immediately of any Class B funds, Class Q funds and QIFs are not subject to any specific changes in content of information particulars and the Commission investment restrictions. Class A Rules only permit certain investments subsequently informed in the annual report sent to them. and investment techniques, depending on the category of fund. The AIF’s constitutional and/or offering documents may also include certain restrictions. 5.3 Is the use of side letters restricted?

The use of side letters is not restricted (subject to any restrictions 4.2 Are there any limitations on the types of investments included in the constitutional documents of the AIF). The that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or International Stock Exchange rules require that all security holders otherwise? in the same class and position be treated equally, which may restrict the scope of side letters for listed AIFs. Aside from Class A Rules, regard must be had to the AIF’s constitutive documents and/or offering materials.

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6 Taxation 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 6.1 What is the tax treatment of the principal forms of regimes such as the Common Reporting Standard? Alternative Investment Funds? On 13 December 2013, Guernsey signed a FATCA Inter- Generally, an AIF in Guernsey will be eligible for exempt status, Governmental Agreement (“IGA”) with the United States, based on meaning it will be considered non-resident for income tax purposes IGA Model 1. Guernsey has also signed an IGA with the United in respect of non-Guernsey source income. This exemption status is Kingdom. dependent on the AIF paying an annual fee of £1,200. The trustee Guernsey has implemented regulations to adopt the Common Guernsey and assets of the unit trust may also apply for this exemption. Reporting Standard (“CRS”). Reporting Guernsey Financial Limited partnerships are considered tax-transparent vehicles and are Institutions are expected to make their first reports by 30 June 2017 not in their own right liable for income tax. with respect to the 2016 calendar year.

6.2 What is the tax treatment of the principal forms of 6.7 Are there any other material tax issues? investment manager / adviser?

Please see the information on tax information exchange in question The standard income tax rate for Guernsey companies is 0%. 1.8. Certain activities are subject to corporate income tax; for instance: a 10% rate applies to licensed fiduciaries, insurers, insurance intermediaries, custody services and fund administrators; and a 20% 6.8 What steps are being taken to implement the OECD’s rate applies to Guernsey property development and income from Action Plan on Base Erosion and Profit-Shifting Guernsey property. The 10% tax on fund administration applies (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? only to administration provided to unconnected third parties. A body established in Guernsey solely to manage a Guernsey fund Guernsey has joined the BEPS Inclusive Framework and committed which has exempt status may also apply for exempt status. to implement BEPS Action Plans. Although not a member of the OECD, Guernsey will be joining its BEPS Ad-Hoc Group on the 6.3 Are there any establishment or transfer taxes levied Multilateral Instrument and has committed to signing the Multilateral in connection with an investor’s participation in an Convention (expected in June 2017). Guernsey has also signed Alternative Investment Fund or the transfer of the the Multilateral Competent Authority Agreement to assist with the investor’s interest? sharing of Country-by-Country Reporting information.

There is no Value-Added Tax in Guernsey or stamp duty levied on investors participating in an AIF or on the transfer of their interest 7 Reforms therein. Guernsey does not impose taxes on capital gains, capital inheritances, gifts, sales or turnover. 7.1 What reforms (if any) are proposed?

6.4 What is the tax treatment of (a) resident, (b) non- Guernsey has never been a member of the European Union. resident, and (c) pension fund investors in Alternative Therefore, Brexit negotiations are unlikely to have a major effect on Investment Funds? the legal rules governing Guernsey AIFs.

The AIF’s fund administrator must provide the Guernsey Director of Guernsey anticipates receiving a third-country AIFMD Passport in Income Tax with details of distributions made to resident investors the near future. In July 2016, the European Securities and Markets or those who carry on business in Guernsey through a permanent Authority concluded that there were no obstacles impending establishment. The AIF must deduct the tax due on dividends paid Guernsey’s Passport application. to a Guernsey resident. In anticipation of receiving the AIFMD Passport, Guernsey has Limited partners of a limited partnership who are not resident in recently introduced rules for “Manager-led Products”. Under such Guernsey for income tax reasons will have no income liability rules, an AIF manager may elect to be subject to a regulatory regime arising from their share in the AIF. very similar to that of EU Member States, in which the manager rather than the fund is the focus of the regulations.

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?

An AIF would be well advised to obtain exempt status from the Guernsey Tax Office before applying for authorisation or registration of the AIF. This is usually part of the fund formation process.

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Robert Varley Chris Dye Babbé LLP Babbé LLP PO Box 69 PO Box 69 La Vieille Cour, La Plaiderie La Vieille Cour, La Plaiderie St Peter Port, GY1 4BL St Peter Port, GY1 4BL Guernsey Guernsey

Tel: +44 1481 713 371 Tel: +44 1481 746 181 Fax: +44 1484 711 607 Fax: +44 1481 711 607 Email: [email protected] Email: [email protected] URL: www.babbelegal.com URL: www.babbelegal.com

Robert Varley is a partner and heads our Funds team. He was Chris Dye is a senior corporate associate in the Corporate Department Guernsey previously managing partner of Walkers’ Dubai office. Robert is noted of Babbé LLP. He was previously a senior corporate associate at a as a specialist in corporate and funds matters, having worked on a firm in Bermuda, where he advised fund managers and administrators, wide variety of transactions ranging from a number of billion-dollar- real estate funds and distressed asset funds. While practising at one plus private equity funds, real estate and infrastructure funds through of Canada’s major corporate legal firms, he advised some of Canada’s multi-billion-dollar EMTN (euro medium-term note) programmes and largest income funds. the offshore aspects of cross-border takeovers and mergers for large corporates, banks, sovereign wealth funds and governments, to a US$20 billion pipeline joint venture, and a large number of ground- breaking Islamic funds and bonds issues.

Setting the standards in offshore commercial markets Babbé LLP is one of Guernsey’s leading law firms. Our Corporate, Trusts, Pensions and Funds teams offer expert legal advice and representation to a wide variety of commercial clients, including multinational banks, fiduciary companies, funds investors and insurers. Our clients choose us for our responsiveness to their needs, our close understanding of the industries in which they operate, our careful stewardship of their interests and our forceful and effective litigation. The Funds Services team at Babbé LLP advises and assists institutions and individual asset managers with the appropriate structures and vehicles to suit their purposes. We have the experience and expertise to assist retail and institutional managers and can advise on closed-ended and open- ended funds, umbrella funds, limited partnerships and trusts, protected cell and incorporated cell companies. We are frequently instructed by asset managers and financial institutions to advise on compliance and regulatory matters relating to daily fund administration and listings on The International Stock Exchange.

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Ireland Brian Kelliher

Dillon Eustace Sean Murray

on when the QIAIF was authorised by the Central Bank. However, 1 Regulatory Framework in such circumstances the non-EU AIFM must be approved by the Central Bank to act as an investment manager of Irish authorised 1.1 What legislation governs the establishment and collective investment schemes (see below). operation of Alternative Investment Funds? An Irish AIF constituting a collective investment scheme authorised and supervised by the Central Bank and marketed to retail investors Where an AIF is a collective investment scheme authorised and (a “RIAIF”) must have an authorised AIFM. Consequently a non- supervised by the Central Bank of Ireland (the “Central Bank”), Irish EU AIFM cannot avail itself of the transition benefits allowed by the legislation that governs the establishment and operation of a collective Central Bank as referred to above and manage a RIAIF on the basis investment scheme applies, as further detailed in question 1.3. that it is designated by the RIAIF as the non-EU AIFM. However, all Irish AIFs are impacted operationally by: Non-AIFM Irish Management Companies/General Partners ■ the European Communities (Alternative Investment Fund RIAIFs and QIAIFs, depending on their legal form, may be required Managers) Regulations 2013 (S.I. 257 of 2013) (the “Irish to appoint a management company/general partner to carry out the AIFM Regulations”) which transposed Directive 2011/61/ management of those AIFs. Where such a management company/ EU (the “AIFM Directive”) into Irish law; and general partner is not the AIFM, it must be approved by the Central ■ Commission Delegated Regulations and Commission Bank and meet the requirements relating to such entities as set out Implementing Regulations adopted by the EU Commission in the Central Bank’s AIF Rulebook (the “AIF Rulebook”), e.g.: in specified areas in order to ensure that the AIFM Directive ■ a minimum capital requirement of at least EUR 125,000 or is implemented consistently across the EU, the principal one one quarter of its total expenditure taken from the most recent of which is the Commission Delegated Regulation (EU) No audited accounts (whichever is higher); 231/2013 supplementing the AIFM Directive with regard ■ organisational requirements such as the appointment of a to exemptions, general operating conditions, depositaries, compliance officer who must be located in the State; policies leverage, transparency and supervision (the “Commission and systems to identify, control and monitor risk; accounting Delegated Regulation”). policies and procedures; maintenance of records, etc.; and ■ adequate management resources. 1.2 Are managers or advisers to Alternative Investment Investment Managers Funds required to be licensed, authorised or regulated by a regulatory body? Investment managers or sub-investment managers which are one of the following entities will not usually be subject to an additional AIFMs regulatory review process by the Central Bank: Unless availing of transitional arrangements under Article 61 of the ■ UCITS management companies; AIFM Directive that have been extended, or unless exempt from ■ MiFID investment firms; authorisation pursuant to Article 3 of the AIFM Directive: ■ EU credit institutions; and ■ Irish AIFMs managing Irish AIFs are required to be authorised ■ externally appointed AIFMs. under the Irish AIFM Regulations; and Investment managers which are not one of the entities listed above ■ non-Irish EU AIFMs managing Irish AIFs are required to be may only be appointed where (i) a Memorandum of Understanding authorised in their home jurisdiction and to have availed of (“MoU”) is in place between the Central Bank and the competent the passporting provisions pursuant to Article 33 of the AIFM authority in the home jurisdiction of the investment manager, and (ii) Directive. the Central Bank has approved the investment manager following Although a non-EU AIFM currently has no passporting rights, receipt of a completed Investment Manager Clearance Form. a non-EU AIFM may avail of transition benefits allowed by the Investment Advisors Central Bank for such entities (until such time as passporting rights The Central Bank does not apply an approval process to investment are extended to non-EU AIFMs by the European Commission) and advisors in order for such entities to provide investment advice in manage an Irish AIF constituting a collective investment scheme relation to a RIAIF/QIAIF, provided that the managers/directors of authorised and supervised by the Central Bank and marketed to the RIAIF/QIAIF confirm that the advisors in question will act in an qualifying investors (a “QIAIF”), provided it is designated by the advisory capacity only and will have no discretionary powers over QIAIF as the AIFM. Such transition benefits will vary depending any of the assets of the RIAIF/QIAIF.

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company/general partner in the case of a non-corporate AIF, and (iii) 1.3 Are Alternative Investment Funds themselves the depositary, in the case of a unit trust or CCF. required to be licensed, authorised or regulated by a regulatory body? All parties to a RIAIF/QIAIF must have been authorised or otherwise deemed acceptable to the Central Bank prior to the application for authorisation (e.g. the management company, general partner, AIFM, RIAIFs/QIAIFs (depending on the legal form) are authorised by the directors in the case of a corporate AIF, depositary, other service Central Bank under the following Irish legislation as amended from providers such as the fund administrator, investment manager, etc.). time to time: (a) unit trusts under the Unit Trusts Act 1990; The directors of any entity authorised by the Central Bank (including inter alia the directors of a corporate RIAIF/QIAIF) are required to (b) investment companies under Part 24 of the Companies Act meet certain standards of fitness and probity. As part of the Central Ireland 2014; Bank’s fitness and probity requirements, any director proposed to (c) investment limited partnerships (“ILPs”) under the Investment be appointed must be pre-approved by the Central Bank. In this Limited Partnerships Act 1994; regard, an individual online questionnaire must be completed by (d) common contractual funds (“CCFs”) under the Investment the proposed director and validated and submitted on behalf of Funds, Companies and Miscellaneous Provisions Act 2005; the appointing entity by a certain time period in advance of the and proposed authorisation date for the RIAIF/QIAIF (i.e. at least 20 (e) Irish collective asset-management vehicles (“ICAVs”) under working days in the case of a RIAIF and at least five working days the Irish Collective Asset-management Vehicles Act 2015. in the case of a QIAIF). (Collectively referred to as the “Irish Funds Legislation”.) A RIAIF/QIAIF is not subject to any minimum capital requirements Under the Irish Funds Legislation, the Central Bank is responsible unless it is internally managed and constitutes the AIFM. for the authorisation and supervision of these AIFs and has the In relation to the authorisation of QIAIFs, there is no prior filing of power to impose conditions on them. The current conditions which QIAIF documentation for review by the Central Bank. Instead, there the Central Bank imposes are contained in the AIF Rulebook. is a self-certification regime (i.e. certification has to be given that the Central Bank’s disclosure requirements relating to the QIAIF 1.4 Does the regulatory regime distinguish between documentation are met). Because there is no prior review by the open-ended and closed-ended Alternative Investment Central Bank, the timeframe for authorisation of a QIAIF is within Funds (or otherwise differentiate between different the control of the relevant parties based on the length of time it takes types of funds) and if so how? to negotiate and agree the QIAIF documents (subject to the pre- clearance of any persons or parties required by the Central Bank). The Central Bank allows RIAIFs/QIAIFs to be structured as follows: Once the documentation is filed online by 5pm on the business day (a) Open-Ended prior to the date for which authorisation is sought, a QIAIF will be An AIF is considered open-ended by the Central Bank where it: authorised on the requested date without a prior review. The Central ■ provides redemption facilities on at least a (i) monthly basis Bank may carry out a “spot check” post-authorisation review. in the case of a RIAIF, and (ii) quarterly basis in the case of a This contrasts with the authorisation process for RIAIFs, as the QIAIF; Central Bank requires certain documents (e.g. the prospectus, risk ■ redeems, when requested, at least (i) 10% of net assets in management process, and agreement/deed appointing the depositary) the case of a RIAIF/QIAIF that redeems on a monthly basis to be submitted for review and cleared of comment by the Central or more frequently, or (ii) 25% in the case of a QIAIF that Bank in advance of the formal application for authorisation being redeems on a quarterly basis; and submitted. ■ does not impose a redemption fee in excess of (i) 3% of the Internally Managed RIAIF/QIAIF Constituting the AIFM net asset value per unit in the case of a RIAIF, or (ii) 5% in the case of a QIAIF. Where it is proposed that a RIAIF or QIAIF will be internally managed and constitute the AIFM, a separate application for An AIF, which provides for a period of greater than 30 days in the authorisation of an AIFM must be submitted to the Central Bank case of a RIAIF and 90 days in the case of a QIAIF between the (together with other supporting documentation, including inter alia dealing deadline and the payment of redemption proceeds, will not a programme of activity) and such authorisation must be obtained be subject to the above requirements provided it classifies itself as before formal application for authorisation of the RIAIF/QIAIF may open-ended with limited liquidity. be submitted to the Central Bank. (b) Open-Ended with Limited Liquidity Any such RIAIF/QIAIF is required to meet the minimum capital A RIAIF/QIAIF is classified as open-ended with limited liquidity if requirements of an AIFM as set out in Regulation 10 of the Irish it does not meet one or more of the requirements for an open-ended AIFM Regulations (equivalent to Article 9 of the AIFM Directive). AIF but does permit the redemption of units throughout the life of The Central Bank is obliged to inform the AIFM in writing as to the AIF. whether or not authorisation has been granted, within three months (c) Closed-Ended of a complete application. However, the Central Bank may extend The Central Bank considers a closed-ended RIAIF/QIAIF to be one this period for another three months where it considers it necessary which does not facilitate the redemption of units at the request of the because of the specific circumstances of the case. unitholders during the life of the AIF.

1.6 Are there local residence or other local qualification 1.5 What does the authorisation process involve? requirements?

RIAIFs/QIAIFs Directors The application for authorisation of a RIAIF/QIAIF must be made A minimum of two directors in a corporate RIAIF/QIAIF, or in any by (i) the AIFM, together with (ii) the corporate AIF or management entity which is authorised by the Central Bank and provides non-

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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 A RIAIF/QIAIF must appoint auditors and a money laundering is a person present in Ireland for the whole of 110 business days reporting officer and, if a corporate AIF, will need to appoint a per year. 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. (i) three directors resident in Ireland or, at least, two directors

Ireland resident in Ireland and one designated person (i.e. a person 1.8 What co-operation or information sharing agreements designated by the board to carry out one or more managerial have been entered into with other governments or functions) resident in Ireland; regulators? (ii) half of its directors resident in the European Economic Area (“EEA”); and The European Securities and Markets Authority has approved co- (iii) half of its managerial functions performed by at least two operation agreements between EU securities regulators and 47 non- designated persons resident in the EEA. EU authorities. The Central Bank has signed an MoU with all of In the case of an Irish AIFM authorised by the Central Bank which these competent authorities other than those in the Maldives and has a PRISM impact rating of Low, the AIFM must have at least: Turkey. (i) two directors resident in Ireland; The MoUs allow for the exchange of information, cross-border on- (ii) half of its directors resident in the EEA; and site visits and mutual assistance in the enforcement of the respective (iii) half of its managerial functions performed by at least two supervisory laws. The MoUs apply to third-country AIFMs that designated persons resident in the EEA. market AIFs in the EU and EU AIFMs that manage or market AIFs outside the EU. The existence of such co-operation arrangements As part of the Central Bank’s fitness and probity requirements, a between the EU and non-EU authorities is a pre-condition of AIFMD proposed director / designated person is required to confirm (via the for allowing managers from third countries to access EU markets or individual questionnaire as referred to in question 1.5) his/her time to perform fund management by delegation from EU managers. commitment in days that will be provided per year in respect of that directorship or role as designated person. In addition the appointing The MoUs enable cross-border marketing of AIFs to professional entity, in validating the questionnaire, is required to confirm its investors between jurisdictions but are subject to the relevant non- expectation regarding the proposed director’s / designated person’s EU jurisdiction being listed as a co-operative jurisdiction by the time commitment per year. Financial Action Task Force. Fund Governance Code Corporate RIAIFs/QIAIFS or the management companies / general 2 Fund Structures partners of non-corporate RIAIFs/QIAIFs are recommended to adhere to a voluntary corporate governance code for funds put in place by the Irish Funds Industry Association at the request of 2.1 What are the principal legal structures used for the Central Bank. Such code provides inter alia for a majority of Alternative Investment Funds? non-executive directors and at least one independent non-executive director. The principal legal structures of RIAIFs/QIAIFs are set out in question 1.3, the main features of which are set out below: Fund Service Providers’ Governance Code (a) unit trusts are contractual arrangements created under a Irish fund service providers such as fund administrators and trust deed made between a management company and a depositaries are recommended to adhere to a voluntary corporate depositary. Unit trusts do not have their own legal personality governance code put in place by the Irish Funds Industry Association and contracts are entered into by the management company at the request of the Central Bank. Such code provides inter alia for and, in certain cases, by the trustee. A unit represents an at least one independent non-executive director. undivided beneficial interest in the assets of the unit trust; Non-Irish Parties (b) investment companies are public limited liability companies incorporated with variable capital, i.e. the actual value of the Local requirements regarding the appointment of a non-Irish AIFM, paid-up share capital is equal at all times to the value of the investment manager or investment advisor are detailed in question net asset value of the company. Shares issued do not represent 1.2 above. a legal or beneficial interest in the company’s assets; (c) ILPs are partnerships between one or more general partners 1.7 What service providers are required? and one or more limited partners, constituted by written agreements between the parties known as partnership agreements. A general partner is personally liable for the The service providers involved in a RIAIF/QIAIF will depend on: debts and obligations of the partnership and a limited partner ■ the legal structure of the AIF as detailed in question 1.3 (e.g. a contributes or undertakes to contribute a stated amount to the management company/general partner will be required to be capital of the partnership; appointed in the case of a non-corporate AIF); (d) CCFs are funds constituted under contract law by means of ■ whether an external valuer, distributor and/or prime broker a deed of constitution executed under seal by a management will be appointed; and company. The CCF is an unincorporated body and does not ■ whether a fund administrator authorised by the Central Bank have a legal personality and therefore may act only through will be appointed (as is customary) to calculate the net asset the management company. Participants in the CCF hold value of the AIF and to provide fund accounting and transfer their participation as co-owners and each participant holds agency services. an undivided co-ownership interest as a “tenant in common” with other participants; and

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(e) ICAVs are corporate bodies with limited liability where the production and offering of a prospectus by a RIAIF/QIAIF but do actual value of the paid-up share capital is at all times equal not extend to other marketing materials. 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 3.2 What are the key content requirements for marketing exclusively to the ICAV and no shareholder has any interest materials, whether due to legal requirements or in the assets of the ICAV. customary practice? Each of the above-referenced AIFs may be established as an umbrella fund with separate sub-funds. There are prescriptive requirements relating to the content of a prospectus issued by or on behalf of a RIAIF/QIAIF. These are set It is also possible to have unauthorised AIFs (i.e. AIFs that are not

out in the AIF Rulebook. Ireland authorised by the Central Bank under Irish Funds Legislation), the The prospectus of a closed-ended AIF must comply with the content principal legal structures of which are companies, trusts and limited requirements in the Irish Prospectus Directive Regulations (where partnerships. applicable). The European Communities (Market in Financial Instruments) 2.2 Please describe the limited liability of investors. Regulations 2007 as amended (the “Irish MiFID Regulations”), which transposed the MiFID Directive into Irish law, require In investment companies and ICAVs, the liability of the shareholders authorised “investment firms” providing “investment services” is limited to the amount, if any, unpaid on the shares held by them. (including inter alia investment advice and certain distribution In unit trusts, the limited liability of the unitholders under the trust services) to ensure that information provided to potential clients deed will depend on the contractual provisions in the trust deed. about inter alia “financial instruments” (such as units in an AIF) meets certain prescribed requirements. In ILPs, the liability of the limited partners is limited to the stated amount of capital they have contributed or undertaken to contribute and, except in limited circumstances set down in the Investment 3.3 Do the marketing or legal documents need to be Limited Partnerships Act 1994, does not extend to the debts of the registered with or approved by the local regulator? partnership beyond the amount contributed. In CCFs, the liability of a unitholder is limited to the amount agreed In relation to a QIAIF, a dated prospectus, constitutional document to be contributed for the subscription of units. and material contracts must be submitted to the Central Bank for noting in advance of the date of authorisation. In relation to a RIAIF, the prospectus and certain other documents must be submitted for 2.3 What are the principal legal structures used for review and clearance by the Central Bank in advance of seeking the managers and advisers of Alternative Investment authorisation of the RIAIF from the Central Bank. Funds? The prospectus of a closed-ended AIF must be submitted to the Central Bank for approval in accordance with the Irish Prospectus The principal legal structure used for managers and advisers of Directive Regulations (where applicable). RIAIFs/QIAIFs is a private company incorporated with limited liability. 3.4 What restrictions are there on marketing Alternative Investment Funds? 2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers Marketing in Ireland to Retail Investors in open-ended or closed-ended funds? A non-Irish AIF which has been approved by the Central Bank to Although RIAIFs/QIAIFs may apply redemption gates if provided market in Ireland to retail investors (see question 3.5 below) must for in the applicable fund documentation, the Central Bank currently comply with the Consumer Protection Code of the Central Bank. imposes limits on an AIF’s ability to restrict redemptions on any one In addition, certain wording prescribed by the Central Bank must dealing day in the context of open-ended funds. These limits are be included in the AIF’s prospectus and in any marketing material distributed in Ireland for the purposes of promoting the AIF to retail detailed in question 1.4. investors. Marketing in Ireland to Professional Investors 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? Notification to the Central Bank pursuant to the Irish AIFM Regulations is required in advance of any marketing in Ireland to professional investors of: There are no legislative restrictions on transfers of investors’ interests in RIAIFs/QIAIFs other than in ILPs. A limited partner may only ■ EU AIFs by Irish AIFMs; assign his partnership interest subject to the consent of all general ■ non-EU AIFs by EU AIFMs; and partners to the assignee being admitted to the partnership as a limited ■ AIFs by non-EU AIFMs. partner. Marketing may only commence once the Central Bank has informed the AIFM that it may commence marketing and is conditional on the 3 Marketing applicable requirements set out in the AIFM Directive having been complied with. For example, a non-EU AIFM must comply with the substantive transparency and other requirements set out under 3.1 What legislation governs the production and offering Articles 22, 23, 24 and, for private equity funds, 26–30, of the AIFM of marketing materials? Directive: ■ Article 22: each AIF must be audited in accordance with the The Irish Funds Legislation and AIF Rulebook govern the prescribed standards.

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■ Article 23: sets out disclosure requirements such as disclosing (ii) an investor who receives an appraisal from an EU credit to investors the current risk profile of the AIF. institution, a MiFID firm or a UCITS management company ■ Article 24: provides requirements to “regularly” report to to the effect that the investor has the appropriate expertise, each Member State in which the AIF is marketed. Member experience and knowledge to adequately understand the States may require more information on a periodic as well as investment in the QIAIF; or an ad hoc basis. (iii) an investor who certifies that they are an informed investor by ■ Articles 26–30: set out detailed rules applicable to private providing the following: equity funds only on the acquisition of control, including ■ confirmation (in writing) that the investor has such rules regarding asset stripping. knowledge of, and experience in, financial and business Non-Irish EU AIFMs marketing EU AIFs to professional investors matters as would enable the investor to properly evaluate Ireland the merits and risks of the prospective investment; or in Ireland must only comply with their local rules. ■ confirmation (in writing) that the investor’s business Non-Irish-registered EU AIFMs (as opposed to non-Irish-authorised involves, whether for its own account or the account EU AIFMs that can avail of the passport pursuant to Article 33 of of others, the management, acquisition or disposal of the AIFM Directive) cannot market AIFs that they manage to property of the same kind as the property of the QIAIF. professional investors in Ireland. Qualifying investors must self-certify in writing to the QIAIF that they: (i) meet the minimum initial investment per investor and 3.5 Can Alternative Investment Funds be marketed to appropriate expertise/understanding tests; and (ii) are aware of the retail investors? risk involved in the proposed investment and of the fact that inherent in such investments is the potential to lose all of the sum invested. RIAIFs/QIAIFs

QIAIFs may be only be marketed to qualifying investors as detailed in 3.7 Are there additional restrictions on marketing to question 3.6. However, RIAIFs may be marketed to retail investors. public bodies such as government pension funds? Non-Irish AIFs Non-Irish AIFs which propose to market their units in Ireland to There are no additional restrictions. retail investors must be authorised by a supervisory authority set up in order to ensure the protection of unitholders and which, in 3.8 Are there any restrictions on the use of intermediaries the opinion of the Central Bank, provides an equivalent level of to assist in the fundraising process? investor protection to that provided under Irish laws, regulations and conditions governing RIAIFs. No, there are no such restrictions. However, any intermediaries used A non-Irish AIF which proposes to market its units in Ireland to to fundraise in Ireland must be regulated where required pursuant to retail investors must make an application to the Central Bank in Irish laws. This will depend on the specific activity been carried out writing, enclosing certain prescribed information. by the intermediary in Ireland. AIFs established in: ■ Guernsey and authorised as Class A schemes; 3.9 Are there any restrictions on the participation in ■ Jersey and authorised as recognised funds; and Alternative Investments Funds by particular types of investors, such as financial institutions (whether as ■ the Isle of Man as authorised schemes, sponsors or investors)? will receive approval to market their units in Ireland to retail investors on completion of the information and documentation There are none in the context of RIAIFs/QIAIFs. requirements. Other AIFs must demonstrate an equivalent level of investor protection to that provided under Irish laws, regulations and conditions governing RIAIFs. 4 Investments The marketing of units in Ireland to retail investors is subject to the requirements set out in question 3.4 above and may not take place 4.1 Are there any restrictions on the types of activities until the AIF has received a letter of approval from the Central Bank. that can be performed by Alternative Investment The fact that Central Bank pre-approval is required and that Funds? consumer protection regulation is applicable renders marketing to retail investors more cumbersome than in the case of marketing to Pursuant to the AIF Rulebook, RIAIFs/QIAIFs may not raise capital professional investors. from the public through the issue of debt securities. However, this restriction does not operate to prevent the issue of notes by QIAIFs, on a private basis, to a lending institution to facilitate financing 3.6 What qualification requirements must be carried out arrangements. However, the recently enacted Irish Collective Asset- in relation to prospective investors? management Vehicles Act 2015 provides for the issue of debentures by an ICAV and therefore it remains to be seen whether the Central RIAIFs Bank will facilitate an ICAV raising capital from the public through A RIAIF has no regulatory minimum subscription requirement and the issue of debentures. no investor qualification requirements. RIAIFs/QIAIFs may not grant loans (except for loan originating QIAIFs QIAIFs) or act as a guarantor on behalf of third parties. This is A QIAIF may only be sold to qualifying investors and a minimum without prejudice to the right of the AIF to acquire debt securities subscription of EUR 100,000 applies. A qualifying investor is: and it does not prevent AIFs from acquiring securities which are not (i) an investor who is a professional client within the meaning of fully paid. It will also not prevent a QIAIF in certain circumstances MiFID; from entering into bridge financing arrangements.

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A RIAIF/QIAIF may not acquire any shares carrying voting rights which would enable it to exercise significant influence over the 5.2 What are the reporting requirements in relation to management of an issuing body. This requirement does not apply to Alternative Investment Funds? investments in other investment funds or where the AIF is a venture capital, development capital or private equity AIF, provided its Annual and Half-Yearly Reports prospectus indicates its intention regarding the exercise of legal and (a) RIAIFs/QIAIFs management control over underlying investments. A newly established RIAIF/QIAIF must submit to the Central Bank a set of accounts (whether an interim report or an annual report) within a certain period of the launch date 4.2 Are there any limitations on the types of investments (i.e. within nine months for a RIAIF and 12 months for a

that can be included in an Alternative Investment Ireland QIAIF) and publish it within two months if an interim report Fund’s portfolio whether for diversification reasons or or six months if an annual report. The first annual reports otherwise? must be made up to a date within 18 months of incorporation/ establishment and published within six months. Although the RIAIF is a higher-risk option than an Irish UCITS On an ongoing basis, a RIAIF/QIAIF must publish an annual fund authorised by the Central Bank, and although concentration report within six months of the end of the financial year. In limits are imposed by the Central Bank on RIAIFs (e.g. 20% of addition, a QIAIF (established as a unit trust or CCF) and the net asset value (“NAV”) issuer limit, 30% of the NAV limit on a RIAIF must publish, within two months of the reporting deposits with an acceptable credit institution, 30% of the NAV limit period, a half-yearly report covering the first six months of in any one open-ended fund, etc.), such limits are generally more the financial year. flexible than those applicable to UCITS funds. (b) AIFMs/Non-AIFM Management Companies/Administrators/ In relation to QIAIFs, the Central Bank does not impose any limits Depositaries on the investment objectives, the investment policies or the degree Where an AIFM, a non-AIFM management company, of leverage which may be employed. administrator or depositary is authorised by the Central Bank, such entity must publish and file with the Central Bank However, for money market QIAIFs and QIAIFs that invest more (i) an annual report within four months of the end of the than 50% of NAV in another fund, the Central Bank does impose financial year, and (ii) a half-yearly report, covering the first certain requirements in relation to the underlying assets. six months of the financial year, within two months of the Other than treasury, cash management and hedging, a loan- reporting period. originating QIAIF must limit its activities to lending and related However, where an AIFM is an internally managed RIAIF/ activities. However, lending is not restricted to loans and can be QIAIF, the annual audited accounts must be published within structured as an investment in debt securities or as participation in a six months (as opposed to four months) of the year end. syndicated lending arrangement. In addition, non-lending activities Furthermore, internally managed corporate QIAIFs are not are permitted where they are related to the loan-originating QIAIF’s required to produce half-yearly financial accounts. lending activities, e.g. investment in equity securities as part of its Prudential Reports financing arrangements. (a) RIAIFs/QIAIFs In addition, in relation to investment companies authorised as A RIAIF/QIAIF is obliged to file the following prudential QIAIFs, there is a statutory requirement to spread investment risk. reports with the Central Bank: ■ a monthly return setting out prescriptive information relating to the AIF; 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? ■ a quarterly Survey of Collective Investment Undertakings return within 10 working days of the end-quarter to which it refers; and A RIAIF may not borrow in excess of 25% of its net assets at any time. QIAIFs are not subject to any regulatory borrowing limits. ■ a Funds Annual Survey of Liabilities return filed with the latter return. A RIAIF or a QIAIF structured as a money market fund that 5 Disclosure of Information meets the definition of a “monetary financial institution” in the Regulation of the European Central Bank (EU) No 883/2011 is also obliged to file statistical information on a 5.1 What public disclosure must the Alternative monthly and quarterly basis with the European Central Bank. Investment Fund make? (b) AIFMs/Non-AIFM Management Companies/Administrators/ Depositaries Except as set out below, RIAIFs/QIAIFs are not required to make Where an AIFM, a non-AIFM management company, public their annual reports or the identity of their investors: administrator or depositary is authorised by the Central Bank, ■ certain documents in relation to ILPs required to be filed such entity must file with the Central Bank a minimum capital and maintained with the Central Bank are a matter of public requirement report when filing its half-yearly and annual record (e.g. the partnership agreement and annual report); reports. and Other Reports ■ where the securities of a closed-ended RIAIF or QIAIF (a) RIAIFs/QIAIFs are admitted to listing on a regulated market, the AIF is required to make its annual and half-yearly reports public in A RIAIF/QIAIF may be obliged to file reports on a periodic accordance with the EU Transparency Directive. Such an basis with the Central Bank depending on the composition AIF must also make public other information, including inter of its portfolio, e.g. where the AIF has side pocket assets, an alia any change in the rights attaching to the various classes annual report is required confirming whether or not the Central of shares. Bank’s parameters continue to be respected and the prospects and/or plans for the side pocket assets must be outlined.

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(b) Depositary A depositary of a RIAIF/QIAIF must enquire into the conduct 6.3 Are there any establishment or transfer taxes levied of the AIFM and the management company, investment in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the company, ICAV or general partner in each annual accounting investor’s interest? period and report thereon to the unitholders via a depositary report included in the annual report of the AIF. There are no such establishment taxes. Furthermore, there are no (c) Irish AIFMs/Non-EU AIFMs Marketing in Ireland transfer taxes payable in Ireland on the issue, transfer, repurchase A non-EU AIFM marketing an AIF in Ireland without a or redemption of units in a RIAIF/QIAIF. Where any subscription passport and an Irish-authorised AIFM are required to file for or redemption of units is satisfied by the in specie transfer of reports with the Central Bank in accordance with Regulation Ireland 25 of the Irish AIFM Regulations, e.g. reports on the principal securities, property or other types of assets, Irish stamp duty may markets and instruments in which they trade on behalf of the arise on the transfer of such assets. AIFs they manage, etc. 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? There is no express statutory or regulatory restriction on the use of RIAIFs/QIAIFs are not subject to any taxes on their income (profits) side letters. However, a RIAIF/QIAIF is required, subject to certain or gains arising on their underlying investments. exceptions as set out in the AIF Rulebook, to treat all unitholders in the same class equally and all unitholders in different classes fairly. RIAIFs/QIAIFs (other than CCFs & ILPs) Furthermore, an AIFM is subject to certain operating conditions, Non-Residents including inter alia an obligation to treat all AIF unitholders fairly There are no Irish withholding taxes in respect of a distribution and to ensure that no unitholder in an AIF obtains preferential of payments by such AIFs to investors or in relation to any treatment unless such preferential treatment is disclosed in the encashment, redemption, cancellation or transfer of units in respect relevant AIF’s constitutional document. of investors who are neither Irish-resident nor ordinarily resident in Ireland, provided the AIF has satisfied and availed of certain equivalent measures or the investors have provided the AIF with the 6 Taxation appropriate relevant declaration of non-Irish residence. Irish Residents 6.1 What is the tax treatment of the principal forms of Exempt Investors (which includes pension funds) – Again, no Irish Alternative Investment Funds? withholding taxes apply in respect of a distribution of payments by the AIF to such investors (which would include approved pension RIAIFs/QIAIFs are not subject to any taxes on their income (profits) schemes, charities, other investment funds, etc.) or any encashment, or gains arising on their underlying investments. While dividends, redemption, cancellation or transfer of units in respect of investors interest and capital gains that an AIF receives with respect to its that have provided the AIF with the appropriate relevant declaration. investments may be subject to taxes, including withholding taxes, Non-Exempt Investors – If an investor is an Irish resident and not in the countries in which the issuers of investments are located, an exempt Irish investor, tax at the rate of 41% (25% where the these foreign withholding taxes may, nevertheless, be reduced or unitholder is a company and an appropriate declaration is in place) is eliminated under Ireland’s network of tax treaties to the extent required to be deducted by the AIF on distributions (where payments applicable. are made annually or at more frequent intervals). Similarly, tax at the rate of 41% (25% where the unitholder is a company and an 6.2 What is the tax treatment of the principal forms of appropriate declaration is in place) will have to be deducted by the investment manager / adviser? AIF on any other distribution or gain arising to the investor on an encashment, redemption, etc. of units by an investor who is Irish- Compensation paid to Irish managers and advisors (such as resident or an ordinary resident in Ireland. While this tax will be a management/advisory fees, as well as performance fees) of RIAIFs/ tax liability of the AIF, it is effectively incurred by investors out of QIAIFs is generally subject to corporation tax at the trading rate their investment proceeds. (i.e. 12.5%). RIAIFs/QIAIFs (established as CCFs or ILPs) With regard to carried interest, aside from a recent regime introduced For Irish tax purposes, a CCF and an ILP (authorised on or after 13 for certain venture fund managers in respect of qualifying venture February 2013) are treated as “tax transparent”, which means that capital funds (which must be structured as partnerships and which the income and gains arising or accruing to the AIF are treated as are quite limited in their activities), Ireland does not have specific arising or accruing to its unitholders in proportion to the value of the legislation dealing with carried interest. Nevertheless, generally units beneficially owned by them as if such income and gains did speaking it should be possible to structure funds such that carried not pass through the hands of the CCF or ILP. Consequently, for tax interest could be treated for Irish tax purposes as a capital gains purposes, the profits that arise to this type of AIF are treated as being tax receipt subject to tax at the standard rate (currently 33%) in the profits that arise to the unitholders themselves. Currently, natural hands of an individual manager. The recently introduced venture persons cannot invest in a CCF without negatively affecting its Irish fund managers regime (where applicable) reduces the capital gains tax transparent status. This may change in the future. tax rates even further to 15% (as opposed to 33%) for an individual Irish Real Estate Funds and 12.5% (as opposed to an effective 33% rate) for a company. Late last year, Ireland introduced a new withholding tax regime in respect of certain Irish property-related distributions and redemptions made by Irish real estate funds (“IREFs”) to certain unit holders. An

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IREF is a non-UCITS authorised fund where (i) 25% or more of the (DAC2 – which essentially imports the CRS into EU legislation) in market value of its assets is derived from certain types of Irish real Ireland was introduced in the Finance Act 2015 by inserting Section estate related assets (“IREF Assets”), or (ii) it would be reasonable 891G of the Taxes Consolidation Act 1997. Section 891F will not to consider that the fund’s main purpose (or one of its main purposes) apply where Section 891G applies. RIAIFs/QIAIFs established in was to acquire IREF Assets or carry on an IREF business (that is, Ireland will have to carry out due diligence to identify various non- activities involving IREF assets the profit or gains of which would, but Irish investors and will then have to report information about such for the general tax exemptions applied to funds, be within the scope investors to the Irish Revenue Commissioners. of Irish taxation). Where a fund is an umbrella fund, the new rules Organisation for Economic Co-operation and Development will be applied at the sub-fund level. In summary, subject to certain (“OECD”) – Base Erosion and Profit-Shifting (“BEPS”) project – exceptions, a 20% withholding tax will be imposed on distributions

see question 6.8 below. Ireland and redemptions made out of IREF profits, which are essentially the accounting profits of the IREF with certain exclusions (e.g. unrealised profits or gains relating to Irish relevant assets (land, etc.) booked in 6.7 Are there any other material tax issues? the IREF’s financial accounts as well as all realised gains in respect of disposals of Irish relevant assets which have been owned for a period Management fees are generally subject to VAT at the current rate of at least five years by the IREF (unless the fund is seen as a personal of 23%. However, under the harmonised VAT legislation, an portfolio IREF from the unitholders’ perspective), distributions/ exemption applies to the management of investment funds as defined dividends made by unquoted companies which derive the greater part by the EU Member States which, in Ireland, includes all authorised of their value from Irish relevant assets, etc.). investment funds. Therefore the VAT exemptions are wide-ranging with regard to the provision of services to funds (for example, fund administration, transfer agency, investment management, etc.). 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing RIAIFs/QIAIFs must adhere to the relevant rules on due diligence an Alternative Investment Fund? and information reporting under the CRS and FATCA, for instance. Furthermore, RIAIFs/QIAIFs will also need to monitor the OECD No. Once a RIAIF/QIAIF has received its authorisation from the BEPS project and its possible effects on their investment structures Central Bank and for so long as such authorisation remains in place, (see question 6.8 below). the taxation treatment detailed above applies. 6.8 What steps are being taken to implement the OECD’s 6.6 What steps have been or are being taken to implement Action Plan on Base Erosion and Profit-Shifting the US Foreign Account and Tax Compliance Act (BEPS), in particular Actions 6 and 7, insofar as they 2010 (FATCA) and other similar information reporting affect Alternative Investment Funds’ operations? regimes such as the Common Reporting Standard? The Irish Government has been very active in the area of BEPS, Foreign Account Tax Compliance Act (“FATCA”) – The Irish and having launched a consultation in May 2014 and published a detailed US Governments signed a Model 1 intergovernmental agreement paper in 2014 (“OECD BASE EROSION AND PROFIT SHIFTING (“Irish IGA”) on 21 December 2012 and provisions were included PROJECT IN AN IRISH CONTEXT – Part of the Economic Impact in the Irish Finance Act 2013 for the implementation of the Assessment of Ireland’s Corporation Tax Policy”), where they Irish IGA and also to permit regulations to be made by the Irish explored the potential impacts of this project that is currently being Revenue Commissioners with regard to registration and reporting undertaken by the OECD. requirements arising from the Irish IGA. Subsequently, the Irish Following the publication of the OECD’s final BEPS reports on 5 Revenue Commissioners (in conjunction with the Department October 2015, Ireland introduced Country-by-Country Reporting of Finance) issued Regulations S.I. No 292 of 2014 which were legislation in the Finance Act 2015, followed by accompanying effective from 1 July 2014. Supporting Guidance Notes (which regulations published on 23 December 2015. The legislation applies will be updated on an ad hoc basis) were first issued by the Irish for accounting periods commencing on or after 1 January 2016. Revenue Commissioners on 1 October 2014 with the most recent The Irish Government is in ongoing discussions with various version being issued in May 2016. RIAIFs/QIAIFs established interested parties (including the Irish Funds Industry) in relation in Ireland will have to carry out due diligence to identify US to the various “Actions” provided for under BEPS (to include investors and non-FATCA-compliant investors, and will then have Actions 6 and 7). Although it is unclear how Ireland will react to to report information about such investors to the Irish Revenue BEPS, asset managers and RIAIFs/QIAIFs should bear in mind the Commissioners. Compliant RIAIFs/QIAIFs will not be subject to, potential impact of these suggested Actions on their structures. nor will they have to operate, FATCA withholding taxes. Intergovernmental Agreements – Aside from the Irish IGA, Ireland has not entered into any other IGAs. 7 Reforms Common Reporting Standards (“CRS”) – As Ireland was one of the early adopter countries, the legislation to implement 7.1 What reforms (if any) are proposed? the CRS in Ireland was introduced in the Finance Act 2014 by inserting Section 891F of the Taxes Consolidation Act 1997, and With regard to the aforementioned ILP, the Irish funds industry is Regulations (Statutory Instrument 583 of 2015) came into effect on examining the possible update/overhaul of the Investment Limited 31 December 2015. The legislation to implement the Revised EU Partnership Act 1994. Directive on Administrative Cooperation in the Field of Taxation

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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 Fax: +353 1 667 0042 Fax: +353 1 667 0042 Email: [email protected] Email: [email protected] URL: www.dilloneustace.ie URL: www.dilloneustace.ie Ireland Brian Kelliher joined Dillon Eustace in 1994 and has been a partner Sean Murray joined Dillon Eustace in 2004 and became a partner at the firm since 2000. He works in the Asset Management and in 2007. He advises on various aspects of financial services from Investment Funds team and specialises in the establishment and a tax perspective; in particular: Investment Management; Structured authorisation of UCITS and AIFs under Irish funds legislation, and Finance; Real Estate; Banking; Leasing; and Private Equity. He is investment firms under MiFID and other domestic legislation. He a member of the Tax Committees of both Irish Funds (“IF”) and the advises on all regulatory/compliance aspects applicable to investment Irish Debt Securities Association (“IDSA”). Sean has written several funds and investment firms. He is a former member and chairman fund articles for leading industry journals and has spoken at numerous of the Legal and Regulatory Committee of the Irish Funds Industry international fund events. Association (the “IF”) and is currently a member of the Company Law Review Group (“CLRG”) and the IF UK Distribution Working Group. Brian has written several fund articles for leading industry journals and has spoken at international fund events.

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, insurance and taxation. Headquartered in Dublin, Ireland, the firm’s international practice has seen it establish offices in Tokyo, New York and the Cayman Islands. Dillon Eustace has one of the largest Financial Services legal practices in Ireland, serving clients across a whole range of activities, including Asset Management and Investment Funds, Derivatives, Investment Services, Insurance and Pensions, Debt and Funds Listing and Regulatory and Compliance. Dillon Eustace represents the largest number of Irish-domiciled funds (Monterey Insight – Ireland Fund Survey 2016), reflecting the fact that the Asset Management and Investment Funds practice has been, and remains, one of the firm’s core activities, with partners having been at the forefront of the Irish industry from its beginnings in the late 1980s.

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Korea Tongeun Kim

Bae, Kim & Lee LLC Dongwook Kang

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) and if so how? operation of Alternative Investment Funds? There is a distinction under the FSCMA between open-ended The primary body of law regulating the investment funds industry collective investment schemes and closed-ended collective in Korea is the Financial Investment Services and Capital Markets investment schemes, and there are regulations applicable to each Act (FSCMA). such type of collective investment scheme. Such distinction applies Under the FSCMA, a collective investment scheme is defined as to AIFs in principle. However, much of the regulations applicable a scheme established for making “collective investment”, meaning to publicly offered collective investment schemes do not apply to any activities of acquiring, disposing of, or otherwise managing AIFs. For instance, a provision requiring closed-ended publicly assets that are valuable for investment with capital raised from at offered collective investment schemes to be listed on a securities least two investors, without being bound by day-to-day management exchange within 90 days from the first issuance of the collective instructions from investors, and distributing the yields therefrom to investment interests does not apply to closed-ended AIFs. investors or any fund management entity. AIFs are classified into two types: privately offered collective Collective investment schemes are classified into publicly offered investment schemes for specialised investment (commonly referred collective investment schemes and privately placed collective to as “hedge funds”); and privately offered collective investment investment schemes, which are sub-divided into hedge funds and schemes for management participation (commonly referred to as private equity funds (PEFs). In this chapter, we will refer to privately “private equity funds” or “PEFs”). A PEF is an AIF, the purpose placed schemes as Alternative Investment Funds, or AIFs. of which is limited to making investments in companies with the The main regulator is the Financial Services Commission (FSC). aim of participating in their management (e.g., by way of acquiring Many of the supervisory responsibilities of the FSC are delegated to 10% or more of the total number of outstanding voting shares in a the Financial Supervisory Service (FSS), the enforcement arm of the portfolio company). A hedge fund can invest in any type of assets FSC, which is responsible for day-to-day supervision and regulation including securities, real estate and infrastructure assets. However, of the financial industry including fund registration and reporting it is generally understood that a hedge fund is not permitted to make of fund establishment, regular and ad hoc regulatory reporting, investments for the purposes that are statutorily reserved for PEFs, securities registration statement filings, processing of fund manager i.e., participation in management of portfolio companies. licence applications and so on.

1.5 What does the authorisation process involve? 1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body? As explained in question 1.3, no authorisation is required at the fund level. Any entity that intends to act as an investment manager for Any entity that intends to act as a manager or an advisor for an AIF an AIF must register itself with the FSC for management of hedge must register itself with the FSC for management of hedge funds funds (hedge fund manager registration) or management of PEFs (hedge fund manager registration) or management of PEFs (PEF (PEF manager (GP) registration), depending on the type of fund it general partner (GP) registration), depending on what type of fund wishes to manage. The table overleaf sets out the requirements for it wishes to manage. registration as a hedge fund manager and a PEF (GP) manager.

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

No. Establishment of AIFs does not require prior authorisation or registration from the regulators. However, an ex post report must be filed with the FSS within two weeks of an AIF’s establishment.

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PEF Manager time taken by the applicant to supplement the application when Hedge Fund Manager Requirements (general partner) required by the regulator. Registration Registration The applicant must be: No specific 1.6 Are there local residence or other local qualification ■ A local financial requirements. requirements? company. However, the regulator, ■ A joint stock company. as a matter of policy, requires the GP to be a As indicated in the table in question 1.5, both hedge fund managers ■ A local branch of Local Presence local entity in Korea. and PEF managers are required to be a local entity or, for hedge fund a foreign financial Most commonly, local investment company managers, a local branch of a foreign financial company engaged in Korea GPs are established as engaged in fund fund (collective investment vehicle) management business. a joint-stock company (collective investment or a limited liability vehicle) management company. business. 1.7 What service providers are required?

Minimum KRW2 billion (US$1.7 KRW100 million A hedge fund must appoint a registered hedge fund manager as Shareholders’ million). (US$87,000). Equity its investment manager and a trust company as the custodian of fund assets. A hedge fund established as an investment company At least two full- At least three full-time must appoint an administrator for fund administration services. A Personnel time investment investment professionals. PEF must engage a registered PEF GP entity as its general partner professionals. (investment manager). The applicant must have office space and physical facilities 1.8 What co-operation or information sharing agreements including security have been entered into with other governments or Facilities Not required. equipment and computer regulators? equipment sufficient for conducting a hedge fund management business. On 28 April 2016, Korea signed the Asia Region Funds Passport’s Memorandum of Cooperation (MoC) together with Australia, Officers of the applicant Japan, Korea and New Zealand. The Asia Region Funds Passport (including directors and will, once implemented, provide a multilaterally agreed framework statutory auditor) must meet requirements under to facilitate cross-border marketing of managed funds across Article 5 of the Financial participating economies in the Asia region. Companies Corporate The same as for hedge Officers Governance Act fund managers. (basically, they should 2 Fund Structures not have been subject to any criminal or other sanctions in the past five 2.1 What are the principal legal structures used for years). Alternative Investment Funds? Major shareholders, including the largest Hedge funds can be established using various types of legal shareholder and structures. In practice, the most common form of hedge funds is an significant shareholders Major with a 10% or more investment trust, of which major features are as follows: Not required. Shareholder shareholding in the ■ An investment trust is formed by a trust agreement between applicant, must meet a manager and a trust company (trustee), which typically is a certain standards of bank or a securities company. financial soundness and social credibility. ■ Investors invest in the fund by purchasing trust units of the investment trust at its base price (net asset value per trust Financial Must be financially unit). Stability The same as for hedge sound and socially ■ The manager has the responsibility and discretion to manage and Social fund managers. reputable. Reputation and operate the fund in accordance with the fund’s investment objectives. The applicant must Prevention of ■ The trustee is obligated, in its capacity as the trustee of have a system in place The same as for hedge Conflicts of the fund, to follow the investment manager’s instructions to prevent conflicts of fund managers. Interest regarding the acquisition and disposal of the fund assets. interest. ■ The manager is required by law to appoint the trustee for custody of the fund assets and monitoring of the manager’s The applicant prepares the application and supporting documents operation of the fund. and will normally have to have a pre-filing consultation with the FSS reviewing officer. With respect to the required time for a hedge ■ Although not obligated to do so, managers of investment fund manager registration, the FSC must process the application trusts customarily delegate fund administration to a fund administration services company (administrator). and complete the registration within two months from the time the applicant filed a full application package, excluding time taken by PEFs must take the form of a limited partnership company. Members the applicant to supplement the application when required by the of a limited partnership company consist of at least one general regulator. In case of a PEF manager registration, the FSC must partner with unlimited liability and at least one limited partner with process the application and complete the registration within one limited liability to third party creditors of the limited partnership month after accepting the complete application package, excluding company. Investors participate in the company as limited partners.

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The manager must be the general partner of the limited partnership The “Asset-Liability Ratio” means the ratio of the sum of the company. following amounts over the hedge fund’s net assets: ■ the aggregate amount of assessed risks incurred by the hedge fund’s exposure to derivatives; 2.2 Please describe the limited liability of investors. ■ the aggregate amount of guarantees and value of assets provided as collateral for a third party; and Investors are always subject to limited liability and, accordingly, they are only liable to the extent of their investments. In this regard, ■ the aggregate amount of borrowed monies. investors are not permitted to participate in the management or Transfer of an interest in a PEF is subject to the consent of the GP operation of Alternative Investment Funds. Further, the manager is (manager). In addition, transferees must be limited to the following restricted from doing the following for the investors: (i) providing eligible investors: Korea or agreeing to provide profits on an investment; or (ii) compensating ■ professional investors, including institutional investors, or agreeing to compensate for losses incurred as a result of an financial companies, mutual aid business entities and listed investment. companies; and ■ non-professional investors, including individuals, private companies, certain public pension funds, and collective 2.3 What are the principal legal structures used for managers and advisers of Alternative Investment investment vehicles making investment in the fund in an Funds? amount determined according to the distinctions below: ■ KRW100 million or more when the investor is an officer A hedge fund manager must be (i) a joint stock company, (ii) a or employee of the PEF’s GP; and local financial company prescribed by the Presidential Decree of ■ KRW300 million or more when the investor does not fall the FSCMA, or (iii) a local branch of a foreign financial investment under any of the above. company engaged in fund (collective investment vehicle) management business. 3 Marketing In comparison, there is no express provision dictating the legal structures of a PEF manager (GP). In practice, most PEF managers (GPs) are established as joint-stock companies or limited liability 3.1 What legislation governs the production and offering companies. of marketing materials?

The Financial Investment Services and Capital Markets Act of 2.4 Are there any limits on the manager’s ability to Korea (FSCMA). restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? 3.2 What are the key content requirements for marketing Hedge funds can be established either as closed-ended funds or open- materials, whether due to legal requirements or ended funds depending on their constituent documents. An open- customary practice? ended hedge fund may restrict redemptions by placing certain limits on the timing of the redemption or putting procedural conditions Customarily, managers of AIFs prepare and provide an investment on the redemption pursuant to the governing document of the fund. proposal document to the prospective investors, which includes Transfer of interests in a hedge fund is limited to eligible investors information on the investment structure, investment strategies and (see question 2.5). In addition, investors and managers may agree investment risks of the fund, and the track record of the manager. on additional restrictions on the transfer of interests in hedge funds, In addition, the FSCMA prescribes more specific regulations on the e.g. by way of requiring the consent of the manager for any transfer. investment advertisement of hedge funds: PEFs are statutorily required to be established as closed-ended i) the target investors of the marketing should be limited to funds, meaning no redemptions are allowed. In addition, the eligible investors (see question 2.5); FSCMA requires that any limited partner intending to transfer their ii) the communications should be made either by document, interests in a PEF should obtain prior consent from the general telephone, emails, text messages or facsimile, and should be partner (manager). made to each individual investor separately; iii) advertising materials must include the following statements: 2.5 Are there any legislative restrictions on transfers of 1. a statement recommending that the investor read the investors’ interests in Alternative Investment Funds? investment prospectus before acquiring interests in the fund; The FSCMA requires that transfer of an interest in a hedge fund 2. a statement indicating that there is a risk of loss of must be limited to the following eligible investors: investments in the fund and that such loss will be borne by the investors; and ■ professional investors, including institutional investors, financial companies, and listed companies; or 3. a statement that the past performance of the fund does not guarantee a return on investment in the future; and ■ non-professional investors, including individuals, general corporates, certain public pension funds, and collective iv) advertising materials may also include (a) the name, type, investment schemes under the FSCMA, making investment investment purpose and operational strategy of the fund, (b) in a fund in an amount according to the distinctions below: information on the manager, custodian, placement agents, administrator (collectively, the “Service Providers”), (c) fees ■ KRW100 million or more when the Asset-Liability Ratio paid to the Service Providers, (d) past performance of the (see below) is less than 200%; and fund (if available), (e) redemption, and (f) other information ■ KRW300 million or more when the Asset-Liability Ratio as specified in the FSCMA. is 200% or greater.

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■ KRW100 million or more when the investor is an officer 3.3 Do the marketing or legal documents need to be or employee of the PEF’s GP; and registered with or approved by the local regulator? ■ KRW300 million or more when the investor does not fall under any of the above. No, there is no such requirement. The managers of AIFs should assess whether the prospective investor fits any of the criteria above. 3.4 What restrictions are there on marketing Alternative For retail investors, the managers have a duty to explain the details Investment Funds? of the investment product, the risks contingent upon such investment and other matters as specified in the FSCMA, with such sufficiency Korea Marketing of AIFs must be conducted by way of private placement as to allow an ordinary investor to understand them. The FSCMA to the eligible investors referred to in question 3.6, and must not be explicitly sets out the managers’ liability for damages incurred to offered by way of public offering. retail investors caused by their violation of such duty to explain. The managers of AIFs must not conduct any of the following acts in connection with the marketing: 3.7 Are there additional restrictions on marketing to 1. providing false information; public bodies such as government pension funds? 2. providing judgments or information on an uncertain matter, causing an uncertain matter to be believed by the prospective There are no additional restrictions prescribed under the FSCMA investor to be certain; regarding public bodies; however, under the new anti-graft law (Kim 3. initiating a real-time conversation, such as a personal visit or Young Ran Law) which came into effect on 28 September 2016 in telephone call, without the investor’s request; Korea, fairly strict restrictions apply to the making of “improper” 4. repeatedly making investment recommendations where the requests, and giving of cash or anything else of value (hospitality, investor has already manifested his/her intention to reject the entertainment, etc.), to government officials, employees of quasi- investment recommendation (however, that investor can be governmental enterprises, persons serving a public capacity, and revisited after one month from rejection); and employees of media and educational institutions (both public and 5. making an investment recommendation on the condition of private). lending or arranging the lending of money.

3.8 Are there any restrictions on the use of intermediaries 3.5 Can Alternative Investment Funds be marketed to to assist in the fundraising process? retail investors? The managers of AIFs can market their own funds without obtaining As discussed in question 3.2 above, for hedge funds, marketing can an additional licence. The managers may also opt to delegate be made vis-à-vis retail investors investing over KRW 100 million or the marketing activities for their own funds to authorised fund KRW 300 million depending on the Asset-Liability Ratio of the fund. distributors licensed under the FSCMA (generally, banks, securities The FSCMA does not specifically prescribe the scope of retail companies and insurance companies). investors eligible for the marketing of PEFs. As such, it is prudent The managers of AIFs may appoint an individual, who received to limit the marketing to retail investors who are reasonably believed certain qualifications from the Korea Financial Investment to be eligible investors (see question 3.6). Association (“KOFIA”), as its investment solicitation agent, and should register such individual with the FSC. 3.6 What qualification requirements must be carried out in relation to prospective investors? 3.9 Are there any restrictions on the participation in Alternative Investments Funds by particular types of The eligible investors for a hedge fund are: investors, such as financial institutions (whether as ■ professional investors as listed under the FSCMA, which sponsors or investors)? include financial institutions, mutual aid business entities, and listed companies; and Generally, there is no such restriction. However, many investors ■ non-professional investors, which include retail investors (especially, financial companies and public pension funds) are (individuals and corporations) and certain institutional investors subject to separate laws and regulations restricting their ability such as public pension funds and collective investment vehicles, to participate in AIFs either as sponsors or investors from the making investment in the fund in the amount pursuant to the perspective of prudential regulations or management of risks distinctions below: specific to each investor. ■ KRW100 million or more, when the Asset-Liability Ratio of the fund is less than 200%; and ■ KRW300 million or more, when the Asset-Liability Ratio 4 Investments of the fund is 200% or greater. The eligible investors for a PEF are: 4.1 Are there any restrictions on the types of activities ■ professional investors as listed under the FSCMA which that can be performed by Alternative Investment include institutional investors, financial companies, mutual Funds? aid business entities, and listed companies; and ■ non-professional investors, which include retail investors Restrictions on transactions with interested parties (individuals and corporations), and certain institutional A manager of a hedge fund and a PEF must ensure that the fund it investors such as public pension funds and collective manages does not enter into any transactions with an “interested investment vehicles, making investment in the fund in the party” (see below) unless: amount pursuant to the following distinctions:

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■ The transaction is conducted via an open market in which a multiple number of unspecified people participate, such as 4.2 Are there any limitations on the types of investments the securities exchange. that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or ■ The transaction is favourable to the fund considering customary otherwise? terms and conditions of similar transactions. ■ The transaction falls under certain types of transactions that Investment restrictions – hedge funds are prescribed as unlikely to cause conflicts of interest. In terms of target investment assets, a hedge fund is not subject to Interested parties mean: any regulatory restrictions other than that it cannot make investments ■ The investment manager, its officers, employees and their in securities issued by an operating company with the aim of respective spouses. Korea participating in its management, which is strictly reserved for PEFs. ■ The major shareholders of the investment manager and their respective spouses. In addition, hedge funds making investments in real estate assets must not: ■ Affiliated companies of the investment manager (excluding portfolio companies of PEFs). ■ Dispose of real estate assets located in Korea within one year from the time of acquisition except where there is special In the case of hedge funds, interested parties additionally include: urgent need for early disposal. ■ Officers and employees of the major shareholders and ■ Dispose of land without any building or other structure before affiliated companies of the investment advisers, and their starting a real estate development project on the same land. respective spouses. Investment restrictions – PEFs ■ Any authorised fund distributor who sold 30% or more of the aggregate fund interests issued by the investment manager. A PEF is limited to making investments in companies with the aim ■ Any custodian who is in custody of 30% or more of the of participating in their management. Specifically, a PEF can make aggregate fund assets managed by the investment manager. investments in: ■ Supervisory directors of investment companies managed by 1. 10% or more of the total number of outstanding voting shares the investment manager. in a portfolio company. Price-sensitive information, insider trading and market 2. Less than 10% of the total number of outstanding voting shares in a portfolio company that enables the PEF to exercise misconduct de facto control over the major business of the portfolio Investment managers and their staff are subject to rules on insider company; for example, by way of appointment and dismissal trading and the use of non-public price-sensitive information. of directors. These rules prohibit a person, who is an insider of a corporation 3. Equity-linked debt securities (for example, convertible and is in possession of non-public price-sensitive information or bonds, bonds with warrant, and exchangeable bonds) issued who receives such information from an insider of a corporation (a by a portfolio company if by acquisition of such equity- “tippee”), from using or causing others to use such information. linked debt securities, the potential shareholding ratio of the Market misconduct rules regulate transactions executed through PEF in the portfolio company’s outstanding voting shares (based on the voting shares to be acquired by the PEF when it listed securities and derivatives markets (the Korea Exchange) as exercises the conversion right or warrant) is 10% or more, or well as general dealings in financial investment products between the PEF is enabled to exercise de facto control over the major any two parties. In relation to listed market transactions, price business of the portfolio company; for example, by way of manipulation, collusive trading, false price indication, price fixing appointment and dismissal of directors. and spreading rumours are prohibited. In relation to dealings 4. Exchange-traded or over-the-counter derivative products for between two parties, falsifying, misrepresenting and deceiving for either hedging risks associated with investments in portfolio the purpose of making a gain from dealing in financial investment companies or SPCs (see below) or hedging risks associated products is prohibited. Violation of these prohibitions can result in with foreign exchange rate fluctuation in relation to fund civil liability, including disgorgement of profits, as well as criminal assets. penalties. 5. Securities issued by a company specialising in investment On 1 July 2015, a new market abuse regime came into effect, and financing for social infrastructure under the Act on which introduced a comprehensive ban on misuse of non-public Private Participation in Infrastructure. information and price-manipulative behaviours in capital markets 6. Equity securities in a special purpose company (PEF- which have not been regulated previously. Violation of the new SPC) established to make investments in any of the above regulation is punishable by an administrative fine of up to 1.5 times investments or another PEF-SPC. the profits gained from such violation, but not by criminal sanctions. 7. Other investment similar to the above investments. Money laundering A PEF must ensure that 50% or more of the aggregate capital contribution of its partners to the fund are invested in assets described All persons employed in the financial services industry as well as in the first, second, fifth and sixth items above within two years from financial institutions are subject to certain surveillance and reporting the time of their respective capital contributions. Further, it must obligations related to money laundering or illegal activities. not dispose of any asset described in the first, second, third or sixth Short sale item above within six months from its acquisition, except for when Short sale of securities is prohibited, with certain exceptions. an exceptional event occurs for the portfolio company. Covered short sale in certain prescribed circumstances and contexts where settlement is deemed warranted (for example, through pre- 4.3 Are there any restrictions on borrowing by the arranged borrowing) is permitted. Alternative Investment Fund?

A hedge fund is subject to certain limits on its borrowing, guaranteeing and investment in financial derivatives. Specifically,

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the ratio of the sum of the following amounts compared to the hedge Regulatory reporting requirements – PEFs fund’s net assets (the “Asset-Liability Ratio”) must be lower than For PEFs, a PEF GP must report the following information regarding 400%: each PEF it manages to the FSS: ■ The aggregate amount of assessed risks incurred by the hedge (i) On an annual basis, where the assets under management (AUM) fund’s exposure to derivatives. of the fund are less than KRW10 billion (US$8.7 million). ■ The aggregate amount of guarantees and value of assets (ii) On a semi-annual basis, where the AUM of the fund is provided as collateral for a third party. KRW10 billion or more: ■ The aggregate amount of borrowed monies. ■ the current status of the fund assets; A PEF is permitted to borrow money or guarantee for a third party up ■ the current status of shareholders’ equity of PEF-SPCs; Korea to 10% of its net assets and only for certain limited purposes such as ■ the amount of investment in each portfolio company and temporary shortage of capital for operating costs or investments in their proceeds; portfolio companies. However, a PEF-SPC is permitted to leverage ■ the current status of financing for investments; and its investments by borrowing money or guaranteeing a third party ■ the current status of surplus capital. related to the portfolio company up to 300% of its shareholders’ equity. In addition, if a PEF participates in the management of a portfolio company, it must report that management participation to the FSS within two weeks. Finally, a PEF GP must file an amendment report 5 Disclosure of Information within two weeks when there is a change in the items reported in the fund establishment report of a PEF it manages.

5.1 What public disclosure must the Alternative Investment Fund make? 5.3 Is the use of side letters restricted?

AIFs are not subject to any public disclosure requirements with For hedge funds and PEFs, side letters are often used in connection regard to their activities or financial status except that AIFs could with the formation of hedge funds and PEFs. However, rather than be subject to public disclosure requirements when they are involved entering into a separate side letter with each investor, it is more in transactions requiring such public disclosure due to the nature common for an investment manager to enter into a single side letter of the transactions (e.g., acquisition of large voting shares in listed agreement with all of the investors together to deal with issues that companies requiring large shareholding disclosure). are not customarily addressed in the fund’s constituent documents (for example, capital commitment arrangements with respect to hedge funds, foreign exchange hedging arrangements, consent to 5.2 What are the reporting requirements in relation to Alternative Investment Funds? transfer of interests, and additional reporting requirements). The FSCMA permits managers of AIFs to treat their investors Reporting or disclosure requirements to the investors differently in terms of distributions of investment profits and losses by prescribing such different treatments in their fund constituent A hedge fund manager is not subject to any mandatory reporting documents, but is silent on whether side letters can be used to arrange or disclosure requirement to the investors. In comparison, a PEF such differential treatments other than distributions of investment GP is required to provide a list of the limited partners (LPs) of the profit and losses or to what extent they could be used. Generally PEF it manages with the fund’s financial statements together with a speaking, the legality of side letter agreements should be reviewed description of the operation and investments of the PEF at least on from the perspective of the investment managers’ fiduciary duty and a semi-annual basis. the general obligation to prevent conflicts of interest among investors. Regulatory reporting requirements – hedge funds For hedge funds, the manager must report the following information regarding each hedge fund it manages to the FSS: 6 Taxation (i) On an annual basis, where the assets under management (AUM) of the fund are less than KRW10 billion (US$8.7 6.1 What is the tax treatment of the principal forms of million). Alternative Investment Funds? (ii) On a semi-annual basis, where the AUM of the fund are KRW10 billion or more: Taxation of AIFs varies depending upon the legal entity form or type ■ the current status of transactions of derivative products; of fund. In addition, treatment under the relevant tax law may vary ■ the current status of guarantees and provision of fund depending on whether the fund meets the following requirements to assets as collateral; and be regarded as a “qualifying fund”: ■ the current status of borrowings. (a) the fund is a collective investment vehicle in accordance with In addition, if any of the following events occurs in relation to a the FSCMA; hedge fund, its investment manager must report such event to the (b) the accounts are settled and the funds are distributed once or FSS within two weeks: more on an annual basis; and ■ the fund’s Asset-Liability Ratio surpasses 400%; (c) capital investment/entrustment and redemption is in cash. ■ the fund holds a non-performing asset; and Taxation of trust type funds ■ a decision on redemption (including deferral of There is no taxation at the level of the fund and taxable income is redemption) is made with regard to an open-ended fund. recognised once the income is distributed to the investors. Finally, a hedge fund manager must file an amendment report within Any income distributed by qualifying funds is taxed as dividends, two weeks when there is a change in any item reported in the fund whereas income distribution by funds that do not meet the requirement establishment report of a hedge fund it manages. of qualifying funds is taxed according to the nature of that income

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(i.e., interest, dividends, capital gains, and business profits). The tax withheld by the AIFs are creditable when the corporate income tax treatment of qualifying and non-qualifying funds applies equally to or the individual income tax is calculated. Pension funds, as not- resident and non-resident investors. for-profit corporations, are also subject to the corporate income tax; When the income is distributed to corporate shareholders, the however, the effective tax rates are generally significantly lower distribution, classified as dividend or interest income, is subject to for such pension funds because of special reserves that they can set corporate income taxes at the corporate shareholder level. aside and deduct from taxable income. Further, pension funds such as the National Pension Fund or Korea Post are a part of the Korean Taxation of company type funds government body and thus will not be subject to the corporate At the fund level, company type funds are subject to corporate income tax or the individual income tax. income tax on investment profits from investment operations. After For a non-resident investor, the income from the qualifying fund Korea taxes are paid at the corporate level, net profits are distributed to is subject to the withholding tax at the rate of 22% (including local each investor in the form of dividend income or investment income and taxed again at the investor level. However, if 90% or more of surtax) or the applicable withholding rate under the relevant tax treaty. the distributable income is paid out as dividends, such amount is deducted from the taxable income, which enables the fund to avoid 6.5 Is it necessary or advisable to obtain a tax ruling from double taxation at the fund level. the tax or regulatory authorities prior to establishing Taxation of partnership type funds an Alternative Investment Fund? Partnership type funds are deemed to be pass-through entities for tax It is not mandatory that a tax ruling be obtained from the tax purposes. At the level of the investor, income arising from qualifying funds is regarded as dividend income and taxed accordingly. Income authorities prior to establishing an AIF. One may consider obtaining from non-qualifying funds is taxed based on the nature of the income tax rulings to gain a level of certainty in the structure, if there exists received. The applicable tax rates and treatment for resident and non- uncertainty in investment fund structures. resident investors are identical to trust type funds discussed above. Taxation of private equity funds 6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act Domestic PEFs may elect to be treated as pass-through entities for tax 2010 (FATCA) and other similar information reporting purposes such that income tax does not incur at the level of the PEF. regimes such as the Common Reporting Standard? If the PEF does not make such an election, the fund itself, as opposed to the investors, is liable for taxes at applicable corporate income Korea signed the Model 1 Intergovernmental Agreement (IGA) with tax rates. Income distributed to investors may be entitled to look- the United States on June 10, 2015. Korea has been treated as if it through treatment on the underlying income if certain conditions are had an IGA in effect since June 30, 2014 following the issuance met, provided that beneficial ownership requirements have been met. of implementation regulations issued by Korea’s Financial Services Commission on June 18, 2014. As of October 29, 2014, the Korean 6.2 What is the tax treatment of the principal forms of government also entered into the Multilateral Competent Authority investment manager / adviser? Agreement (MCAA) to exchange information with the jurisdictions committed to the Common Reporting Standard (CRS). On February Management/advisory vehicles that are established or tax-resident 16, 2017, Korea amended its regulations for implementing the in Korea are subject to corporate income taxes on any form of profit- automatic exchange of financial information with foreign countries related returns, including carried interest and management fees. under the CRS and FATCA.

6.3 Are there any establishment or transfer taxes levied 6.7 Are there any other material tax issues? in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the There are no other material tax issues. investor’s interest?

6.8 What steps are being taken to implement the OECD’s There is generally no tax implication when investors participate in Action Plan on Base Erosion and Profit-Shifting an AIF or the transfer investor’s interest. Having said that, however, (BEPS), in particular Actions 6 and 7, insofar as they if there is any gain incurred in connection with transfer of the affect Alternative Investment Funds’ operations? investor’s interest, such income would be subject to withholding tax (including local surtax) at the tax rate of 15.4% (for residents) and Korea has amended its tax laws to include master file/local file and 22% (for non-residents). Country-by-Country Reporting requirements under Action 13 of OECD’s Action Plan on BEPS. Although a substance-over-form 6.4 What is the tax treatment of (a) resident, (b) non- rule already applies under local tax laws to deny treaty benefits resident, and (c) pension fund investors in Alternative in treaty abuse situations, Korea has not yet indicated its plans on Investment Funds? adopting Action 6 on preventing treaty abuse. Korea has also not yet taken any steps in regards to Action 7 on permanent establishment With respect to resident investors, the income from the qualifying issues. fund is subject to withholding tax at the rate of 15.4% (including local surtax). 7 Reforms For a resident corporation, any income from the qualifying fund is subject to corporate income tax at the progressive tax rates ranging from 11% to 24.2%. For a resident individual, any income from 7.1 What reforms (if any) are proposed? the qualifying fund is subject to the individual income tax at the progressive tax rates ranging from 6.6% to 41.8%. Any taxes Currently, there are no proposed reforms.

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Tongeun Kim Dongwook Kang Bae, Kim & Lee LLC Bae, Kim & Lee LLC 133 Teheran-ro 133 Teheran-ro Gangnam-gu, Seoul 06133 Gangnam-gu, Seoul 06133 Republic of Korea Republic of Korea

Tel: +82 2 3404 0256 Tel: +82 2 3404 6538 Email: [email protected] Fax: +82 2 3404 7304 URL: www.bkl.co.kr Email: [email protected] URL: www.bkl.co.kr Korea

Tongeun Kim is a partner (Senior Foreign Attorney) in the firm’s Dongwook Kang is a partner in the firm’s Financial Services Practice Mergers and Acquisitions Practice Group and Financial Services Group. His practice is mainly focused on funds and investment Practice Group. He has a broad range of experience on cross-border management, financial regulations, and alternative investments. He M&A, joint venture and foreign investment transactions as well as has extensive experiences of advising Korean and foreign investment general corporate matters. He also advises on asset management managers, institutional investors, and financial companies. He regularly (funds) and securities regulatory issues and assists in obtaining deals with regulatory and transactional issues related to the formation regulatory approvals and licences, as well as registering securities and marketing of local and offshore funds, including registration of and fund products under the Financial Investment Services and offshore funds with the Korean regulator. Capital Markets Act. He has represented major international financial institutions and blue chip companies on their investments and other projects in Korea. Mr. Kim has been consistently ranked as a leading corporate/M&A expert and also in the banking/finance/funds area for Korea inChambers Global Guide to the World’s Leading Lawyers and other international legal publications including ALB’s annual “Hot 100” list of practitioners in 2011. He previously worked at Clifford Chance in Hong Kong. Mr. Kim graduated from Brown University and received an M.A. from the University of Chicago and his J.D. from the University of Southern California Law School. He is a member of the California Bar. His native languages are Korean and English.

Founded in 1980, Bae, Kim & Lee LLC is one of the leading law firms in Korea and in Asia with over 500 professionals and supporting specialists. As the first Korean law firm to set up offices in China and the UAE, BKL maintains seven overseas offices in Beijing, Shanghai, Dubai, Hong Kong, Hanoi, Ho Chi Minh City and Yangon. With over 20 practice groups specialised in virtually every area of interest for business clients, including corporate, M&A, securities and financial services, international arbitration, tax, litigation and intellectual property, BKL is the second-largest law firm in Korea by size and revenue. BKL established an internal Pro Bono Committee in 2002 for the first time among Korean law firms and has devoted itself to fulfilling its corporate social responsibilities since its inception. BKL received the Best CSR Practices Award at the 1st Korea Bar Association Awards and the Human Rights Award of Korea by the National Human Rights Commission in 2014, and was named in the ALB CSR List 2016.

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Liechtenstein

König Rebholz Zechberger Attorneys at Law Dr. Helene Rebholz

It is worth noting that the Liechtenstein Financial Market Authority, 1 Regulatory Framework which supervises all Liechtenstein financial market service providers (including banks, insurance undertakings, asset managers and 1.1 What legislation governs the establishment and professional trustees), is known to be fairly accessible. The FMA is operation of Alternative Investment Funds? open to discuss projects in advance of or during licensing procedures and generally handles applications in a relatively speedy manner. Liechtenstein has implemented the AIFM Directive 2011/61/EU by Nevertheless, the FMA takes a rather strict approach and adheres issuing the AIFMG (Law on Alternative Investment Fund Managers) strongly to certain principles, such as proper internal governance and AIFMV (Regulation to the Law on Alternative Investment structures and procedures and, specifically, “substance” requirements. Fund Managers). The establishment and operation of Alternative Investment Funds in Liechtenstein is therefore governed by the 1.3 Are Alternative Investment Funds themselves Law on Alternative Investment Fund Managers and the respective required to be licensed, authorised or regulated by a regulations. regulatory body? In addition to the AIFMG, non-UCITS funds can be established and operated in Liechtenstein on the basis of the IUG (Law on Investment With respect to AIFs, the Liechtenstein regulatory regime different- Undertakings) and the corresponding IUV Regulation (Regulation iates between an authorisation requirement and a licence requirement, to the Law on Investment Undertakings). Funds established on depending on the target investor group and the type of AIF. the basis of the IUG have a limited field of application only for An AIF needs to be authorised by the FMA, if the AIFM intends to Alternative Investment Funds (AIFs) for certain types and categories market the AIF: of investors (i.e. one-investor funds, family funds, funds for a pre- ■ exclusively to professional investors in Liechtenstein; or existing interest group and funds for a group of affiliated companies). ■ to professional investors as well as retail investors in Liechtenstein and the AIF is not required to be licensed. 1.2 Are managers or advisers to Alternative Investment An AIF is required to be licensed by the FMA, if it is marketed to Funds required to be licensed, authorised or retail investors in Liechtenstein and: regulated by a regulatory body? ■ the AIF is leveraged; Alternative Investment Fund Managers (on the basis of the AIFMG ■ investor protection and public interest require a licence; or as well as the IUG) are required to be licensed by the Liechtenstein ■ the investment strategy of the AIF does not conform with any Financial Market Authority (FMA). of the types of funds provided for in the AIFMV (see question 1.4). The Liechtenstein AIFMG offers, next to the regular AIFM licence, the possibility to obtain a licence as a so-called “small AIFM”. A small AIFM has to adhere to certain restrictions with regard to volume 1.4 Does the regulatory regime distinguish between of investments and investment strategies and can only manage: open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different ■ assets up to EUR 100m (or the equivalent in CHF), including types of funds) and if so how? assets acquired through leverage; or ■ assets up to EUR 500m (or the equivalent in CHF) (i) if The Liechtenstein regulatory regime does not distinguish between the fund does not use leverage, and (ii) if redemption rights open-ended and closed-ended AIFs; both are required to be cannot be exercised for the first five years after the initial authorised or licensed (see question 1.3 above). Both must also investment. have professional asset and risk management and must safeguard For small AIFMs, a simplified licensing regime applies. that a proper liquidity management is in place in order to always In addition, the AIFMG provides for specific licences for allow for redemptions in line with the constituent documents of the administrators, risk managers, fund distributors, etc. fund. Whether “advisers” to an AIFM are required to be licensed depends The AIFMV determines different types of funds conditioned upon on the tasks and competences of such advisers. If the “advice” is certain investment strategies (i.e. AIFs for liquid investments, AIFs “extensive” and factually has to be considered portfolio management for illiquid investments, AIFs for liquid and illiquid investments, rather than “advice”, a licence is required. and leveraged AIFs).

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So-called “small AIFMs” (see question 1.5) are under the obligation “Small AIFMs” to assign each AIF they manage to a certain type of fund determined The AIFMG draws a distinction between (regular) AIFMs and by the AIFMV and ensure compliance with the respective provisions “small AIFMs”. The latter are subject to a fast-track licensing set out in the AIFMV. process (vereinfachtes Zulassungsverfahren, Registrierung) which Other AIFMs and “small AIFMs” who choose to obtain a licence as does not provide for a minimum capital requirement. However, a (regular) AIFM may – subject to their licence, their constituting “small AIFMs” cannot take advantage of the EEA/EU passport documents and the provisions of the AIFMG: (once available). Therefore, they may as well exercise their option ■ invest the assets of their AIFs in any type of instrument or to obtain a licence as a regular AIFM. investment; and In contrast to other AIFMs, “small AIFMs” are required to appoint ■ manage the assets of the respective AIFs using all applicable a licensed administrator and to conclude an organisational contract investment strategies, techniques and instruments. (Organisationsvertrag) with this administrator, providing for Liechtenstein In other words, AIFMs and “small AIFMs” with a regular AIFM organisational requirements, risk and liquidity management, as well licence do not have to adhere to a certain type of fund determined as the administration of the small AIFM. under the AIFMV. Hence, they are restricted neither with regard to certain types of investments nor with respect to certain investment 1.6 Are there local residence or other local qualification strategies, techniques and instruments associated with particular requirements? types of funds. Yes, there are. As a prerequisite to obtain an AIFM licence under 1.5 What does the authorisation process involve? Liechtenstein law, the AIFM must have its effective place of management (Hauptverwaltung) and registered office (Sitz) in A Liechtenstein AIFM requires a licence issued by the FMA in order Liechtenstein. to be allowed to exercise its business activities. The AIFM licence In general, the directors/executives of an AIFM which actively is recognised in all Member States of the EEA and entitles the AIFM conducts business in Liechtenstein must be “fit and proper” and to manage and distribute AIFs within the EEA (“EEA/EU passport”) have their residence in, or at least close to, Liechtenstein (within once the AIFMD has been adopted and has become part of the EEA a distance of a one-hour car drive), so that they are able to comply Treaty. with their obligations as directors/executives. Additional personnel In addition to asset management, which is comprised of portfolio are required for an AIFM to make sure that the AIFM can properly management and risk management, the AIFM licence may include fulfil all its duties and can properly supervise delegated tasks. administration and other fund-related services. The prerequisites There are no specific statutory rules as to the set-up of the for the licence vary depending on the type and extent of licence organisation of the AIFM and its effective place of management. sought. The AIFM may delegate certain tasks to other (licensed) The “proper management” requirement, however, is rather strictly professionals in and outside of Liechtenstein to a certain extent. interpreted by the local Financial Market Authority (FMA), so the The minimum capital of an AIFM is EUR 125,000; in the case of a organisation and business case must be thoroughly considered, self-managed AIF, a minimum capital of EUR 300,000 is required. established and presented to the FMA. When applying for a licence, the AIFM has to prove and confirm The AIFM may delegate some of its tasks to other service providers, that it is appropriately organised; specifically that it has sufficient provided such delegation is objectively justified (e.g. by assigning competent personnel to cover the duties performed by the AIFM, a specialised investment manager to a specific asset class or as well as to supervise delegated tasks. The AIFM must have a investment strategy) and the delegate is sufficiently qualified and management board of at least two people, who are sufficiently has the resources to perform the delegated tasks. If the AIFM professionally qualified and of sufficient personal integrity (“fit and delegates the portfolio management or the risk management, the proper”) to carry out their tasks. delegate must be a regulated entity (except that the FMA approves The business plan to be filed when applying for a licence further delegation to an unregulated service provider in exceptional cases). has to provide information on the shareholder, who also has to be Delegation of portfolio management or risk management to a service “fit and proper” in order to ensure sound and proper management provider domiciled in a third country (i.e. a non-EEA country) is of the entity. only possible if cooperation agreements between the FMA and the third-country regulator are in place. Upon receipt of the complete application form and documents, the FMA has to decide within three months whether to grant the AIFM licence to the applicant. 1.7 What service providers are required? As for the authorisation process regarding AIFs, the AIFM has to file a notification of distribution (Vertriebsanzeige, including a The business activity of an AIFM is to manage one or more AIFs, i.e. business plan, constituent documents, etc.) for each AIF with the basically asset management. Under the AIFMG, asset management FMA, which in turn only checks whether the provisions of the means at least portfolio management and risk management. The AIFM AIFM Act are observed. If this is the case, the FMA grants the has to perform either portfolio management or risk management authorisation within 20 working days from receipt of all required itself. Other fund-related tasks and services (such as administration, notification documents. marketing, evaluation and accounting services in the widest sense) can be performed by the AIFM but may also be delegated. As for the licence process regarding AIFs, the AIFM has to file an application (Antrag auf Zulassung) for each AIF with the FMA. If the organisation of the AIFM does not guarantee that the The FMA issues a notice of receipt within three working days from evaluation of the AIFs and portfolio management, as well as the the receipt of the complete application documents, and within 20 compensation policy, are functionally independent, the evaluation additional working days – or in the case of a self-managed AIF, of AIFs must be conducted by an external service provider. within a maximum of three months – it decides whether or not to Furthermore, the AIFM in any event has to appoint a depository and grant a licence. an auditor for each AIF.

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AIFMs must also appoint licensed administrators, risk managers In general, the investors’ assets are strictly separated from the AIFM’s and/or distributors if they do not perform those services themselves. assets. The investor is not liable for obligations of the AIFM and the In addition, the AIFM may appoint a prime broker according to the managed assets are not accessible for obligations of the AIFM. Any provisions of the constituent documents of the respective AIF. “liability” is therefore limited to loss of assets invested in the AIF. Delegation of tasks and cooperation with a range of licensed service providers is common in Liechtenstein given that the AIFM structures 2.3 What are the principal legal structures used for in Liechtenstein are often relatively small. Rather than offering managers and advisers of Alternative Investment the whole range of fund services themselves, many AIFMs in Funds? Liechtenstein prefer to operate on the basis of long-standing business relationships with service providers performing certain fractions of Under the AIFMG, an AIFM is defined as any legal person whose fund services on a specialised basis (e.g. specialised risk managers). regular business is managing one or more AIFs. Hence, the AIFM may adopt the form of any legal person provided for under Liechtenstein Liechtenstein law, especially under the PGR. 1.8 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 The Liechtenstein Financial Market Authority (FMA) has entered in open-ended or closed-ended funds? into bilateral Memoranda of Understanding (MoU) providing for cooperation and information-sharing with the regulatory authorities If, when and to what extent redemptions or transfers may be of Austria, the British Virgin Islands, China, Hong Kong, Jersey, restricted must be set out in the constituent documents of the AIF. Russia, San Marino, Slovenia and Switzerland. There are no specific provisions in the law in this respect apart from general “code of conduct” requirements and the obligation of the Furthermore, the Liechtenstein FMA has concluded MoUs specifically AIFM to comply with the management directives and restrictions relating to the AIFMD and AIFMD-related information exchange with set forth in the constituent documents of the respective fund. 45 regulatory authorities within and outside the EEA. An updated list is available on the homepage of the FMA at www.fma-li.li. Furthermore, a cooperation agreement between all regulatory 2.5 Are there any legislative restrictions on transfers of authorities of the EEA, Central Banks and Ministers of Finance of investors’ interests in Alternative Investment Funds? the European Union was entered into in 2010 relating to questions of financial stability within the EEA. No; investors are generally free to transfer their interests subject to eventual restrictions as set forth in the constituent documents of the fund, e.g. disallowing the selling-on of units of a fund for qualified 2 Fund Structures investors to retail investors, etc.

2.1 What are the principal legal structures used for 3 Marketing Alternative Investment Funds?

The principal legal structures for AIFs are regulated in the AIFMG 3.1 What legislation governs the production and offering and include: of marketing materials? ■ Common Contractual Fund (CCF)/Fonds Commun de Place- ment (FCP) Structure – Contractual Form (“Investmentfonds”, The production and offering of marketing materials are governed Vertragsform). in detail by the AIFMG, the AIFMV and the Law on Securities Prospectus (WPPG). ■ (Authorised) Unit Trust Structure – Collective Trust (“Kollektivtreuhänderschaft”, Treuhänderschaft). ■ Société d’Investissement à Capital Variable (SICAV) Structure 3.2 What are the key content requirements for marketing or Open-Ended Investment Company (OEIC) Structure materials, whether due to legal requirements or (“Investmentgesellschaft”, Satzungsform). customary practice? ■ Liechtenstein LP Structure (“Anlage-Kommanditgesell- schaft”, Personengesellschaft). The key content requirements for marketing materials include, ■ PLC Structure (“Anlage-Kommanditärengesellschaft”, amongst others: Personengesellschaft). ■ a description of the investment strategy and aims of the AIF; ■ Other legal forms: ■ a description of the most relevant legal aspects, including The government may implement by ordinance that an AIF information regarding the competent court, the applicable domiciled in Liechtenstein may adopt a legal form different law and the recognition/enforcement of judgments; and from those listed above as long as the protection of investors ■ the identity and obligations of all service providers involved and the public interest are preserved. – especially the AIFM, the depository and the auditor – including a description of investors’ rights.

2.2 Please describe the limited liability of investors. The legislation mentioned in question 3.1 above provides for a detailed list of content requirements for marketing materials, The limited liability of investors depends on the legal structure whereas the requirements are more extensive if the AIF is distributed chosen for the respective AIF. It may be regulated in contractual to retail investors as well. provisions, statutory provisions and/or general legal provisions, The marketing materials containing the prescribed investor especially those of the Law on Persons and Companies (PGR). information must be made available to investors in the form

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specified in the constituent documents of the AIF; with respect to does not need to be provided and no prospectus is necessary. retail investors, this should be in the form of a prospectus. “Qualified investors” include professional investors as well as retail investors who meet certain conditions set out in the AIFMV.

3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? 3.7 Are there additional restrictions on marketing to public bodies such as government pension funds? The marketing materials to be offered to potential investors (mentioned in question 3.2 above) must be filed with the FMA in the No, there are no such restrictions. course of the authorisation or licence process of the respective AIF.

3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process? Liechtenstein 3.4 What restrictions are there on marketing Alternative Investment Funds? Depending on the tasks to be fulfilled by such intermediaries, this It is important to note that the EEA/EU passport for AIFMs which may qualify as marketing or distribution of funds, in which case can be obtained under the AIFMG in transposition of the AIFM the intermediary needs the appropriate licence (e.g. as a distributor Directive, once the Directive is adopted into the EEA Treaty, only under the AIFMG, as an asset manager under the Liechtenstein Act encompasses the distribution of AIFs to professional investors; the on Asset Management Companies, etc.). distribution of AIFs to retail investors, however, remains subject to national regimes and is not regulated at EU level. 3.9 Are there any restrictions on the participation in Therefore, the provisions of the AIFMG regarding retail investors Alternative Investments Funds by particular types of (referred to in question 3.5 below) are specific to Liechtenstein and investors, such as financial institutions (whether as do not transpose provisions of the AIFM Directive. sponsors or investors)?

No, not on the basis of the AIFMG. 3.5 Can Alternative Investment Funds be marketed to retail investors? 4 Investments Under Liechtenstein law, AIFs can be marketed to retail investors in Liechtenstein if certain conditions are fulfilled. In this case, authorisation of the AIF may not suffice and a licence must be 4.1 Are there any restrictions on the types of activities that obtained in order to gain access to retail investors in Liechtenstein can be performed by Alternative Investment Funds? if, for example, the AIF uses leverage (see question 1.3). No, generally not. There may be restrictions depending on the Furthermore, the AIFM regime in Liechtenstein imposes additional “regime” that the AIFM/AIF wishes to have applied (see question duties on the AIFM if it is marketed to Liechtenstein retail investors. 1.4 above). If the AIFM targets retail investors in other states, it must meet their respective regulatory requirements with regard to retail investors which are, as already mentioned, not (yet) harmonised at the 4.2 Are there any limitations on the types of investments European level. that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or otherwise? 3.6 What qualification requirements must be carried out in relation to prospective investors? No, generally not. There may be restrictions depending on the “regime” that the AIFM/AIF wishes to have applied (see question The terminology of the AIFMG differentiates between “professional 1.4 above). investors”, “retail investors” and “qualified investors”. The obligations of the AIFM vary depending on the type of investor, as does the 4.3 Are there any restrictions on borrowing by the availability of certain types of AIFs to investors. Alternative Investment Fund? As mentioned above, the question of whether an authorisation or a licence is required for the distribution of an AIF depends, inter alia, The AIFM has to set limits for the maximum extent of leverage with on whether it is distributed exclusively to professional investors or respect to each AIF. In addition, the AIFM has to prove to the FMA to retail investors as well. that the respective limits on leverage are appropriate and have not Importantly, if the AIF is intended to be distributed to professional been exceeded at any time. investors only, the requested documents for the authorisation to be filed with the FMA must include a description of measures taken to prevent its distribution to retail investors. 5 Disclosure of Information Under the AIFMG, “professional investors” are defined as professional clients as determined in the Markets in Financial 5.1 What public disclosure must the Alternative Instruments Directive (MiFID). “Retail investors” are investors Investment Fund make? other than professional investors. In the case of AIFs which (i) comply with one of the fund types as An AIF has to prepare financial statements/annual reports within six defined in the AIFMV (see question 1.4), and (ii) are distributed to months from the end of the financial year and has to make them so-called “qualified investors” only, certain distribution information available to the regulatory authority and investors.

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With regard to a non-resident investor, no Liechtenstein taxes accrue, 5.2 What are the reporting requirements in relation to nor are any deducted, on the basis of the Liechtenstein Tax Act. Alternative Investment Funds? However, a non-resident investor may be subject to taxation in accordance with his home-country tax laws with regard to fund The AIFMG imposes detailed reporting requirements on the AIFM units held or income/proceeds received. In addition, depending with respect to each AIF towards investors on the one hand and on the domicile of the investor, withholding tax obligations may towards the FMA on the other. apply on the basis of bilateral or multilateral treaties entered into Alongside specific reports, e.g. in case of amendments to the by Liechtenstein. organisation of the AIFM or relevant amendments with regard to certain AIFs (e.g. changes in risk profile, liquidity management, etc.), regular reports are mandatory, such as quarterly statistics, 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing regular yearly accounts as well as macroeconomic information (i.e. Liechtenstein the most important markets and financial instruments, and the most an Alternative Investment Fund? relevant risk positions and risk concentrations). No, generally not. A ruling may, however, be advisable in the case of certain specific AIFs or AIFM structures. 5.3 Is the use of side letters restricted?

“Side letters” will – depending on their contents – regularly form 6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act part of the constituent documents that must be submitted in the 2010 (FATCA) and other similar information reporting course of the authorisation or licensing process for each AIF. regimes such as the Common Reporting Standard?

6 Taxation Liechtenstein entered into the FATCA Agreement Model 1 on 16 May 2014. On that basis, and on the basis of the implementing law, Liechtenstein financial institutions are obliged to report accounts 6.1 What is the tax treatment of the principal forms of of US persons to the Liechtenstein Tax Authority. Data will then Alternative Investment Funds? be forwarded to the US Internal Revenue Service (IRS) by the Liechtenstein Tax Authority. Liechtenstein Investment Funds are subject to Liechtenstein tax at Liechtenstein is also one of the so-called “early adopters” of the 12.5% of taxable income. Income from managed assets does not Organisation for Economic Co-operation and Development’s form part of taxable income (Art. 48 Abs 1 lit g) Tax Act). (OECD) Common Reporting Standards and has enacted a national automatic exchange of information implementation law (the AIA 6.2 What is the tax treatment of the principal forms of Act), which entered into force in January 2016. investment manager / adviser? 6.7 Are there any other material tax issues? According to the provisions of the Tax Act, legal persons (explicitly including investment undertakings) are subject to unrestricted tax Liechtenstein has a growing network of double tax agreements liability if their domicile or effective place of management is in and tax information exchange agreements (TIEAs) which allow Liechtenstein. for clarification of the tax situation of individual investors from However, inter alia: numerous countries with regard to Liechtenstein fund solutions. ■ dividends arising from participations in domestic or foreign legal persons; 6.8 What steps are being taken to implement the OECD’s ■ capital gains from the sale or liquidation of participations in Action Plan on Base Erosion and Profit-Shifting domestic or foreign legal persons; and (BEPS), in particular Actions 6 and 7, insofar as they ■ corporate income from the managed assets of investment affect Alternative Investment Funds’ operations? undertakings, are entirely tax-exempt. The Double Tax Agreements Liechtenstein has entered into in recent years are all in full compliance with the OECD Model Treaties and will be interpreted on the basis of available OECD commentary 6.3 Are there any establishment or transfer taxes levied literature. in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the investor’s interest? 7 Reforms

No, not from a Liechtenstein law point of view, if a non-Liechtenstein investor does invest, transfer or de-invest. The investor may, however, 7.1 What reforms (if any) are proposed? be subject to taxation in accordance with his home-country tax laws. The AIFMG is in the process of being revised. The goal of the 6.4 What is the tax treatment of (a) resident, (b) non- reform is to clarify certain technical issues which have turned out to resident, and (c) pension fund investors in Alternative be too complicated or unclear in practical handling and to simplify Investment Funds? the AIFMG even further (e.g. by deleting the distinction between the authorisation and the licensing of AIFs). A Liechtenstein investor holding units in an AIF is subject to wealth tax; income tax does not accrue.

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Dr. Helene Rebholz König Rebholz Zechberger Attorneys at Law Landstrasse 36 9495 Triesen Liechtenstein

Tel: +423 399 10 80 Email: [email protected] URL: www.akrz-law.com

Helene Rebholz is a founding partner of König Rebholz Zechberger

Liechtenstein Attorneys at Law. She holds a law degree from the University of Innsbruck (Austria) and an M.A.S./LL.M. in European Law. She further qualified as a CAS Fund Business Expert in 2011. Helene Rebholz is admitted to the Bar in Liechtenstein and also practises law in Austria. Helene started practising law in Liechtenstein in 2001. In 2003, she joined the former law firm Batliner Gasser where she soon became Managing Partner. She headed the M&A, Banking, Insurance and Investment Funds Practice Group. In 2015, she founded König Rebholz Zechberger Attorneys at Law together with MMag. Benedikt König and Mag. Florian Zechberger.

König Rebholz Zechberger Attorneys at Law was established in January 2015. König Rebholz Zechberger Attorneys at Law specialises in private client litigation (Liechtenstein foundations, trusts and establishments), advice and representation in the field of “financial services” in the widest sense (banking law, investment funds, “MiFID” and insurance law) and M&A transactions. In addition, the firm has a “generalist” approach, offering legal advice and representing clients in a broad number of areas of the law (corporate law, commercial litigation, legal assistance requests, white collar crime, etc.). All partners are experienced practitioners and have been practising law in Liechtenstein and Austria for many years, frequently dealing with complex international cases. With regard to Alternative Investment Funds, the firm regularly provides advice to banks, fund management companies, asset managers, etc. with regard to the structuring of funds or distribution activities with a cross-border element.

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Luxembourg Corinne Philippe

Bonn & Schmitt Amélie Thevenart

Moreover, the AIFM can be (a) an externally appointed entity, or 1 Regulatory Framework where the legal form of the AIF permits internal management, (b) the AIF itself. 1.1 What legislation governs the establishment and Securitisation vehicles, which are governed by the Luxembourg law operation of Alternative Investment Funds? of 22 March 2004 on securitisation vehicles, as amended, should not normally fall into the scope of the AIFM Law unless certain criteria In Luxembourg, an Alternative Investment Fund (“AIF”) within the exist which would make the AIFM Law applicable. meaning of the AIFM Law, as defined below, will usually take the form of: (i) a fund authorised under Part II of the Luxembourg law 1.2 Are managers or advisers to Alternative Investment of 17 December 2010 on undertakings for collective investment, Funds required to be licensed, authorised or as amended (“Part II Fund” and “2010 Law” respectively); (ii) a regulated by a regulatory body? specialised investment fund (“SIF”) under the law of 13 February 2007 relating to specialised investment funds, as amended (the “SIF In practice, all Luxembourg entities that manage AIFs (based Law”); (iii) a “SICAR” (société d’investissement à capital risque), in Luxembourg, in another EU country or outside the European being an investment company for investment exclusively in risk Union) must be regulated and are supervised by the CSSF and will capital, which is typically an investment vehicle used for private be subject to the AIFM Law. Investment managers managing the equity from time to time and is governed by the Luxembourg law portfolio of an AIF may be located outside Luxembourg. If they are of 15 June 2004 on companies investing in risk capital, as amended supervised by a recognised financial supervisory authority, the CSSF (the “SICAR Law”); or (iv) a reserved alternative investment fund will generally approve the appointment based on due diligence on (“RAIF”) under the law of 23 July 2016 on reserved alternative updated information if not yet approved by the CSSF. In the case investment funds (the “RAIF Law”). of an unregulated investment manager, the CSSF will carry out a The above-mentioned vehicles are regulated directly by the due diligence check regarding the expertise, track record, financial Luxembourg financial supervisory authority (Commission de standing and reputation of this unregulated entity. Surveillance du Secteur Financier – “CSSF”) with the exception of the RAIF which is not subject to prior authorisation or direct supervision. Luxembourg-based entities acting as advisers to AIFs are also regulated by the CSSF and must be licensed pursuant to the law of Certain unregulated investment structures may also qualify as AIFs; 5 April 1993 on the financial sector, as amended (the “1993 Law”), for example, the SOPARFI (société de participations financières), unless certain exemptions apply. a Luxembourg company set up in the form of one of the permitted corporate structures available under Luxembourg law and governed by the Law of August 1915 on commercial companies, as amended 1.3 Are Alternative Investment Funds themselves (the “1915 Law”). required to be licensed, authorised or regulated by a regulatory body? The implementation into national law of European Directive 2011/61/EU of the European Parliament in relation to the supervision Part II Funds, SIFs and SICARs are required to be authorised by the of managers of alternative investment funds (“AIFMD”) has CSSF prior to being established in Luxembourg. changed the regulatory environment for managers of AIFs and for AIFs themselves. Luxembourg was one of the first EU Member RAIFs are not required to be authorised by the CSSF. States to successfully transpose the AIFMD into its national law, As mentioned above, it is also possible for an unregulated structure with the introduction of the law of 12 July 2013 relating to managers to qualify as an AIF and such entity will not be authorised or of alternative investment funds (the “AIFM Law”). regulated by the CSSF. All AIFs established in Luxembourg must be managed by an alternative investment fund manager (“AIFM”) who shall be 1.4 Does the regulatory regime distinguish between responsible for ensuring compliance with the AIFM Law. The open-ended and closed-ended Alternative Investment AIFM will be subject to either the simplified registration regime Funds (or otherwise differentiate between different or the full-scope authorisation regime, depending on (i) the assets types of funds) and if so how? under management, and (ii) whether the AIFM will market the shares on a cross-border basis to investors located outside Luxembourg. AIFs in Luxembourg can be open- or closed-ended and such

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information is required to be disclosed in the offering document of of the management company (or AIFM). However, they are the AIF. typically delegated by the AIFM to a third party who must be authorised as a credit institution or as a professional in The laws governing Part II Funds, SIFs, SICARs and RAIFs all the financial sector (“PSF”) under applicable Luxembourg permit the creation of the fund as a single compartment fund or an legislation, complying with the relevant laws and regulatory umbrella fund with more than one compartment. requirements. A further differentiation exists depending on the investment vehicle ■ Auditor: the financial statements of the AIF must be audited utilised by the AIF in Luxembourg. The 2010 Law, the SIF Law by an independent approved Luxembourg auditor with and the RAIF law permit the creation of either a contractual appropriate professional experience. vehicle without legal personality (fonds commun de placement – “FCP”) or an investment company. The latter may be organised 1.8 What co-operation or information sharing agreements as either an investment company with variable capital (société Luxembourg have been entered into with other governments or d’investissement à capital variable – “SICAV”) or fixed capital regulators? (société d’investissement à capital fixe – “SICAF”). The types of investment vehicle used for Luxembourg AIFs are The CSSF has signed the Memorandum of Understanding (“MoU”) described in more detail in section 2 below. on Cooperation between the Financial Supervisory Authorities, Central Banks and Finance Ministries of the EU on Cross-Border Financial Stability, dated 1 June 2008. The text of the MoU, 1.5 What does the authorisation process involve? including the list of signatories, is available on the CSSF website, via the following link: http://www.cssf.lu/fileadmin/files/Documents_ The file submitted to the CSSF requesting AIFM authorisation must internationaux/MoU_2008_Final_1_June_2008.pdf. contain certain information at the minimum, including, inter alia: a completed application questionnaire (available on the CSSF website); The CSSF has also signed MoUs with a certain number of constitutional documents of the AIF; service provider agreements; supervisory authorities of the financial sector, which lay down the information on the governing bodies and senior managers; and drafts principles and terms relating to cooperation between authorities of the various policies and procedures that the AIFM will need to have on issues relating to prudential supervision. The list of signatories in place to comply with organisational and operational requirements. is available on the CSSF website, via the following link: http:// www.cssf.lu/en/eu-international/subnav/col3/memoranda-of- The CSSF has three months from the date of acknowledging receipt understanding/. of the file to complete its examination process, during which the clock may be stopped where additional information is requested. Pursuant to the AIFM Law and further to ESMA’s approval of Once approved, the AIFM is entered on the CSSF’s Official List of cooperation arrangements between EU securities regulators and their global counterparts, as of February 2015, the CSSF had signed AIFMs, which is tantamount to formal authorisation. cooperation agreements with 44 non-EU authorities. ESMA has published a list of the AIFMD MoUs signed between EU regulators 1.6 Are there local residence or other local qualification (including the CSSF), and the up-to-date list can be found via the requirements? following link: https://www.esma.europa.eu/sites/default/files/ library/2015/11/aifmd_mous_signed_by_eu_authorities_by_16_ The registered office and central administration of the AIF/ september_15.xlsx. AIFM must be located in Luxembourg in order to qualify as a In addition, the CSSF is a member of the European System of Luxembourg-based AIF/AIFM. The depositary bank appointed by Financial Supervision (“ESFS”), created with effect from 1 January the AIF must also be located in Luxembourg. In addition, an AIFM 2011, and participates in each of the following entities comprising should have at least two conducting officers who permanently reside the ESFS: in Luxembourg. ■ the European Banking Authority (“EBA”); ■ the European Securities and Markets Authority (“ESMA”); 1.7 What service providers are required? and ■ the European Insurance and Occupational Pensions Authority A Luxembourg AIF will either be an internally managed AIF, where (“EIOPA”). its legal form allows it, or it will appoint an external AIFM under a The European supervisory authorities gather representatives of all separate agreement pursuant to which the latter will be responsible the supervisory authorities of the EU Member States and contribute for the administration, portfolio management, risk management and to establishing common regulatory and supervisory standards marketing of the AIF. An AIF established in the form of an FCP and practices and ensuring that the Member States’ supervisory must appoint an external AIFM, as it does not have its own legal authorities apply a single set of harmonised rules and consistent personality. supervisory practices. The following additional service providers will be required: In addition to the above, Luxembourg currently has around 77 ■ Depositary: must be a Luxembourg credit institution or an double taxation treaties (“DTT”) in force. The 46 DTTs entered entity licensed under the 1993 Law as an investment firm into between Luxembourg and a third country include the provisions authorised to provide depositary services. The depositary is of Article 26 §5 on exchange of information of the Organisation for responsible for the safekeeping and supervision of the assets Economic Co-operation and Development (“OECD”) Model Tax belonging to the AIF. Convention on Income and on Capital, so that an effective exchange ■ Paying Agent: a Paying Agent will be required in Luxembourg of information in tax matters is ensured. and in each country where the AIF is distributed, and generally the depositary (and its network) will provide these services. Luxembourg signed the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the “Convention”) on 29 ■ Administration Agent/Domiciliation Agent/Registrar and May 2013. The Convention was ratified in Luxembourg by the Law Transfer Agent: these functions all fall within the competency dated 26 May 2014 and entered into force on 1 November 2014.

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such transfers include transfers to “certain prohibited persons” (e.g. 2 Fund Structures citizens of the United States) or transfers to persons who do not meet the criteria of a well-informed investor (investisseur averti) as 2.1 What are the principal legal structures used for defined in the SICAR, SIF and RAIF Laws, respectively. Alternative Investment Funds? 2.5 Are there any legislative restrictions on transfers of AIFs can be set up in the form of a contractual vehicle without investors’ interests in Alternative Investment Funds? legal personality (fonds commun de placement – “FCP”), or by an investment company adopting one of the corporate forms available There are no legislative restrictions on such transfers. Please refer under the 1915 Law; namely, as a public limited liability company to the answer to question 2.4 above. (société anonyme), private limited company (société à responsabilité limitée), partnership limited by shares (société en commandite Luxembourg par actions – “SCA”), corporate limited partnership (société en 3 Marketing commandite simple – “SCS”), or special limited partnership (société en commandite speciale – “SCSp”). The SCSp was introduced into Luxembourg law in 2013. It has no legal personality and mirrors the 3.1 What legislation governs the production and offering of marketing materials? Anglo-Saxon limited partnership vehicle. The SCSp can be formed with a minimum of one general partner and one limited partner, and the partnership exists as of the time of signature of the partnership The post-authorisation marketing of AIFs is governed by the 2010 agreement, which can be formed under private seal or by notarial Law, SIF Law, SICAR Law and AIFM Law. CSSF circulars and/ deed and offers the advantage of being a flexible corporate structure or CSSF regulations are also part of the legal framework, specifying for investment funds. Luxembourg has seen a rise in demand for the application of the laws. SCSps; 493 new registrations of SCPs occurred between May 2016 and March 2017. In fact, most of the fund structures currently being 3.2 What are the key content requirements for marketing established in Luxembourg take the form of either an SCA, SCS or materials, whether due to legal requirements or SCSp, having a Luxembourg-based general partner. customary practice?

Investors should review all relevant AIF documentation before 2.2 Please describe the limited liability of investors. deciding on an investment in a Luxembourg AIF, in particular the offering document, articles of association (or management Liability of the limited partner/ordinary investor is generally limited regulations) and annual reports (as available). to the amount committed by each investor to the fund. General partners’ liability is unlimited but will typically be limited where the general partner takes the form of a Luxembourg limited liability 3.3 Do the marketing or legal documents need to be company. registered with or approved by the local regulator?

The core fund documents need to be approved by the local regulator 2.3 What are the principal legal structures used for (offering document, articles of association, etc.). However, managers and advisers of Alternative Investment presentations, flyers, or similar short-form marketing documentation Funds? do not need to be approved by the Luxembourg regulators. Investment Managers and Advisers of AIFs in Luxembourg typically exist in the form of a public limited company (société anonyme) or 3.4 What restrictions are there on marketing Alternative a private limited company (société à responsabilité limitée) and are Investment Funds? governed by the 1915 Law. Certain Luxembourg AIF products are generally reserved for, and may only be advertised to, well-informed investors (investisseurs 2.4 Are there any limits on the manager’s ability to avertis) (see question 3.6 for details). In particular, SIFs, SICARs restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? and RAIFs may only be offered to well-informed investors. For Part II Funds, there are no restrictions. These may be offered to retail There are no limits prescribed by law concerning a manager’s ability investors, unless other specific laws forbid this. to restrict redemptions, but it is market practice in Luxembourg to Luxembourg AIFs regulated under the 2010 Law, SIF Law, provide for the occasional suspension of the net asset value (“NAV ”) SICAR or RAIF Law are automatically authorised for marketing calculation and the subscription, conversion and redemption of in Luxembourg. With respect to Luxembourg non-regulated AIFs, shares or units of the AIF, in certain prescribed circumstances their marketing is limited to professional investors. which must be disclosed in the offering document (e.g. a breakdown The AIFM Law contains detailed provisions applicable to of communication devices/political instability/emergency). In Luxembourg AIFMs and non-Luxembourg AIFMs who are addition, any such suspension must be communicated to the marketing/distributing units/shares of Luxembourg AIFs or non- investors by the AIFM in an appropriate manner. There is no Luxembourg AIFs in Luxembourg and abroad, respectively. Only distinction between open- and closed-ended AIFs in this regard. authorised AIFMs can benefit from the marketing passport available The AIFs must value their assets and calculate the net asset value at under the AIFM Law and thus, in order to market EU AIFs in least once per year. Transfer of shares or units owned by investors Luxembourg, the AIFMs established in another Member State must to another investor will, in practice, not be restricted, although be authorised under the AIFMD. a closed-ended AIF might typically establish certain transfer “Marketing”, under Luxembourg regulatory rules, means a direct restrictions. Examples of where the manager will be able to restrict or indirect offering or placement, at the initiative of the AIFM or

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on behalf of the AIFM of units or shares of an AIF it manages, to or with investors domiciled or with a registered office in the EU. 4 Investments Hence, any active marketing activities are covered by the term. It is currently understood that reverse solicitation, i.e. the placement of 4.1 Are there any restrictions on the types of activities that AIF units/shares at the initiative of an investor, is not covered by the can be performed by Alternative Investment Funds? term and hence does not trigger AIFMD requirements. There is no restriction in terms of eligible assets of a SIF. 3.5 Can Alternative Investment Funds be marketed to For a SICAR, the eligible assets are restricted to direct and/or retail investors? indirect investment in securities that represent risk capital. Risk capital consists mainly of high-risk investments made in view of Only Part II Funds can be marketed to retail investors in their launch, development or listing on the stock exchange. Such Luxembourg Luxembourg, while SIFs, SICARs and RAIFs can only be marketed investments may take various forms and are normally completed to well-informed investors as defined in these laws. The marketing with a medium-term view. of non-regulated EU AIFs is limited to professional investors. For a RAIF, the restrictions are equivalent to those of a SIF or EU AIFMs authorised in another EU Member State can market units/ SICAR depending on the investment policy. shares of EU AIFs they manage to retail investors in Luxembourg, For Part II Funds, the eligible assets are unrestricted. provided that (i) the EU AIF is subject to permanent supervision performed by a supervisory authority set up by law in order to ensure the protection of investors, and (ii) the EU AIF is furthermore subject 4.2 Are there any limitations on the types of investments in its home Member State to regulations offering a level of protection that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or for investors, as well as to a prudential supervision considered by the otherwise? CSSF as equivalent to that provided for in Luxembourg legislation. The 2010 Law imposes additional conditions on the marketing There are no limitations pertaining to types of investments available to of such non-Luxembourg AIFs, including the appointment of a AIFs in Luxembourg, other than those referred to above for SICARs. Luxembourg paying agent and prior authorisation by the CSSF. SIFs are subject to minimum diversification requirements in that they cannot invest more than 30 per cent of their net assets or commitments 3.6 What qualification requirements must be carried out in the same type of security issued by the same issuer. There are no risk in relation to prospective investors? diversification limits for SICARs, while Part II Funds are, in general, subject to a risk diversification of 20 per cent of their net assets. Investment in a SIF, SICAR or RAIF is reserved for “well-informed investors” requiring a limited level of protection and looking for investment flexibility suitable to their particular expertise and needs. 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? Pursuant to the SIF, SICAR and RAIF Laws, “well-informed” investors are those which meet the criteria of being either: (i) institutional investors; (ii) professional investors; or (iii) other Applicable Luxembourg laws do not provide for any restrictions. investors who confirm in writing that they adhere to the status of However, AIFs must mention in their offering document the level “well-informed” investors and who either: (a) invest a minimum of leverage they use. 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 in 5 Disclosure of Information the SIF, SICAR or RAIF. 5.1 What public disclosure must the Alternative 3.7 Are there additional restrictions on marketing to Investment Fund make? public bodies such as government pension funds? AIFs are required to produce and make available to investors an Luxembourg laws do not provide any specific restrictions. annual report. In addition, Part II Funds should publish an unaudited semi-annual report. If mentioned in the documentation, the AIFM must publish the net 3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process? asset value (or provide it to investors on an individual basis). Any other publication must be fulfilled as mentioned in the offering document of the AIF. Luxembourg or foreign intermediaries may act as distributors, provided the latter are authorised by competent authorities to act as Luxembourg AIFMs are also subject to certain minimum trans- distributors of a Luxembourg AIF. parency requirements towards investors and the CSSF, pursuant to The use of nominees who act as intermediaries between investors the AIFM Law, which will necessitate the disclosure of information and the AIF (i.e. where the nominee subscribes for shares/units of concerning the AIFs under management including, inter alia, the AIF in the name and on behalf of an investor) is possible. information on conflicts of interest, liquidity risk, leverage, and remuneration policy.

3.9 Are there any restrictions on the participation in Alternative Investments Funds by particular types of 5.2 What are the reporting requirements in relation to investors, such as financial institutions (whether as Alternative Investment Funds? sponsors or investors)? AIFs must communicate their annual reports to the CSSF. There are Luxembourg law does not provide any specific restrictions. also certain reporting requirements pertaining to risk management

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procedures. Furthermore, the AIFM Law imposes additional reporting services, provided that these services, strictly recharged, requirements on the CSSF, including, inter alia: periodic reports on the form a distinct whole and are essential functions to the principal instruments, markets, exposures and concentrations in which exempt management services, thus leaving technical the AIFMs trade on behalf of the AIFs under management; details on supplies outside of the VAT exemption scope. the assets of the AIFs under management, including risk profiles and Given the breadth of exemptions available, investment liquidity arrangements; information on the overall level of leverage funds and their management companies will, in most employed by each AIF under management; and the acquisition by the cases, derive an almost 100 per cent exempt turnover. For o AIF of certain important holdings in non-listed companies. that reason Circular n 723 denies them the possibility to deduct the input VAT they might have borne on non- The CSSF may require further information on an ad hoc basis if it is exempt services. considered necessary to ensure the effective monitoring of systemic 2. SIFs and RAIFs risk.

a) Subscription tax Luxembourg SIFs and RAIFs (other than RAIFs investing exclusively 5.3 Is the use of side letters restricted? in risk capital) are subject to an annual subscription tax of 0.01 per cent, calculated and payable quarterly on No, it is generally not restricted. However, the use of side letters their aggregate net asset value at the end of the relevant must be disclosed to investors via the AIF’s rules or incorporation quarter. Exemptions are available to certain institutional documents in order to assure the fair treatment of all investors. cash funds, pension pooling funds and microfinance funds as well as funds investing in other funds already subject to the subscription tax. 6 Taxation b) Registration tax 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? (e.g. amendments of articles). c) Direct taxes 1. Part II Funds Luxembourg SIFs and RAIFs (other than RAIFs investing a) Subscription tax exclusively in risk capital) are exempt from Luxembourg Part II Funds are subject to an annual subscription tax of direct taxes. 0.05 per cent, calculated and payable quarterly on their RAIFs investing exclusively in risk capital may opt for a aggregate net assets as valued on the last day of each special tax regime similar to the Luxembourg SICARs. quarter. The value of such units representing assets held Hence RAIFs investing exclusively in risk capital, opting by the said undertaking in other Part II Funds, which for this special tax regime, are fully taxable companies have already paid the subscription tax, is exempt from but benefit from an exemption on any income from this tax. A reduced rate of 0.01 per cent is applicable transferable securities, their transfer, contribution or to undertakings the exclusive object of which is (i) the liquidation (except the annual minimum net wealth tax of collective investment in money-market instruments, and EUR 4,815). (ii) the placing of deposits with credit institutions. d) VAT b) Registration tax Regarding VAT, please refer to the above-mentioned rules Part II Funds are subject, upon their incorporation as well in the context of Part II Funds. as upon any further corporate events (like amendment to the articles of incorporation or transfer of seat), to a fixed registration duty of EUR 75 (regardless of the number 6.2 What is the tax treatment of the principal forms of of compartments). Part II Funds organised as FCPs are investment manager / adviser? outside the registration duty’s scope (since FCPs are contractual agreements without legal personality). Investment management companies established in Luxembourg will c) Direct taxes be subject to Luxembourg corporate income tax, municipal business Part II Funds are exempt from any Luxembourg income, tax and net wealth tax at standard rates. Their taxable base may, withholding, capital gains or net wealth taxes. however, be reduced by various deductions. Fund management d) Value-added tax (“VAT”) services supplied in Luxembourg are in principle exempt from VAT Pursuant to Circular no 723 of 29 December 2006, the (for more details, please refer to the above-mentioned VAT rules in Luxembourg tax authorities have expressly recognised the context of Part II Funds). that all investment funds are VAT-taxable persons (it being Private portfolio managers and investment advisers are professionals understood that in the case of an FCP the management and thus fall under the rules of individual taxation for independent company is the VAT-taxable person). Consequently, activities. Luxembourg VAT will, as a general rule, be applicable under the reverse charge mechanism whereby a A withholding tax of 20 per cent is levied on the gross amount of the Luxembourg-based fund (or, in case of an FCP, the director fees, which is creditable against the director’s Luxembourg management company) receives services from suppliers tax. Such withholding tax should be final for a non-resident director located in other EU Member States. provided that the director fees do not exceed EUR 100,000 per year A VAT exemption (article 44 (1) (d) of the Luxembourg and constitute the only Luxembourg professional source income. VAT law) is available to portfolio management services, The AIFM Law allows, under certain conditions (like the tax investment advisory services and certain administrative residency of the employee or the full return of committed capital services, while mere technical services, supervision and to investors prior to payment to employees), the taxation of carried control services supplied by a depositary are not exempt services. The VAT exemption on administrative and interest realised by certain employees of the AIF or the AIFM as management services is also available to outsourced “speculative income”, with an applicable tax rate of 25 per cent of

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the average tax rate applicable to the adjusted income, i.e. a marginal income tax rate of 11.44 per cent (including the employment fund 6.5 Is it necessary or advisable to obtain a tax ruling from contribution) as from 2017. The AIFM Law defines “carried the tax or regulatory authorities prior to establishing an Alternative Investment Fund? 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 share in the profits of the AIF accrued to the AIFM as a return on any There is no requirement to obtain a tax ruling in Luxembourg prior investment by the AIFM into the AIF. to establishing an AIF. However, depending on the structure (e.g. the use of specific financial instruments), it might be advisable The minimum corporate tax introduced for certain holding to secure the structure, including the AIF, with the Luxembourg companies as of 1 January 2011 (further amended as of 1 January tax authorities through a tax ruling. The tax ruling procedure is 2013) has been replaced by a minimum net wealth tax as of 1 January subject to an administrative fee ranging from EUR 3,000 to 10,000 2016, which may apply to management and advisory companies in

Luxembourg depending on the complexity of the case. certain circumstances. Depending on the assets of the management and advisory company, the minimum net wealth tax is either a fixed rate of EUR 4,815 or a progressive rate ranging from EUR 535 to 6.6 What steps have been or are being taken to implement 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 United States of America signed the Alternative Investment Fund or the transfer of the Intergovernmental Agreement Model 1 on 28 March 2014, which investor’s interest? was amended by an exchange of notes signed on 31 March 2015 and 1 April 2015 and ratified by the law of 24 July 2015. The first No establishment or transfer taxes are in principle levied in reporting obligations concerned the 2014 calendar year, which the Luxembourg in connection with an investor’s participation in an Foreign Financial Institutions had to meet by 31 August 2015. The AIF or the transfer of the investor’s interest. reporting for the 2015 calendar year and all following calendar years needs to be realised before 30 June of each following year. 6.4 What is the tax treatment of (a) resident, (b) non- As per the Common Reporting Standards, Luxembourg signed resident, and (c) pension fund investors in Alternative the OECD Multilateral Convention on Mutual Administrative Investment Funds? Assistance in Tax Matters, which provides a legal basis for the automatic exchange of tax information and which was approved No withholding tax is levied on distributions made by a regulated by the law of 26 May 2014. Luxembourg is part of the 53 “early Luxembourg AIF to resident, non-resident or pension fund investors. adopters” of the OECD’s Common Reporting Standards. The Distributions made by an unregulated Luxembourg AIF to resident, reporting for the 2017 calendar year and all following calendar years non-resident or pension fund investors should be subject to a 15 needs to be realised before 30 June of each following year. per cent withholding tax on dividends unless a reduced rate or an exemption is available under a double tax treaty or the participation The Common Reporting Standards have also been implemented at exemption regime. EU level by Directive 2014/107/EU, which has been transposed in Luxembourg by the law of 18 December 2015. The reporting for Income distributed by the Luxembourg AIF should be taxed in the the 2016 calendar year and all following calendar years needs to be country of residence of the non-resident or pension fund investor. realised before 30 June of each following year. Capital gains realised by non-residents may only be taxed in Luxembourg (i) in case of unregulated AIFs, (ii) where no double tax treaty is available, and (iii) under certain specific circumstances. 6.7 Are there any other material tax issues? Luxembourg-resident individual or corporate investors have to declare their income in their annual tax return. Under Council Directive 2003/48/EC on the taxation of savings Dividends distributed by and capital gains realised on a regulated income (the “Savings Directive”), Luxembourg had elected for AIF should be subject to corporate taxation at the level of the the withholding tax system instead of the exchange of information Luxembourg corporate investor, whereas such dividends and capital system provided by the Savings Directive. However, by the law of gains from an unregulated AIF may benefit from the participation 25 November 2014, which entered into force on 1 January 2015, exemption regime at the level of the Luxembourg corporate investor, Luxembourg abolished this withholding tax system and introduced under certain conditions. an automatic exchange of information. The Savings Directive was Dividends distributed by an AIF to a resident individual investor repealed by Directive 2015/2060/EU on 10 November 2015 and are subject to the progressive tax rates depending on the investor’s will no longer be applicable once all reporting obligations have been annual income and matrimonial situation, the marginal income complied with. tax rate being 45.78 per cent (including the employment fund A tax issue which may arise is whether Luxembourg AIFs managed contribution). Capital gains arising from the sale of AIF shares or by a non-Luxembourg AIFM lose their Luxembourg tax residency units, other than speculative gains (which have been realised within due to the AIFM being established abroad and are thus taxed six months after the acquisition), are exempt from taxation in the according to the laws of the seat of the AIFM. This, however, hands of a Luxembourg-resident individual investor, except if the depends on the content of the laws of the jurisdiction of the AIFM. investor holds more than 10 per cent of the capital of the investment In the opposite sense, i.e. having a non-Luxembourg AIF and a company (SICAV or SICAF), the 10 per cent threshold being Luxembourg-based AIFM, the Luxembourg AIFM Law makes clear determined on an umbrella fund basis. that the non-Luxembourg AIF will not be subject to Luxembourg As to pension fund pooling vehicles set up as FCPs, they are tax- taxation. transparent for Luxembourg direct tax purposes and hence are outside the registration duty’s scope.

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Luxembourg transfer pricing regulation (in particular, by determining 6.8 What steps are being taken to implement the OECD’s clearly the arm’s length remuneration between related parties) as Action Plan on Base Erosion and Profit-Shifting from 1 January 2017 and through the non-public country-by-country (BEPS), in particular Actions 6 and 7, insofar as they reporting obligations applicable as from the financial year 2016. affect Alternative Investment Funds’ operations?

Luxembourg is actively implementing all of the OECD’s BEPS 7 Reforms Action Plans through various domestic measures. BEPS Action Plan 1 regarding VAT on business-to-consumer digital 7.1 What reforms (if any) are proposed? services was implemented in domestic law on 1 January 2015. Luxembourg implemented BEPS Action Plan 2 on hybrid mismatches No major reforms are currently proposed to impact directly AIFMs by transposing Directive 2014/86/EU on the prevention of double Luxembourg in 2017. non-taxation deriving from hybrid loan arrangements. A new bill is currently under review by the Chambre des Députés BEPS Action Plans 3 and 4 on CFCs and interest deductions are of Luxembourg related to the implementation of EU Regulation subject to an EU anti-tax avoidance directive adopted in July 2016, 2015/751. This bill shall, inter alia, clarify the depositary liability which must be transposed into domestic law by 31 December 2018. of Part II Funds depending on their target investors. BEPS Action Plan 5 on harmful tax practices led to the repeal of the The MiFID II Directive is not directly applicable to AIFMs but, in previous IP Box regime in Luxembourg on 1 July 2016. all likelihood, it may be applicable to their distributors and other In particular, with regard to (i) BEPS Action Plan 6 on treaty abuse, intermediaries. Luxembourg introduced a general anti-abuse rule when it transposed The EU Regulation on Packaged Retail and Insurance-Based Directive 2015/121 amending the EU Parent-Subsidiary Directive, Investment Products (EU 1286/2014) (“PRIIPs”) shall impact AIFs and (ii) BEPS Action Plan 7 on the prevention of artificial avoidance sold to retail investors. of permanent establishment status and BEPS Action Plan 14 on dispute resolution, developments are under way in connection with the OECD’s Multilateral Convention for which a signature is expected in Acknowledgment June 2017, but for which the implementation date is as yet unknown. The authors would like to thank Alex Schmitt for his invaluable BEPS Action Plans 8 to 10 on transfer pricing and Action Plan 13 on contribution to this chapter. Me Schmitt is a Founding Partner at Bonn transfer pricing documentation and country-by-country reporting have & Schmitt and is specialised in banking and finance and investment also been implemented in Luxembourg through the amendment of funds. Tel: +352 27 855 / Email: [email protected].

Corinne Philippe Amélie Thevenart Bonn & Schmitt Bonn & Schmitt 148, Avenue de la Faïencerie 148, Avenue de la Faïencerie L-1511 L-1511 Luxembourg Luxembourg

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

Corinne Philippe is a Senior Counsel at Bonn & Schmitt and is Amélie Thevenart is a Counsel at Bonn & Schmitt, specialised in specialised in investment management. Corinne has 30 years of investment funds. She has 10 years of experience in Luxembourg experience in the area of investment funds. investment funds law, both in-house at regulated Luxembourg management companies, and at the law firm Bonn & Schmitt. She assists in the setting up, merger and liquidation of different Luxembourg funds (UCITS/SIF/SICAR/Part II/non-regulated AIFs). Amélie has also acquired solid experience in the drafting and reviewing of different types of fund-related agreements (e.g. depositary agreements, investment management agreements, distribution agreements and management company agreements).

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

VdA Vieira de Almeida Carlos Filipe Couto

investing in (i) securities or financial assets, and (ii) real estate (real 1 Regulatory Framework estate investment funds). Both AIF types may be open or closed- ended. 1.1 What legislation governs the establishment and In general terms, open-ended AIFs target the retail market and operation of Alternative Investment Funds? closed-ended AIFs target high-net-worth or professional investors, thus in open-ended AIFs scrutiny by the BoM tends to be tighter. Activity involving the management, investment and marketing of Alternative Investment Funds (AIFs) is mainly regulated by: the 1.5 What does the authorisation process involve? Undertakings for Collective Investment Law, enacted by Decree no. 54/99 of 8 September 1999 and amended by Decree no. 36/2005 of 29 August (the UCI Law), which sets out most of the rules In a nutshell, the authorisation request for setting up AIFs is filed relating to AIFs; Decree no. 56/2004 of 10 December 2004, as with the BoM and the relevant AIF’s manager must provide the BoM amended by Decree no. 31/2006 of 30 August, which implemented with the relevant AIF’s documentation, notably the regulation and a the Regulation on Credit and Financial Institutions (Banking Law); copy of the agreement to be executed between the fund manager and Decree-Law no. 4/2009 of 24 July 2009 (Mozambique Securities the depositary. Market Code); and Ministerial Ordinance no. 10/99 of 24 February Furthermore, the BoM may request further information from the 1999 (Financial Intermediation Activities Regulation). fund manager. The Bank of Mozambique (BoM) is the relevant supervisory authority. If applicable, authorisation should be given within 45 days of receipt of either the relevant documentation or any supplementary 1.2 Are managers or advisers to Alternative Investment information or amendments to the documents required by the BoM. Funds required to be licensed, authorised or If at the end of such period the applicants have not been notified of regulated by a regulatory body? the authorisation, this means it has been tacitly refused. The marketing of the AIF’s units shall start within 90 days of the Yes. Fund managers, as financial institutions, are subject to the granting of the relevant authorisation. BoM’s supervision; accordingly, the relevant authorisation procedure shall be filed with the BoM. 1.6 Are there local residence or other local qualification The UCI Law does not foresee any de minimis exception or fast-track requirements? authorisation procedure, therefore all fund managers, regardless of the type of assets under management, will need to comply, in No, there are not. general terms, with the same requirements.

1.7 What service providers are required? 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body? 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 Yes. The setting up of AIFs is subject to authorisation with the estate appraisers. BoM, which is the competent regulator to conduct the supervision of It should be noted that the UCI Law does not expressly foresee the AIF management activity and ancillary service providers as well as existence of an auditor and, in the case of real estate AIFs, real estate distribution and compliance with the general rules applying to AIFs, appraisers; however, the existence of such two entities in the case notably in connection with the protection of investors’ interests. 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. 1.4 Does the regulatory regime distinguish between Furthermore, the AIF may also have, but is not legally compelled to open-ended and closed-ended Alternative Investment have, distributors or entities that will market its units, although such Funds (or otherwise differentiate between different entities are more common in open-ended AIFs. types of funds) and if so how?

Yes. In general terms, the UCI Law distinguishes between AIFs

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As far as restriction of transfers in open-ended funds is concerned, 1.8 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 in respect of the Alternative Investment Fund Managers Directive transfer of the units from investors to third parties. (AIFMD) or AIFs. 2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds? 2 Fund Structures Mozambique No. However, it is important to bear in mind the limitations 2.1 What are the principal legal structures used for established on foreign investment, which place constraints on Alternative Investment Funds? transfers abroad of profits or dividends obtained in Mozambique. Therefore, prior to an investment in a Mozambique AIF being Under the UCI Law and subject to the licensing procedures described performed, the thresholds and requirements to be met by such an in question 1.5 above, an AIF may only adopt the contractual structure investment shall be assessed, on a case-by-case basis, as well as with no legal personality. This is the classic structure and requires the provisions applicable to the transfer abroad of the profits or that the AIF be managed by a separate fund manager. The investors’ dividends obtained pursuant to the redemption of the units/shares or or unitholders’ interests in such funds are called units (unidades de liquidation of the AIF. participação). 3 Marketing 2.2 Please describe the limited liability of investors.

3.1 What legislation governs the production and offering The assets of an AIF are only liable for its debts. Accordingly, the of marketing materials? AIF will not bear liability for the debts of investors, fund managers, depositaries, distributors or other AIFs. Likewise, the investors are not personally liable for the debts of the AIF. Please refer to question 1.1 above, as well as to the Consumer Law, approved by Law no. 22/2009 of 28 September 2009, and the The statement of the preceding paragraph does not stem expressly Advertising Code, approved by Decree no. 65/2004 of 31 December from the UCI Law, but rather from general legal principles applicable 2004. to investment in AIFs.

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

There are no drafts available; neither does the UCI Law set out An AIF needs to be managed, depending on its scope, by a: express provisions addressing marketing materials. However, ■ fund manager (financial institution), which may only manage providing information on the investment policy, markets targeted, AIFs investing in securities and other financial assets; main features (identification of the relevant entities, terms and ■ real estate fund manager (financial institution), which may conditions of the investment, links to the legal documents) and only manage AIFs investing in real estate funds; or historic returns of the AIF is perceived as common practice for fund ■ commercial or investment bank, but only in the case of managers and other distribution entities. closed-ended AIFs. Lastly, on a general note, the information contained in the marketing materials must comply with the following principles: legality; 2.4 Are there any limits on the manager’s ability to truthfulness; objectivity; adequacy; opportunity; and clarity. restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? 3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator? The UCI Law is silent in respect of the fund manager’s ability to limit redemptions in open-ended funds, but considering that such type of AIFs is, in general, targeted towards retail investors, the BoM will Yes. AIFs’ prospectuses, as well as their amendments, are subject to most certainly scrutinise this matter. In fact, such possibility would prior BoM authorisation. need to be clearly set out in the AIF’s regulation, which is analysed Furthermore, all marketing actions in respect of an AIF shall inform throughout the authorisation procedure. the addressee of the existence of the prospectus and the place where Moreover, the draft AIF regulation, approved by the UCI Law, it may be consulted. includes a field where conditions set out for redemptions must be described, but only refers to applicable fees, settlement dates and 3.4 What restrictions are there on marketing Alternative the criteria for the determination of which units will be redeemed. Investment Funds? The fund manager may suspend the units’ redemption, in the case of an abnormal situation that may impact the usual running of the The concept of marketing or distribution of AIFs is not defined in market or jeopardise the interests of the unitholders, provided the the UCI Law. Nevertheless, it should be construed as comprising BoM is immediately informed of said suspension. all activity directed towards investors with a view to promoting or

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proposing the subscription of the relevant AIF’s units, regardless of the means of communication used. 4 Investments Nonetheless, the general principles laid down in question 3.2 above in respect of marketing will be equally applicable to all marketing 4.1 Are there any restrictions on the types of activities activities and materials. that can be performed by Alternative Investment Funds? Furthermore, attention is drawn to the fact that the reverse solicitation is not officially recognised or defined under Mozambican law and it Yes. AIFs may only focus on investment activities and their is thus not an official exemption expressly foreseen in the applicable investments must comply with the general rules applicable to legal framework, but rather a tolerated practice. Such practice financial instruments markets. consists of an investor, on its own initiative and without having been engaged for such purpose by the distributor, requesting information Mozambique on a specific AIF. However, a case-by-case assessment needs to 4.2 Are there any limitations on the types of investments be conducted, considering that the use of the reverse solicitation that can be included in an Alternative Investment exemption may come under the BoM’s scrutiny. Fund’s portfolio whether for diversification reasons or otherwise? Lastly, the requirements and principles laid down in the Consumer Law and Advertising Code in respect of investors, which are deemed Yes. The assets eligible for the portfolio of an AIF will depend on as consumers, shall also be observed. its specific type. In general terms, an AIF cannot hold in its portfolio: (i) units from a 3.5 Can Alternative Investment Funds be marketed to UCI managed by the same fund manager; (ii) assets encumbered with retail investors? in rem security, liens or precautionary proceedings; (iii) securities issued or held by its fund manager; (iv) securities issued or held by Yes, they can. entities that hold more than 10% of the fund manager share capital; (v) securities issued or held by entities 20% or more of whose share 3.6 What qualification requirements must be carried out capital is held by the fund manager; (vi) securities issued or held in relation to prospective investors? by entities that are members of the management body of the fund manager; (vii) securities issued or held by entities 20% or more of There is no particular requirement to be fulfilled in relation to whose share capital is held by members of the management body of investors in AIFs. However, every marketing material must make the fund manager; (viii) securities issued or held by entities whose reference to the existence of the AIF’s prospectus and the place management bodies are comprised of one or more directors of the where it may be consulted by the investor. fund manager; (ix) securities issued or held by entities, pursuant to a placement agreement, by the fund manager, depositary or entities Nonetheless, the fund manager shall ensure that the “know your which hold 10% or more of the share capital of the fund manager, customer” and investment adequacy analyses are properly carried save for public subscription offers targeting securities envisaged to out in relation to the investor, and that the procedures against money be admitted to trading in a stock exchange; and (x) real estate assets laundering and the financing of terrorism are closely respected. in co-ownership. The prohibitions laid down in points (iv) to (viii) do not apply if the 3.7 Are there additional restrictions on marketing to securities at stake are admitted to trading in the Mozambique stock public bodies such as government pension funds? exchange.

No, there are no additional restrictions. Moreover, in general terms, an AIF investing in securities or financial assets may have on its portfolio securities as defined in the Mozambique Securities Code, which comprise shares, bonds, 3.8 Are there any restrictions on the use of intermediaries participation titles in public funds, units and any other similar to assist in the fundraising process? instruments, as well as instruments stemming from rights detached from the previous securities, provided that they are exchangeable in No. However, the relationship established between the intermediaries a secondary market. and the AIF shall be laid down in a written agreement and disclosed An AIF investing in real estate may hold in its portfolio real estate in the AIF’s legal documents. assets registered in the Land Registry Office as pertaining to an Furthermore, the intermediary, when carrying out the fundraising investment fund, and holdings of 50% or more in companies listed process, needs to act within the scope of activities that it is in a stock exchange and whose scope consists in acquiring, selling, authorised to conduct; i.e. if the fundraising process corresponds renting and exploring real estate assets. to AIF marketing, the intermediary will need to be an authorised institution under the applicable legal terms in order to carry out the distribution of securities. 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund?

3.9 Are there any restrictions on the participation in Fund managers may obtain loans on behalf of AIFs under their Alternative Investments Funds by particular types of management, but the loan period cannot exceed 120 days, investors, such as financial institutions (whether as consecutive or not, within a period of one year and up to a maximum sponsors or investors)? of 10% of the AIF’s global value. No. However, the holding of AIFs’ units may have an impact on Moreover, the assets of the AIF can only be encumbered, in any way credit institutions’ and financial institutions’ own funds, which whatsoever, in order to obtain loans within the conditions referred to needs to be assessed on a case-by-case basis. in the preceding paragraph.

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5 Disclosure of Information 6 Taxation

5.1 What public disclosure must the Alternative 6.1 What is the tax treatment of the principal forms of Investment Fund make? Alternative Investment Funds?

AIFs’ legal documents and their updates shall be made available to Considering there is no special tax regime applicable to Collective investors, in the premises of the fund manager, the depositary and, if Investment Vehicles, the general tax regime applies, under which applicable, the distributor. Mozambican-resident entities are subject to a corporate income Considering that legal documents must describe the identity of tax at the rate of 32% (Imposto sobre o Rendimento das Pessoas the fund manager, depositary, auditor, distributors and other AIF Coletivas – IRPC), to be levied on taxable profits obtained on a services providers, the majority of data in connection with the AIF worldwide basis (including income obtained abroad). Mozambique will be made available to the public. However, the identity of the investors in the AIF is not mandatorily 6.2 What is the tax treatment of the principal forms of subject to public disclosure. investment manager / adviser?

There is no special tax treatment or rules applicable in Mozambique 5.2 What are the reporting requirements in relation to Alternative Investment Funds? 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 Fund managers must prepare annual accounts of the AIFs under profits obtained on a worldwide basis). management by 31 December of each year. In the following four months, the fund manager shall publish the balance sheets and profit and loss accounts. 6.3 Are there any establishment or transfer taxes levied The fund manager shall also prepare biannual accounts after the end in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the of the relevant semester. investor’s interest? The annual and biannual accounts shall be made available to investors, as they become ready, in the premises of the fund manager, No establishment or transfer taxes are applicable. the depositary and, if applicable, the distributor. Additionally, with regard to such data, the fund manager shall publish a report containing the activities carried out during the last 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative term, which shall comprise information on the units, transactions, Investment Funds? portfolio evaluation and evolution, etc.

In the case that the marketing entity of the AIF is also a bank of Please note that income deriving from a fund’s units is qualified which the investor is a client, it can provide the above information as investment income, while income deriving from the sale of said together with the investor’s bank statement. fund’s units is qualified as capital gains for tax purposes. The fund manager shall publish in the Mozambique Stock Resident investors Exchange’s official journal, on a monthly basis with reference to Personal Income Tax (Imposto sobre o Rendimento das Pessoas the last day of the immediately preceding month, an inventory of Singulares – IRPS): investment income earned by resident the AIF’s asset portfolio, its global net value and the number of beneficiaries is subject to final withholding tax at a 20% rate. units currently in circulation. The fund manager shall remit this information to the BoM within three days after its publication. The positive difference between capital gains and capital losses assessed by resident beneficiaries on the sale of fund units is Lastly, the fund manager shall submit to the BoM its monthly trail included in the taxable income of the beneficiary and subject to balances, by the 15th day of the following month. taxation at progressive income rates (currently between 10% and 32%). Such balance may be partially exempt according to the fund 5.3 Is the use of side letters restricted? units’ holding period. IRPC: investment income payments to a resident entity are subject The use of side letters that set out particular terms and conditions in to withholding tax at a rate of 20% (to be paid on account of the final respect of governance, investment, etc. of an AIF is not specifically CIT bill). Such income will subsequently be included in the entity’s addressed by the UCI Law. final IRPC tax result. However, in the case of open-ended AIFs, considering that they Capital gains earned on the sale of fund units are also included in the usually target retail investors and/or a broader unrestricted scope of final IRPC tax result of the resident entity and are subject to IRPC investors, the use of side letters which alter any relevant provision at a 32% rate. of the legal documents shall be deemed illegal, considering that as Non-resident investors a general principle fund managers need to abide by the AIF’s legal IRPS: investment income earned by non-resident beneficiaries is documents during the provision of its activity. subject to a final withholding tax at the rate of 20%. In closed-ended AIFs, notably in AIFs targeting only professional As a rule, capital gains taxation on the sale of fund units is similar to investors, we trust that there is a wider margin to set out, namely that which is set out above for resident individuals. through a side letter, specific provisions in respect of certain matters. However, in general terms, as the provisions of the UCI Law are IRPC: investment income paid to a non-resident entity is subject to imperative, any side letter providing for actions in breach of such a 20% final withholding tax rate. legal provisions will be deemed illegal and may subject the fund As a rule, capital gains taxation on the sale of fund units is similar manager to administrative offence proceedings. to that which is set out above for resident corporate beneficiaries.

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Pension funds 6.7 Are there any other material tax issues? Pension funds established and operating according to the Mozambique laws are subject to a similar tax treatment to that mentioned above for resident investors under the IRPC. No, there are not. Pension funds established and operating according to the laws of a foreign jurisdiction are subject to a similar tax treatment to that 6.8 What steps are being taken to implement the OECD’s mentioned above for non-resident investors under the IRPC. Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing Mozambique is not an OECD Member State and we are not aware

Mozambique an Alternative Investment Fund? of any initiative by the Mozambican tax authorities regarding this subject. Mozambique legislation provides for a tax ruling system in which However, the OECD’s Commissioners General and Heads of tax authorities may provide a binding ruling by request. In this Delegations of the Revenue Authorities of Botswana, Lesotho, respect, since there is no specific tax regime for investment funds, Mozambique, Namibia, South Africa, Swaziland and Zambia we would recommend that they request a tax ruling in order to gathered in Pretoria, South Africa on 16 July 2015 in order to obtain more regulatory and tax certainty. This results from the fact discuss BEPS, among other matters. that, after the ruling is issued, the decision obtained by the taxpayer (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 7 Reforms be amended or changed by a court decision.

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 2010 (FATCA) and other similar information reporting The Mozambique capital markets framework has been subject to regimes such as the Common Reporting Standard? several updates in recent years. However, at the present date, the UCI Law remains in urgent need of a complete revamp in order to Mozambique has not entered into any treaty or adhered in any address its shortfalls and the increasing market needs, particularly as way to any mechanism in order to implement either FATCA or the far as real estate AIFs are concerned. Common Reporting Standard and, to the best of our knowledge, Nonetheless, we are not aware of any legislative initiatives aimed at no initiative has been undertaken by the Mozambique authorities amending or updating the UCI Law currently in effect. regarding this matter.

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Pedro Simões Coelho Carlos Filipe Couto VdA Vieira de Almeida VdA Vieira de Almeida Av. Duarte Pacheco, 26 Av. Duarte Pacheco, 26 1070-110 Lisbon 1070-110 Lisbon Portugal Portugal

Tel: +351 21 311 3677 Tel: +351 21 311 3677 Email: [email protected] Email: [email protected] URL: www.vda.pt URL: www.vda.pt

Law Degree, Universidade Livre de Lisboa, Faculty of Law. Law Degree, University of Porto, Faculty of Law. Master’s Degree in

Criminal Law, University of Coimbra, Faculty of Law. Postgraduate Mozambique Areas of practice: banking and finance; collective investment Degree in Corporate Law, University of Coimbra, Faculty of Law. schemes; capital markets; and private equity. Postgraduate Degree in Insurance Law, University of Lisbon, Faculty Pedro is currently head of the firm’s investment funds practice and of Law and Association Internationale de Droit des Assurances (AIDA) a partner in the Banking & Finance Group. He is also responsible – Portuguese Chapter. for the Agency & Trust practice and for the firm’s aviation finance Areas of practice: banking and finance; collective investment team. He has been actively involved in several transactions, mainly schemes; capital markets; private equity; and insurance. focused on the advising, structuring and setting up of collective investment schemes such as mutual funds and real estate investment Carlos is an associate in the Banking & Finance Group, where he funds, infrastructure vehicles, venture capital funds and private equity has participated in several transactions, notably in securities issues. structures. He regularly advises common representatives and trustees, and has assisted with the setting up of collective investment schemes, Languages: Portuguese; English; French; and Spanish. providing ongoing counsel to the respective fund managers. He also Admitted to the Portuguese Bar Association as a specialist in financial provides general regulatory advice to banking entities and is actively law. involved in aviation finance and cross-border factoring transactions. Lastly, he provides ongoing general advice to insurance companies Among other articles, Pedro Simões Coelho has published the and intermediaries on regulatory matters, as well as on pension fund following: schemes and pension fund managers. ■■ Portugal chapter, The International Comparative Legal Guide to: : Portuguese; English; and French. Alternative Investment Funds 2016. Languages Admitted to the Portuguese Bar Association. ■■ The AIFMD Passport and non-EU Alternative Investment Funds, Funds People, 2016. Among other articles, Carlos Filipe Couto has published the following: ■■ Mozambique chapter, The International Comparative Legal Guide ■■ Mozambique chapter, The International Comparative Legal Guide to: Alternative Investment Funds 2016. to: Alternative Investment Funds 2016. ■■ Angola chapter, The International Comparative Legal Guide to: ■■ Fund Management – Portugal, Getting the Deal Through, 2016. Alternative Investment Funds 2016. ■■ The AIFMD Passport and non-EU Alternative Investment Funds, ■■ Fund Management – Portugal, Getting the Deal Through, 2016. Funds People, 2016. ■■ Hedge Funds in Portugal – The European Lawyer Reference ■■ Cross Border Merger of UCITS, Funds People, October 2015. Series, 2011 (first edition) and 2014 (second edition). ■■ Investment Funds in Portugal: Regulatory overview – Practical Law Company Investment Funds Handbook 2012, 2013, 2014, 2015 and 2016. ■■ Fusão Transfronteiriça de Organismos de Investimento Coletivo em Valores Mobiliários – Funds People, 2015.

VdA is an independent Portuguese law firm with 350-plus staff and strong experience in various industries. Over the past 40 years, VdA has been involved in a significant number of pioneering transactions in Portugal and abroad, in some cases together with the most relevant international law firms, with whom we have a strong working relationship. The recognition of VdA’s work is shared with our team and clients, and is reflected in the awards achieved, such as: the “Financial Times 2015 Game Changing Law Firm in Continental Europe”; the “Financial Times Innovative Lawyers in Continental Europe 2013 and 2016”; the “Most Active Law Firm” awarded to VdA by Euronext for five consecutive years; the “Portuguese Law Firm of the Year 2015 and 2016” awarded by the IFLR; the “Portuguese Law Firm of the Year 2016” and “Client Service Law Firm of the Year 2017” awarded by Chambers & Partners; the “Iberian Firm of the Year 2017” awarded by The Lawyer; and the “International Firm of the Year 2017” awarded by Legal Business. VdA, through its VdA Legal Partners (which encompasses all lawyers and independent law firms associated with VdA Vieira de Almeida for the provision of integrated legal services), is actively present in 11 jurisdictions that include all African members of the Community of Portuguese- Speaking Countries (CPLP), as well as Timor-Leste and some of the francophone African countries. Angola – Cape Verde – Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau – Mozambique – Portugal São Tomé and Príncipe – Timor-Leste

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Portugal Pedro Simões Coelho

VdA Vieira de Almeida Manuel Simões de Carvalho

regardless of the asset under management, will need to comply, in 1 Regulatory Framework general terms, with the same requirements. Nonetheless, considering the type of AIFs the fund manager intends 1.1 What legislation governs the establishment and to manage, i.e. AIFs investing in securities or financial assets, operation of Alternative Investment Funds? non-financial assets or real estate, there will be some specific requirements to be met, notably as regards investment policies and The activity involving the management, investment and marketing contracts with service providers. of Alternative Investment Funds (AIFs) is mainly regulated by the Undertakings for Collective Investment Law (Regime Geral dos 1.3 Are Alternative Investment Funds themselves Organismos de Investimento Coletivo), enacted by Law no. 16/2015 required to be licensed, authorised or regulated by a of 24 February 2015 (UCI Law), which implemented in Portugal regulatory body? Directive 2009/65/EC on undertakings for collective investment in transferable securities (UCITS) (UCITS Directive), as amended Yes. The setting up of AIFs is subject to authorisation with from time to time, as well as Directive 2011/61/EU on Alternative the CMVM, which is the competent regulator to undertake the Investment Fund Managers (AIFMD), which sets out most of the rules supervision of AIF managers, ancillary service providers, AIFs’ relating to AIFs, the CMVM Regulation no. 2/2015 on Undertakings distributors and compliance with the general rules applying to AIFs, for Collective Investment (Regulation no. 2/2015), which sets forth notably those relating to the protection of investors’ interests. more specific rules regarding certain aspects of the UCI Lawand the Portuguese Securities Code (Código dos Valores Mobiliários or PSC), enacted by Decree-Law no. 486/99 of 13 November 1999, as 1.4 Does the regulatory regime distinguish between amended from time to time, that entered into force on 1 March 2000. open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different The Portuguese Securities Exchange Commission (Comissão do types of funds) and if so how? Mercado de Valores Mobiliários or CMVM) is the main regulatory body in relation to the aforementioned matters. Yes. In general terms, the UCI Law distinguishes between AIFs Furthermore, AIFs’ managers, as financial institutions, are also investing (i) in securities or financial assets, such as undertakings subject to the Bank of Portugal (Banco de Portugal or BoP) prudential for collective investment in transferable securities that do not supervision, notably in what concerns the applicable provisions of comply with the UCITS Directive limits and are thus classified the Portuguese Banking Law, enacted by Decree-Law no. 298/92 of as AIFs which invest in securities, (ii) in real estate (real estate 31 December, as amended from time to time, and all complementary investment funds), and (iii) in long-term non-financial assets with legal documents in connection therewith. a determinable value. The AIFs described in points (i) and (ii) above may be open- or 1.2 Are managers or advisers to Alternative Investment closed-ended, but the type referred to in point (iii) shall be closed- Funds required to be licensed, authorised or ended. regulated by a regulatory body? In general terms, the open-ended AIFs are addressed to the retail market and the closed-ended AIFs target affluent or professional Yes. Fund managers, as financial institutions, are subject to the investors. As a result, the CMVM’s scrutiny over open-ended AIFs Bank of Portugal’s supervision, notably in respect of prudential tends to be tighter. matters. Moreover, fund managers, as financial intermediaries, are Furthermore, depending on the type of AIF at stake and whether it is also subject to the CMVM’s supervision in what concerns most of open or closed-ended, different investing limits will apply, notably the rules governing their management of AIFs’ activity. in respect of leverage and asset allocation. Therefore, the fund managers’ authorisation procedure will be conducted before the BoP and the CMVM at the same time, but the 1.5 What does the authorisation process involve? final authorisation will only be granted if both regulators agree that the candidate fulfils all legal requirements to manage AIFs. In a nutshell, the authorisation for the setting up of an AIF must The UCI Law did not implement in Portugal the de minimis be filed with the CMVM. In requesting such authorisation, the exemption foreseen in the AIFMD. As a result, all fund managers, relevant AIF’s manager must provide the CMVM with the AIF’s

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documentation, notably the Key Investor Information Document Furthermore, the AIF may also have, but is not legally compelled (KIID) and the full prospectus of the AIF (if applicable), which must to have, distributors or entities that will market the AIF, which is also include the AIF’s regulation. standard practice in the case of open-ended AIFs. In addition, the CMVM must also be given copies of the agreements to be executed between the management company and (i) the depositary, 1.8 What co-operation or information sharing agreements (ii) the distributors or entities that will market the AIF, and (iii) any have been entered into with other governments or other entities that will render services to the AIF or to the AIF manager. regulators? Documents evidencing the acceptance of the rendering of the relevant services by all entities involved in the AIF’s activities must In accordance with the information currently available on the also be provided to the CMVM. CMVM’s website, the CMVM has signed memorandums of Portugal An authorisation is given within 20 days (or 30 days in the case understanding with the competent regulators of other non-EU of self-managed collective investment companies) of the receipt of Member States, namely Albania, Australia, the Bahamas, Bermuda, either the fully documented application or of any supplementary Brazil, the British Virgin Islands, Canada, Canada OSFI, the Cayman information or amendments to the documents required by the Islands, Dubai, Guernsey, Hong Kong MA, Hong Kong SFC, India, CMVM. If at the end of such period the applicants have not yet the Isle of Man, Israel, Japan FSA, Japan MAFF, Japan METI, Jersey, been notified of the deferral of their application, the authorisation is Labuan, the Former Yugoslav Republic of Macedonia, Malaysia, considered to have been tacitly refused. the Maldives, Mauritius, Mexico, Montenegro, Morocco, Pakistan, The CMVM may refuse the authorisation if the applicant does not Singapore, South Africa, South Korea (FSC & FSS), Republika submit the required documentation or if the AIF manager at stake Srpska, Switzerland, Tanzania, Thailand, the United Arab Emirates, engages in irregular management of other investment funds. US CFTC, US SEC and Vietnam. After the authorisation has been granted, an AIF will be fully set up from the moment the first subscription is settled. 2 Fund Structures

1.6 Are there local residence or other local qualification 2.1 What are the principal legal structures used for requirements? Alternative Investment Funds?

Considering that the vast majority of the AIFs in Portugal have been An AIF may take one of two forms or structures, both subject to the set up under the contractual form with no legal personality, they licensing procedures described in question 1.5 above: ought to be managed by a separate fund manager. ■ Contractual structure with no legal personality. This is the The fund manager may be a Portuguese incorporated financial classic structure and requires that the AIF be managed by a institution or an entity providing services on a cross-border basis separate fund manager. The investors’ or participants’ interests under the AIFMD passport legal framework, either through the free in these funds are called units (unidades de participação). provision of services or the freedom of establishment. ■ Collective investment company endowed with legal personality However, it is important to bear in mind that the UCI Law only (sociedade de investimento). Collective investment companies allows for an EU fund manager, passported under AIFMD, to which mainly invest in securities are classified as SIMs manage a Portuguese AIF if such an AIF exclusively targets (sociedades de investimento mobiliários), while those which professional investors, in accordance with the MiFID definition. mainly invest in real estate are classified as SIIs (sociedades de investimento imobiliário). Both SIMs and SIIs may be As regards Portuguese incorporated fund managers, they shall have self-managed or have appointed a third party as their manager, a board of directors comprising at least three members, one of them which must be a duly authorised investment fund manager. necessarily being an independent director (or non-executive director). Participants in these collective investment companies will hold Moreover, pursuant to the recently enacted Law no. 148/2015 of shares (ações). 9 September (Auditing Supervision Framework) the fund manager Lastly, please note that the AIFMD has been partially implemented shall also have an audit board comprising at least three members in Portugal by Law no. 18/2015 of 4 March, relating to Venture (the majority of which need to be considered independent) plus a Capital, Social Entrepreneurship and Specialised Investment sole auditor. (Venture Capital Law). The members of the board of directors and audit board of the fund The Venture Capital Law contains a specific regime applicable to manager need to be previously authorised by the BoP, being subject AIFs investing in equity instruments for a limited period of time as to a thorough suitability assessment during such a procedure. well as other structures, which in spite of sharing similar features Furthermore, the fund manager shall have in place several internal with the UCI’s framework, is perceived under Portuguese law as policies aiming to address the risk of its activity, remuneration being an autonomous subject in relation to the UCIs. That being issues, outsourcing, internal control, evaluation of the assets said, the present questionnaire does not take into account the Venture pertaining to the AIFs under management, anti-money laundering, Capital Law as it falls outside the relevant scope. selection of the members of the boards of directors and audit board, In Portugal, besides one collective investment company endowed all subject to the control of the CMVM, the BoP and to a certain with legal personality that has been set up until the present date, all extent the depository, and entailing permanent record-keeping by AIFs are usually set up under the contractual structure with no legal the fund manager. personality. In an overall assessment of pros and cons of both structures, it should 1.7 What service providers are required? be taken into account that the contractual structure has a long track record in Portugal, being the preferred choice for setting up AIFs, An AIF is legally required in Portugal to have a fund manager (if it as it offers an affordable, simple and well-known model for AIFs. is not endowed with legal personality), a depository, an auditor and, Conversely, the collective investment company endowed with legal in the case of real estate AIFs, real estate appraisal experts. personality is clearly a more complex model that allows, however,

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greater control for the investors over the management of the AIF. As regards the restriction of transfers in open-ended funds, the same Nonetheless, the lack of a decisive incentive to change the current rationale described above in respect of the redemption applies. status quo in respect of the way AIFs are usually set up in Portugal Conversely, regarding closed-ended AIFs, mainly those targeting may be deemed as holding back a better use of the opportunities professional investors, we trust that it is possible to establish in the offered by this structure. AIF’s regulation restrictions on the transfer of units from investors to third parties. 2.2 Please describe the limited liability of investors. 2.5 Are there any legislative restrictions on transfers of Legally, the asset of an AIF is only liable for its debts, thus it will investors’ interests in Alternative Investment Funds?

Portugal not be liable for investors, fund manager, depository, distributors or other AIFs’ debts. Likewise, investors are not personally liable for There are no legislative restrictions. the AIF’s debts and will under no circumstances be burdened by any debt of the AIF. Notwithstanding, in the case of closed-ended real estate AIFs, the 3 Marketing UCI Law allows for the AIF’s regulation to establish that, following a resolution of the investors’ assembly, the investors in a privately 3.1 What legislation governs the production and offering subscribed real estate AIF will take over the debts of the AIF, of marketing materials? provided that the creditors agree so and that it is ensured that the debts arising after the extinction of the AIF will be taken over by Please refer to question 1.1 above. the fund manager.

3.2 What are the key content requirements for marketing 2.3 What are the principal legal structures used for materials, whether due to legal requirements or managers and advisers of Alternative Investment customary practice? Funds? Regulation no. 2/2015 provides minutes for the AIF’s legal documents The AIF, which is not self-managed, will need to be managed by a: (KIID, prospectus and regulation). ■ fund manager (financial institution) authorised to manage On the contrary, there are no minutes available in respect of marketing UCITS, AIFs investing in securities or financial assets materials. Nonetheless, it is common practice for the fund manager and in non-financial assets, or real estate investment funds and other distribution entities to provide information on the investment (sociedade gestora de fundos de investimento mobiliário); policy, markets targeted, main features (identification of the relevant ■ real estate fund manager (financial institution), which may entities, ISIN Code, terms and conditions of the investment, links to only manage real estate funds (sociedade gestora de fundos de investimento imobiliário); or the legal documents) and historic returns of the AIF. ■ credit institution, provided that it has own funds in an amount Pursuant to Regulation no. 2/2015, if the marketing materials no less than €7,500,000, the AIF is closed-ended, and that the disclose return figures, they shall also contain, at least: overall asset of the AIFs under its management falls below (i) ■ The identification of the AIF and fund manager. €100,000,000, if the portfolio includes assets acquired with ■ The reference “the disclosed returns represent past data and resort to the leveraging effect, or (ii) €500,000,000, if the do not guarantee future returns”. AIFs do not resort to leveraging. ■ The identification of the reference period for return figures Considering that it is unusual for an AIF to be self-managed in indicated. Portugal and due to the limitations falling upon credit institutions, ■ Confirmation on whether or not the return figures disclosed almost every AIF is managed by fund managers (financial already include the applicable taxation. institutions) as described in the first two paragraphs above. ■ Information on where and how the KIID and other legal documents may be obtained. 2.4 Are there any limits on the manager’s ability to ■ In cases where the AIF’s units/shares are admitted to trading restrict redemptions in open-ended funds or transfers on a regulated market, identification of the market at stake in open-ended or closed-ended funds? and if the values disclosed are calculated on the basis of the asset value or on the market value of the units/shares. The UCI Law is silent in respect of the ability of the fund manager ■ The warning that investment in the AIF may lead to the to restrict redemptions in open-ended funds, but considering that loss of principal invested, in cases where the AIF does not such types of AIFs in general target retail investors, the CMVM will guarantee payment of the principal invested. most certainly closely scrutinise this matter. In fact, such possibility ■ If the figures disclosed are annualised, but have a reference would need to be clearly set out in the AIF’s regulation, which is period greater than one year, the information disclosed shall analysed during the authorisation procedure. also contain the reference according to which the reference return could only be obtained if the investment was performed Moreover, the minute of the AIF regulation, approved by Regulation during the entire period of reference. no. 2/2015, contains a field where the conditions set out for redemptions must be described, but only as regards the applicable ■ The risk level, with identical emphasis of the return figure, for an identical period of reference. fees, settlement dates and the criteria for the determination of which units/shares will be redeemed. Likewise, Regulation no. 2/2015 Lastly, as a general note, in accordance with the PSC, the information only seems to foresee conditions under which redemptions may be contained in the marketing materials shall be prepared in Portuguese suspended, but not restricted. or followed with a duly legalised translation, and must be complete, true, updated, clear, objective and licit.

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Nonetheless, the fund manager shall ensure that the “know your 3.3 Do the marketing or legal documents need to be customer and investment adequacy analysis” is properly carried registered with or approved by the local regulator? out in relation to the investor, as well as ensure that the anti-money laundering and terrorism financing procedures are respected. Marketing materials in respect of AIFs do not need to be registered We stress that in the case of AIFs exclusively targeting professional or authorised by the CMVM. investors, the fund manager shall guarantee that the investors that do However, an AIF’s legal documents, namely the KIID, the full not meet such eligibility criteria cannot invest in the AIF. prospectus of the AIF and/or the AIF’s regulation, as well as any further amendment to them, need to be registered with the CMVM and publicly disclosed through the CMVM’s website. 3.7 Are there additional restrictions on marketing to

public bodies such as government pension funds? Portugal

3.4 What restrictions are there on marketing Alternative There are no additional restrictions. Investment Funds?

The marketing or distribution (comercialização) of AIFs is very 3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process? broad, being defined as the activity directed towards investors with a view to promoting or proposing the subscription of units/shares, regardless of the means of communication used. No. However, the relationship established between the intermediaries and the AIF shall be put in a written agreement and disclosed in the The entities which are legally permitted to market AIFs are (i) AIF AIF’s legal documents. managers, (ii) depositaries, (iii) financial intermediaries registered or authorised by the CMVM to perform the relevant activities, Furthermore, the intermediary, when carrying out the fundraising namely those of placement and reception and transmission of orders process, needs to act within the scope of activities that it is authorised on behalf of third parties, and (iv) other entities as foreseen in to conduct, i.e. if the fundraising process corresponds to marketing Regulation no. 2/2015 and subject to its authorisation. of the AIF under the UCI Law, the analysis carried out in respect of Furthermore, the concept of reverse solicitation is not an official question 3.4 above will be entirely applicable herein. exemption from the UCI Law requirements, but rather a tolerated practice, which consists of an investor, on its own initiative and 3.9 Are there any restrictions on the participation in without any previous engagement on the part of the distributor, Alternative Investments Funds by particular types of requesting information on the AIF at stake. However, a case-by-case investors, such as financial institutions (whether as assessment needs to be conducted, considering that the new AIFMD sponsors or investors)? framework has induced a greater use of the reverse solicitation expedient, which may come under the CMVM’s scrutiny. No. However, the holding of units/shares in AIFs may have an Virtually every type of marketing falls into the category of distribution impact, that needs to be assessed on a case-by-case basis, on the (comercialização), thus if such is not carried out by a duly licensed own funds and reserves of the credit and financial institutions. entity or under the reverse solicitation exemption, it will be in breach of the UCI Law. 4 Investments A clear distinction must be drawn regarding pre-marketing. If such marketing is conducted in relation to a specific AIF with the intention of triggering a future solicitation by the addressee to 4.1 Are there any restrictions on the types of activities that receive more information and subscribe the AIF, it is rather likely can be performed by Alternative Investment Funds? that the CMVM will consider it to fall within the concept of actual marketing. Conversely, if the pre-marketing has only a general Yes. AIFs can only focus on investment activities and their nature, i.e. seeks to present to the investor the existence and activity management and investment shall comply with the general rules carried out by the fund manager or an overall look at the market, applicable to the financial instruments markets, notably the ones without recommending or referring to any investment opportunity resulting from the implementation carried out in Portugal of the in particular, there are grounds to sustain that we will not be facing a MiFID by the PSC. marketing activity subject to the UCI Law requirements.

4.2 Are there any limitations on the types of investments 3.5 Can Alternative Investment Funds be marketed to that can be included in an Alternative Investment retail investors? Fund’s portfolio whether for diversification reasons or otherwise? Yes. However, AIFs passported under the AIFMD can only be marketed in Portugal to professional investors. Yes. The assets eligible for the portfolio of the AIF will depend on In order for the AIF to be marketed with retail investors in Portugal, its specific type. the fund manager will need to obtain an authorisation of the CMVM, Therefore, AIFs investing in securities or financial assets, such as to be granted after the conclusion of a full registration procedure in undertakings for collective investment in transferable securities that Portugal of the AIF. do not comply with the UCITS Directive limits, may also invest up to 10% of their NAV in units/shares of real estate AIFs. Moreover, the AIF’s regulation shall set out the other relevant limits, otherwise 3.6 What qualification requirements must be carried out in relation to prospective investors? the limits established in the UCITS Directive, as implemented by the UCI Law, shall apply. There is no particular requirement to be fulfilled in relation to Real estate investment funds may invest the majority of their assets investors in AIFs. in real estate, but may also invest in shares of real estate investment

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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 Any information published pursuant to the requirements set out below encumbered, with liens or charges that may render its future disposal is available to investors, usually through the CMVM’s information more difficult, such asin rem security. diffusion system (website). AIFs which invest in long-term non-financial assets with a Moreover, the fund manager must publish and send to the CMVM: determinable value need to hold at least 30% of their NAV in long-

Portugal ■ The annual accounts within three months after the end of the term non-financial assets with a determinable value and may invest financial year. up to 25% of their NAV in real estate, units/shares in real estate ■ The biennial accounts within two months after the end of the investment funds and shares in real estate investment companies. relevant semester. Lastly, we stress that loans originating from AIFs are not allowed in ■ An inventory of the fund’s asset portfolio, its global net value, general terms under Portuguese law. any responsibilities not found in the balance sheet and the number of units currently in circulation, on a monthly basis. 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? 5.3 Is the use of side letters restricted?

Yes. In respect of real estate AIFs, the borrowing limits are 25% The use of side letters that set out particular terms and conditions in of the asset for open-ended AIFs and 33% of the asset for closed- respect of governance, investment, etc. of the AIF is not specifically ended publicly and privately (by more than five investors, which addressed by the UCI Law. are exclusively qualified as professional investors) subscribed However, in the case of open-ended AIFs, considering that they AIFs. Closed-ended AIFs which are privately subscribed by five tend to target retail investors and/or a broader unrestricted scope of or fewer investors or whose investors are exclusively qualified as investors, the use of side letters which alter any relevant provision professional investors, are not subject to any borrowing limit. of the legal documents, shall be deemed illegal, considering that as a As regards AIFs investing in securities or financial assets and AIFs general principle the fund manager needs to abide by the AIF’s legal investing in long-term non-financial assets with a determinable documents during the provision of its activity. value, their regulations shall set out the limits for borrowing, but the In closed-ended AIFs, notably those which are privately subscribed UCI Law is silent in respect of borrowing limits. or targeting only professional investors, we trust that there is a wider margin to set out, namely through a side letter, specific provisions in 5 Disclosure of Information respect of certain matters. However, in general terms, the provisions of the UCI Law are imperative, therefore any side letter providing for actions in breach of such legal provisions will be deemed illegal and 5.1 What public disclosure must the Alternative may subject the fund manager to administrative offence proceedings. Investment Fund make?

Besides the reporting obligations referred to in question 5.2 below, 6 Taxation which elements are made available to the public on the CMVM’s website, the identity of the persons/companies holding qualifying 6.1 What is the tax treatment of the principal forms of shareholdings (10% or more) in the fund manager shall also be Alternative Investment Funds? publicly disclosed. Furthermore, the legal documents of the AIFs and their updates shall Decree-Law no. 7/2015 of 13 January 2015 (DL 7/2015) introduced also be made available on the CMVM’s website. Considering that a new UCI specific tax legal framework, which has been in since 1 the legal documents shall describe the identity of the fund manager, July 2015. depository, auditor, distributors and other services providers to the AIFs are subject to corporate income tax (CIT) at the general rate AIF, the majority of the data in connection with the AIF will be (currently set at 21%), but are exempt from municipal and state made available to the public. surcharges. Taxable income corresponds to the net profit assessed However, the identity of the investors in the AIF is not mandatorily in accordance with an AIF’s accounting standards. subject to public disclosure. However, investment income, rental income and capital gains (except when sourced in a tax haven) are disregarded for taxable 5.2 What are the reporting requirements in relation to profit assessment purposes. Costs incurred in connection with such Alternative Investment Funds? income (including funding costs) are also disregarded for profit assessment purposes. The following are also disregarded for taxable The fund manager must prepare and publish annual and biennial profit assessment purposes: (i) non-deductible expenses under the accounts. These must be made available free of charge at the CIT code; and (ii) income and expenses relative to management fees investors’ request. and other commissions earned by AIFs. The marketing entity must send or make available to the investors a An AIF’s income is not subject to withholding tax. However, statement informing them of: autonomous tax rates established in the CIT Code will apply. ■ the number of units such investor holds; and AIFs that are exclusively investing in money market instruments ■ their value and the aggregate value of the investment. and bank deposits will also be subject to stamp duty calculated on

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their global net asset value at a rate of 0.0025% (per quarter). Other beneficial owner apply. Capital gains arising from the transfer of AIFs will be subject to stamp duty to be levied on their global net units are taxed at a special tax rate of 28% on the positive difference asset value at a rate of 0.0125% (per quarter). between capital gains and losses or the above progressive income tax rates, additional income tax rates and an additional surcharge if the investor opts to aggregate the income received. 6.2 What is the tax treatment of the principal forms of investment manager / adviser? Corporate income tax (CIT): Income payments to a resident entity are subject to withholding tax at a rate of 25% (to be paid on account In the case of AIFs endowed with legal personality which are self- of the final CIT due) and are qualified as income or gains for CIT managed, the tax regime referred to in question 6.1 above applies. purposes. Income payments to omnibus accounts are subject to On the contrary, in the case of AIFs managed by a third party, the a final withholding tax rate of 35%, unless the relevant beneficial Portugal income obtained by such an AIF manager (including capital gains owner of the income is identified, in which case the standard tax earned on the transfer of fund units) is subject to CIT at a rate of 21% rates applicable to the beneficial owner apply. to which a municipal surcharge of up to 1.5% may be applicable A resident entity is subject to CIT at a rate of 21% (if the taxpayer is on taxable profits, depending on the municipality where the AIF a small or medium-sized enterprise as established in Decree-Law no. manager is established (the municipalities have the right to decide 372/2007 of 6 November 2007, the rate is 17% for taxable profits up to if the municipal surcharge is levied and at which rate). Taxable €15,000 and 21% for taxable profits in excess thereof). A resident entity profits are also subject to a progressive state surcharge which has the may also be subject to a municipal surcharge (derrama municipal) of following applicable rates: (i) 3% on the part of the taxable profits up to 1.5% on taxable profits, depending on the municipality where exceeding €1.5 million up to €7.5 million; (ii) 5% on the part of the it is established (the municipalities have the right to decide if the taxable profits exceeding €7.5 million up to €35 million; and (iii) municipal surcharge is levied and at what rate). Taxable profits are 7% on the part of the taxable profits exceeding €35 million. also subject to a progressive state surcharge (derrama estadual) which has the following applicable rates: (i) 3% on the part of the taxable profits exceeding €1.5 million up to €7.5 million; (ii) 5% on the part of 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an the taxable profits exceeding €7.5 million up to €35 million; and (iii) Alternative Investment Fund or the transfer of the 7% on the part of the taxable profits exceeding €35 million. investor’s interest? Capital gains earned on the transfer of fund units are fully included in the taxable income of the resident entity and are subject to the Establishment taxes are not applicable in Portugal to the mere same rates and surcharges as above. holding of a participation in an AIF. Please note in this regard that (b) Non-resident investors. Non-resident investors are taxed in the case of acquisition of an AIF’s units of a privately subscribed as follows: closed-ended real estate AIF, which results in the investor holding PIT: Income payments and capital gains derived from units in an AIF more than 75% of the units representing the assets of such AIF, are exempt from PIT provided that the evidence of non-resident status property transfer tax should apply proportionally at the applicable required by the tax law is timely delivered by the beneficiary of the rate (up to 6.5%) to the taxable value or the total value of the assets, income to the AIF. A refund procedure is available within a two-year as the case may be, but in each case with preference to the evaluation period in cases where a 28% withholding tax was applied for failure report of the investment fund manager, if higher. to timely deliver the documentation. The refund procedure requires the certification of a special form by the competent authorities of the 6.4 What is the tax treatment of (a) resident, (b) non- state of residence. Non-resident investors domiciled in a blacklisted resident, and (c) pension fund investors in Alternative jurisdiction are not able to benefit from income tax exemptions and, Investment Funds? in addition, will be subject to an aggravated 35% withholding tax. Income payments to accounts opened in the name of one or more (a) Resident investors. The taxation of resident investors is account holders acting on behalf of one or more unidentified third as follows: parties are subject to a final withholding tax rate of 35%, unless the Personal income tax (PIT): Income distributed or derived from relevant beneficial owner of the income is identified, in which case redemptions to Portuguese individuals (outside their commercial the tax rates applicable to the beneficial owner apply. activity) is subject to a 28% final withholding tax. If the investor opts Non-resident individuals who obtain income distributed by a to aggregate the income received, it will be subject to progressive real estate AIF or through the redemption of such AIF units/ income tax rates of up to 48%. In the latter circumstance an participations shall become subject to withholding tax at the final additional income tax will be due on the part of the taxable income rate of 10% provided the non-residence evidence in Portugal has exceeding €80,000 as follows: (i) 2.5% on the part of the taxable been obtained in due time. income exceeding €80,000 up to €250,000; and (ii) 5% on any CIT: A CIT exemption applies where income arising from the units taxable income exceeding €250,000. In addition, if the option of is distributed or made available to a non-resident entity without a income aggregation is made, an additional surcharge rate will also permanent establishment in Portugal. be due for the tax year of 2017 according to the taxpayer’s taxable income, as follows: (i) for taxable income up to €20,261, the rate Capital gains arising from the transfer of units are also exempt from is 0%; (ii) for taxable income exceeding €20,261 up to €40,522, CIT. the rate is 0.88%; (iii) for taxable income exceeding €40,522 up to In order to benefit from such exemptions, adequate evidence of non- €80,640, the rate is 2.75%; and (iv) for taxable income exceeding resident status must be timely provided. €80,640, the rate is 3.21%. However, from 1 January 2018, it is Non-resident corporate investors who obtain income distributed by foreseen that the additional surcharge will no longer be applicable. a real estate AIF or through the redemption of such an AIF shall Income payments to omnibus accounts are subject to a final become subject to withholding tax at the final rate of 10%. Income withholding tax rate of 35%, unless the relevant beneficial owner of payments and capital gains derived from units in an AIF are exempt the income is identified, in which case the tax rates applicable to the from CIT.

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However, non-resident investors cannot benefit from the exemptions 3. In addition, pension funds which are established and operate or the reduced withholding tax rates, as the case may be, pursuant to in accordance with the law of a Member State of the EU the characteristics of the AIF if: (i) the non-resident entity is domiciled other than Portugal or in a Member State of the European in a blacklisted jurisdiction listed in Ministerial Order 150/2004 of Economic Area are exempt from CIT, provided, in this case, 13 February, as amended from time to time; (ii) more than 25% of that such Member State is bound to cooperate with Portugal under an administrative cooperation arrangement in tax the capital of the non-resident entity is held, directly or indirectly, matters similar to the exchange of tax information existing by resident legal entities except when such entities are resident in a within EU Member States which are also exempt from CIT, Member State of the EU other than Portugal or in a Member State provided the following cumulative requirements are met: of the European Economic Area provided, in this case, that such a i. the pension fund covers exclusively the payment of State is bound to cooperate with Portugal under an administrative retirement benefits for old age or disability, for survival, Portugal cooperation arrangement in tax matters similar to the exchange of tax for early retirement, post-employment health care benefits information existing within the EU Member States or in a State with and, where they are supplementary to those benefits and are which Portugal has a double tax treaty in force or a tax information provided on an ancillary basis to the previously mentioned exchange agreement in force; or (iii) non-resident investors have not benefits, the attribution and death grants; timely provided non-residence evidence in Portugal. ii. the pension fund is managed by institutions for occupational If the exemptions or reduced withholding tax rates do not apply, the retirement, as provided by Directive no. 2003/41/EC, of general rules and tax rates (25%, 28% or 35%, as the case may be) the European Parliament and of the Council, of 3 June; will apply. iii. the pension fund is the ultimate beneficial owner of the (c) Pension fund investors. Pension fund investors are taxed income; and as follows: iv. with respect to income distributions made by AIFs, the 1. Pension funds which are established and operate in corresponding participation in the share capital is held, accordance with Portuguese law are taxed as follows: continuously, for at least one year. i. In the event of income deriving from AIFs distributions, In this case, however, it is not clear if the applicable exemption pension funds are exempt from CIT and are exempt from for CIT purposes at the level of the pension funds enables either withholding tax. (i) the operation of a withholding tax exemption upon payment of ii. In the event of income deriving from the redemption of the income from the AIF to the pension fund or, alternatively, (ii) the units or liquidation of the AIF, pension funds are subject attribution to the pension funds to the right to claim a refund of the to withholding CIT at a 25% rate, which will be refunded CIT withheld. To the best of our knowledge, the tax authorities have upon submission of the annual income tax return, since not provided any public guidance in this respect up to this moment. pension funds are exempt from CIT. 2. Pension funds which are established and operate in accordance 6.5 Is it necessary or advisable to obtain a tax ruling from with the law of a Member State of the EU other than Portugal the tax or regulatory authorities prior to establishing or in a Member State of the European Economic Area are an Alternative Investment Fund? taxed as follows: i. In the event of income distributed by real estate AIFs Portuguese taxpayers may request advance rulings regarding or through the redemption of the units or liquidation of specific tax situations. When advance rulings are issued, thetax such a real estate AIF, the pension funds are subject to withholding tax at the final rate of 10%. authorities may not derogate from such rulings in relation to the taxpayers that requested it, except pursuant to court decisions. ii. In the event of income deriving from securities AIFs, including income deriving from distributions and from the Subject to the payment of a fee (it may range from €2,550 up to redemption of the units or liquidation of the AIF, pension €25,500), an advance ruling may be provided urgently, provided funds should be exempt from CIT. In order to benefit that such request by the applicant is accompanied by a tax from such exemptions, adequate evidence of non-resident framework proposal, reasons raised for urgency and the amount to status must be timely provided. be determined by the tax authorities according to the complexity of iii. However, non-resident pension funds cannot benefit from the topic is paid. the exemptions or the reduced withholding tax rates, as If the tax authorities accept the urgency of the matter, the binding the case may be, pursuant to the characteristics of the ruling will be issued within 75 days from the date of presentation of AIF if: (i) the non-resident pension fund is domiciled in a blacklisted jurisdiction listed in Ministerial Order the request, and in the event that the tax authorities do not issue the 150/2004 of 13 February, as amended from time to time; ruling in such a time frame, it is considered that the tax treatment (ii) more than 25% of the capital of the non-resident presented by the taxpayer is agreed to by the tax authorities. Non- pension fund is held, directly or indirectly, by resident urgent rulings are delivered within 150 days, although this deadline legal entities except when such entities are resident in is merely indicative. a Member State of the EU other than Portugal or in a Unless the new law does not provide a clear answer on any particular Member State of the European Economic Area provided, topic that might be raised by an investor, it is not necessary to in this case, that such a State is bound to cooperate with Portugal under an administrative cooperation arrangement obtain a tax ruling from the tax or regulatory authorities prior to in tax matters similar to the exchange of tax information establishing an AIF. existing within the EU Member States or in a State with which Portugal has a double tax treaty in force or a tax 6.6 What steps have been or are being taken to implement information exchange agreement in force; or (iii) non- the US Foreign Account and Tax Compliance Act resident pension funds have not timely provided non- 2010 (FATCA) and other similar information reporting residence evidence in Portugal. regimes such as the Common Reporting Standard? iv. If the exemptions or reduced withholding tax rates do not apply, the general rules and tax rates (25%, 28% or 35%, Portugal has implemented, through Law no. 82-B/2014 of 31 as the case may be) will apply. December, the legal framework based on reciprocal exchange of

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information on financial accounts subject to disclosure in order definition of interest deduction limits and on substance assessment to comply with FATCA. Portugal signed an Intergovernmental requirements in order to be able to benefit from the Parent-Subsidiary Agreement with the US on 6 August 2015, which has been in force Directive. However, to the best of our knowledge, we are not aware since 10 August, 2016 and, as such, Portuguese financial institutions at this stage of any proceedings or actions taken or proposed to be (funds and fund managers) are already implementing procedures taken by the Portuguese Authorities regarding Actions 6 and 7 of which will enable them to fully comply with the legal reporting and BEPS, insofar as they affect AIFs’ operations. compliance rules. In addition, the Common Reporting Standard (CRS) has also been 7 Reforms recently enacted, through Decree-Law no. 64/2016, of 11 October 2016, which implemented the legal framework based on reciprocal Portugal exchange of information on financial accounts subject to disclosure 7.1 What reforms (if any) are proposed? in order to comply with CRS and, as such, Portuguese financial institutions (funds and fund managers) are already implementing Considering that the new UCI Law was enacted less than a year procedures which will enable them to fully comply with the legal ago, no major amendments to the law are expected in the near reporting and compliance rules. future. However, the possibility of further one-off amendments to the UCI Law directly attributable to changes in the EU legislation 6.7 Are there any other material tax issues? in this respect cannot be set aside, particularly as regards the implementation of additional amendments to the AIFMD and The acquisition of real estate by any real estate AIF is subject to UCITS Directive. Property Transfer Tax (up to 6.5%) and stamp tax (0.8%) and each Moreover, the new UCI tax regime, which entered into force and applicable tax rate will be levied either on the purchase price or the effect on 1 July 2015, and which aligned the taxation of investment tax patrimonial value of the property, if higher. funds in Portugal with the European standards, may be subject to future amendments, depending on the political options to be taken by the Portuguese government. 6.8 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 affect Alternative Investment Funds’ operations?

There have been amendments to the Portuguese legislation in connection with the recommendations of the Base Erosion and Profit-Shifting (BEPS) action plan, issued by OECD, such as on the

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Pedro Simões Coelho Manuel Simões de Carvalho VdA Vieira de Almeida VdA Vieira de Almeida Av. Duarte Pacheco, 26 Av. Duarte Pacheco, 26 1070-110 Lisbon 1070-110 Lisbon Portugal Portugal

Tel: +351 21 311 3677 Tel: +351 21 311 3677 Email: [email protected] Email: [email protected] URL: www.vda.pt URL: www.vda.pt Portugal Law Degree, Universidade Livre de Lisboa, Faculty of Law. Law Degree, University of Lisbon, Faculty of Law. Areas of practice: banking and finance; collective investment schemes; Postgraduate qualification in Taxation, Portuguese Catholic University, capital markets; and private equity. Lisbon. Pedro is currently head of the firm’s investment funds practice and a Manuel is a senior associate in the Tax Law practice group, where partner in the Banking & Finance Group. He is also responsible for the he deals with transactions within the financial tax area. In such Agency & Trust practice and for the firm’s aviation finance team. He has capacity he provides consistent tax assistance on banking & finance, been actively involved in several transactions, mainly focused on the asset management and insurance matters, in Portugal and cross- advising, structuring and setting up of collective investment schemes border, such as on equity, classic and innovative debt instruments, such as mutual funds and real estate investment funds, infrastructure securitisation transactions and project finance loans. He also provides vehicles, venture capital funds and private equity structures. regular assistance (including on their set-up) to investment collective undertakings, venture capital funds and related investors. Languages: Portuguese; English; French; and Spanish. Admitted to the Portuguese Bar Association as a specialist in financial law. Among other articles, Pedro Simões Coelho has published the following: ■■ Portugal chapter, The International Comparative Legal Guide to: Alternative Investment Funds 2016. ■■ The AIFMD Passport and non-EU Alternative Investment Funds, Funds People, 2016. ■■ Mozambique chapter, The International Comparative Legal Guide to: Alternative Investment Funds 2016. ■■ Angola chapter, The International Comparative Legal Guide to: Alternative Investment Funds 2016. ■■ Fund Management – Portugal, Getting the Deal Through, 2016. ■■ Hedge Funds in Portugal – The European Lawyer Reference Series, 2011 (first edition) and 2014 (second edition). ■■ Investment Funds in Portugal: Regulatory overview – Practical Law Company Investment Funds Handbook 2012, 2013, 2014, 2015 and 2016. ■■ Fusão Transfronteiriça de Organismos de Investimento Coletivo em Valores Mobiliários – Funds People, 2015.

VdA is an independent Portuguese law firm with 350-plus staff and strong experience in various industries. Over the past 40 years, VdA has been involved in a significant number of pioneering transactions in Portugal and abroad, in some cases together with the most relevant international law firms, with whom we have a strong working relationship. The recognition of VdA’s work is shared with our team and clients, and is reflected in the awards achieved, such as: the “Financial Times 2015 Game Changing Law Firm in Continental Europe”; the “Financial Times Innovative Lawyers in Continental Europe 2013 and 2016”; the “Most Active Law Firm” awarded to VdA by Euronext for five consecutive years; the “Portuguese Law Firm of the Year 2015 and 2016” awarded by the IFLR; the “Portuguese Law Firm of the Year 2016” and “Client Service Law Firm of the Year 2017” awarded by Chambers & Partners; the “Iberian Firm of the Year 2017” awarded by The Lawyer; and the “International Firm of the Year 2017” awarded by Legal Business. VdA, through its VdA Legal Partners (which encompasses all lawyers and independent law firms associated with VdA Vieira de Almeida for the provision of integrated legal services), is actively present in 11 jurisdictions that include all African members of the Community of Portuguese- Speaking Countries (CPLP), as well as Timor-Leste and some of the francophone African countries. Angola – Cape Verde – Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau – Mozambique – Portugal São Tomé and Príncipe – 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. As further explained below, the investors in an Alternative The official currency of Puerto Rico is the United States dollar. 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 ■ Puerto Rico Uniform Securities Act (“PRUSA”): PRUSA doing business. It is important to note that Puerto Rico’s securities is modelled after the NASAA’s Model Uniform Securities and investment adviser laws and regulations are modelled after 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 corporations and limited liability companies in Puerto Rico. As mentioned above, Alternative Investment Funds and their It is modelled after the Delaware General Corporations Investment Advisers organised under the laws of Puerto Rico and/or 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 committed capital in assets (other than short-term holdings) under management (“AUM”) of an Investment Adviser determines that are not qualifying investments, valued at cost or fair whether it should register with the SEC or with a state regulatory value, consistently applied by the fund; (iii) does not borrow, body, such as OCFI with regard to Puerto Rico-based Investment issue debt obligations, provide guarantees or otherwise incur Advisers. leverage in excess of 15% of the private fund’s aggregate capital contributions and uncalled committed capital, and any ■ Small Advisers: Investment Advisers with less than USD 25 such borrowing, indebtedness, guarantee or leverage is for million in AUM are regulated by the states unless the state a non-renewable term of no longer than 120 calendar days, in which the adviser has its principal office and place of except that any guarantee by the private fund of a qualifying business has not enacted a statute regulating advisers. portfolio company’s obligations up to the amount of the value ■ Medium Advisers: Investment Advisers with more than of the private fund’s investment in the qualifying portfolio USD 25 million and less than USD 100 million in AUM company is not subject to the 120-calendar-day limit; (iv) only are regulated by the states if (i) the Investment Adviser is issues securities the terms of which do not provide a holder registered with the local regulator in the state in which it has with any right, except in extraordinary circumstances, to its principal office, and (ii) it is subject to examination by the withdraw, redeem or require the repurchase of such securities local regulator. but may entitle holders to receive distributions made to all ■ Large Advisers: Investment Advisers with more than USD holders pro rata; and (v) is not registered under Section 8 100 million but less than USD 110 million in AUM may, but of the ICA, and has not elected to be treated as a business are not required to, register with the SEC. Once AUM exceed development company pursuant to Section 54 of the ICA. USD 110 million, the Investment Adviser must register with ■ The main difference between the Venture Capital Fund the SEC. Once an Investment Adviser registers with the SEC, Adviser Exemption and the Private Fund Adviser Exemption state laws and regulations pertaining to investment advisers is that Investment Advisers relying on the Venture Capital are pre-empted. Fund Adviser Exemption can have AUM in excess of USD Notwithstanding the foregoing, there are various exemptions from 150 million without having to register with the SEC. registration at the federal and Puerto Rico level that Investment ■ Investment Advisers relying on the Venture Capital Fund Advisers to Alternative Investment Funds may rely on: 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) and if so how? from registration to advisers of private funds and of venture capital funds that comply with certain requirements. No. Neither United States nor Puerto Rico laws and regulations Under Regulation 8526, an Investment Adviser shall be exempt distinguish between open-ended and closed-ended Alternative from registration with OCFI if it satisfies the following conditions: Investment Funds. Such distinctions are generally seen with regulated ■ neither the Investment Adviser nor any of its advisory affiliates investment companies (i.e. mutual funds registered under the ICA or are subject to an event that would disqualify an issuer under the PR ICA).

Rule 506(d)(1) of SEC Regulation D; Puerto Rico

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

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

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

3.1 What legislation governs the production and offering of marketing materials? Alternative Investment Funds generally offer and sell their securities 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. Puerto Rico in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any It is common practice to include in the Fund’s legal and marketing manipulative or deceptive device or contrivance in contravention of documents certain disclosure language that expressly states that the such rules and regulations as the SEC may prescribe as necessary or offering materials and the legal documents have not been registered, appropriate in the public interest or for the protection of investors. reviewed or approved with any regulatory agency. Pursuant to said power, the SEC promulgated Rule 10(b)-5 which states that it is unlawful for any person, directly or indirectly, to 3.4 What restrictions are there on marketing Alternative employ any device, scheme or artifice to defraud, to make any Investment Funds? untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the Under the Securities Act and PRUSA, securities offered and sold in circumstances under which they were made, not misleading or to the United States must be registered with the SEC and/or PRUSA, engage in any act, practice or course of business which operates as as may be applicable, unless an exemption from registration applies. a fraud or deceit upon any person in connection with the purchase Given the extensive disclosure and regulatory requirements under or sale of any security. the Securities Act, Alternative Investment Funds rely on the private offering exemption available under Section 4(a)(2) of the Securities 3.2 What are the key content requirements for marketing Act. Particularly, Alternative Investment Funds rely on the safe materials, whether due to legal requirements or harbour provided under Regulation D (for example, Rule 506(b)), customary practice? which requires, among others, that the sale of securities under said Rule be made only to “Accredited Investors” with an allowance of Besides the provisions of Section 10(b) of the Exchange Act and a maximum of 35 “Non-Accredited Investors” and that no public of Rule 10(b)-5 promulgated thereunder, the Investment Advisers offering or solicitation be made. of Alternative Investment Funds must be aware of the provisions of Section 206 of the Advisers Act, which make it unlawful for any 3.5 Can Alternative Investment Funds be marketed to Investment Adviser: (i) to directly or indirectly employ any device, retail investors? scheme, or artifice to defraud any client or prospective client; (ii) to engage in any transaction, practice, or course of business which Prior to the enactment of Rule 506(c) under Regulation D, no operates as a fraud or deceit upon any client or prospective client; issuer that was relying on the private offering exemption under the (iii) acting as principal for his own account, knowingly to sell any Securities Act could publicly market, offer or solicit its securities. security to or purchase any security from a client, or acting as broker Furthermore, in order to comply with the safe-harbour provisions for a person other than such client, knowingly to effect any sale under Regulation D, the offer and sale of securities had to be made or purchase of any security for the account of such client, without to “Accredited Investors” as defined in question 3.6 below. As disclosing to such client in writing before the completion of such such, the marketing of Alternative Investment Funds was strictly transaction the capacity in which he is acting and obtaining the limited. Compliance with the private offering exemption is a matter consent of the client to such transaction; or (iv) to engage in any of high importance because it is one of the factors to be eligible for act, practice or course of business which is fraudulent, deceptive or exemption from registration under Sections 3(c)(1) and 3(c)(7) of manipulative. the ICA. Please note that under Rule 206(4)-8 of the Advisers Act, it shall Now, pursuant to Rule 506(c), issuers can solicit and generally constitute a fraudulent, deceptive, or manipulative act, practice, advertise an offering while still being deemed to be undertaking or course of business within the meaning of Section 206(4) of the a private offering pursuant to Section 4(a)(2) of the Securities Act Advisers Act for any Investment Adviser to a pooled investment if: (i) all the investors in the offering are “Accredited Investors”; vehicle to: (i) make any untrue statement of a material fact or to and (ii) the issuer has taken reasonable steps to verify that the omit to state a material fact necessary to make the statements made, investors are accredited investors. Under Rule 506(c), the mere in light of the circumstances under which they were made, not representation of an investor that it is an “Accredited Investor” is misleading, to any investor or prospective investor in the pooled not enough and among the reasonable steps that can be taken are: (i) investment vehicle; or (ii) otherwise engage in any act, practice, verifying the income via the receipt and review of IRS W-2 Forms; or course of business that is fraudulent, deceptive, or manipulative and (ii) receiving a certification from a certified public accountant, with respect to any investor or prospective investor in the pooled a lawyer, a registered broker/dealer, among others, stating that the investment vehicle. investor, in fact, complies with the requirements to be classified as Investment Advisers should also take into consideration the an “Accredited Investor” under Rule 501 of Regulation D. provisions of Rule 206(4)-1 and related SEC No-Action Letters with regard to advertisements by Investment Advisers.

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

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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 contributions and which in aggregate do not exceed USD 350 to

There are certain restrictions as to the type of intermediaries that an Puerto Rico 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 Goods and Services (Act 84 of 2002, as amended) generally prohibits in Section 3(a)(39) of the Exchange Act, at the time of his any person from offering or delivering to a public servant of the participation; executive agencies – with whom the person wishes to establish or ■ compensated in connection with his participation by the has established a contractual or commercial or financial relationship payment of commissions or other remuneration based either – any contributions or donations, among other things. A related directly or indirectly on transactions in securities; and provision of the Code of Ethics prohibits a person who has “actively ■ an associated person of a broker or dealer at the time of his participated in political campaigns”, from establishing negotiations participation. with secretaries, heads of agencies, municipal executives or The term “associated person” includes any natural person who is executive directors of public corporations, that may lead to the a partner, officer, director or employee of the issuer, a corporate improper granting of advantages or favours for their benefit. general partner of a limited partnership that is the issuer, a company In addition, pursuant to the Puerto Rico Political Campaign or partnership that controls, is controlled by, or is under common Financing Oversight Act (Act 222 of 2011, as amended), there is a control with, the issuer or an investment adviser registered under the clear prohibition that business entities shall not make contributions Advisers Act to an investment company registered under the ICA out of their own resources in or outside Puerto Rico to any political which is the issuer. party, aspirant, candidate, campaign committee, or to any authorised Alternative Investment Funds must be aware that the use of persons agent, representative, or committee thereof, or to political action that engage in activities that would classify them as brokers or committees that make contributions to or coordinate expenditure dealers, such as persons engaged as “finders”, entails substantial among such entities. risks and sanctions. For example, the Alternative Investment Fund However, a business entity may establish, organise, and administer could be forced to rescind the subscription agreements entered a committee, to be known as a segregated committee or fund that, into with investors and be ordered to return in its entirety all of the for the purposes of contributions and expenditures, shall be treated capital that was raised from said investors. as a political action committee that must be registered in the Office of the Election Comptroller of Puerto Rico, render reports, and 3.9 Are there any restrictions on the participation in comply with all requirements imposed under the Political Campaign Alternative Investments Funds by particular types of Financing Oversight Act. Thus, the business entity members, investors, such as financial institutions (whether as employees, and their immediate family or related persons may make sponsors or investors)? contributions that shall be deposited in the account established and registered in the Office of the Election Comptroller. Under Section 619 of the Dodd-Frank Wall Street Reform and In order for a business entity to be able to establish a segregated Consumer Protection Act (which added a new Section 13 to the committee or fund for these purposes, it must comply with the Bank Holding Company Act), banking entities are generally limitations and requirements set forth in Section 625j of the Political prohibited from “engaging in proprietary trading or from acquiring Campaign Financing Oversight Act. The committee, organisation or retaining an ownership interest in, sponsoring, or having certain or citizen group may make donations from said account to political relationships with a Hedge Fund or Private Equity Fund, subject to parties, aspirants, candidates, and campaign committees and certain exemptions”.

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

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Furthermore, Alternative Investment Funds should take into Under the PR Corporations Act, each entity organised in Puerto consideration antitrust concerns if a transaction in which they are Rico or authorised to do business in Puerto Rico must make certain engaging is subject to the Hart-Scott-Rodino Antitrust Improvements filings with the Puerto Rico Department of State that are available Act of 1976 and/or the Puerto Rico Monopoly Act and certain to the public. Similarly to Delaware, only entities organised as restrictions related to short-selling of securities under the rules and Corporations are required to file annual reports. Further, LLCs and regulations promulgated under the Exchange Act, such as Regulation LPs are not required to file annual reports as they are only required SHO and Regulation M. to make an annual fee payment.

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

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Section 933 of the IRC and Act 20, which provides a preferential tax (3) residency tests during the tax year in which they received the rate of 4% for services rendered from Puerto Rico to persons located income. The three (3) tests are: (i) physical presence; (ii) tax home; outside of Puerto Rico, such as Funds, other Investment Advisers and (iii) closer connection. If the individual complies with all three or investors. In addition, Act 20 provides a 0% rate on dividends (3) tests and receives Puerto Rico sourced income, they can exclude distributed by the entity to its owners from income derived from said income from federal and state taxation. Bona fide individuals export activities. Please note that Act 20 requires grantees to have are subject to the taxes imposed by the PR IRC. The tax rates that at least three full-time (or full-time equivalent) employees within apply vary depending on the type of income and amount of income the first six months from the commencement of operations and five received. Tax rates vary from 0% to 33% for individuals, and from employees within two years after commencement of operations. 20% to 39% for corporations. The terms of the exemption provided to the entity under Act 20 are Non-residents that derive Puerto Rico sourced income are subject gathered in a Tax Grant, which is considered a contract between to the PR IRC. As with residents, the tax rates that apply to Puerto Rico the government of Puerto Rico and the entity that requested the non-residents vary depending on the amount and type of income benefits. The initial term of an Act 20 Tax Grant is 20 years and can received by the non-resident. In the case of non-residents that are be extended for an additional 10 years. 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% withholding at source. 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an Entities organised in Puerto Rico are considered foreign entities Alternative Investment Fund or the transfer of the for purposes of the IRC and can also use the exclusion of income investor’s interest? provided by Section 933 of the IRC. As with individuals that are residents of Puerto Rico and engaged in a trade or business, entities The PR IRC does not provide a specific transfer tax on the transfer are subject to the PR IRC and the tax rates vary depending on the of an investor’s ownership interest in the Alternative Investment type of income. The PR IRC tax rates for entities range from 20% Fund. As with the IRC, the PR IRC imposes a capital gains tax on up to 39%. In the case of entities that are not engaged in a trade or the sale of appreciated ownership interest in the Fund. If the Fund business that derive Puerto Rico sourced income, they are subject to elects to be taxed as a partnership, as with the IRC, the PR IRC a 39% withholding tax. provides that the tax liability on the income received by the Fund will flow through to the members and they will be responsible for 6.5 Is it necessary or advisable to obtain a tax ruling from any tax liability determined under the PR IRC. the tax or regulatory authorities prior to establishing Notwithstanding, the Puerto Rico government enacted Act No. 22 an Alternative Investment Fund? of January 17, 2012, as amended (“Act 22”), which provides an exemption from Puerto Rico sourced passive income. This includes It is not required to request a tax ruling from the Puerto Rico capital gains, interest and dividends. Act 22 ties into both the IRC Treasury Department prior to the establishment of an Alternative exemption for a bona fide resident to not be subject to federal Investment Fund. taxation on Puerto Rico sourced income and the sourcing rules of the IRC. Therefore, for example, an individual that receives interest 6.6 What steps have been or are being taken to implement income from an investment in a Fund located in Puerto Rico would the US Foreign Account and Tax Compliance Act be exempt from Puerto Rico and federal taxes. By the same token, 2010 (FATCA) and other similar information reporting given that capital gains are sourced to the residence of the seller and, regimes such as the Common Reporting Standard? in the case of partnership, are determined at the level of the partners, investors can greatly benefit from the interplay of the above rules. Puerto Rico is subject to the Foreign Account and Tax Compliance Furthermore, an individual who owns an Investment Adviser which Act 2010. has an Act 20 Tax Grant (as discussed above), and which provides services to an Alternative Investment Fund or to another Investment 6.7 Are there any other material tax issues? Adviser located outside of Puerto Rico, can receive dividend distributions subject to a 0% tax rate. There are none. To benefit from Act 22, individuals must becomebona fide residents of Puerto Rico and they must not have been residents of Puerto Rico between 2006 and 2012. 6.8 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 6.4 What is the tax treatment of (a) resident, (b) non- affect Alternative Investment Funds’ operations? resident, and (c) pension fund investors in Alternative Investment Funds? As of this date, Puerto Rico has not adopted the OECD’s Action Plan on Base Erosion and Profit-Shifting (BEPS). Puerto Rico born individuals are also United States citizens. As such, they are subject to taxation on their worldwide income, under both the IRC and the PR IRC. To determine the tax treatment that 7 Reforms may apply to (a) residents, (b) non-residents, and (c) pension fund investors, it is required to examine their treatment under both the IRC and the PR IRC. In addition, as mentioned above, bona fide 7.1 What reforms (if any) are proposed? residents of Puerto Rico can exclude from federal and state taxation any income that is treated as Puerto Rico sourced, pursuant to the On the local front, the Puerto Rico Legislature will propose to the exclusion of Section 933 of the IRC. To be considered a bona fide United States Congress an amendment to the Foreign Assistance resident of Puerto Rico, the individual must comply with three Act of 1961 in order to authorise the Overseas Private Investment

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

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 by Chambers & 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 ■ arranging transactions in investments; and Alternative Investment Market (AIM) or the Specialist Fund Market ■ advising on investments. (SFM) of the London Stock Exchange. Historically there have been examples of Scottish investment companies of this type, designed

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to facilitate indirect investment into alternative asset classes such regulated activities. This will require the production of a detailed as forestry assets. In these cases the company becomes subject to business plan, including proposed internal controls and outsourcing, regulation by the FCA and the London Stock Exchange, in respect a staff organisational chart including all those individuals who of compliance with applicable provisions of FSMA, the Disclosure are seeking approved person status and relevant reporting lines, a and Transparency Rules, the Admission & Disclosure Standards compliance monitoring programme, details of IT systems as well of the London Stock Exchange and, as applicable, the Prospectus as numerous other pieces of information. A typical, straightforward Rules and/or AIM Rules for Companies. application would normally be processed within three months. More complex applications can take longer. As indicated in question 1.2 above, where the manager and operator do not have the required 1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment FCA authorisations, it is usually possible to structure the AIF so as Funds (or otherwise differentiate between different to outsource these activities to authorised service providers. Scotland types of funds) and if so how? AIFs structured as QISs or NURSs An application for authorisation of a QIS or NURS must be submitted The table below sets out the key features of the three main examples to the FCA. This involves submission of a structured application of AIF described above: form, constitutional documents and prospectuses which comply with the detailed requirements of the FCA Collective Investment Investment Authorised Schemes sourcebook (COLL), and a solicitor’s certificate. A typical Company Unit Trust Admitted to application would normally be processed within two months. Scottish or OEIC (for Trading on Key Feature Limited example: AIFs structured as public companies admitted to trading on a Securities Partnership Qualified AIM or SFM Market (for Investor example, AIM or The company must be registered as a public limited company and Schemes) SFM) obtain a trading certificate. A prior requirement is that the nominal value of the company’s share capital is not less than £50,000. At least Trust or Legal structure Partnership Company Company one quarter of the nominal capital and the whole of any premium must be paid-up. Separate legal Yes Yes Yes The process of applying for admission to AIM includes (i) the personality production of a detailed AIM admission document (which complies Open-/closed- with the AIM Rules for Companies and the AIM Rules for Investing Either Open-ended Closed-ended ended Companies), and (ii) the appointment of a nominated adviser (nomad) and broker. A nomad is usually a corporate finance firm, investment Manager or Manager and Is the Fund/ Authorised bank or a broker that has been approved by the London Stock Custodian (FCA), Manager/ Manager and/ Corporate Exchange. The nomad is responsible to the London Stock Exchange Fund (Companies Trustee/ or operator Director, for assessing the appropriateness of a company for an application to Act, FCA listing Depositary (FCA) Trustee/ rules or AIM AIM and for advising the company on the admission process and its regulated? Depositary and rules) continuing obligations under the AIM Rules for Companies. Fund (FCA) The process of applying for admission to the Specialist Fund Market Admitted to is a two-stage process. The requirements include (i) the approval of a trading on a Not in practice, prospectus by the UK Listing Authority, and (ii) following approval securities market, with the of the prospectus, application to the London Stock Exchange for for example Admitted to exception of the Alternative admission to trading on the SFM. Applicants will require specialist trading on those Exchange No Investment advice. a securities Traded Funds Market or market? (ETFs) that Specialist Funds use these fund Market of the 1.6 Are there local residence or other local qualification structures London Stock requirements? Exchange

Collective Basic formation requirements for Scottish Limited Partnerships Investment Yes Yes No Some market practice for the formation of SLPs is outlined below. Scheme? Where the separate legal personality of the SLP is required for the Bespoke operation of the fund (which is often the case with AIFs, particularly valuation in the case of fund of funds, feeder funds and other vehicles), certain Determined by Pricing provisions NAV of fund market of these steps are of particular importance: in fund documentation ■ It is fundamental that the partnership agreement is written so as to be governed by Scots Law, specifically stating that the partners intend the partnership to be a Scottish partnership. ■ The SLP is generally required to have a principal place of 1.5 What does the authorisation process involve? business in Scotland. This is often an address provided by the lawyers advising on the SLP formation. AIFs structured as SLPs ■ It is recommended that the general partner is a Scottish No authorisation is required at fund level. As indicated in question entity. This is most usually a Scottish special purpose private 1.3 above, the manager and/or operator will typically be required to limited company. The general partner will be responsible be authorised by the FCA. Where not already authorised prior to for any day-to-day management of the SLP; however, this is normally delegated to an authorised manager. The registered the launch of the fund, the manager or operator will be required to office of the general partner is normally the principal place of apply to the FCA for authorisation to conduct the expected range of business of the SLP.

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■ The partnership agreement is usually signed in Scotland. amount. For example, ‘capital contribution’ is often defined in the This is often undertaken by an attorney for the partners, partnership agreement as a fraction (e.g. 0.01 per cent) of a limited who do not have to be physically present in Scotland to sign partner’s commitment to the SLP. The rest of the limited partner’s documents. commitment to the SLP will comprise a loan. In addition, an occasional meeting, for example an annual review If the partnership is wound up, for example, on an insolvent basis meeting, is sometimes held at the SLP’s principal place of business then the limited partner will normally rank as an ordinary creditor address in Scotland. for sums advanced above the nominal capital commitment. With effect from 6 April 2017, most AIF SLPs can apply to be treated 1.7 What service providers are required? as Private Fund Limited Partnerships (PFLPs). Limited partners in PFLPs are not required to contribute capital and any capital contributed Scotland In the case of SLPs, the service providers required will vary can be repaid at any time without affecting the limited liability status. depending on the activities of the fund. As indicated above, the The general partner of the SLP, which (subject to any delegation management and operation of a typical AIF SLP will be undertaken arrangements) is responsible for the management and operation of by manager and operator, which may be the same entity, authorised the SLP, has unlimited liability. by the FCA to carry out the regulated activities involved. However, operator services are often provided by specialist fund administration businesses, which will often also provide ancillary services such as 2.3 What are the principal legal structures used for fund accounting. managers and advisers of Alternative Investment Funds? The rules implementing the EU Alternative Investment Fund Managers Directive (AIFMD) in the UK apply in Scotland. These The principal legal structures used for managers and advisers rules introduced requirements for specific service providers, such of AIFs in Scotland are limited companies and limited liability as depositaries, for AIFs managed by managers within the scope of partnerships (LLPs). the AIFMD. LLPs are tax-transparent, which may assist efficient structuring of the management vehicle. 1.8 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 Co-operation or information sharing agreements are entered into in open-ended or closed-ended funds? at the UK level and there are currently no separate agreements applicable to Scotland. Please see the England & Wales chapter of AIF SLPs can be either open- or closed-ended. 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. 2 Fund Structures The LPA 1907 restricts distributions of capital by SLPs during the life 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). As indicated in question 1.4 above, the focus of this chapter is on 2.5 Are there any legislative restrictions on transfers of SLPs. investors’ interests in Alternative Investment Funds? SLP key features include (i) flexible terms of management and operation, (ii) tax transparency, (iii) separate legal personality, (iv) In the case of SLPs, transfers of partnership interests are required limited liability for investors, and (v) the possibility of multiple to be advertised in the Edinburgh Gazette and, for the purposes of passive investors (limited partners). For these reasons SLPs are the LPA 1907, do not take full effect until publication of the advert. frequently used as AIF vehicles, particularly as private equity funds, Publication of the advert is a simple administrative procedure. real estate funds (including their feeder funds and carried interest With effect from 6 April 2017, the requirement to advertise in the vehicles), and fund of funds structures. Edinburgh Gazette has been removed for PFLPs.

2.2 Please describe the limited liability of investors. 3 Marketing

Investors participate in SLPs as limited partners. Provided it does not involve itself in the management of the SLP, a limited partner’s 3.1 What legislation governs the production and offering liability for the debts and obligations of the SLP is limited to the of marketing materials? amount of its capital contribution. It is normal for AIF SLPs to be structured so as to ensure that this capital contribution is a nominal As indicated in question 1.3 above, for regulatory purposes, AIF

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SLPs are generally classified as unregulated collective investment schemes (UCIS). 3.5 Can Alternative Investment Funds be marketed to retail investors? The marketing and promotion of UCIS is regulated by the FSMA and related orders and the AIFMD-driven rules, where the manager In general, no – but AIFs can be marketed to some investors classed is within the scope of the Directive. as retail investors subject to the restrictions described under question In very general terms, these regulations mean that, as is the case 3.4 above. with AIFs in many other jurisdictions, AIF SLPs cannot be freely marketed to the public, but only to certain categories of eligible investor (such as ‘investment professionals’ and ‘sophisticated 3.6 What qualification requirements must be carried out investors’). in relation to prospective investors? Scotland

A range of qualification requirements for eligible investors are 3.2 What are the key content requirements for marketing set out primarily in the Financial Services and Markets Act 2000 materials, whether due to legal requirements or (Financial Promotion) Order 2005 (FPO), the Financial Services and customary practice? Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (CIS Promotion Order) and specific FCA Key content requirements for AIF SLP marketing materials are conduct of business rules. The specific rules that apply will depend similar to those used in many other jurisdictions and, typically, on factors such as whether the promoter of the AIF is authorised by details include: the FCA or not. Some commonly used categories of eligible investors ■ investment objectives and strategy; are noted below: ■ investment process; ■ investment professionals; ■ management personnel; ■ certified high-net-worth individuals; and ■ summary of key fund terms; ■ certified sophisticated investors. ■ risk disclosures; These categories are specifically defined in the applicable legislation. ■ disclosure of UK tax treatment of the fund and investors and, if the fund is being distributed on a cross-border basis, disclosure of the tax treatment of the fund and investors in 3.7 Are there additional restrictions on marketing to other key jurisdictions; and public bodies such as government pension funds? ■ regulatory statements and disclosures required by the FSMA and other securities laws in the UK and, if the fund is being No; public bodies will often fall within one of the categories of distributed on a cross-border basis, regulatory statements eligible investor, such as ‘investment professional’, but this should and disclosures required by securities laws in other key be specifically checked. jurisdictions.

This content is required by a combination of market practice and 3.8 Are there any restrictions on the use of intermediaries certain provisions of the FSMA and related orders, the common law to assist in the fundraising process? of Scotland and the securities laws of other jurisdictions in which the fund may be being promoted. The AIFMD-driven rules apply The restrictions on marketing that apply to the manager or promoter where the manager is within the scope of the Directive. will also apply to intermediaries.

3.3 Do the marketing or legal documents need to be 3.9 Are there any restrictions on the participation in registered with or approved by the local regulator? Alternative Investments Funds by particular types of investors, such as financial institutions (whether as SLPs are required to be registered with the Registrar of Limited sponsors or investors)? Partnerships in Edinburgh. This requires the filing of a form at registration, containing basic details of the partnership, the partners Generally, and subject to the points made above (see questions 1.2 and capital contributions. There are limited continuing obligations and 3.4 in particular) on authorisation and marketing, there are no to notify the registrar of various changes relating to the partnership, restrictions on the participation in Alternative Investment Funds by its business and capital. There is no registration requirement in particular types of investors. respect of an SLP’s marketing document. Some qualifications apply to this. For example, Scottish local government pension schemes (LGPS) are subject to the restrictions 3.4 What restrictions are there on marketing Alternative set out in the Local Government Pension Scheme (Management and Investment Funds? Investment of Funds) (Scotland) Regulations 2010, which contains concentration limits for various classes of investments. LGPS, together with other types of pension funds, will also be subject to As indicated in question 3.1 above, most AIF SLPs are classified as the terms of their internal investment policies. unregulated collective investment schemes (UCIS). The marketing and promotion of UCIS is regulated by the FSMA and related orders. Certain types of retail investment funds (for example, UCITS funds) also have to comply with investment restrictions which may limit In very general terms, these regulations mean that, as is the case with their exposure to Alternative Investment Funds. AIFs in many other jurisdictions, AIF SLPs cannot be freely marketed to the public, but only to certain categories of eligible investor (such In addition, investments by financial institutions in AIFs may impact as ‘investment professionals’, ‘high-net-worth individuals’ and their regulatory capital requirements. ‘sophisticated investors’). The rules which implement the AIFMD in the UK apply in Scotland. These significantly restrict the range of activities which managers within the scope of the Directive can undertake.

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4 Investments 6 Taxation

4.1 Are there any restrictions on the types of activities 6.1 What is the tax treatment of the principal forms of that can be performed by Alternative Investment Alternative Investment Funds? Funds? Although SLPs have separate legal personality (which is why they In general, no. However, (as described in question 1.2 above) the are often used in fund of funds structures, feeder funds, and similar management and operation of an AIF in Scotland will normally vehicles), they are tax-transparent for most UK taxes. This means involve regulated activities that are required to be carried out by that no income, corporation or capital gains tax is payable by the SLP Scotland persons authorised by the FCA. Such persons will be authorised to itself. Instead, the UK tax authorities look through the partnership conduct a specific scope of activities. structure and partners are taxed on their share of partnership income The rules that implement the AIFMD in the UK also restrict certain arrived at in accordance with their profit-sharing ratios (which can activities, for example where an AIF acquires control of a non-listed be different from the ratios in which capital has been contributed). company. These restrictions relate to matters such as distributions, For capital gains tax purposes, partners are treated as owning capital reductions and share buybacks. fractional shares in the underlying assets.

4.2 Are there any limitations on the types of investments 6.2 What is the tax treatment of the principal forms of that can be included in an Alternative Investment investment manager / adviser? Fund’s portfolio whether for diversification reasons or otherwise? The tax treatment of the principal forms of investment manager/ adviser will vary according to the structure used, for example a No such limitations apply to AIF SLPs, although it is common for company or limited liability partnership (LLP). LLPs are often fund documentation to limit the types of investments held. used as management vehicles, as they are tax-transparent corporate vehicles, offering limited liability, with no restrictions on members 4.3 Are there any restrictions on borrowing by the participating in management. VAT on management fees is often Alternative Investment Fund? a key tax consideration, as is the use of the Investment Manager Exemption, which allows a non-UK resident fund that is trading for No such restrictions apply to AIF SLPs, although it is common for tax purposes, such as a hedge fund, to appoint a UK-based investment fund documentation to limit borrowing by the fund. manager without creating a permanent establishment in the UK. The rules implementing the AIFMD in the UK require managers within the scope of the Directive to specify leverage limits. 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 5 Disclosure of Information investor’s interest?

Stamp duty may be payable on the transfer of an investor’s interest 5.1 What public disclosure must the Alternative in an SLP. In practice, transfers of interests are often structured so Investment Fund make? as to mitigate stamp taxes.

The registration and disclosure requirements, contained in the LPA 1907, that apply to AIF SLPs are set out in question 3.3 above. 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative In addition, the Partnerships (Accounts) Regulations 2008 (as Investment Funds? amended) require the annual accounts of certain SLPs to be filed. As indicated above, although SLPs have separate legal personality, 5.2 What are the reporting requirements in relation to they are generally tax-transparent and the UK tax authorities look Alternative Investment Funds? through the partnership structure. Partners are taxed on their share of partnership income in accordance with their profit-sharing ratios Financial reporting requirements for AIFs are generally contained in (which can be different from the ratios in which capital has been the fund documentation. contributed). For capital gains tax purposes, partners are treated as owning fractional shares in the underlying assets. The tax profile of Managers often rely on exemptions from the FCA conduct of individual investors determines their tax liability. business rules relating to periodic financial statements. AIF SLPs are generally operated so that they are not treated for UK The rules which implement the AIFMD in the UK introduce tax purposes as carrying on a trade, the result of which is that non- additional reporting requirements. 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 5.3 Is the use of side letters restricted? investment income, although this is likely to be restricted to UK tax that is withheld at source (for example, by a portfolio company in A requirement to disclose arrangements such as side letters was a private equity fund). Withholding tax on UK investment income introduced by the AIFMD. Other than this, the use of side letters would be subject to the relevant double taxation treaty between the is not restricted by current legislation. As is common in other UK and the investor’s jurisdiction of residence. jurisdictions, investors will often seek to negotiate ‘most favoured Non-resident investors who hold their interest in the AIF SLP as nation’ provisions. part of their trade (for example, financial traders such as banks)

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are likely to be treated as carrying on part of that trade in the UK through a permanent establishment, branch or agency which is a 6.8 What steps are being taken to implement the OECD’s UK representative (for example, the general partner or manager Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they of the fund). The UK-resident general partner would then be affect Alternative Investment Funds’ operations? treated as the investor’s UK tax representative, and would share responsibility with the investor for submitting UK tax returns and Implementation of the OECD’s Action Plan on Base Erosion and paying any UK tax due on the investor’s partnership income. In Profit-Shifting is being dealt with at UK level. these circumstances the manager will often be authorised to retain an amount equal to such investor’s liability to UK corporation or income tax and pay such amounts to the UK tax authorities. These 7 Reforms tax liabilities can usually be mitigated by the use of special purpose Scotland vehicles established for the purpose of participating in the AIF SLP. In addition, non-UK jurisdictions may apply or withhold tax on 7.1 What reforms (if any) are proposed? income or gains receivable by the AIF SLP from investments in those jurisdictions. In these circumstances, investors will normally With effect from 6 April 2017, reforms (summarised below) were seek relief under applicable double tax treaties, and the availability implemented to bring the regime for UK partnerships (including of relief may depend on whether the SLP is treated as fiscally AIF SLPs) much more into line with those of other legal centres transparent in the overseas jurisdiction. such as Delaware, the Cayman Islands and the Channel Islands, reducing administrative requirements and enabling documentation to be simplified. 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing These changes are applicable to any limited partnership established an Alternative Investment Fund? in Scotland or England which registers as a Private Fund Limited Partnership (PFLP). This is not generally necessary. A limited partnership may register as a PFLP upon or at any time after its establishment, provided that it is a collective investment scheme for FSMA purposes (a CIS) or would be a CIS but for the 6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act availability of an applicable exemption (essentially this makes the 2010 (FATCA) and other similar information reporting regime available for most investment partnerships, including those regimes such as the Common Reporting Standard? for investment solely within a corporate group). The changes include: FATCA compliance is currently coordinated at the UK level ■ the introduction of a ‘white list’ of permissible activities for (primarily by the International Tax Compliance (United States of limited partners which will not be treated as ‘taking part in America) Regulations 2013). The use of AIFs domiciled in Scotland business’ and therefore will not bring a risk of loss of limited should not ordinarily introduce any additional material factors liability; relevant to FATCA or compliance with similar information reporting ■ removal of certain duties upon limited partners (unless the regimes. partnership agreement provides otherwise); It is to be noted that SLPs often elect to be treated as corporations ■ removal of the requirement for limited partners to make any for US tax purposes. Where that is the case, it may be relevant capital contribution, with partners being free to contribute for FATCA compliance purposes (for example, when considering capital or loans (or to make no contribution); which entity may become liable for FATCA withholding tax). ■ removal of the prohibition upon the return of capital prior to winding-up; ■ removal of the requirement to register the amount of capital 6.7 Are there any other material tax issues? contributed, the purpose of the partnership and its duration or term; As indicated above, the tax profile of individual investors in an AIF ■ removal of the requirement for a court order to wind up a SLP will determine the applicable tax liability. Fund documentation limited partnership where the general partner has been will recommend that investors take their own tax advice. removed; and In addition, there have been a number of recent changes to the taxation ■ removal of the need to advertise transfers of limited partner of ‘carried interest’ arrangements for management executives, which interests in the Edinburgh Gazette (the requirement will are beyond the scope of this chapter. remain for the change of the status of an interest from a general partner interest to a limited partner interest).

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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, Glasgow, Aberdeen and Brussels. We are ranked ‘No.1’ in 37 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

WongPartnership LLP Charlotte Sin

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? AIFs are themselves not required to be licensed by any regulatory body in Singapore. However, if the AIF is incorporated as a Singapore The legislation (if any) governing the establishment and operation of company, it would be registered by the Registrar of Companies and an Alternative Investment Fund (AIF) will depend on the structure comply with rules under the Companies Act of Singapore, and if the AIF takes. For example, if the AIF is structured as a Singapore the AIF is registered as a Singapore limited partnership, it would be incorporated company, the Companies Act (Cap. 50) of Singapore registered by the Registrar of Limited Partnerships and comply with will be the governing legislation. If the AIF is structured as a limited rules under the Limited Partnerships Act of Singapore. Authorisation partnership registered in Singapore, the Limited Partnerships Act of an AIF is not generally required except where: (i) the AIF (Cap 163B) of Singapore will be the governing legislation. On the is offered only to accredited investors pursuant to a prospectus other hand, AIFs structured as unit trusts are established and operated exemption in section 305 of the SFA (S305 Exemption). In that case, in accordance with the terms of the trust deed constituting the AIF a simple notification of the proposed offer of the interests in the AIF and there is no specific legislation governing the establishment of is required to be filed with the MAS before the AIF is offered to such trusts unless the AIF is offered to the public for investment accredited investors in Singapore; or (ii) the AIF is offered to the in which case there are extensive prudential rules and procedural public for investment in which case the AIF needs to be authorised or requirements under the Securities and Futures Act (Cap. 289) of recognised by the MAS and in addition there are extensive prudential Singapore that apply. rules and procedural requirements under the SFA that apply.

1.2 Are managers or advisers to Alternative Investment 1.4 Does the regulatory regime distinguish between Funds required to be licensed, authorised or open-ended and closed-ended Alternative Investment regulated by a regulatory body? Funds (or otherwise differentiate between different types of funds) and if so how? Under the Securities and Futures Act (Cap. 289) of Singapore (SFA), a person who carries on business in fund management is The current regulatory regime in Singapore does not differentiate required to hold a capital markets services licence (CMS licence) between open-ended and closed-ended AIFs. for fund management unless it is able to avail itself of any of the licensing exemptions. Fund management includes the management of a portfolio of securities on behalf of a customer (whether on a 1.5 What does the authorisation process involve? discretionary authority granted by the customer or otherwise). Hence, fund managers and investment advisers of private equity An application for a CMS licence by a fund manager of an AIF funds are required to be licensed and regulated by the Monetary involves filling out some forms prescribed by the MAS and submitting Authority of Singapore (MAS) unless they qualify for any of the a simple business plan, shareholding chart and organisation chart of licensing exemptions. In the case where the manager or adviser to a the applicant and the applicant’s audited financial statements and, private equity fund is undertaking fund management on behalf of not where applicable, the consolidated financial statements of the group more than 30 qualified investors (essentially institutional investors the applicant is a part of. After the application is submitted, the and accredited investors) of which not more than 15 are collective MAS would generally take around four to six months to review and investment schemes (CIS) or closed-ended funds that are offered raise any queries it has relating to the application. only to institutional or accredited investors, the manger or adviser is exempted from licensing but is required to be registered with the 1.6 Are there local residence or other local qualification MAS. The managers and advisers of AIFs that invest (directly or requirements? through another entity) in immovable assets (or corporations or unincorporated bodies whose sole purpose is to hold immovable In the case where the AIF is set up as a Singapore incorporated assets) can only also be exempted from licensing if all the investors company, at least one Singapore resident director (i.e. a Singapore in the AIF are qualified investors. citizen, Singapore permanent resident or holder of an employment

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pass issued by the Ministry of Manpower in Singapore) will have to be appointed to the board of the AIF. If the AIF is set up as a 2.4 Are there any limits on the manager’s ability to Singapore limited partnership and the general partner is ordinarily restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds? resident outside Singapore, the Registrar of Limited Partnerships will require an ordinarily resident natural person acting as the local manager to be appointed. There are no statutory limits on the manager’s ability to restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds. For AIFs that are authorised for investment 1.7 What service providers are required? by the members of the public and which are not listed on the Singapore Stock Exchange, there are certain liquidity requirements In general, the MAS requires that assets under management be held for investors prescribed under the Code on Collective Investment Singapore by an independent custodian, that is, a prime broker, depositories Schemes. However, no such AIF (being one that is not listed on the or banks that are properly registered or authorised in their home Singapore Stock Exchange) has ever been established in Singapore jurisdiction, although it recognises that private equity and wholesale after a successful fund-raising. real estate funds can adopt other methods, subject to appropriate disclosures and other safeguards. The assets under management 2.5 Are there any legislative restrictions on transfers of must be subject to an independent valuation carried out by a third- investors’ interests in Alternative Investment Funds? party service provider or by an in-house fund valuation function under certain conditions. In the case where the AIF is managed by a fund manager who is only licensed by the MAS to manage funds for qualified investors, 1.8 What co-operation or information sharing agreements all transfers of investors’ interests in the AIF must be made only to have been entered into with other governments or qualified investors. For AIFs that have not been authorised by the regulators? MAS for investment by members of the public, the fund manager must not make any offering of the interests in the AIF to members Singapore has concluded the following international co-operation of the public, unless one or more exceptions are invoked, such and information sharing agreements with other governments and as the private placement exemption, the S305 Exemption or the regulators: institutional investors exemption, and the constitution documents of such an AIF must restrict transfers of interests amongst the investors (a) Exchange of Information Arrangements; to ensure that the interests in the AIF are not held by any member (b) Convention on Mutual Administrative Assistance in Tax of the public. Matters; and (c) International Tax Compliance Agreements (e.g. FATCA, Common Reporting Standard and Country-by-Country 3 Marketing Reporting).

3.1 What legislation governs the production and offering 2 Fund Structures of marketing materials?

The SFA, Financial Advisers Act of Singapore and the various 2.1 What are the principal legal structures used for subsidiary legislation issued thereunder govern the offering of Alternative Investment Funds? marketing materials. Limited partnerships and private limited companies are the principal legal structures used for AIFs. 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. For AIFs that are offered to investors pursuant to the Section 305 Under the Limited Partnerships Act of Singapore, the liability of Exemption, the MAS has prescribed a list of disclosures to be made limited partners of a fund structured as a limited partnership is in the AIF’s information memorandum. The items to be disclosed limited to the limited partner’s capital contribution to the limited include the investment objective and focus of the AIF, investment partnership provided the limited partner does not become involved approach of the manager, the risks of subscribing for interests in in the management of the limited partnership. the AIF, details relating to the manager, and, where applicable, For AIFs incorporated as Singapore private limited companies, the the trustee and custodian for the AIF and the financial supervisory Companies Act of Singapore limits the liability of the investors such authorities that they are regulated by, the conditions, limits and that they will not be required to contribute more than the amount of gating structures for redemption, the AIF’s policy on side letters, share capital they have paid into the company. details on where the accounts of the AIF may be obtained and the fees and charges payable by the investors and the AIF. In practice, even for AIFs that are not offered pursuant to the S305 Exemption, 2.3 What are the principal legal structures used for it is customary for the information memorandum to disclose almost managers and advisers of Alternative Investment all of the above information. Funds?

Fund managers and investment advisers which are regulated by the 3.3 Do the marketing or legal documents need to be MAS are required to be set up as Singapore incorporated companies. registered with or approved by the local regulator?

This would depend on which prospectus exemption is invoked

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when marketing the AIF. If the AIF is marketed only to accredited investors pursuant to the S305 Exemption, a copy of the information 3.9 Are there any restrictions on the participation in memorandum (i.e. any materials distributed to investors for the Alternative Investments Funds by particular types of investors, such as financial institutions (whether as purpose of enabling them to decide whether to invest in the AIF, sponsors or investors)? such as the private placement memorandum and fund fact sheets) would have to be given to the MAS for record purposes. The MAS Banks in Singapore are prohibited under section 32 of the Banking does not approve the information memorandum. Act of Singapore from acquiring or holding any major stakes (i.e. any beneficial interest exceeding 10% of the total number of issued 3.4 What restrictions are there on marketing Alternative shares or control over more than 10% of the voting power) in a Investment Funds? company undertaking non-financial business. However, Regulation 7 of the Banking Regulations excludes private equity and venture Singapore Generally, an offer of interests in an AIF in Singapore would need capital investments from the ambit of section 32. MAS Notice 630 to be made in or accompanied by a prospectus registered with the to banks on private equity and venture capital investments sets out MAS unless the offer is made pursuant to one of the exemptions or the scope of private equity and venture capital investments that can safe harbours in the SFA. be undertaken by Singapore banks, the duration of investments and the bank’s involvement in the management of such investments. The restrictions on marketing would depend on which safe-harbour For example, a bank shall not hold any indirect private equity and or prospectus exemption is invoked when marketing the AIF. If the venture capital investment, where such investee is not managed by offer is made pursuant to the private placement exemption in the SFA, the bank or a related party, for a period exceeding 12 years from the the AIF can be offered to no more than 50 offerees over a period of 12 date of its first investment in the investee. months. If the offer is made pursuant to the “small offers” exemption, no more than S$5 million can be raised by a person from “personal offers” of interests in the AIF over a period of 12 months. In both cases, 4 Investments no advertisements may be published in connection with the offer and the marketing of the AIF will need to be undertaken by persons who hold a CMS licence for dealing in securities and a Financial Advisors 4.1 Are there any restrictions on the types of activities that licence for marketing collective investment schemes or persons who can be performed by Alternative Investment Funds? are exempted from holding such licences. For AIFs that are not registered by the MAS for offers to members of the public, there are currently no statutory or regulatory restrictions 3.5 Can Alternative Investment Funds be marketed to on the types of activities that can be performed by AIFs, although retail investors? investment restrictions are commonly provided for contractually.

AIFs are typically marketed to institutional investors and accredited investors (rather than members of the public) either because of 4.2 Are there any limitations on the types of investments the terms of offer of the AIF (e.g. higher minimum subscription that can be included in an Alternative Investment amounts) or because the licence granted by the MAS to the fund Fund’s portfolio whether for diversification reasons or otherwise? manager restricts its clientele to qualified investors only.

For AIFs that are not registered by the MAS for offers to members 3.6 What qualification requirements must be carried out of the public, there are no such limitations. in relation to prospective investors?

As mentioned above, prospective investors of AIFs are typically 4.3 Are there any restrictions on borrowing by the Alternative Investment Fund? institutional investors and accredited investors. Such investors would normally be required to produce supporting documents such For AIFs that are not registered by the MAS for offers to members of as their latest financial statements or bank statements as evidence of the public, there are currently no statutory or regulatory restrictions, their financial worth. although contractual restrictions are common.

3.7 Are there additional restrictions on marketing to public bodies such as government pension funds? 5 Disclosure of Information

There are no additional restrictions on marketing to public bodies. 5.1 What public disclosure must the Alternative Investment Fund make? 3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process? AIFs structured as Singapore companies are required to file their financial statements, as well as information on their shareholders and Under the current legislative framework, intermediaries engaged to directors, with the Accounting and Corporate Regulatory Authority assist in fundraising for AIFs are required to hold a CMS licence for of Singapore (ACRA). Such information can be obtained by dealing in securities and a Financial Advisors licence for marketing members of the public from ACRA on payment of a fee. collective investment schemes, or be exempted from holding such AIFs structured as limited partnerships are not required to file annual licences. When the Securities and Futures (Amendment) Act 2016 is returns with ACRA. In addition, the particulars of the limited partners gazetted to come into force in Singapore, all entities marketing AIFs are not open to inspection by the public if the AIF is managed by a will only be required to hold a CMS licence for dealing in capital licensed fund manager or a person exempted from the requirement markets products or be exempted from holding such a licence. to be so licensed.

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In addition, AIFs that are registered by the MAS for offers to In order to promote Singapore as a jurisdiction for fund management, members of the public have extensive disclosure obligations in the the MAS administers certain tax incentive schemes (known as the prospectus that they have to lodge with the MAS, and as continuing basic tier tax incentive scheme and enhanced tier tax incentive disclosure obligations, the AIFs have to disclose the interests of scheme) available for AIFs that are managed by Singapore-based substantial investors (namely, those who hold 5% or more of the fund managers. Such schemes can effectively exempt AIFs that equity interests in the AIFs), directors and the Chief Executive satisfy the qualifying conditions from virtually all incidents of Officer of the fund manager in the AIFs, as well as the financial income tax except where the income is sourced from Singapore performance of the AIFs. immoveable properties.

5.2 What are the reporting requirements in relation to 6.2 What is the tax treatment of the principal forms of Singapore Alternative Investment Funds? investment manager / adviser?

AIFs structured as companies are required to make regular filings with Investment managers and advisers are normally set up as Singapore ACRA, including with regard to issuances of securities, changes in companies. As such, please refer to question 6.1 on the tax treatment directors and shareholders, creation of charges and annual reports. A of Singapore companies. general partner of a limited partnership is similarly required to lodge A Singapore-based fund management company can apply for a a statement with the Registrar of Limited Partnerships whenever 10% concessionary income tax treatment for income deriving from there are changes in any of the particulars registered in respect of the the management of the fund under the Financial Sector Incentive limited partnership. – Fund Manager Scheme (FSI-FM). This concessionary tax rate In addition, AIFs that are registered by the MAS for offers to members is awarded under certain conditions and at the MAS’s discretion. of the public have to send semi-annual and annual performance The FSI-FM incentive is limited to a Singapore incorporated fund reports to their investors. This is in addition to reporting requirements management company with minimum assets under management of imposed by the Singapore Stock Exchange, as such AIFs are at least S$250 million, in addition to meeting other qualitative and invariably listed on the Singapore Stock Exchange. quantitative conditions under the scheme.

5.3 Is the use of side letters restricted? 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an There are no restrictions on the use of side letter arrangements by Alternative Investment Fund or the transfer of the investor’s interest? AIFs. However, for restricted funds marketed only to accredited investors, pursuant to the Section 305 Exemption, the MAS has prescribed certain disclosures to be made to investors in the private There are no establishment taxes levied in connection with an placement memorandum on such side letter arrangements, such as investor’s participation in an AIF. An investor’s transfer of shares the nature and scope of such side letters. in an AIF set up as a Singapore company will attract stamp duty at the rate of 0.2% of the consideration for the transfer or the net asset value of the shares transferred, whichever is higher. Stamp duty 6 Taxation may be payable on the transfer of limited partnership interests in an AIF if the assets of the partnership include shares of Singapore corporations and immoveable properties situated in Singapore. 6.1 What is the tax treatment of the principal forms of Alternative Investment Funds? 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative Singapore limited partnerships are not liable to tax at the entity Investment Funds? level. Instead, each partner will be taxed on his or its share of the income from the limited partnership. The tax treatment of investors in AIFs becomes a relevant Singapore income tax is imposed on income accruing in or derived consideration for investors where the AIF is not able to invoke from Singapore and on foreign-sourced income received in Singapore any of the available tax exemption schemes such as the basic tier (subject to certain exceptions). While Singapore does not impose tax incentive scheme or the enhanced tier tax incentive scheme. tax on capital gains, gains from the disposal of investments may be Limited partnerships are tax-transparent vehicles and, accordingly, considered as income rather than capital gains (and thus subject to income and gains received by the fund are taxable in the hands of Singapore income tax) if they arise from or are otherwise connected the partners. The tax payable by a particular partner will depend on with the activities of a trade or business carried on in Singapore. that particular partner’s tax profile. Resident individual investors Hence, one common issue for AIFs on taxation is whether gains are taxed at progressive tax rates of up to 22% on their taxable are capital in nature and thus not taxable in Singapore, or taxable as income, while corporates are taxed at 17% on their taxable income. trading income. Non-resident investors in a private equity fund structured as AIFs which are Singapore incorporated companies are generally a Singapore company are not subject to taxation. There is no taxed at a flat rate of 17% on their chargeable income. There is, withholding tax on dividend distributions made by AIFs structured however, an exemption in the case where an AIF structured as a as Singapore companies to non-resident investors. If any interest or company owns 20% or more of the ordinary share capital of another royalty is paid by an AIF to a non-resident investor, withholding tax company, and has held those shares for a continuous period of at at the rate of 15% is applicable. least 24 months prior to their disposal. In that case, the gains will Pension fund investors are subject to tax on their taxable income in be exempt from tax for any shares disposed in the investee company the same manner as corporate investors. between 1 June 2012 and 31 May 2022.

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6.5 Is it necessary or advisable to obtain a tax ruling from 6.8 What steps are being taken to implement the OECD’s the tax or regulatory authorities prior to establishing Action Plan on Base Erosion and Profit-Shifting an Alternative Investment Fund? (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? It is not generally necessary to obtain a tax ruling from the tax authority before establishing an AIF. As discussed in the last On 16 June 2016, Singapore joined the inclusive framework for paragraph of question 6.1, there are tax exemption schemes for implementing measures against Base Erosion and Profit-Shifting AIFs in Singapore known as the basic tier tax incentive scheme (BEPS). The inclusive framework was proposed by the OECD and enhanced tier tax incentive scheme. In practice, many fund and endorsed by G20 members in February 2016. By joining the managers of AIFs would consider applying for a tax exemption inclusive framework, Singapore has committed to implement four Singapore scheme if they are able to meet the qualitative and quantitative minimum standards of the 15-point action plan under the BEPS conditions. project, namely: (i) countering harmful tax practices (Action point 5); (ii) preventing treaty abuse (Action point 6); (iii) transfer pricing documentation – Country-by-Country Reporting (Action point 13); 6.6 What steps have been or are being taken to implement and (iv) enhancing dispute resolution (Action point 14). the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting Action point 6 seeks to address treaty abuse and, in particular, regimes such as the Common Reporting Standard? treaty shopping. The tax authority in Singapore has opined that Singapore does not condone treaty shopping and, therefore, the tax Singapore and the US signed a FATCA Model 1 intergovernmental treaties signed by Singapore generally contain anti-treaty shopping agreement (IGA) on 9 December 2014 to help ease Singapore-based provisions to prevent abuse. To further bolster the anti-treaty shopping financial institutions’ (SGFIs) FATCA compliance burden. The IGA provisions, Singapore is currently part of a group of jurisdictions and Regulations entered into force on 18 March 2015. working together under the aegis of the OECD and G20 to develop Pursuant to the IGA and Regulations, SGFIs are now required a multilateral instrument (MI) for incorporating BEPS measures into to register with the FATCA Registration Portal as a “Registered existing bilateral treaties to counter treaty abuse. The tax authority in Deemed-Compliant Financial Institution (Including a Reporting Singapore has indicated that Singapore will consider whether to adopt Financial Institution under a Model 1 IGA)”. When SGFIs register the instrument after it is finalised and ready for jurisdictions to adopt. with the US Internal Revenue Service, they obtain a Global To date, Singapore has yet to make any public announcements on its Intermediary Identification Number. SGFIs are required to perform position on specific articles in the MI or any timeline for the domestic due diligence procedures in relation to new individual accounts and ratification process. new entity accounts opened on or after 1 July 2014. SGFIs are also In relation to Action 7 (Permanent Establishment Status), it is not required to automatically remit information to the US government yet known whether and when Singapore will implement changes to via the Inland Revenue Authority of Singapore (IRAS) of accounts the definition of “permanent establishment” to prevent the artificial believed to be beneficially owned by US persons (including US avoidance of permanent establishment status in relation to BEPS. entities). Details exchanged would include the holder’s name, US Tax Identification Number and account balance, as well as interest earned on the account. 7 Reforms The Income Tax (International Tax Compliance Agreements) (Common Reporting Standard) Regulations 2016 of Singapore (CRS 7.1 What reforms (if any) are proposed? Regulations) were published on 2 December 2016. The CRS Regulations allow Singapore to implement the Standard On 15 February 2017, the MAS published a Consultation Paper on for Automatic Exchange of Financial Account Information in Tax the Proposed Regulatory Regime for Managers of Venture Capital Matters (AEOI), also known as the Common Reporting Standard Funds (VC Consultation Paper). The VC Consultation Paper (CRS), with effect from 1 January 2017. The CRS Regulations proposed simplified rules for managers of venture capital funds (VC require all SGFIs to put in place necessary processes and systems to managers). As the current regulatory regime for fund managers does collect CRS information from all non-Singapore tax resident account not make a distinction between VC managers and managers handling holders from 1 January 2017. Such collection of information other asset classes, VC managers are subject to the same regulatory by SGFIs is necessary in order for them to submit the required framework and compliance regime as other fund managers. information to IRAS in 2018, for subsequent exchange under the Under the proposed simplified authorisation process, the MAS CRS. This timeline is in accordance with Singapore’s commitment will focus primarily on a fitness and propriety assessment of the to commence first exchange of information under the CRS in 2018. VC managers. Unlike the current regime, the MAS will not require Reporting SGFIs will be required to transmit to IRAS the CRS VC managers to have directors and representatives with at least five information of their account holders who are tax residents of years of relevant experience in fund management. jurisdictions with whom Singapore has a Competent Authority Under the proposed simplified regulatory framework, new and Agreement for CRS. existing VC managers will not be subject to the capital requirements and business conduct rules that currently apply to fund managers 6.7 Are there any other material tax issues? in general. The base capital requirements and risk-based capital requirements will be removed and the requirement for independent valuation, internal audits and submission to the MAS of audited No, there are not. financial statements will not be imposed.

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The proposed changes aim to expedite the application process and ease the compliance burden on VC managers. Charlotte Sin On 23 March 2017, the MAS also issued a consultation paper on the WongPartnership LLP 12 Marina Boulevard, Level 28 proposed framework for the Singapore Variable Capital Company Marina Bay Financial Centre, Tower 3 (S-VACC) to introduce a new corporate structure for collective Singapore 018982 investment schemes (CIS). The S-VACC is intended to address Tel: +65 6517 8657 some of the restrictions in the use of the company structure for Fax: +65 6532 5711 CIS. In particular, unlike a Singapore incorporated company, the Email: [email protected] S-VACC will provide greater flexibility for the return of capital to URL: www.wongpartnership.com shareholders in order to facilitate redemption rights of investors. Singapore The proposed S-VACC framework is intended to cater to both open- Charlotte Sin is a Partner in the Asset Management & Funds Practice. She regularly advises fund managers and trustees on ended and closed-ended investment funds, and allow for segregation the offer of investment funds in Singapore. She has experience in of assets and liabilities of sub-funds within an umbrella structure. the establishment and authorisation of local collective investment This will allow asset managers to achieve cost efficiencies by schemes and the recognition of foreign collective investment schemes consolidating administrative functions at the umbrella fund level. for retail and restricted offerings in Singapore. She also advises clients In addition, S-VACCs would be allowed to maintain their respective on regulatory compliance with securities regulations in Singapore including the Securities and Futures Act, Financial Advisers Act and registers of shareholders, but would be required to disclose the guidelines and notices issued by the Monetary Authority of Singapore. registers to supervisory and law enforcement agencies where Charlotte is a recommended lawyer in The Legal 500: Asia Pacific necessary. The S-VACC is proposed to be limited to investment – The Client’s Guide to the Asia Pacific Legal Profession, 2017 for fund purposes only, and would be required to be managed by a fund the area of Investment Funds in Singapore. She graduated from the manager who is regulated by the MAS. Shares of the S-VACC University of Hull and went on to obtain a Master of Laws from the would generally be issued and redeemed at net asset value to ensure University of Sydney. She is admitted to the Singapore Bar and the New York State Bar. accountability and transparency for creditors.

WongPartnership is a trusted law firm with a high level of expertise in all areas of law, and is well-reputed for its commitment toexcellence. Headquartered in Singapore, WongPartnership has over 300 lawyers and offices in Beijing, Shanghai and Yangon, as well as in Abu Dhabi, Dubai, Jakarta and Kuala Lumpur (through associate firms). The firm has a twin focus on advisory/transactional work in the areas of finance, corporate and capital markets where it has been involved in landmark mergers and acquisitions and capital markets transactions, as well as complex and high-profile litigation and arbitration matters. The exceptional nature of WongPartnership’s work has drawn recognition from major regional and international commentators, and the firm has established itself among the top echelons of the Asian legal world. The collaborative nature of its practices ensures that clients receive the quality of service that is essential in today’s competitive and challenging environment.

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Spain Miguel Cases

Cases & Lacambra Toni Barios

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? Yes, Alternative Investment Fund Managers (“AIFMs”) are regulated by the Spanish National Securities Market Commission (“CNMV”), Spanish legislation distinguishes between closed-ended and open- and require its prior authorisation; although it has to be noted that those ended Alternative Investment Funds (“AIFs”). non-Spanish AIFMs already authorised in other EU Member States Spanish closed-ended AIFs are governed by Law 22/2014, of 12 can be passported with no need of obtaining further authorisation. November 2014, regulating private equity entities, other closed- The CNMV, as the supervisory authority, has created a special ended collective investment entities and the management companies register where AIFMs and collective investment and venture capital of closed-ended collective investment entities, and amending the companies must register prior to the start of their activities. Although, Collective Investment Schemes Act, which involves the transposition depending on the type of AIF, the requirements and timeline will into Spanish law of Directive 2011/61/EU. vary, Spanish AIFMs must be registered in the Commercial Registry Spanish open-ended AIFs are governed by Law 35/2003, of 4 and must have obtained prior authorisation from the CNMV after November, on Collective Investment Schemes applying to open- the approval of their application (demonstrating that they meet ended funds, and the same has been modified by the indicated the regulatory criteria, including: equity requirements; suitable Directive relating to fund management companies of alternative risk management and investment selection procedures; suitability funds, and Royal Decree 83/2015, of 13 February, amending Royal requirements of the shareholders, managers, directors and other key Decree 1082/2012, of 13 July, approving the Regulation for the persons; and, if any, applicable exemptions). Consequently, any Development of the Collective Investment Schemes Law. AIFM which does not appear to be registered in the special CNMV Given that Spain is a Member State of the European Union registry is not able to perform management activities. (“EU”), the Spanish regulation is the result of the transposition With regard to advisers to AIFs, although there is no special register, of the European regulatory framework (i.e. (i) the Undertakings the activities they perform and the scope of the same will determine for Collective Investment in Transferable Securities (“UCITS”) any required licences and authorisations or any supervision by any Directive 2014/91/EC, applicable to harmonised funds; (ii) Directive regulatory body. 2011/61/EC of the European Parliament and of the Council of 8 June 2011, on Alternative Investment Fund Managers (“AIFMD”) applicable to companies managing alternative funds; (iii) Directive 1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a 2009/65/EC of the European Parliament and of the Council of 13 July regulatory body? 2009, on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in Yes. AIFs themselves must also obtain authorisation by the CNMV, transferable securities (UCITS) (“UCITS Directive”); and finally since it is the authorising, supervisory and control authority. (iv) Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC 1.4 Does the regulatory regime distinguish between of the European Parliament of the Council and repealing Council open-ended and closed-ended Alternative Investment Directive 93/22/EEC (“MiFID”). Please note that a preliminary Funds (or otherwise differentiate between different draft bill implementing Directive 2014/65/EU of the European types of funds) and if so how? Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive Yes, as set out in question 1.1 above, the Spanish legal system 2011/61/EU (“MiFID II”) and Regulation (EU) No 600/2014 of the distinguishes between open-ended and closed-ended AIFs, European Parliament and of the Council of 15 May 2014 on markets regulated respectively by Law 35/2003 and Law 22/2014. Each in financial instruments and amending Regulation (EU) No 648/2012 Law establishes different types of structures and, among others, the (“MiFIR”) is currently under public consultation). requirements, aspects and procedures of each of these entities. Open-ended AIFs may adopt the form of either an investment fund or investment company, and can be financial or non-financial, depending

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on their purpose and on whether or not they invest in financial instruments or assets. 1.8 What co-operation or information sharing agreements have been entered into with other governments or On the other hand, closed-ended AIFs may be constituted as private regulators? equity entities (“ECR”: Entidades de Capital Riesgo) or companies (“SCR”: Sociedades de Capital Riesgo). The CNMV, within the EU supervisory framework, has subscribed Moreover, Law 22/2014 establishes other types of closed-ended to many information exchange agreements with other jurisdictions collective investment figures such as: (i) closed-ended collective and supervisory bodies from within the EU and abroad; for example, investment entities (“EICC”); (ii) closed-ended investment funds Argentina, Australia, Belgium, Bolivia, Brazil, Canada, Chile, China, (“FICC”); and (iii) closed-ended investment companies (“SICC”). Colombia, Costa Rica, the Czech Republic, the Dominican Republic, Spain Ecuador, El Salvador, France, Germany, Hong Kong, Italy, Mexico, 1.5 What does the authorisation process involve? Panama, Peru, Portugal, Romania, Taiwan, the United Arab Emirates and the USA. Given the different treatment between open-ended and closed-ended Specifically with regard to information sharing agreements, these AIFs, the authorisation process will depend on the type of fund and, include, amongst others: (i) the European Union Agreement on Co- in addition, on whether it is authorised outside or within the EU. operation Between the Financial Supervisory Authorities, Central Banks and Finance Ministries – On Financial Stability in the European Those AIFs authorised within the EU will not require specific authorisation by the CNMV, and are enabled to operate in the Union; (ii) the International Organization of Securities Commissions country through the EU passport. However, non-EU AIFs shall be (“IOSCO”) Multilateral Agreement; (iii) the European Securities required to obtain prior authorisation by the CNMV in order to carry and Markets Authority (“ESMA”) Multilateral Agreement for the out any activity in Spain. Exchange of Information and Supervision of Securities Activities; (iv) the Co-operation Framework Agreement for Mutual Assistance An AIF seeking to set up in Spain shall submit its application and in the Supervision and Monitoring of an AIFM, its Delegates and draft constitution documents for approval by the CNMV. The Depositaries; (v) the Securities and Exchange Commission (“SEC”) authorisation request must, in all cases, include the following and Committee of European Securities Regulators (“CESR”) documents: (i) a report; (ii) accreditation of the good reputation (currently ESMA) Work Plan; and (vi) the exchange of confidential and professionalism, in the terms stated in the regulations, of those information between the SEC and CNMV, in accordance with who hold a position of fund administrator; (iii) in general terms, any International Financial Reporting Standards (“IFRS”), on companies data, reports or records deemed appropriate to verify compliance issuing securities in both markets. with the conditions and requirements legally established; (iv) the prospectus and the key investor information document; and (v) the rules of management. 2 Fund Structures In the case of both AIFs and investment companies which designate an AIFM already authorised by the CNMV as their management company, they must notify the CNMV of this. 2.1 What are the principal legal structures used for Alternative Investment Funds? AIFs cannot start their activity until they are registered in the special CNMV register. Essentially, AIFs can be constituted through either an investment fund or an investment company. However, investment funds can 1.6 Are there local residence or other local qualification only be managed by a management company since they have no requirements? legal personality, whereas an investment company can be managed directly (by its own board of directors), or by delegating management Local residence and other local qualification requirements only to an authorised institution. apply for Spanish-based AIFs or AIFMs registered in Spain and for The main legal structures for open-ended AIFs are investment funds those foreign AIFs intended to be marketed in Spain. whose objective is to obtain the highest possible return using all the Thus, those AIFs or AIFMs which carry out their activities in Spain investment opportunities available to the manager (“hedge funds” or will be subjected to local residence or qualification requirements, Instituciones de Inversión Colectiva de Tipo Libre) and funds of hedge except in those cases where the AIFM is authorised to carry out its funds (Fondos de Instituciones de Inversión Colectiva de Tipo Libre). activities in Spain on a cross-border basis through the EU passport, The main legal structures for closed-ended AIFs are: private equity as noted in question 1.2 above. entities (which can take the form of funds or companies); and other AIFs marketed in Spain shall designate a legal person responsible for types of entities (i.e. closed-ended collective investment entities, which complying with the general provisions of disclosure of information can be either funds or companies, as noted in question 1.4 above). and communication of any change affecting the essential elements in its offering to investors or data registration with the CNMV. 2.2 Please describe the limited liability of investors.

1.7 What service providers are required? It must be assumed that the participants will be responsible up to the limit of their contributions, which constitutes limited liability. The applicable law and regulations set out that there shall be a depositary institution in which: (i) securities, cash or any other 2.3 What are the principal legal structures used for products; and (ii) management companies (in case of investment managers and advisers of Alternative Investment funds), need to be deposited. Funds? In addition, AIFs may be marketed by financial intermediaries, which mainly tend to be banks, securities or securities agencies. The companies responsible for the management of funds may adopt

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either of the legal forms, which are: a management company of The key investor document will be drafted in concise, non-technical a venture capital entity; or a collective investment management language and presented in a common format, allowing for comparison, company. and must be easily analysable and comprehensible to the average investor in order that he/she is reasonably able to understand the essential characteristics, nature and risks of the investment product 2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers that is offered and make investment decisions without recourse to in open-ended or closed-ended funds? other documents. The document must be continuously updated and any amendments thereto should be sent to the CNMV. The management companies of open-ended AIFs issue and redeem For closed-ended AIFs, prior to subscription, investors must be shares at the same intervals as net asset value calculations upon the provided with a prospectus that must contain information which is Spain request of any participant, under the terms established in the relevant fair, clear and not misleading, as well as consistent. regulations. Notwithstanding the foregoing, AIFs do not have to grant the requested redemption on a net asset value calculation date 3.3 Do the marketing or legal documents need to be set by the participant, and so it does not constitute any right by registered with or approved by the local regulator? itself and shall be expressly stated in the prospectus. However, the CNMV, on its own initiative or upon the request of the management Yes. The CNMV establishes the standard model applicable to all the company, may temporarily suspend the subscription or redemption documentation to be submitted to investors. In this sense, it keeps a of units when it is not possible to determine its price or concur on record of brochures, documents with key investor information, and other force majeure events. In principle, subscription or redemption annual and quarterly reports on the AIF, to which the public will of shares may only be restricted or suspended if there is just cause have free access. or in cases of force majeure. All documents published in the public domain will be forwarded Closed-ended AIFs can establish restrictions on redemptions and simultaneously to the CNMV in order to keep the above-mentioned will be subject to their own ruling provisions. records updated. In the case of the dissemination of the prospectus and the document 2.5 Are there any legislative restrictions on transfers of containing key investor information, prior registration by the investors’ interests in Alternative Investment Funds? CNMV is required. Registration of the prospectus and the document containing key investor information will require prior verification No, there are no specific legislative restrictions. However, general by the CNMV. principles of public order and of company law may apply.

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

AIFs and their management companies must respect, in any event, 3.1 What legislation governs the production and offering the regulations concerning marketing and advertising in Spain. The of marketing materials? CNMV monitors compliance with these obligations. It is especially relevant that authorisation for marketing in Spain Legislation governing either production and marketing materials of may be refused due to prudential reasons, specifically: (i) not being investment funds will depend on whether it is a closed-ended or treated in an equivalent manner to investment funds in the respective open-ended fund. Thus, Law 35/2003 and Regulation 1082/2012 country of origin; (ii) non-compliance with the rules of order and on Collective Investment Entities apply to open-ended AIFs; and discipline in the Spanish securities markets; (iii) not sufficiently Law 22/2014 to closed-ended funds. However, there is a common ensuring the adequate protection of investors resident in Spain; regulation for both types of AIF, which consists of: (i) the revised or (iv) the existence of disruption in the conditions of competition text of the Securities Market Law 4/2015, which states, in general between AIFs authorised outside Spain and those authorised in terms, the basic conditions for marketing materials, as well as Act Spain. 34/1998, of 11 November 1998, for advertising; and (ii) Royal Decree 217/2008, of 15 February 2008, on investment firms. 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 customary practice? According to AIFMD and MiFID, those AIFs managed by AIFMs regulated by AIFMD may be marketed and advertised to retail For open-ended AIFs, the key investor document information investors but subjected to enhanced investment requirements set shall include information containing the essential characteristics forth in the Spanish legislation in order to ensure protection for such of the fund. The words “key investor information” shall appear retail investors. prominently at the top of the first page of the document in Spanish or Accordingly, open-ended funds can be marketed to retail investors another language that accepts the CNMV. Specifically, information provided the following conditions are fulfilled: (i) an investment of, shall include the following data: (i) identification of the AIF; (ii) a at least, EUR 100,000; and (ii) a written declaration from the retail brief description of its investment objectives and investment policy; investor confirming that it is aware of the associated risks. (iii) a presentation of the historical returns or, where appropriate, Despite the fact that the advertising of closed-ended AIFs is targeted profitability scenarios; (iv) costs and associated expenses; and (v) to professional investors, this does not preclude the possibility for risk/reward investment, with appropriate guidance and warnings in retail investors to invest in closed-ended funds, provided they fulfil relation to the risks associated with investments in the Council of the conditions mentioned above. Institutional Investors’ (“CII”) considered warnings profile.

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invest more than 10% of their assets in another hedge fund. In the 3.6 What qualification requirements must be carried out case of closed-ended funds, the aforementioned minimum 60% of in relation to prospective investors? their assets must be invested in financial instruments as shares or profit-participating loans. Prior to investment, investors shall declare, in writing, that they Those AIFMs authorised within any Member State of the EU or acknowledge the investment risks. in those countries not included in the Financial Action Task Force (“FATF”) list of countries not co-operating in the exchange of 3.7 Are there additional restrictions on marketing to information, are able to invest up to 100% of their assets in other public bodies such as government pension funds? ECRs. Spain The legislation does not provide any additional restrictions on 4.3 Are there any restrictions on borrowing by the marketing to public bodies. Alternative Investment Fund?

3.8 Are there any restrictions on the use of intermediaries While the applicable law does not state a specific cap for closed- to assist in the fundraising process? ended funds, in the case of open-ended funds, debt may not exceed five times the value of its assets and must be consistent with the Financial intermediaries, which can be banking or non-banking implementation of its strategy and investment policy. In both entities, shall perform activities related to the selling, buying, open-ended and closed-ended funds, the cap on borrowing shall be transferral or subscription of participations in AIFs. specified in the prospectus.

3.9 Are there any restrictions on the participation in 5 Disclosure of Information Alternative Investments Funds by particular types of investors, such as financial institutions (whether as sponsors or investors)? 5.1 What public disclosure must the Alternative Investment Fund make? No, there are no specific restrictions in the applicable laws or regulations. However, we would recommend that an in-depth analysis In general, AIFMs shall disclose any facts considered specifically be carried out, on a case-by-case basis, on the individual restrictions relevant to the situation or development of the institution and must resulting from legal or statutory provisions of the relevant sponsor or be communicated immediately to the CNMV. Once analysed, the investor. CNMV must disseminate and include any relevant development in the quarterly and annual or semi-annual report immediately. 4 Investments The legislation applicable to open-ended AIFs states that a series of documents must be provided on a mandatory basis, the most important of which are: (i) a prospectus, containing the investment 4.1 Are there any restrictions on the types of activities fund rules; (ii) the document containing the main information for that can be performed by Alternative Investment the investor; (iii) an annual report containing, among others, the Funds? annual accounts, the management report and the audit report on the accounts; (iv) another semi-annual report; and (v) two quarterly Open-ended funds are not subjected to the investment rules which reports. These are provided in order to ensure that all relevant are binding for closed-ended funds. Their object can consist of circumstances that may influence the determination of the value of either financial or non-financial activities. the assets and prospects of the institution are publicly known, on a In private equity entities, their object must be temporary investment continually updated basis, as well as the inherent risks involved, and in non-listed companies, but their purpose cannot be related to compliance with the applicable laws. real estate or of a financial nature. However, they can perform In the case of closed-ended funds, AIFMs must notify the CNMV, other activities (e.g. invest in other private equity entities, provide within 10 days, of any acquisition or loss of a significant interest advisory services to those companies, etc.). held by the AIF, provided that the voting rights of the AIF in such Closed-ended funds are subject to different restrictions regarding their company increase or decrease from a certain triggering percentage object, as this cannot constitute a commercial or industrial purpose. (10% to 50% or 75%). However, in the case of open-ended funds, The object of closed-ended funds must be related to a predefined the obligation to inform the CNMV arises when the investor position investment policy. reaches, goes above, or falls below the triggering percentage (20%, 40%, 60%, 80% or 100% of the company capital or fund assets).

4.2 Are there any limitations on the types of investments that can be included in an Alternative Investment 5.2 What are the reporting requirements in relation to Fund’s portfolio whether for diversification reasons or Alternative Investment Funds? otherwise? An AIFM must provide the CNMV with any information it requires To comply with the principle of risk diversification, AIFs must at any time, and shall provide on a regular basis, information about: comply with the limitations that are imposed regarding the (i) the principal markets and instruments in which it trades on behalf minimum percentage of the assets which shall be invested (in some of the fund, company or entity it manages; (ii) the main instruments cases, investment in assets and financial instruments may not exceed in which the fund trades; and (iii) the principal exposures and certain thresholds). concentrations of each of the funds it manages. In particular, and as In both open-ended and closed-ended funds, a minimum of 60% of noted in question 5.1 above, AIFMs shall provide the CNMV with their assets shall be invested. However, open-ended funds cannot an annual report.

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Open-ended AIFs must submit to the CNMV a monthly memorandum estate companies. However, this clause will not apply if the real containing the operational statistics, and another investment portfolio. estate owned by these companies is used for business activities. Also, they must provide every investor with a semi-annual and a quarterly report. 6.4 What is the tax treatment of (a) resident, (b) non- AIFs should inform the CNMV about, inter alia: (i) the percentage resident, and (c) pension fund investors in Alternative of the fund’s assets that are subject to special arrangements arising Investment Funds? from their illiquid nature; (ii) any new arrangements for managing the liquidity of the fund; (iii) the actual risk profile of the fund and Both resident and non-resident investors, or pension fund investors, risk management systems used by the management company for, will be taxed on dividends and capital gains, if any, derived from among others, market risk, liquidity risk, counterparty risk and the sale of shares. Capital gains will be assessed for the difference Spain operational risk; (iv) the main categories of assets in which the between the transfer value and the acquisition cost. Collective Investment Undertaking (“CIU”) has invested; and (v) Residents the results of stress tests. Individuals will be subject to a 19% to 23% tax rate, and companies will be subject to a fixed 25% tax rate. 5.3 Is the use of side letters restricted? It is important to point out that Spanish tax-resident individuals will not be taxed on the capital gains derived from the sale of participations Any preferential treatment shall be disclosed in the prospectus. in an investment fund, provided a subsequent investment in a However, AIFs shall comply with the relevant provisions in relation qualifying investment fund is made. to conflicts of interest and the overall obligation to keep investors Non-residents duly informed. Depending on the tax treaty enforced with Spain, capital gains may be taxed at source or only in the country of residence of the seller. 6 Taxation In addition, EU residents may apply for an exemption on the capital gains obtained in Spain. As a general rule, the applicable tax rate will be 19%. However, if the non-resident constitutes a permanent 6.1 What is the tax treatment of the principal forms of establishment (“PE”) in Spain, the tax rate will be 25% and the Alternative Investment Funds? Corporate Income Tax provisions will apply. Pension fund investors The tax treatment of the main forms of Alternative Investments Tax treatment of pension fund investors will depend on their tax Funds depends on whether the fund is an open-ended or a closed- residence as indicated in previous paragraphs. ended fund. Income obtained by a Spanish-resident pension fund will be subject On the one hand, open-ended funds are subject to a special regime to Corporate Income Tax at 0% over its income if it is covered under foreseen in the Spanish Corporate Income Tax Law which includes the scope of the Act 1/2002, of 29 November. the application of a 1% tax rate if certain requirements are met. Dividends obtained by a pension fund resident in the EU or EEA On the other hand, closed-ended funds (e.g. private equity entities) will not be subject to withholding tax in Spain. will be subject to the general Spanish Corporate Income Tax rate of 25% on their worldwide income. However, these sorts of funds will benefit from: (i) a 99% tax exemption for capital gains derived 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing from the sale of subsidiaries; and (ii) a full exemption for dividends an Alternative Investment Fund? obtained from their subsidiaries, both subject to certain requirements.

These tax measures are compatible with the existing participation It is not strictly necessary to obtain a tax ruling from the exemption regime, which may also be applicable. 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 6.2 What is the tax treatment of the principal forms of treatment given by the Administration to a particular AIF. investment manager / adviser? The ruling must be issued by the General Tax Directorate within six months following the request. Tax rulings duly requested are binding The Spanish tax system does not foresee any special tax treatment on the tax authorities, and their criteria must be compulsorily applied for investment managers or advisers. Consequently, the provisions to taxpayers in similar cases, provided the regulations existing at the set out in the Spanish Corporate Income Tax Law will apply and the time of issuance and the applicable case law remains unchanged. tax rate will be 25% on their worldwide income. However, in practice, the tax authorities may change their criteria The management of the fund may be exempt from VAT if several on newly issued tax rulings from time to time, but such changes requirements are met. will not have retroactive effects for taxpayers (the new criteria will supersede the previous ones for future cases). The filing of a tax ruling prevents penalties in case of a tax audit, 6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an provided the facts are the same. Alternative Investment Fund or the transfer of the investor’s interest? 6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act No. However, further analysis would be required on the tax 2010 (FATCA) and other similar information reporting implications derived from the transfer of participations in a fund regimes such as the Common Reporting Standard? with more than 50% of its assets in real estate located in the Spanish territory. In particular, Spain has introduced an anti-abuse clause FATCA has been developed in Spain by Orden HAP/1136/2014, in order to avoid the transfer of real estate through the sale of real which regulated Form 290, which is used to provide information to the

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Spanish tax authorities in order to comply with the FATCA provisions. (Belgium, Bolivia, Croatia, Cuba, Ireland, Israel, Nigeria, Portugal, Spanish Royal Decree 1065/2007 Regarding the Obligation to Russia, Slovenia, etc.), with a specific Limitation on Benefits Report Information on Financial Accounts, has also been adapted to (“LoB”) clause. The tax treaty between Spain and the United States incorporate the FATCA provisions. contains a global LoB clause. In addition, Spain has introduced On 22 September 2015, Spain passed new measures which provide excluding clauses for several entities or regimes (for example, in that for accounts opened on or after 1 January 2016, both the FATCA the tax treaties with Barbados, Jamaica, Luxembourg and Uruguay). and Common Reporting Standard (“CRS”) rules grant account- holders a period of 90 days in which to provide financial institutions 7 Reforms with the required information regarding their tax residency and

Spain nationality. If the information is not provided within this period, financial institutions will be required to “block” the account and 7.1 What reforms (if any) are proposed? cannot make charges against or credits to, or perform any other operations on, the account until such data is supplied. Other than the preliminary draft bill mentioned in question 1.1 above, Spain has also taken part in the development of the automatic exchange transposing Directive 2014/65/EU of the European Parliament and of financial account information promoted by the Organisation for of the Council of 15 May 2014 on markets in financial instruments Economic Co-operation and Development (“OECD”). and amending Directive 2002/92/EC and Directive 2011/61/EU (“MiFID II”) and Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in 6.7 Are there any other material tax issues? financial instruments and amending Regulation (EU) No 648/2012 (“MiFIR”), we are not aware of any further proposed reform which No, there are not. could modify the previous sections.

6.8 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 affect Alternative Investment Funds’ operations?

Spain has passed measures to adopt the actions of the OECD’s Action Plan with regard to Action 6 (“Prevent treaty abuse”). In this regard, Spain has signed tax treaties with several countries

Miguel Cases Toni Barios Cases & Lacambra Cases & Lacambra Av. Pau Casals 22 Av. Pau Casals 22 08021 Barcelona 08021 Barcelona Spain Spain

Tel: +34 93 611 92 32 Tel: +34 93 611 92 32 Email: [email protected] Email: [email protected] URL: www.caseslacambra.com URL: www.caseslacambra.com

Miguel Cases is the Managing Partner of Cases & Lacambra Toni Barios is a Partner at Cases & Lacambra and leads the Finance and leads the Corporate and Banking & Finance practice. He practice of the firm. He has extensive experience in Banking & Finance, has extensive experience advising credit institutions, investment having been involved in debt and equity capital markets transactions services firms and undertakings, being the legal counsel of several and all sorts of public and private financings and debt restructuring national and international financial institutions, public authorities and transactions. He provides advice on the structuring, formation and investment funds in respect of their regulatory situation, banking operation of Alternative Investment Funds, and represents institutional agreements, structuring and negotiation of financial derivatives, and and private investors seeking to invest in private investment funds. debt transactions.

Cases & Lacambra is a client-focused boutique law firm with a 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. Cases & Lacambra has offices in both Spain and the Principality ofAndorra.

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Switzerland François Rayroux

Lenz & Staehelin 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 ordinance, the Collective Investment Schemes Ordinance (“CISO”). Funds, the licensing requirements depend on what types of investor Further, the Swiss Financial Market Supervisory Authority are approached in Switzerland. The distribution of shares/units in (“FINMA”) has enacted additional ordinances that provide for a foreign Alternative Investment Fund to non-qualified investors specific rules regarding (i) the investment policy, bookkeeping, requires prior authorisation from FINMA. The distribution of a valuation and publication duties of collective investment schemes foreign Alternative Investment Fund to non-supervised qualified (regulated in FINMA’s Collective Investment Schemes Ordinance), investors, such as pension funds, does not trigger the obligation to 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) 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 of investments. Accordingly, securities funds, real estate funds, 1.8 What co-operation or information sharing agreements other traditional investment funds and Alternative Investment Funds have been entered into with other governments or regulators? each follow a different set of rules regarding the investment policy and permitted investment techniques. In December 2012, FINMA entered into a co-operation arrangement with the EU securities regulators (represented by the European 1.5 What does the authorisation process involve? regulator ESMA) for the supervision of Alternative Investment Funds, including hedge funds, private equity and real estate funds. The formation of a Swiss Alternative Investment Fund, as well as The co-operation arrangements include the exchange of information, the formation of a Swiss Alternative Investment Fund manager, are cross-border on-site visits and mutual assistance in the enforcement

Switzerland subject to authorisation by FINMA. In addition to an extensive of the respective supervisory laws. Such co-operation arrangement application that has to be filed with FINMA, a FINMA-recognised applies to Swiss Alternative Investment Fund managers (“AIFMs”) audit firm has to be appointed to carry out the review ofthe that manage or market Alternative Investment Funds in the EU and application in the case of the authorisation of a Swiss Investment to EU AIFMs that manage or market AIFs in Switzerland. The Fund manager. For the purpose of the performance of this “entry agreement also covers co-operation in the cross-border supervision audit”, such audit firm may not be the fund’s or the manager’s of depositaries and delegates of AIFMs. regular auditor. In addition, with respect to the distribution of foreign collective investment schemes to non-qualified investors, FINMA has entered 1.6 Are there local residence or other local qualification into various agreements regarding co-operation and the exchange requirements? of information. As of 24 April 2017, FINMA had entered into such agreements with the supervisory authorities of Austria, Belgium, Swiss Alternative Investment Funds are required to have their Denmark, Estonia, France, Germany, Guernsey, Hong Kong, central administration in Switzerland. Accordingly, the ultimate Ireland, Jersey, Liechtenstein, Luxembourg, Malta, the Netherlands, supervision of the fund must be carried out in Switzerland. Norway, Sweden and the United Kingdom. However, the delegation of investment decisions to third parties (including foreign entities) is possible, provided such third parties are subject to a recognised supervision and, furthermore, that a 2 Fund Structures co-operation agreement has been entered into with the relevant jurisdictions where the third parties are located, in case such 2.1 What are the principal legal structures used for jurisdictions (typically European Union (“EU”) countries under Alternative Investment Funds? the EU Directive on Alternative Investment Fund Managers (“AIFMD”)) require on their part that third countries conclude such Swiss Alternative Investment Funds are often set up as open-ended co-operation agreements. contractual funds of the category of “other funds for alternative The members of the executive board of Swiss fund management investments”. Contractual funds are based on a collective investment companies or Swiss asset managers of collective investment schemes agreement under which a fund management company commits itself are required to take up residence at a location which is suitable for to managing the fund’s assets in accordance with the provisions of the the proper management of the business operations. Furthermore, fund contract at its own discretion and of its own account. A different both the members of the Board of Directors as well as the persons Swiss legal structure that could be used for Alternative Investment responsible for management must possess adequate professional Funds is the SICAV launched as an “other fund for alternative qualifications. investments”. The SICAV is also an open-ended fund structure. Further, Swiss law provides for a “closed LP”. However, only a few Swiss LPs have been established so far and they are typically used 1.7 What service providers are required? for private equity investments or investments in real estate projects.

Open-ended Swiss Alternative Investment Funds are required to appoint a custodian. The custodian must be a Swiss bank. 2.2 Please describe the limited liability of investors. Single Alternative Investment Funds may, subject to the approval of FINMA, also appoint a prime broker. If the prime broker is a The liability of investors is capped at the amount of their investments licensed Swiss securities dealer or a Swiss bank, a separate custodian in the Swiss Alternative Investment Fund. In the case of an umbrella is not required. fund, investors are only entitled to the income and assets of the In addition, the fund management company, the SICAV, the SICAF respective sub-fund in which they are participating and each sub- and the LP must appoint an auditor. fund is only liable for its own liabilities. Foreign Alternative Investment Funds that are distributed in Switzerland are required to appoint a Swiss representative and a 2.3 What are the principal legal structures used for Swiss paying agent, unless the distribution is strictly limited to (i) managers and advisers of Alternative Investment supervised financial intermediaries (e.g. banks, securities dealers Funds? and insurance companies), or (ii) investors that entered into a written discretionary asset management agreement with a supervised Typically, Swiss managers and advisers are incorporated as a financial intermediary and provided the distribution activities are corporation within the meaning of art. 620 et seq. of the Swiss Code made through such supervised financial intermediary. of Obligations. According to the CISA, a Swiss-based manager must use one of the following Swiss legal structures: (i) corporation; (ii) partnership limited by shares; (iii) limited liability company; (iv) general partnership; or (v) limited partnership.

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Foreign asset managers of collective investment schemes may, document) are set out in the CISO and in the revised Guidelines on subject to certain additional requirements, open a branch in the Distribution of Collective Investment Schemes (“Distribution Switzerland. Guidelines”) as well as in the revised Guidelines on Duties Regarding the Charging and Use of Fees and Costs (“Transparency Guidelines”), which specify certain requirements regarding 2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers the distribution of funds and investor information, issued by in open-ended or closed-ended funds? SFAMA, and which entered into force on 1 July 2014. According to the relevant provisions, the prospectus of a Swiss Alternative Investors in open-ended funds are, in principle, entitled to request Investment Fund must contain, inter alia, information on: (i) the the redemption of their units and payment of the redemption amount Alternative Investment Fund, such as place of incorporation, types in cash at any time. This right to redeem at any time may only of shares/units and the rights attached thereto; (ii) the modalities Switzerland be restricted in the case of collective investment schemes whose and conditions for the repayment and/or redemption of shares/units; value is difficult to ascertain, or which have limited marketability (iii) the investment policy and investment restrictions; (iv) the fees (e.g.: investments which are not listed or traded on another regulated payable to the fund management company, the custodian and any market open to the public; mortgages; or private equity investments). other third party; (v) other fees and costs, such as performance fees, In any event, the right to redeem at any time may only be suspended commissions, retrocessions and other financial benefits and rebates; for a maximum period of five years and such restrictions must be (vi) the relevant tax provisions (including any withholding taxes); stated explicitly in the fund’s regulations and in the prospectus. (vii) the fund management company and the custodian; and (viii) third parties that carry out delegated tasks.

2.5 Are there any legislative restrictions on transfers of With respect to the distribution of funds to non-qualified investors, investors’ interests in Alternative Investment Funds? FINMA will verify in the context of the registration process the contents of such foreign funds prospectus. That prospectus has to The transferability of investors’ interests in an Alternative Investment be completed with a “Swiss wrapper”, containing specific Swiss Fund depends on the fund’s legal structure. Generally speaking, information, including the name of the Swiss representative and of there are no legislative restrictions on transfers of investors’ interests the paying agent, the place where the prospectuses, the last annual in open-ended Alternative Investment Funds. However, restrictions and semi-annual reports as well as the articles of association can may be provided for in the fund’s regulations. This would be the be obtained without costs. Swiss law also requires, for private case if a contractual fund or a SICAV were not open to retail clients. placements to non-supervised qualified investors, that the prospectus (or any other marketing documentation) contain information on the Further, the Swiss LP is, by design, a legal structure that is only available to qualified investors. Consequently, interests in an LP identity of the Swiss representative and paying agent, the place may only be transferred to other qualified investors. where the prospectus, the annual and semi-annual reports as well as the articles of association can be obtained free of charge and the Finally, investment corporations that do not fall within the scope place of jurisdiction in Switzerland. of the CISA (see question 1.1) are required to provide for transfer restrictions in their articles of association to ensure that their In addition, the fund’s regulations and the prospectus distributed shareholders are exclusively qualified investors. to non-qualified investors in Switzerland must contain a notice regarding the special risks involved in alternative investments. The Typically, Swiss collective investment schemes, whether for wording of such warning clause must be approved by FINMA and alternative investments or not, provide for a compulsory redemption must be placed on the first page of the fund’s regulations and the in their fund documentation in case an investor no longer meets the eligibility requirements to invest in the fund or if their investment prospectus. in the fund could jeopardise the interests of all the other investors. Unlike traditional investment funds, Alternative Investment Funds are not required to prepare a simplified prospectus or a key investor information document. 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? Swiss Alternative Investment Funds must submit their prospectus The production and offering of marketing materials are governed and any amendments thereto to FINMA. Foreign Alternative by the CISA and its implementing ordinances. The production and Investment Funds must only submit their prospectus to FINMA offering of marketing materials of investment companies that are (along with any other relevant fund documentation) if they distribute not subject to the CISA are governed by Swiss corporate law and, their shares/units to non-qualified investors in Switzerland. in the case of a listed investment company, the listing rules of the Accordingly, no registration or approval of the marketing or legal relevant stock exchange. documents of foreign Alternative Investment Funds is required as Further, marketing activities in Switzerland are also subject to the long as the shares/units of such funds are exclusively distributed Swiss legislation against unfair competition that provides for a to qualified investors. In respect of foreign Alternative Investment number of prohibited marketing practices. Funds, the placement restrictions applicable to the distribution of all non-registered funds applies (see also question 3.6 below), whereby a distinction must be made between the placement to 3.2 What are the key content requirements for marketing non-supervised qualified investors as opposed to the placement to materials, whether due to legal requirements or customary practice? supervised institutions, as well as within the context of discretionary asset management agreements (in which case no “distribution” is deemed to occur). The minimum content requirements for marketing materials (i.e. prospectus, simplified prospectus, or key investor information

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qualified investors); and (vi) high-net-worth individuals, provided 3.4 What restrictions are there on marketing Alternative they have declared that they may be considered as qualified Investment Funds? investors.

There are no specific restrictions on the marketing of Swiss Alternative Investment Funds. However, reference to the special 3.7 Are there additional restrictions on marketing to public bodies such as government pension funds? risks involved in alternative investments must be made in the fund’s name, prospectus and other marketing materials (see also question 3.2). Additionally, Swiss Alternative Investment Funds that are Public bodies such as government pension funds are considered incorporated as an LP may only be marketed and distributed to qualified investors provided that the assets are managed ona qualified investors (see question 3.5). “professional basis”. The marketing and subsequent distribution of

Switzerland Alternative Investment Funds to qualified investors do not need to be authorised by FINMA. In particular, there are no rules that require 3.5 Can Alternative Investment Funds be marketed to the fund’s manager, investment adviser or placement agents to retail investors? obtain a separate licence or registration to market the fund’s shares/ units to public bodies. However, to market and distribute foreign Swiss Alternative Investment Funds can be marketed to retail Alternative Investment Funds to such non-supervised qualified investors. However, Alternative Investment Funds that are structured investors (including public bodies), a Swiss representative and a as an LP may not be marketed to retail investors, but only to qualified Swiss paying agent must be appointed and distribution agreements investors. In addition, the fund’s regulation may provide for further have to be entered into between the relevant Swiss representative restrictions with respect to retail clients. and the persons distributing the Alternative Investment Fund Foreign collective investment schemes may be marketed to retail in Switzerland. In addition, pension funds are subject to certain investors if they were authorised for distribution in Switzerland by investment restrictions (see question 3.9). FINMA. In order to obtain an authorisation, the following criteria have to be met: (i) the collective investment scheme, the fund 3.8 Are there any restrictions on the use of intermediaries management company or the fund company, the asset manager as to assist in the fundraising process? well as the custodian, are subject to public supervision intended to protect investors; (ii) the regulatory framework regarding the The fundraising process is considered a part of the distribution of fund management company’s or the fund company’s as well as the collective investment schemes. Consequently, any third parties that custodian’s organisation, investor rights and investment policy, is assist in the fundraising process, such as placement agents or other equivalent to the provisions of the CISA; (iii) the designation of intermediaries, are considered distributors of collective investment the collective investment scheme does not give reason for deception and confusion; (iv) appointment of a Swiss representative and a schemes. Swiss distributors of collective investment schemes are Swiss paying agent; and (v) FINMA and the foreign supervisory required to obtain a licence from FINMA. Foreign distributors authorities have entered into an agreement on the co-operation and may only engage in distribution activities in Switzerland if (i) the exchange of information regarding the distribution of the fund. As fund is exclusively distributed to qualified investors, (ii) the foreign a matter of practice, since a couple of years ago, FINMA has only distributor is subject to adequate supervision in its home country, registered investment funds which are organised as Undertakings and (iii) the distributor entered into a distribution agreement with for Collective Investments in Transferable Securities (“UCITS”). the Swiss representative. Due to the FINMA practice which requires that a non-UCITS fund meets equivalent criteria to those which apply to Swiss Alternative 3.9 Are there any restrictions on the participation in Investment Funds, there have been no new registrations of foreign Alternative Investments Funds by particular types of Alternative Investment Funds in Switzerland recently. Existing investors, such as financial institutions (whether as foreign Alternative Investment Funds are grandfathered. sponsors or investors)?

There are no restrictions per se. However, certain financial 3.6 What qualification requirements must be carried out institutions and other qualified investors, such as pension funds and in relation to prospective investors? insurance companies, are only allowed to invest a certain amount of their net assets in Alternative Investment Funds. If a foreign Alternative Investment Fund has not been approved for distribution to retail clients in Switzerland, the fund’s manager and any third-party distributor must ensure that the fund is only 4 Investments distributed to qualified investors. According to the CISA, the following investors are considered as qualified investors: (i) supervised financial intermediaries (i.e. banks, securities dealers, 4.1 Are there any restrictions on the types of activities insurance companies, fund management companies, asset managers that can be performed by Alternative Investment of collective investment schemes and central banks); (ii) public Funds? bodies and pension funds with professional treasury management; (iii) corporations with professional treasury management; (iv) Alternative Investment Funds may only (i) pledge or cede as investors that have entered into a written discretionary asset collateral up to 100 per cent of the fund’s net assets, and (ii) commit management agreement with a supervised financial intermediary to an overall exposure of up to 600 per cent of the fund’s net assets. or an independent asset manager, provided such investors have not The fund’s regulations must explicitly set out those investment opted out of their qualified investor status; (v) independent asset restrictions. managers (if the relevant independent asset manager meets the Further, Swiss Alternative Investment Funds are allowed to engage requirements of the CISA and undertakes in writing to exclusively in short selling transactions, but only to the extent permitted in the use the fund-related information for clients who are themselves fund’s regulations.

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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 The use of side letters is, as such, not expressly restricted or otherwise? prohibited. However, the use of side letters raises delicate issues in light of the principle of the equality of treatment which applies strictly According to the CISO, the following types of investments can be among investors in the context of Swiss Alternative Investment included in a Swiss Alternative Investment Fund: securities; units Funds. Where the use of side letters leads to potential conflicts of in collective investment schemes; money market instruments; sight interest, the Alternative Investment Fund and/or its manager has and time deposits with a maturity of up to 12 months; precious to implement effective measures to detect, prevent and supervise metals; derivative financial instruments; and structured products. such conflicts of interest. If conflicts of interest arising from the In addition, FINMA may authorise other investments such as use of side letters cannot be avoided, the side letter arrangement has Switzerland commodities and commodity certificates. 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? Investment Funds. Swiss collective investment schemes (i.e. a contractual fund, SICAVs and LPs) are viewed in a transparent manner from a Swiss corporate 5 Disclosure of Information income tax perspective. They are thus not subject to Swiss corporate income taxes on their income or gains (except if they directly hold 5.1 What public disclosure must the Alternative real estate situated in Switzerland. A collective investment scheme Investment Fund make? directly holding real estate situated in Switzerland may nevertheless be tax-exempt for the purposes of corporate income tax if its investors Alternative Investment Funds must prepare a prospectus that consist exclusively of tax-exempt occupational pension institutions). has to include, inter alia, information on the investment policy, Distributions made by Swiss collective investment schemes investment techniques, and any fees paid to managers and third are subject to withholding tax at a 35 per cent rate, unless they parties (see question 3.2). In addition, the fund must publish the correspond to distributions of capital gains or income realised from fund’s regulations and prepare annual and semi-annual reports (see real estate held directly by the fund. Swiss investors may claim question 5.2). Investors may request the disclosure of additional the refund of withholding tax if they declare the income in their information, such as the basis for the calculation of the net asset tax return or account for it in their financial statements. Foreign value per unit or information on specific business transactions investors may qualify for an exemption from Swiss withholding effected by the fund. tax under the so-called affidavit procedure (exemption provided for by Swiss internal law irrespective of the applicability of a treaty). This requires that more than 80 per cent of the Swiss collective 5.2 What are the reporting requirements in relation to investment scheme’s assets are from a non-Swiss source and Alternative Investment Funds? that the investors demonstrate (typically via their bank) that they are not Swiss residents. Foreign-resident investors may further Open-ended collective investment schemes are required to keep qualify for a partial or total exemption from Swiss withholding tax separate accounts and to publish an annual report within four under a double taxation treaty existing between their country of months of the end of the financial year. Such annual report has to residence and Switzerland. The relief is typically granted by way of include, inter alia, financial statements, information on the number reimbursement rather than by way of exemption. of shares/units redeemed and newly issued during the financial year, the inventory of the fund’s assets at market value, the performance SICAF and investment companies that are incorporated as a Swiss of the open-ended collective investment scheme, as well as a short- corporation not regulated under the CISA (see question 1.1) are form report by the auditors regarding the information provided in taxed as corporate entities and hence subject to corporate income the annual report. tax and tax on net equity. In addition, their distributions are subject to withholding tax at a 35 per cent rate. In addition, open-ended collective investment schemes are required to publish a semi-annual report within two months of the end of the first half of the financial year. The semi-annual report must include, 6.2 What is the tax treatment of the principal forms of inter alia, an unaudited statement of net assets or an unaudited investment manager / adviser? balance sheet and income statement, respectively. Further, the fund management companies and the SICAV must Swiss investment managers/advisers are subject to corporate income publish the net asset value of their funds at regular intervals. tax at federal, cantonal and communal levels on their net profit as accounted for in the statutory financial statements and, as the case may be, adjusted for tax purposes. They may also be subject to tax

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on their net equity at cantonal and communal levels. There is no special tax status available for investment managers/advisers. 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 6.3 Are there any establishment or transfer taxes levied regimes such as the Common Reporting Standard? in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the Switzerland has entered into a FATCA inter-governmental agreement investor’s interest? (“IGA”). This Swiss IGA follows the Model 2 IGA. Accordingly, a Swiss Financial Institution (as such term is defined in the Swiss IGA) Liability for issuance stamp duty does not generally arise on the is required to register with the US Internal Revenue Service (“IRS”) issuance and redemption of Swiss collective investment scheme and enter into a Foreign Financial Institution (“FFI”) agreement. shares/units. However, the issuance of shares of a SICAF or any

Switzerland Under the Swiss IGA, the Reporting Swiss Financial Institution other investment company in the form of a Swiss corporation (see will report its US-related accounts directly to the IRS. Further, it question 1.1) is subject to the Swiss issuance stamp duty. The should be noted that the Swiss IGA provides for certain exemptions discussion of the Swiss parliament on the proposal to abolish the with respect to Swiss collective investment schemes. The Swiss issuance stamp duty has been suspended. IGA, as well as the Swiss Federal Act on the Implementation of Further, the transfer of shares/units in a Swiss collective investment the FATCA Agreement with the United States of America, entered scheme (irrespective of its legal form) is subject to a 0.15 per cent into force on 30 June 2014 and non-compliance with the provision transfer stamp duty if a Swiss securities dealer (e.g. Swiss bank, of the Act or the Swiss IGA may be sanctioned by a fine of up to Swiss broker-dealer, etc.) is involved in the transaction as a party CHF 250,000. Unlike most jurisdictions, which have entered into a or an intermediary. Model 1 type IGA, Switzerland has not issued any official guidance notes regarding the implementation of the Swiss IGA. However, a committee known as the FATCA Qualification Committee, headed 6.4 What is the tax treatment of (a) resident and (b) non- resident, and (c) pension fund investors in Alternative by the State Secretariat for International Financial Matters (“SIF”) Investment Funds? and consisting of representatives of the major financial industry associations including SFAMA, publishes a Q&A section in order Non-resident investors financially suffer the withholding tax paid by to provide some assistance regarding questions arising from the the fund, whereby such withholding tax may be recovered in full or implementation of the Swiss IGA. partially, depending on the terms of the applicable double taxation Switzerland has also created the necessary legal basis for the treaty, if any (see question 6.1). There is in general no special implementation of CRS. The national legislation entered into force tax regime for pension fund investors in Alternative Investment and data is being collected as of 1 January 2017. Funds. A number of double taxation treaties do, however, allow Certain collective investment schemes may qualify as non-reporting for a full withholding tax refund for taxes paid on dividends to a financial institutions. Additionally, for an automatic exchange of pension fund. Furthermore, a collective investment scheme whose information to actually take place, an international agreement investors consist exclusively of tax-exempt domestic occupational between the respective countries is needed. Switzerland has entered pension institutions may apply for the declaration procedure for into such agreements with various countries (i.a. EU Member the purposes of the withholding tax. Certain foreign occupational States, Japan, Canada and Australia). pension institutions are considered tax-exempt investors for transfer stamp duty purposes. 6.7 Are there any other material tax issues?

6.5 Is it necessary or advisable to obtain a tax ruling from There are no other material tax issues. the tax or regulatory authorities prior to establishing an Alternative Investment Fund? 6.8 What steps are being taken to implement the OECD’s The laws and regulations applicable to Swiss collective investment Action Plan on Base Erosion and Profit-Shifting schemes are clear. Thus, it is generally not necessary to obtain a tax (BEPS), in particular Actions 6 and 7, insofar as they ruling as regards the Alternative Investment Fund itself. This being affect Alternative Investment Funds’ operations? said, when an entire structure is set up, including an asset manager in Switzerland with Alternative Investment Funds located offshore, Switzerland, as a member of the OECD, has actively participated in then it is market practice to require rulings from the competent local the base erosion and profit-shifting (“BEPS”) project. The Federal tax authorities in respect mainly, but not exclusively, of the allocation Council has instructed the Federal Department of Finance (“FDF”) of profits between the different entities of the structure (i.e. asset to offer analyses and proposals in order to implement the outcomes. manager in Switzerland, manager offshore, and investment funds). Currently, Switzerland is undergoing a third series of corporate Furthermore, when dealing with private equity or hedge funds, tax tax reforms. These reforms address certain BEPS outcomes. In rulings may be necessary to confirm the tax treatment of the carried particular, a patent (or royalty) box that complies with internationally interest or performance fees. In this respect, the practice of the tax accepted standards is to be introduced and internationally criticised authorities may vary widely from one Swiss canton to another. tax regimes are to be abolished. However, the Swiss voters rejected In light of developments regarding the spontaneous exchange the proposal in February 2017. The Federal Council charged the of information in tax matters, such a ruling may be subject to a FDF to draw up the substantive parameters for a new tax proposal spontaneous exchange of information with the tax authorities of including the abolishment of special tax arrangements for status countries of residence of entities involved in the structure and the companies by mid-2017 at the latest. The foreseen exchange of country of residence of the ultimate shareholder of the structure. information on tax rulings requires a legal basis in Swiss law.

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Switzerland has ratified the multilateral administrative assistance The documentary record must contain information on investment convention of the Organisation for Economic Cooperation and objectives and the investor’s risk profile, as well as the reasons for Development (“OECD”)/Council of Europe and put in place making the specific personal recommendation. It should be noted national legislation on this matter. Additionally, the total revision of that this new obligation does not, however, apply in cases where the the Tax Administrative Assistance Ordinance (“TAAO”) entered into relevant marketing activity is not considered distribution within the force on 1 January 2017. The new ordinance defines the framework meaning of the CISA (such as distribution of funds to supervised and the procedures required for the spontaneous exchange of qualified investors). information. The implementation of country-by-country reports is The revision of the CISA and CISO led to the issuance of a new also in need of legal foundations. To this effect, the Federal Council circular of the Swiss financial regulator, the FINMA Circular adopted the dispatch on the multilateral agreement on the exchange “Distribution of Collective Investment Schemes” (FINMA-Circ. of country-by-country reports and the federal act required for its 2013/9). The FINMA Circular entered into force on 1 October Switzerland implementation. Treaty abuse is combatted through the respective 2013. In this context, on 22 May 2014 SFAMA issued its revised anti-abuse clauses in double taxation treaties. Switzerland will, Distribution Guidelines as well as its revised Transparency in light of the OECD’s work, make the necessary adjustments Guidelines, which specify certain requirements regarding the either multilaterally or bilaterally where the new standard does not distribution of funds and investor information. The Guidelines have already apply. So far Switzerland has not addressed BEPS Action 7 been recognised as a minimum standard by FINMA. This means separately. The exchange of rulings may have an effect on preventing that the Guidelines are of general application, regardless of SFAMA the artificial avoidance of the permanent establishment status. 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 must be incorporated in the distribution agreement entered into 7 Reforms between the foreign distributors and the Swiss representative. As of 1 July 2014, the Distribution Guidelines are applicable to all 7.1 What reforms (if any) are proposed? distributors and representatives that started their activities after 1 March 2013. Existing distribution agreements had to be amended by 30 June 2015. On 1 March 2013, the amended CISA entered into force. In addition to new rules for private placements of non-Swiss collective In substance, the Transparency Guidelines are applicable to Swiss investment schemes, the amended CISA aligns the Swiss regulatory representatives of foreign funds, and distributors (Swiss or foreign) framework applicable to investment managers with international of these funds in Switzerland. In particular, the Transparency standards, in particular with the EU Directive on Alternative Guidelines apply to foreign funds distributed to qualified investors Investment Fund Managers (“AIFMD”), by requiring all Swiss and non-qualified investors by their incorporation by reference in the investment managers of non-Swiss collective investment schemes distribution agreement entered into with the Swiss representative. to obtain an authorisation from FINMA. However, as Switzerland Further, in November 2015, the Swiss Federal Council published is part of neither the EU nor the European Economic Area (“EEA”), a new law on financial services, inter alia, aimed at improving Swiss Alternative Investment Funds and Swiss Alternative investor protection. Among the measures proposed are, inter Investment Fund managers will not yet be able to benefit from the alia, the introduction of cross-sector rules of business conduct, EU passport rights provided for in the AIFMD and the respective the improvement of product documentation for clients and stricter national implementing laws. As a last part of the amended CISA, rules for the cross-border distribution of financial products into on 1 January 2014, a new duty to keep documentary records entered Switzerland. The debate on this new law started in the Swiss into force. This new obligation applies when a distributor (including Parliament in December 2016 and has now passed the first chamber any third parties mandated by such distributor) of an Alternative of the Swiss Parliament. It is currently expected that the new law, Investment Fund provides individual advice to an investor to if adopted by the Swiss Parliament, will not come into effect before buy units or shares in one or more Alternative Investment Funds. the end of 2018.

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

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

Delaware also has sophisticated court systems that are experienced 1 Regulatory Framework in matters involving alternative entities, and the governing statutes generally support the principles of freedom of contract among 1.1 What legislation governs the establishment and sponsors, managers and investors to order their affairs as they wish. operation of Alternative Investment Funds? All of these factors make Delaware the most common choice for U.S.-domiciled Alternative Investment Funds. In the United States, Alternative Investment Funds and their advisers are subject to the laws of the federal government and of the 1.2 Are managers or advisers to Alternative Investment individual state or jurisdiction in which the entities are incorporated, Funds required to be licensed, authorised or doing business and/or selling securities. regulated by a regulatory body? At the federal level, investment companies organised in and/or operating in the United States, including Alternative Investment Investment advisers to Alternative Investment Funds are subject Funds, are generally subject to the jurisdiction of the Securities and to regulation by the SEC under the Advisers Act and by the state Exchange Commission (“SEC”). The SEC’s jurisdiction comes securities regulators in the states in which the adviser conducts by way of the Investment Company Act of 1940, as amended business. (“Investment Company Act”), which governs the activities of In general, an adviser is required to register with the SEC if it has at investment companies, and the Investment Advisers Act of 1940, least $110 million in assets under management (“AUM”), subject to as amended (“Advisers Act”), which governs the operations and certain exemptions. Advisers with less than $110 million but more activities of investment advisers. In addition, the offering and sale than $100 million AUM may but are not required to register with the of interests in Alternative Investment Funds is regulated by the SEC SEC. Advisers with less than $100 million in AUM are generally under the Securities Act of 1933 (“Securities Act”) and the Securities prohibited from registration with the SEC and instead must comply Exchange Act of 1934 (“Exchange Act”), and are also regulated by with the registration requirements of the states in which the adviser the Financial Industry Regulatory Authority (“FINRA”), a self- conducts business. The state-level registration requirements and regulatory agency. exemptions vary on a state-by-state basis. In addition, depending on the activities of the Alternative Investment Registering as an investment adviser with the SEC provides for pre- Fund, other federal regulators may have jurisdiction over the fund emption from the various state registration requirements. However, or its adviser. Alternative Investment Funds that invest in futures, investment advisers that are exempt from registration with the SEC, options on futures, or swaps (other than certain security-based swaps) or ineligible to register with the SEC based on their AUM, may be are subject to the jurisdiction of the Commodity Futures Trading required to comply with multiple states’ investment adviser regimes. Commission (“CFTC”). Further, Alternative Investment Funds Generally, a non-U.S. adviser may register with the SEC regardless sponsored by banks or bank holding companies may also be subject of its AUM. Further, under the SEC’s “territorial” approach to to certain requirements under the federal banking laws and may be Advisers Act jurisdiction, a non-U.S. adviser that is registered with subject to the jurisdiction of the Board of Governors of the Federal the SEC is generally subject to the substantive requirements of the Reserve System (“Federal Reserve”). Alternative Investment Funds Advisers Act only with respect to its U.S. clients. that trade or invest in electricity are subject to regulation by the In 2010, the Dodd-Frank Wall Street Reform and Consumer Federal Energy Regulatory 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 limited liability protections applicable to investors in such entities. certain narrower exemptions, which are summarised below:

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1.2.1 Foreign Private Adviser Exemption Investment Funds qualify for an exemption or exclusion from To be eligible for the Foreign Private Adviser Exemption, an adviser registration under the Investment Company Act and therefore from must: (i) have no place of business in the United States; (ii) have, most of its substantive requirements. Most Alternative Investment in total, fewer than 15 clients (e.g., managed accounts or pooled Funds are designed to qualify for the exclusions provided by investment vehicles) and investors in the United States in private Sections 3(c)(1) or 3(c)(7) of the Investment Company Act. Section funds advised by the investment adviser; (iii) have less than $25 3(c)(1) provides an exclusion for any fund whose securities are million in aggregate assets under management that are attributable beneficially owned by not more than 100 persons and which does not to clients in the United States and investors in the United States in publicly offer its securities. Section 3(c)(7) provides an exclusion private funds advised by the investment adviser; and (iv) neither for any fund whose securities are owned exclusively by “qualified

USA hold itself out generally to the public in the United States as an purchasers”; i.e., purchasers who meet certain net worth/investor investment adviser nor act as an investment adviser to any registered sophistication tests and who do not publicly offer their securities. investment company or business development company. 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 Further, investment advisers to Alternative Investment Funds are the Advisers Act is desirable for many non-U.S. investment advisers. regulated pursuant to the Advisers Act as described above. 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 Funds to the SEC on both Form ADV (the SEC’s annual reporting investment advisers to private funds only with less than $150 million form, which is publicly available) and Form PF (a private fund in assets under management in the United States. For investment reporting form which is kept confidential by the SEC). The SEC advisers with their principal office and place of business outside the conducts periodic examinations of registered investment advisers United States, the exemption applies if (x) the investment adviser and exempt reporting advisers, and at such examinations the SEC has no client that is a U.S. person except for one or more private may inspect records relating to any Alternative Investment Funds funds,1 and (y) all assets managed by the investment adviser at a advised by the investment adviser. place of business in the U.S. are solely attributable to private fund 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 with open-ended and closed-ended Alternative Investment respect to their private funds. The “place of business” requirement Funds (or otherwise differentiate between different types of funds) and if so how? allows a non-U.S. adviser to manage an unlimited amount of private fund assets from outside the United States, which 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- ended and closed-ended Alternative Investment Funds. The new 1.2.3 Venture Capital Fund Adviser Exemption 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 and encompasses any private fund that: (i) holds no more than operations of the funds. 20 per cent of the fund’s capital commitments in non-qualifying investments as defined by the SEC (other than short-term holdings); 1.5 What does the authorisation process involve? (ii) does not borrow or otherwise incur leverage, other than limited short-term borrowing (excluding certain guarantees); (iii) does not offer its investors redemption or other similar liquidity rights except Unlike many other countries, the U.S. federal securities laws do not in extraordinary circumstances; (iv) represents itself as pursuing a provide for any suitability requirements, capital requirements, or qualification requirements for owners and key personnel of investment venture capital strategy to its investors and prospective investors; advisers. Rather than providing a comprehensive regulatory regime, and (v) is not registered under the Investment Company Act and has the Advisers Act provides for disclosure requirements and imposes not elected to be treated as a business development company. on advisers a broad fiduciary duty to act in the best interests of their Like the advisers exempt under the Private Fund Adviser Exemption, clients. As a result, investors have the responsibility to negotiate their advisers exempt under the Venture Capital Fund Adviser Exemption own arrangements with investment advisers based on the disclosure are subject to certain SEC reporting and recordkeeping requirements they receive. with respect to their private funds. Investment advisers register with the SEC and with state securities Advisers relying on the Private Fund Adviser Exemption or the regulators by filing Form ADV. Within 45 days of filing Form ADV, Venture Capital Fund Adviser Exemption are referred to as “exempt the SEC must either grant registration or institute an administrative reporting advisers” by the SEC, reflecting the fact that these proceeding to determine if registration should be denied. advisers are not registered but are subject to SEC reporting and Form ADV is publicly available and consists of the following parts: recordkeeping requirements. 1.5.1 Part 1A: this part requires information about the adviser’s business practices, ownership and employees in a “check-the- 1.3 Are Alternative Investment Funds themselves box” or “fill-in-the-blank” format, although certain sections required to be licensed, authorised or regulated by a and schedules require brief, narrative disclosure about various regulatory body? matters, including disciplinary events. It is filed electronically with the SEC. In the United States, Alternative Investment Funds are regulated 1.5.2 Part 1B: this part requires additional information about certain pursuant to the Investment Company Act. However, most Alternative Part 1A responses, as well as narrative disclosure with respect

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to disciplinary events. It is only completed by advisers registered with one or more states and is filed electronically 1.8 What co-operation or information sharing agreements with the states. have been entered into with other governments or regulators? 1.5.3 Part 2A: this part is known as the “brochure”. It requires a narrative, plain English response to a number of specific items, including a description of the business, fees and United States government authorities have entered into memoranda compensation, disciplinary information, and key risk factors. of understanding (“MOUs”) with numerous governments and It is filed electronically with the SEC and delivered to clients. regulators, including almost all EU countries in connection with the 1.5.4 Part 2B: this part is known as the “brochure supplement”. It implementation of the AIFMD Rider I.

requires resumé-like information about certain personnel of USA the adviser who provide advisory services to the particular client. The brochure supplement does not have to be filed 2 Fund Structures with the SEC for federally-registered advisers but must be delivered to relevant clients of the adviser. 2.1 What are the principal legal structures used for The SEC uses the information provided in Part 1 of Form ADV Alternative Investment Funds? for regulatory purposes, including determining whether to approve the registration of a new adviser. Part 2 of Form ADV includes Alternative Investment Funds organised in the U.S. most commonly information that must be provided to clients. Advisers must keep take the form of a limited partnership organised in Delaware. their Form ADV current by filing periodic amendments as long The Delaware limited partnership allows great flexibility in the as they are registered. Amendments are required promptly in terms governing the relationship between the sponsor, as general accordance with Form ADV instructions in the event that certain partner, and the investors, as limited partners. Delaware has a types of information become inaccurate (such as identifying relatively well-developed body of law governing partnerships information, custody information and disciplinary information), and experienced courts, and the resulting legal certainty together or certain other types of information become materially inaccurate with the fact that practitioners in major legal centres in the U.S. (such as information about successions, client transactions and are likely to be familiar with Delaware partnership law contribute control persons). Amendments are otherwise required at least to the general tendency to use Delaware partnerships. The limited annually within 90 days of the adviser’s fiscal year end. partnership form’s prevalence among Alternative Investment Funds is attributable to the limited liability status it affords investors as 1.6 Are there local residence or other local qualification limited partners, flow-through treatment for U.S. federal and state requirements? income tax purposes and the operational efficiencies of capital (as opposed to share) accounting. A Delaware limited liability The SEC does not impose any local residence requirements for a company offers generally equivalent advantages, but it is currently registered adviser. However, as part of the registration process, less common as a vehicle for use with Alternative Investment Funds. a non-U.S. adviser registering with the SEC or with a state must It has not overcome the tendency to stay with what is familiar. In consent to appointing the Secretary of the SEC and/or the applicable addition, the limited liability company may attract franchise taxes in secretary of state as the adviser’s agent to receive service of process certain states of the United States and is not treated as transparent in the United States. Additionally, if an Alternative Investment in certain non-U.S. jurisdictions for foreign tax and treaty purposes. Fund or its investment adviser is domiciled in a particular state, that Delaware statutory trusts offer advantages similar to those of a state may have similar requirements regarding the appointment of limited partnership but also are not commonly used for Alternative an agent for service of process. Investment Funds. Alternative Investment Funds are often structured as a complex of 1.7 What service providers are required? several pooled investment vehicles rather than one vehicle in order to accommodate the tax preferences of different types of investors Alternative Investment Funds typically engage service providers (and occasionally regulatory requirements and investors’ internal including accountants, auditors, administrators and custodians. One policies). A common approach is to establish “parallel” or “mirror” or more prime brokers may be engaged as well, and the adviser will funds that invest in a side-by-side manner. This allows the form and typically engage legal counsel with respect to the formation and jurisdiction of the organisation to be varied according to investor offering of the Alternative Investment Fund. type, the most common variation being to house non-US investors within an entity located offshore in a tax-neutral jurisdiction such as Most of these engagements are customary rather than required, the Cayman Islands. It also permits each parallel fund to structure although in certain cases the applicable laws will indirectly require its holding of particular portfolio investments or categories of the use of certain service providers. For example, the Advisers Act investments in whatever manner is optimal for the investors in that requires that any registered adviser with custody of client funds or parallel fund. For example, a parallel fund through which U.S. securities take certain steps to safeguard those assets. These steps tax-exempt investors or foreign investors invest may hold certain include maintaining the client funds and securities with a “qualified investments through corporations, real estate investment trusts custodian” (which includes banks, broker-dealers, and certain non- (“REITs”) or other vehicles that are non-transparent for tax in order U.S. financial institutions that customarily hold such assets separate to “block” income that might otherwise subject them directly to from their own). The qualified custodian may be the adviser or income tax or reporting requirements in the U.S. while choosing not an affiliate thereof; although in such cases the adviser or affiliate to “block” for other investments. is required to undergo an annual examination by an independent public accountant. The parallel fund structure is often used by private equity, real estate and other closed-ended funds likely to be holding investments large enough and for long enough to warrant structuring their holdings on a case-by-case basis. Hedge funds, on the other hand, often opt to forego this flexibility in favour of a “master-feeder” or “spoke-and-

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hub” structure. In this structure, investors subscribe for interests cases of actual fraud. In no event would an investor be liable for in “feeder funds” that in turn all invest in one “master” fund that more than the amounts contributed by it and amounts distributed holds all investments. Typically, U.S. taxable investors invest 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 fund and receive compensation USA is a small price to pay given that the volume and velocity of hedge solely through the general partner (or equivalent governing body) fund trading strategies tend to make it impractical to hold one of the fund vehicle. However, they often choose to divide this role investment or group of investments through multiple structures, and between the general partner and a separate vehicle, usually called the nature of assets held tends to reduce the need to structure for the “manager”. The manager, acting pursuant to a management tax. Another potential advantage of the “master-feeder” structure agreement with the fund, manages the fund’s day-to-day operations, relates to “ERISA”, the U.S. federal regime protecting U.S. private and often enters into transactions on behalf of the fund pursuant pension fund investors. Many Alternative Investment Funds seek to to a power of attorney. These services are provided in return avoid the application of ERISA by assuring that the portion of their for a fee, typically calculated as a percentage of commitments, equity held by private pension funds is not “significant” (generally capital contributed to the fund, net asset value of the fund or some assumed to mean 25 per cent or more of any class of equity). By combination thereof. The general partner retains ultimate control assuring that all capital is invested through a master fund, the of the management of the fund delegated to the manager, and “master-feeder” structure opens up the possibility that, with certain receives some share of the fund’s profit in the form of an allocation additional precautions, this test can be performed by reference to or distribution, commonly referred to as an “incentive allocation”, U.S. private pension fund investors’ indirect interest in the master “carried interest” or “promote”. The general partner often also fund as opposed to applying this test to each feeder fund vehicle serves as the vehicle through which the sponsor contributes capital in which these investors invest directly. This is helpful because 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 through maintaining one manager entity to provide common infrastructure a seat on a limited partnership advisory board provided for in the such as employment and service provider contracts and ownership partnership agreement will fall within this safe harbour. Even if the of intellectual property. General partner liability also militates in limited partner’s conduct falls outside of the statute’s safe harbours, favour of compensating the sponsor uniquely through fee payments the limited partner will only be liable to persons transacting business to the manager. However, structuring compensation as an allocation with the limited partnership that reasonably believed, based upon of fund profits to the general partner of the fund partnership allows the limited partner’s conduct, that the limited partner is a general the profits to retain their tax character in the hands of the sponsor, partner. The position under the limited liability company statute in which profits may include capital gains and/or dividend income Delaware is slightly better in that the statute contains no exception (members of Congress have proposed legislation that would take to limited liability status of its members based on participation in away the favourable tax treatment of such profit allocations). control or management, though this in most cases is not likely to be Moreover, the activities delegated to the manager may subject its critical given the extensive protections described above for limited fee income to state or local tax (for example, the Unincorporated partners. Business Tax in New York City), and this provides the additional Note that the limited liability of limited partners and members of advantage of a profits allocation to the general partner. limited liability companies described above relates to liability The Delaware limited liability company is the form used most often arising from their status as such, and is not a general shield for general partners and managers. This form offers the benefits of against liabilities they may incur due to actions giving rise to any the Delaware limited partnership referenced above under question independent basis for liability. Moreover, in the case of both the 2.1, including the ability to elect pass-through tax treatment. In partnership and limited liability company, all amounts distributed addition, a limited liability company can be governed by a managing to investors may be clawed back in certain bankruptcy or fraudulent member or board of directors that, unlike a general partner, is not conveyance scenarios to pay partnership liabilities unless otherwise by virtue of its status exposed to the entity’s debts and obligations. agreed in the organisational document. In addition, courts may Certain sponsors still use an older form of entity called a “subchapter (though rarely) apply a doctrine similar to “piercing the corporate S corporation”, which also offers limited liability and pass-through veil” in the context of corporations to find limited partners or tax treatment. However, this older form has generally fallen out of members liable for partnership or company debts or obligations, in use because it imposes numerous restrictions, including that only

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one class of stock may be issued and the holders typically cannot be other entities. The limited liability company by contrast permits 3 Marketing great variation in the treatment of members, on an individual or class basis, both as to governance and economic rights. For example, 3.1 What legislation governs the production and offering control may be given solely to senior management, and the share of of marketing materials? profits and terms governing vesting of profits interests may easily be varied as among members according to any number of criteria. Section 10(b), the general antifraud provision of the Exchange Act, permits the SEC to adopt rules that prohibit any “manipulative or 2.4 Are there any limits on the manager’s ability to deceptive device or contrivance” in connection with the purchase or USA restrict redemptions in open-ended funds or transfers sale of securities. Pursuant to such authority, the SEC adopted Rule in open-ended or closed-ended funds? 10b-5, which generally prohibits the use of any “device, scheme, or artifice to defraud”, and which creates liability for any misstatement “Open-ended” in the United States is a term for registered investment or omission of a material fact. Rule 10b-5 and the other Exchange companies under the Investment Company Act. Alternative Act antifraud rules have a broad scope of applicability, which Investment Funds are not open-ended as they all restrict redemption encompasses the marketing of Alternative Investment Funds. to a greater or lesser degree varying from hedge-style (e.g., monthly) Alternative Investment Fund marketing is also regulated by the to private-equity-style (no redemptions absent special situations). Advisers Act, specifically the general antifraud provisions set forth No restrictions are imposed by generally applicable law on the in Section 206 and the rules promulgated thereunder. The SEC has ability of sponsors of Alternative Investment Funds to restrict the generated layers of additional Advisers Act marketing guidelines liquidity of an investor’s interest in an Alternative Investment Fund through various means, including no-action letters and enforcement by restricting frequency or volume of redemptions, withdrawals or actions against advisers. The Advisers Act regulations and the transfers. additional guidelines articulated by the SEC collectively form a Both hedge-style and private-equity-style investment funds usually complex and non-intuitive framework of detailed requirements do not permit transfers to unaffiliated parties without sponsor that extends across all aspects of Alternative Investment Fund consent on a case-by-case basis due, among other things, to the marketing. Care should be taken to avoid conflating the Advisers need to assure compliance with the regulatory requirements noted Act regulations with the Exchange Act antifraud provisions. For directly below. example, in contrast to Rule 10b-5, the Advisers Act regulations are not limited to situations involving the purchase or sale of a security. To the extent that an adviser’s communications with an investor 2.5 Are there any legislative restrictions on transfers of are outside of the federal securities laws, they remain subject to investors’ interests in Alternative Investment Funds? common-law and state securities law prohibitions against fraud.

If in connection with an offering of interests as part of a distribution (for example, by an underwriter purchasing interests in the fund and 3.2 What are the key content requirements for marketing materials, whether due to legal requirements or reselling them through its distribution channels), transfers could customary practice? result in disqualification of the fund’s offering from relying on an exemption from the otherwise applicable requirement to register The communications of all advisers, whether or not they are issuances of securities with the SEC. Similarly, if the interests were registered with the SEC, are subject to the general antifraud issued outside of the United States in reliance on the registration provisions of Section 206 of the Advisers Act, which prohibit exemption under the SEC’s Regulation S, transfers resulting in advisers from engaging in any act, practice, or course of business the interests coming to rest in the United States could result in which is fraudulent, deceptive or manipulative. In addition, the disqualification from that exemption. In addition, the sponsor must Supreme Court in SEC v. Capital Gains Research Bureau, Inc. (75 ensure that transfers do not result in 2,000 or more investors holding U.S. 180, 186 (1963)) stated that an adviser, as a fiduciary, has “an interests in the fund in order to avoid a requirement to register the affirmative duty of ‘utmost good faith, and full and fair disclosure of fund’s interests under the U.S. Exchange Act of 1934 (the limit all material facts’, as well as ‘an affirmative obligation’ ‘to employ was fewer than 500 until it was raised to 2,000 under the Jumpstart reasonable care to avoid misleading’... clients”. The duty of full and Our Business Startups Act (“JOBS Act”)). If the fund chooses to fair disclosure is especially important when an adviser’s interests avoid registration and regulation as an investment company under may conflict with those of its clients. An adviser is required to the Investment Company Act by relying on the Section 3(c)(1) make appropriate disclosure to clients regarding any facts that may exclusion described in question 1.3 above and having fewer than affect the adviser’s independence, including situations that involve 100 U.S. beneficial owners, it must also ensure that transfers do a potential conflict of interest. An adviser may be found to have not result in exceeding that limit. Otherwise, it would need to violated Section 206 in cases where the prohibited conduct was come within another investment company registration exemption unintentional. available for funds, such as the exemption for funds whose investors are all “qualified purchasers” (generally, individuals owning $5 Advisers to Alternative Investment Funds are also subject to million or more in investments, institutions owning and investing Rule 206(4)-8 of the Advisers Act, which defines fraud to include on a discretionary basis $25 million or more in investments and certain conduct not commonly considered fraudulent. Rule 206(4) directors, officers and certain other “knowledgeable employees” (8) deems it to constitute a fraudulent, deceptive or manipulative of the fund or its affiliates). Finally, depending on the precise act, practice or course of business within the meaning of Section circumstances of the fund, it may want to restrict transfers in order 206 for any registered or unregistered adviser to a pooled vehicle to ensure that it avoids treatment as a “publicly traded partnership”, to (a) make any untrue statement of material fact, (b) omit to state which could subject it to entity-level U.S. federal income taxation if a material fact necessary to make a statement not misleading, or it is a U.S. entity or engaged in certain activities in the U.S. (c) otherwise engage in any other fraud on investors or prospective investors in the pooled investment vehicle. The SEC does not have to establish scienter on the part of an adviser in order to bring an

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enforcement case specifically for fraud. Even an unintentional particular advertisement is false or misleading also depends on the violation of the substantive provisions of Rule 206(4)-8 that occurs facts and circumstances involved in its use, including: (i) the form due to negligence would be deemed to constitute fraud within the as well as the content of the advertisement; (ii) the implications or meaning of Section 206. For example, if an adviser inadvertently inferences drawn from the advertisement in its total context; and and in good faith neglected to include a material fact necessary (iii) the sophistication of the prospective client. to make its offering memorandum not misleading, the SEC could Rule 206(4)-1(b) defines “advertisement” as including “any notice, bring an enforcement case for fraud against the adviser under Rule circular, letter or other written communication addressed to more 206(4)-8. 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, USA the Advisers Act specifically prohibits an adviser that is registered report, or publication concerning securities, or that is to be used in or required to be registered with the SEC from certain practices making any determination as to when to buy or sell any security, that the SEC considers to be misleading or likely to be misleading. or which security to buy or sell; or (2) any graph, chart, formula, Rule 206(4)-1 prohibits including in an advertisement any of the or other device to be used in making any determination as to when following: (a) direct or indirect references to a testimonial of any kind to buy or sell any security, or which security to buy or sell; or (3) concerning the adviser or concerning any advice, analysis, report or any other investment advisory service with regard to securities”. other service it has rendered; (b) direct or indirect references to past Any material that promotes advisory services for the purpose of specific recommendations by the adviser that were or would have maintaining existing clients or soliciting potential clients to buy been profitable to any person, unless the advertisement sets out or those services will typically be considered an “advertisement”. offers to furnish a detailed list of all recommendations made within Because of the broad definition of “advertisement”, advisers the immediately preceding period of not less than one year, and should exercise caution before making a determination that any includes certain disclaimers; (c) any direct or indirect representation communication with existing or prospective clients falls outside of that any graph, chart, formula or other device being offered: (i) can the definition of advertisement and is not subject to the advertising in and of itself determine which securities to buy or sell or when to requirements under Rule 206(4)-1. buy or sell securities; or (ii) will assist any person in making such determinations, without in each case prominently disclosing the 3.3 Do the marketing or legal documents need to be limitations thereof and the difficulties with respect to its use; or (d) registered with or approved by the local regulator? any statement to the effect that any report, analysis or other service will be furnished free or without charge, unless such materials or The SEC does not impose any requirements for registering or services are entirely free and without any direct or indirect condition approval of the marketing documents of an Alternative Investment or obligation. Fund. Nor does the SEC generally provide assistance to advisers Rule 206(4)-1 also prohibits an adviser from publishing, circulating in determining whether they are in compliance with the advertising or distributing any advertisement that contains any untrue statement, rules. However, during any SEC examination of a registered or which is otherwise false or misleading. The foregoing “catch-all” adviser, the SEC will often request to view advertising materials prohibition has generated various no-action letter interpretations distributed by the adviser, along with documentation supporting the by the SEC, particularly in connection with the standards and claims made in the advertisements. In addition, any inconsistencies methodology for calculating and presenting past performance and between an adviser’s advertising materials and its statements made for the construction of model performance results. For example, in in filings such as its Form ADV and Form PF are likely to attract the Clover Capital Management, Inc. (available October 28, 1986), one attention of the SEC. of the most important no-action letters regarding advertisements, the SEC identified a wide range of specific practices that would be misleading with respect to the presentation of past performance, 3.4 What restrictions are there on marketing Alternative Investment Funds? including, among other things: (a) failing to disclose the effect of material market or economic conditions on the results portrayed; (b) failing to reflect the deduction of investment advisory fees, Securities sold in the United States (including interests in Alternative brokerage or other commissions, and any other expenses that a Investment Funds) must be registered with the SEC absent an client would have paid or actually paid; (c) suggesting or making exemption from the registration requirements under the Securities claims about the potential for profit without also disclosing Act. Interests in Alternative Investment Funds are typically sold in the possibility of loss; and (d) failing to disclose any material the United States pursuant to an exemption from such requirements conditions, objectives, or investment strategies used to obtain the because registration would subject an Alternative Investment Fund performance advertised. In Clover, the SEC also stated that several to regulation under the Investment Company Act and to substantive practices would be misleading with respect to the presentation of disclosure and reporting obligations. Alternative Investment Fund model results, including, among other things, (i) failing to disclose interests are sold either under the private placement exemption under the limitations inherent in model results, and (ii) failing to disclose Section 4(2) of the Securities Act or the safe harbour thereunder if any of the securities or strategies reflected in a model portfolio do contained in Regulation D. Generally, to fall within either exemption, not relate, or relate only partially, to the services currently offered an adviser must adhere to the following requirements: (a) sales by the adviser. only to “accredited investors” as defined under Regulation D; (b) a “reasonable belief” that its investors are accredited; (c) no general The standards set forth in Clover are just part of a broader set of solicitation through television, newspapers, the Internet and the like; guidelines that has been created by the SEC with respect to the (d) maintenance of records of all solicitations made in the U.S.; and interpretation of the “catch-all” provision and the other requirements (e) no interviews or co-operation with the U.S. press or with press of Rule 206(4)-1. Although a summary of the Rule 206(4)-1 likely to be directed into the U.S. The definition of “accredited guidelines is beyond the scope of this article, any adviser that is investors” is discussed in greater detail in question 3.6 below. subject to the U.S. advertising rules must become familiar with all aspects of the SEC’s requirements. In addition, advisers should be With the 2013 adoption of amendments to Rule 506 of Regulation mindful that SEC no-action letters generally advise that whether any D implementing certain components of the JOBS Act, Alternative

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Investment Funds gained the ability to employ general solicitations general advertising must take “reasonable” steps to verify that and general advertising to offer their securities without becoming purchasers of their securities are accredited investors. Issuers who subject to Securities Act registration requirements. However, do not make general solicitations and do not use general advertising in order to engage in such activities, an issuer is required to take only need to have a “reasonable belief” that all of their investors are “reasonable” steps to verify that purchasers of its securities are accredited investors. accredited investors. Whether the steps taken by the issuer are In addition, Alternative Investment Funds typically avail themselves “reasonable” is determined based on the particular facts and of the exclusion from the definition of an “investment company” circumstances of each offering and each purchaser. An issuer contained in either Section 3(c)(1) or 3(c)(7) of the Investment making a general solicitation should retain records that document Company Act (Alternative Investment Funds operating under such the processes and procedures used to verify that all of its purchasers exclusions are referred to herein as “3(c)(1) funds” and “3(c)(7) USA are accredited investors. To date, Alternative Investment Funds have funds”, respectively). Alternative Investment Funds whose securities generally not availed themselves of the opportunity to make general (other than short-term paper) are beneficially owned by no more solicitations and use general advertising. Most continue to abide by than 100 persons are exempted from the definition of an investment the pre-existing requirements prohibiting general solicitation. company under Section 3(c)(1). A “look-through” provision applies In order to avoid registration as an “investment company” under in determining the number of beneficial owners for purposes of the Investment Company Act, Alternative Investment Funds Section 3(c)(1). In the case of a 3(c)(1) fund investor that itself is typically rely on one of the exclusions from the definition of an both (i) a 10 per cent or greater owner of the voting securities of investment company provided by the Investment Company Act that such 3(c)(1) fund, and (ii) a registered investment company, a 3(c) are discussed in question 3.6 below. While under the Investment (1) fund, a 3(c)(7) fund, or an owner that would have to register Company Act these exclusions cannot be relied upon if an Alternative were it organised under U.S. law, then the 3(c)(1) fund must “look Investment Fund makes a public offering of its securities, the through” to such investor’s underlying security holders for the SEC takes the view that with the adoption of the amendments to purposes of calculating its number of owners. In addition, a 3(c)(1) Rule 506, Alternative Investment Funds may now employ general fund must “look through” any investing entity that was formed for solicitations and general advertisements without losing the private the purpose of investing in the 3(c)(1) fund. It should also be noted fund exclusions under the Investment Company Act. The SEC has that under the Advisers Act a registered investment adviser may not also confirmed that an offering in the United States under amended charge performance fees (typically measured based on the amount Rule 506 involving general solicitation or general advertising will of both realised and unrealised gains and losses) in connection with not prevent an issuer from conducting a concurrent offshore offering an Alternative Investment Fund unless its investors are deemed to pursuant to Regulation S under the Securities Act. be “qualified clients” capable of bearing the risks associated with An unregistered offering by an Alternative Investment Fund that performance fee arrangements. Qualified client status requires fails to comply with all aspects of the exemption from the Securities that net worth or assets under management meet certain dollar Act’s registration requirements will generate rescission rights under thresholds that are generally higher than the thresholds required to state and federal law for each investor at the original purchase price. be an accredited investor. Accordingly, 3(c)(1) funds that charge These rescission rights are exercisable at any time, regardless of performance fees must ensure that their investors are qualified performance, with the adviser potentially bearing the economic clients in addition to being accredited investors. risks involved. For an Alternative Investment Fund to qualify as a 3(c)(7) fund, each investor must be a qualified purchaser or knowledgeable employee. Under the Investment Company Act, qualified purchasers include: 3.5 Can Alternative Investment Funds be marketed to retail investors? (a) any natural person that owns not less than $5 million in “investments” (as defined by the SEC); (b) any company directly or indirectly owned entirely by two or more closely related natural Alternative Investment Funds generally must be sold only to persons, their estates or foundations, charities, or trusts formed by or “accredited investors” as defined under Regulation D in order to for their benefit that owns not less than $5 million in “investments”; avoid being required to register under the Securities Act, subject to (c) any person, acting for its own account or the accounts of other a 35 investor exception for non-accredited investors.2 The definition qualified purchasers, that in the aggregate owns and invests ona of “accredited investors” is discussed in question 3.6 below. discretionary basis not less than $25 million in “investments”; (d) any other trust not formed for the specific purpose of acquiring 3.6 What qualification requirements must be carried out the 3(c)(7) fund’s securities and as to which both the person with in relation to prospective investors? investment discretion with respect to the trust and each of the contributors is a qualified purchaser under (a), (b) or (c) above; As noted in the prior section, Alternative Investment Funds (e) any person who received securities of a 3(c)(7) fund as a gift generally must be sold only to “accredited investors” in order to or bequest, or due to an involuntary event (such as death, divorce avoid being required to register under the Securities Act, subject or legal separation) from a qualified purchaser; and (f) any entity to a 35 investor exception for non-accredited investors. An in which all beneficial owners of all securities issued are qualified “accredited investor” includes: an individual which either has a purchasers. Section 3(c)(7) does not “look through” its investors, net worth (taken together with the net worth of any spouse) of $1 provided that the investors were not formed for the purpose of million,3 or in the last two years has had either an annual income of making the investment. A 3(c)(7) fund may have an unlimited $200,000 or a combined annual income (with spouse) of $300,000 number of investors without having to register under the Investment and a reasonable expectation of the same income level in the current Company Act. In practice, however, onshore 3(c)(7) funds typically year; a bank or other financial institution; a tax-exempt or other stay below 499 total investors and offshore 3(c)(7) funds typically entity with assets in excess of $5 million; or any entity in which all stay below 1,999 U.S. investors (with unlimited non-U.S. investors) such entities’ beneficial owners are accredited investors. As noted in order to remain within certain exemptions from Exchange Act previously, issuers wishing to avail themselves of the opportunity registration. under amended Rule 506 to make general solicitations and use

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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 Exchange Act section 3(a)(4) defines the term “broker” to mean “any a corporation from entering into business arrangements or contracts person engaged in the business of effecting transactions in securities with certain governmental entities if the corporation, its PAC, its for the accounts of others”. The Exchange Act further requires that affiliates, and in many cases certain covered directors, employees, brokers be registered as such with the SEC. In addition, depending and their family members (such as spouses or children) make or on various fact-based circumstances, brokers may have to register 4 USA solicit political contributions in that jurisdiction. These bans on with the securities commissions of the states in which they are government contracting could last up to five years in some cases. In effecting transactions in securities. Accordingly, when interests some jurisdictions, a contribution by a covered donor does not trigger in an Alternative Investment Fund are sold, the question should be a ban on government contracts but rather requires such contractor asked whether the person selling such interests in an Alternative to report contributions made by its covered donors. Directors and Investment Fund is acting as a “broker” and should therefore be employees individually making or soliciting political contributions 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 to remove the connection between political contributions to state relatively narrow and requires attention to the precise circumstances and local officials who may have influence over the awarding of surrounding the sale of the Alternative Investment Fund’s interests. government and public pension investment advisory business (i.e., For example, in order to comply with the exemption’s requirement “pay-to-play” practices). This is accomplished by: that associated persons not be compensated in connection with ■ prohibiting advisers from being compensated for investment sales of the Alternative Investment Fund’s interests, an adviser that advisory services provided to a state or local government is contemplating a bonus for an associated person must consider entity for two years if covered employees of the firm make whether that bonus may be correlated with, or may even have the political contributions to certain officials of that government appearance of being correlated with, such associated person’s sales entity; of the interests of the Alternative Investment Fund. ■ prohibiting solicitation or coordination of political The safe harbour offered by Rule 3a4-1 is especially significant contributions to such officials or certain state or local party given that the use of a broker who should be, but is not, registered, committees; to sell interests of an Alternative Investment Fund can result in ■ only allowing employees of the adviser and certain regulated substantial sanctions not only for the broker, but also the Alternative entities to solicit investment advisory business from government Investment Fund and its adviser. Such sanctions could include the entities; and granting of rescission rights to investors, such that the relevant ■ requiring advisers to maintain books and records relating to investors may recoup the original price of their investment in an state and local government entity clients, political contributions, Alternative Investment Fund regardless of the current valuation of use of placement agents, and information relating to covered that holding. employees. One sometimes encounters the claim that a person who introduces Each state and many localities also have lobby laws that impose a potential buyer of securities to an issuer is not engaged in the lobby registration and reporting requirements on persons who business of effecting transactions in securities for the accounts contact certain public officials for the purpose of influencing of others and therefore is merely a “finder” who is not required certain governmental decisions or actions. In addition to requiring to register as a broker. However, the circumstances in which a registration for “traditional” lobbying activity such as lobbying person could be considered a “finder” are extremely rare because legislation and regulations, the majority of states and numerous the concept of “finder” does not include the normal range of selling localities also require registration for procurement lobbying, activities (e.g., discussions regarding an Alternative Investment including marketing to public bodies or attempting to influence any Fund and the delivery of an Alternative Investment Fund’s offering other non-ministerial official action of the executive branch or any materials). Consequently, it is unusual to find a person who confines of its agencies. the scope of his activities in such a way as to meet the definition of Each state also has its own gift laws regulating gifts, e.g., meals, a “finder”. As such, advisers must take precautions to ensure that entertainment, gift items, transportation, or lodging, given to its state paid sales agents are properly registered or actually exempt from and/or local public officials. Also note that certain local jurisdictions registration. have their own separate gift laws. These laws vary depending on the Rule 206(4)-3 under the Advisers Act prohibits an adviser that is jurisdiction, and tend to fall into four categories: jurisdictions which: required to be registered under the Advisers Act from directly or (1) absolutely ban gifts regardless of value; (2) impose dollar limits indirectly paying a cash fee to a solicitor with respect to solicitation on gifts – some are per occasion and some are per time period; (3) arrangements unless certain additional conditions are met. Among prohibit gifts that may reasonably tend to influence an official; and (4) the requirements is an agreement by the solicitor to provide the only restrict gifts which may be problematic under a bribery standard. client with a copy of the investment adviser’s Form ADV Part 2A

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and a separate written solicitor disclosure.5 In addition, Form ADV and derivative instruments – based on “inside information” or also requires that an adviser disclose that it pays solicitation fees and “material, nonpublic information”. These laws also prohibit describe the fee arrangements. the distribution of inside information to others who may use that knowledge to trade securities (also known as “tipping”).

3.9 Are there any restrictions on the participation in Information is material where there is a substantial likelihood that Alternative Investments Funds by particular types of a reasonable investor would consider that information important in investors, such as financial institutions (whether as making his or her investment decisions. Generally, this includes any sponsors or investors)? information the disclosure of which may have a substantial effect on the price of a company’s securities. No simple test exists to The Volcker Rule, a provision of the Dodd-Frank Act, prohibits determine when information is material; assessments of materiality USA banking entities (including asset manager subsidiaries of such involve a highly fact-specific inquiry. banking entities) from organising and offering, or investing in, Material information often relates to a company’s financial results hedge funds or private equity funds. Despite the ban on investments and operations, including, for example, dividend changes, earnings in such funds, however, the Volcker Rule allows banking entities to results, changes in previously-released earnings estimates, significant continue to sponsor and invest in covered funds, subject to certain merger or acquisition proposals or agreements, major litigation, exemptions. liquidity problems, and extraordinary management developments. The primary exemption available to banking entities is the “permitted Material information also may relate to the market for a company’s funds exemption”. In order to qualify for the permitted funds securities. Pre-publication information regarding reports to be exemption, a banking entity must satisfy the following conditions: published in the financial press also may be material. (i) the banking entity must provide bona fide trust, fiduciary, Information is “public” when it has been disseminated broadly to investment advisory or commodity trading advisory services; investors in the marketplace. For example, information is public after (ii) the fund must be organised and offered only in connection with it has become available to the general public through a public filing the provision of bona fide trust, fiduciary, investment advisory, with the SEC or some other government agency, a news reporting or commodity trading advisory services and only to persons service or publication of general circulation, and after sufficient time that are customers of such services of the banking entity; has passed so that the information has been disseminated widely. (iii) the banking entity must limit (a) its ownership of the fund to less than 3 per cent of the fund’s ownership interests, and (b) 4.2 Are there any limitations on the types of investments its aggregate ownership in all covered funds to less than 3 per that can be included in an Alternative Investment cent of the banking entity’s Tier 1 capital; Fund’s portfolio whether for diversification reasons or (iv) the banking entity is prohibited from entering into a otherwise? relationship with any covered fund that would be a “covered transaction” under Federal Reserve Act Section 23A. Unlike Generally, advisers advising Alternative Investment Funds are Section 23A of the Federal Reserve Act, pursuant to which obligated to cause such funds to invest in the types of investments that “covered transactions” are subject to limits and certain conditions and exemptions, the Volcker Rule prohibition is are consistent with such fund’s investment objective, as disclosed in absolute (subject to certain exemptions) and thus is frequently such fund’s offering materials. In addition, certain other restrictions referred to as “Super 23A”; on the types of investments that can be included in an Alternative Investment Fund’s portfolio apply, as discussed below. (v) the banking entity may not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance Investments in Regulated Industries of the covered fund or of any covered fund in which such A variety of federal and state laws place limits on ownership of the covered fund invests; securities of certain companies. Most of these federal and state (vi) the fund, for corporate, marketing, promotional or other laws apply to companies in highly regulated industries. The laws purposes, may not share the same name or a variation of the are designed to prevent a single person or group from acquiring an same name with the banking entity (or an affiliate or subsidiary influential or controlling position in a company. These laws may thereof) and may not use the word “bank” in its name; require prior consent of a regulator before the securities can be (vii) no director or employee of the banking entity may take an purchased, and, for purposes of determining ownership or control, ownership interest in the covered fund except for any director an investment adviser may be required to aggregate the holdings of or employee who is directly engaged in providing investment all accounts over which it exercises investment discretion along with advisory or other services to the covered fund; and any proprietary accounts and accounts of its principals. Some of the (viii) the banking entity must clearly and conspicuously disclose, in types of issuers where applicable laws place restrictions include: writing, to any prospective and actual investor in the covered ■ public utility companies or public utility holding companies; fund certain enumerated disclosures and comply with any additional rules of the appropriate agencies designed to ■ bank holding companies; ensure that losses in such covered fund are borne solely by ■ owners of broadcast licences, airlines, railroads, water investors in the covered fund and not by the banking entity. carriers and trucking concerns; ■ casinos and gaming businesses; 4 Investments ■ defence-related industries, including the Committee on Foreign Investment in the United States (“CFIUS”) review of transactions that could result in control of a U.S. business by 4.1 Are there any restrictions on the types of activities that a foreign person; can be performed by Alternative Investment Funds? ■ insurance companies; and ■ public service companies (such as those providing gas, Limitation on Insider Trading electric or telephone services). Federal and state securities laws prohibit Alternative Investment In addition, the Hart-Scott-Rodino Anti-Trust Improvements Act Funds from trading securities – including equity and debt securities of 1976 (the “HSR Act”) places notification requirements and

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waiting periods before transactions subject to the HSR Act may security necessary to cover the position or has reasonable grounds be consummated. The HSR Act is intended to address antitrust to believe the security can be borrowed in time to meet the delivery concerns, and the notification and waiting periods are designed date. Additionally, Rule 201 of Regulation SHO (the “circuit to allow government officials to review and approve certain breaker” rule) limits the ability to execute orders on short sales on transactions. The HSR Act’s requirements may be triggered by the certain securities that are not marked “short exempt” (within the proposed acquisition of voting securities and assets of the acquired meaning of Rule 200(g) of Regulation SHO) and that have declined person having an aggregate value of $50 million (as adjusted). Such in value by 10 per cent or more from the prior day’s closing price. an acquisition, however, would be exempt from these requirements SEC Rule 105 of Regulation M under the Exchange Act (“Rule of the HSR Act if the acquisition were for investment purposes only 105”) prohibits any “person” from purchasing from a secondary USA and if, as a result of such acquisition, the acquirer would hold 10 per offering of equity securities for cash if the person has effected a cent or less of the issuer’s outstanding voting securities. short sale in such security during the “Rule 105 Restricted Period”, Investments in Registered Funds that is, the shorter period beginning: (i) five business days prior to Although Alternative Investment Funds are not registered under the pricing of the offered securities; or (ii) with the initial filing of the Investment Company Act, they are nevertheless subject to the the registration statement or other offering document with the SEC restrictions of Sections 12(d)(1)(A)(i) and (B)(i) of that Act. These and, in each case, ending with the pricing of the offered securities. provisions require that any Alternative Investment Fund and any Generally all Alternative Investment Funds managed by a single entity controlled by the Alternative Investment Fund, may not own, adviser would be treated collectively as a “person” for the purposes in the aggregate, more than 3 per cent of the total outstanding voting of Rule 105, unless formal information barriers are adopted that securities of any registered open-ended or closed-ended investment prevent coordination of trading and sharing of information between company (each, a “Registered Fund”), including money market portfolio managers of different Alternative Investment Funds funds. The 3 per cent limit is measured at the time of investment. directly or indirectly. Alternative Investment Funds that invest all of their assets (other than Further, another possible exception is the “bona fide purchase” cash) in a Registered Fund pursuant to a master-feeder arrangement, exception, as defined in Rule 105. however, are not subject to the restrictions of Section 12(d)(1), provided that the following conditions are met: 4.3 Are there any restrictions on borrowing by the ■ the Alternative Investment Fund’s depositor or principal Alternative Investment Fund? underwriter must be a registered broker-dealer, or a person controlled by a registered broker-dealer; and There are no restrictions on borrowing by the Alternative Investment ■ the purchase of Registered Fund shares must be made pursuant Funds but the leverage and its attendant risks must be disclosed in to an arrangement whereby the Alternative Investment Fund the fund’s offering materials. is required to vote all proxies: (i) in accordance with the instructions of its security holders; or (ii) in the same proportion as the vote of all other shareholders of the Registered Fund. 5 Disclosure of Information Finally, Alternative Investment Funds may be permitted to invest in certain registered, exchange-traded funds (“ETFs”) beyond the 3 per cent aggregate limit established by Section 12(d)(1). The ETF, 5.1 What public disclosure must the Alternative however, must have obtained an exemptive order from the SEC that Investment Fund make? specifically permits investments above 3 per cent by Alternative Investment Funds, and an Alternative Investment Fund’s investment An Alternative Investment Fund that relies on the exemptions from in the ETF must meet all terms and conditions contained in the order. registration under Regulation D of the Securities Act to offer its Short Sales interests must file a Form D at the time of the first closing of such fund in which U.S. investors participate and must amend it annually Short selling involves selling securities that may or may not be for so long as the fund continues to offer its interests. Form D owned by the seller and borrowing the same securities for delivery to requires disclosure of certain information about the fund, including: the purchaser, with an obligation to replace the borrowed securities the identity of the issuer’s executive officers, directors, promoters at a later date. “Naked” short selling generally refers to a practice and other related persons; amounts sold; and any sales commissions whereby securities are sold short without the seller’s owning or paid. Filed Forms D are publicly available online. Furthermore, having borrowed the requisite securities and therefore may result Alternative Investment Funds are subject to similar filings with in a “failure to deliver”. Short selling allows the investor to profit states under Blue Sky Laws. from declines in securities prices. A short sale creates the risk of a theoretically unlimited loss, in that the price of the underlying Alternative Investment Funds and their advisers must make certain security could theoretically increase without limit, thus increasing public filings, including of the following, among others: the cost to the Fund of buying those securities to cover the short ■ SEC Reporting on Ownership of Equity Securities. The position. There can be no assurance that the security necessary to Securities Exchange Act requires any person who, directly or cover a short position will be available for purchase. Consequently, indirectly, acquires more than 5 per cent of any class of shares of a domestic public company to file a report with the SEC certain market participants could accumulate such securities in within 10 days of such acquisitions. Additional reporting is a “short squeeze”, which would reduce the available supply, and required if a person acquires more than 10 per cent of the thus increase the cost, of such securities. Purchasing securities shares of a U.S. public company. to close out the short position could itself cause the price of the ■ SEC Portfolio Reporting. Any institutional investment securities to rise further, thereby exacerbating the loss. In order to manager with investment discretion over US$100 million reduce “failures to deliver” and address certain concerns and abuses or more in equity securities at the end of a calendar year associated with naked short selling, the SEC adopted Rule 203(b) must file quarterly reports with the SEC containing position of Regulation SHO under the Exchange Act to limit the ability information about the equity securities under the discretion of of a broker or dealer to accept short sale orders unless the person the fund manager, and the type of voting authority exercised entering the order, e.g., the Firm, has already arranged to borrow the by the fund manager.

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■ 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? ■ the types of services offered by an investment adviser; See question 5.1 above. ■ the adviser’s fee schedule; ■ disciplinary information relevant to the adviser or its employees; 5.3 Is the use of side letters restricted? ■ conflicts of interest; There are no outright restrictions on the use of side letters. However, ■ the educational and business background of management USA and key advisory personnel of the adviser; and advisers to Alternative Investment Funds are subject to fiduciary duties under Section 206 of the Advisers Act and Rule 206(4)-8 ■ certain information regarding each Alternative Investment under the Advisers Act, which prohibit an adviser from making false Fund managed by the adviser, including each fund’s 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 to give other investors the ability to assess the impact of such side Under these rules, only SEC-registered private fund advisers with letters on their investment, if any. Such preferential terms include at least $150 million in private fund assets under management must any modifications to the voting or control rights, preferential liquidity file Form PF. Within this group, private fund advisers are divided rights, and terms that materially alter the investment program. In by size into the following two broad groups with different reporting addition, to the extent an Alternative Investment Fund agrees to requirements: provide any additional material information to an investor pursuant ■ Large private fund advisers. This includes any adviser with: to a side letter, such Alternative Investment Fund should take steps ■ $1 billion or more in liquidity and registered money to disclose such information to all investors simultaneously. market fund assets under management, which must file Form PF quarterly, within 60 days of the end of each fiscal quarter. 6 Taxation ■ $1.5 billion or more in hedge fund assets under management, which must file Form PF quarterly, within 15 days of the 6.1 What is the tax treatment of the principal forms of end of each fiscal quarter. Alternative Investment Funds? ■ $2 billion or more in private equity fund assets under management, which must file Form PF annually, within Most U.S.-sponsored private investment funds are classified 120 days of the end of the fiscal year. as partnerships, which are transparent for U.S. federal income These investment advisers must include more detailed information tax purposes. If the fund will make significant non-U.S. equity than smaller investment advisers. The reporting focuses on the investments, forming the fund as a non-U.S. entity in a tax-neutral following types of private funds that the investment adviser manages: jurisdiction, such as the Cayman Islands, minimises the likelihood that ■ Hedge Funds. Large hedge fund advisers must report on the portfolio investments will be subject to the anti-deferral controlled an aggregated basis (and not on a position-level basis) foreign corporation (“CFC”) rules, which can require taxable U.S. information regarding exposures and turnover by asset class investors to include their share of the portfolio company’s earnings in and geographical concentration. In addition, for each managed income in advance of the receipt of cash attributable to such income. hedge fund having a net asset value of at least $500 million, these advisers must report certain information relating to that As noted above, in order to accommodate structures that take into fund’s exposures, leverage, risk profile and liquidity. account the tax considerations relevant to different categories of ■ Liquidity Funds. Large liquidity fund advisers must provide investors, private investment funds are often established with several information on the types of assets in each of their liquidity “parallel” or “mirror” funds that invest in a side-by-side manner. fund’s portfolios, certain information relevant to the risk This permits each parallel fund to structure its holding of particular profiles of the funds and the extent to which a fund has a policy portfolio investments or categories of investments in the manner that of complying with all or certain aspects of the Investment is optimal for the investors in that parallel fund. For example, certain Company Act’s principal rule concerning registered money U.S. tax-exempt investors are subject to U.S. federal income tax on market funds (Rule 2a-7). “unrelated taxable business income”, which includes income treated ■ Private Equity Funds. Large private equity fund advisers as debt financed (“UBTI”). U.S. tax-exempt investors may invest in must respond to questions focusing primarily on the extent of a parallel fund that structures any investments that would give rise to leverage incurred by their funds’ portfolio companies, the use UBTI through investments in corporations, real estate investment trusts of bridge financing and their funds’ investments in financial (“REITS”) or other non-transparent entities that “block” income that institutions. might subject them directly to income tax or reporting requirements in ■ Smaller private fund advisers. This includes all other private the U.S. Similarly, a parallel fund established for non-U.S. investors advisers that are not considered large private fund advisers. These investment advisers must file Form PF annually within will allow the fund to “block” any investments that would result in 120 days of the end of the fiscal year and report only basic U.S. tax and reporting obligations for those investors if held on a flow- information regarding the private funds they advise. This through or transparent basis by making such investments through includes information regarding size, leverage, credit providers, corporations, REITS or other non-transparent entities. investor types and concentration and fund performance and, Hedge funds, by contrast, often employ a “master-feeder” type of additionally for hedge funds, fund strategy, counterparty structure. In this structure, investors subscribe for interests in “feeder credit risk and use of trading and clearing mechanisms.

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funds” that in turn all invest in one “master” fund that holds all under current law, if the equity owners of the fund manager and investments. Typically, U.S. taxable investors invest in an onshore fund general partner sell their interests in the manager and general feeder that is classified as a partnership (and thus transparent) for partner entities, they would generally recognise capital gain on the U.S. federal income tax purposes, while foreign and U.S. tax-exempt sale. (Members of the U.S. Congress and the Administration have investors invest through an offshore feeder classified as a non-U.S. proposed legislation in the past that would take away at least some corporation for U.S. tax purposes and organised in a tax-neutral portion of the favourable tax treatment of such profits allocations jurisdiction. The offshore feeder’s corporate classification “blocks” and, potentially, gain on sale of an interest in the manager and/or any UBTI that would result from leverage used by the master fund. general partner.) The feeder’s corporate status also ensures that the feeder, rather than Sponsors may utilise different and more complex structures where USA the investors, would be subject to any U.S. tax reporting obligations key employees or other service providers are located in both U.S. should they arise. and non-U.S. jurisdictions. These structures may involve separate The master fund is often classified as a partnership for U.S. federal vehicles for U.S. versus non-U.S. service providers and/or sub- income tax purposes. If classified as a corporation, provided it is advisory agreements between the main fund advisor and sub-advisors formed in a non-U.S. jurisdiction, the fund generally will not be operating in different jurisdictions. Transfer pricing considerations subject to entity-level tax in the U.S. so long as the fund is not are relevant to ensuring that the economic arrangements among the treated as engaged in a U.S. trade or business in the U.S. as discussed different vehicles, the advisor and the sub-advisors minimise the below. U.S. taxable investors in the onshore feeder generally likelihood of double taxation. will include their share of the fund’s income and gains in income on a current basis (much like the tax treatment of a partnership) 6.3 Are there any establishment or transfer taxes levied under the passive foreign investment company (“PFIC”) rules. in connection with an investor’s participation in an (Although PFIC tax treatment is similar to that of a partnership, Alternative Investment Fund or the transfer of the certain differences may be important, including that losses do not investor’s interest? flow through to investors and expenses of the fund are not subject to the miscellaneous itemised deduction limitations that apply to U.S. Provided the fund is structured to ensure that non-U.S. investors are taxable individual investors.) not treated as engaged in a U.S. trade or business (including by way U.S. managers of investment funds with non-U.S. investors of their direct investment in a partnership or other transparent entity typically take steps to ensure that fund investments qualify under that is treated as so engaged) and that the fund’s investments are not a safe harbour for trading in stocks or securities for the fund’s own subject to tax under FIRPTA, no U.S. federal income tax or transfer account, which ensures that the fund will not be subject to tax in tax generally applies to a non-U.S. investor’s participation in, or sale the U.S. despite the manager’s activities in the U.S. on behalf of or transfer of its interests in the fund. Likewise, U.S. tax-exempt the fund. Likewise, managers typically monitor investments to investors are not subject to U.S. federal income tax or transfer tax avoid taxation under the “FIRPTA” rules that can apply if the fund provided that their investment is structured in a manner that “blocks” invests in U.S. real property (or entities holding substantial U.S. UBTI (for example, investment in the offshore feeder of a master- real property that constitute United States real property holding feeder hedge fund structure or investment in a parallel private companies (“USRPHCs”)). These constraints may pose additional investment fund that structures investment to prevent UBTI) and that considerations in structuring investments or sales of fund assets. For an investor does not finance its investment in the fund with debt. example, investments in newly originated loans or debt instruments Investors (or the fund itself) may be subject to certain U.S. may not qualify for the trading safe harbour. Likewise, investments withholding taxes as described below. in USRPHCs would subject the fund to U.S. federal income tax and Typically, funds will endeavour to structure their investments so reporting obligations unless the investment was in the form of debt that the fund is not treated as having a permanent establishment or 5 per cent or less of the equity of a publicly traded company. in the jurisdiction by reason of its investments or activities in that Private investment funds with U.S. tax-exempt or non-U.S. jurisdiction. Non-U.S. jurisdictions may impose withholding or investors often take additional steps to structure investments and transfer taxes on the fund or fund investors. sales of assets in a manner that avoids triggering U.S. tax for non- U.S. and tax-exempt investors, as noted above. 6.4 What is the tax treatment of (a) resident, (b) non- resident, and (c) pension fund investors in Alternative 6.2 What is the tax treatment of the principal forms of Investment Funds? investment manager / adviser? U.S. Taxable Investors. Typically, U.S. taxable investors invest in a U.S. sponsors typically form the fund investment manager/advisor fund vehicle that is classified as a partnership (and thus transparent) as an entity classified as a partnership for U.S. federal income tax for U.S. federal income tax purposes. U.S. taxable investors purposes. As noted above, the sponsors often form separate vehicles generally will include their share of the fund’s income and gains to serve as the manager and the fund general partner so that the in income on a current basis. If instead the fund is classified as general partner is not subject to certain state or local franchise taxes a corporation, U.S. taxable investors generally will include their (such as the Unincorporated Business Tax in New York City) with share of the fund’s income and gains in income on a current basis respect to the profits it receives in the form of a “carried interest” (much like the tax treatment of a partnership) under the passive or “promote” from the fund. Under current U.S. federal income foreign investment company (“PFIC”) rules. (Although PFIC tax tax law, profits allocated to the general partner from the fund retain treatment is similar to that of a partnership, certain differences may their tax character when they flow through to the sponsor’s equity be important, including that losses do not flow through to investors owners, which profits may include capital gains and/or dividend and expenses of the fund are not subject to the miscellaneous income. The holder of a partnership interest generally recognises itemised deduction limitations that apply to U.S. taxable individual capital gain upon a sale of his interest in the partnership (except to investors.) the extent attributable to the value of certain inventory items). Thus,

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Non-U.S. Investors. Provided the fund is structured to ensure that financial institutions – including most non-U.S. investment funds non-U.S. investors are not treated as engaged in a U.S. trade or and other collective investment vehicles – to report information business (including by way of their direct investment in a partnership about the holdings of U.S. taxpayers or face 30 per cent withholding or other transparent entity that is treated as so engaged) or subject on certain payments they receive. FATCA also imposes withholding to state and local tax and that the fund’s investments are not subject and reporting obligations on U.S. funds. to tax under FIRPTA, no U.S. federal income tax or reporting The U.S. Treasury Department and IRS have finalised detailed obligations should apply to a non-U.S. investor’s participation in, or regulations and forms necessary for FATCA compliance and sale or transfer of its interests in the fund. continue to update online FATCA Questions & Answers (“Q&As”) Non-U.S. investors (or, in hedge fund master-feeder structures, the to facilitate compliance through its internet web portal, which each offshore feeder fund) may be subject to U.S. withholding tax at foreign financial institution must use to register and receive a global USA a 30 per cent rate on their share of interest, dividends, dividend- intermediary identification number (“GIIN”) needed to evidence equivalents and other fixed or determinable annual or periodical FATCA compliance to payors. (“FDAP”) income from sources within the U.S. Certain interest is Meanwhile, local jurisdictions are implementing FATCA through exempt from this withholding tax. local regulations and guidance, as envisioned under intergovernmental Separately, under the Foreign Account Tax Compliance Act agreements (“IGAs”) with the U.S. The IGAs address local law (“FATCA”), certain foreign financial institutions, including most impediments, such as bank secrecy and data protection laws, that investment funds and non-U.S. custodians (“FFIs”), will be subject would prevent institutions in those countries from fully complying to a 30 per cent withholding tax on U.S. source dividends, interest with FATCA. and certain other payments, and, starting in 2019, on the gross Finally, the OECD’s common reporting standard (“CRS”) for proceeds from the sale of equity interests or debt issued by U.S. Automatic Exchange of Financial Account Information, modelled issuers and possibly other payments, unless the institution enters into on FATCA, has taken effect for many countries who have chosen an agreement with the U.S. Internal Revenue Service (the “IRS”) to to participate. Under the CRS, participating countries are able to report certain information regarding beneficial ownership by U.S. obtain annual financial information from financial institutions in their persons and complies with other requirements (or, where the U.S. jurisdictions and then automatically exchange that information with has entered into an intergovernmental agreement with a relevant their exchange partner countries. Many countries have taken steps to jurisdiction (an “IGA”), the institution complies with requirements translate the CRS into domestic law. The CRS supplements existing under the IGA, which will entail reporting information regarding exchange of information arrangements (e.g. tax treaties and the OECD beneficial ownership either to the IRS or the taxing authority in Multilateral Convention on Mutual Assistance in Tax Matters). the relevant jurisdiction). A non-U.S. investor that is considered to be an FFI under FATCA or a relevant IGA may be subject to U.S. withholding tax unless it complies with applicable requirements. 6.7 Are there any other material tax issues? Pension Fund Investors. U.S. state pension funds generally take The foregoing is a general summary of certain U.S. federal income the position that they are not subject to U.S. federal income tax, tax issues. A private investment fund may encounter other material including with respect to UBTI. Non-U.S. pension funds are U.S. tax issues depending on the relevant facts and circumstances. generally subject to the same consequences described above for non-U.S. investors, except to the extent they qualify for the benefits of a treaty. Certain more favourable rules may apply to them if the 6.8 What steps are being taken to implement the OECD’s fund makes investments potentially subject to tax under FIRPTA. Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations? 6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing The U.S. has taken steps with respect to certain aspects of BEPS and an Alternative Investment Fund? is considering others.

No tax ruling is typically obtained in the U.S., although tax counsel Specifically, with respect to Action 6 (prevention of treaty abuse), to private investment funds may render an opinion to the sponsor, the U.S. generally already satisfies the minimum standard through based on customary assumptions and representations from the limitation on benefits (“LOB”) articles in its tax treaties in force sponsor, on the expected U.S. federal income tax classification of or in treaties or protocols awaiting ratification and its anti-conduit the fund. rules. Certain treaties with LOB provisions (e.g., Poland and Hungary) are stalled awaiting ratification in the U.S. Senate. In Funds may make certain non-U.S. investments in the form of 2016, the Treasury Department released for comment a revised investments in special purpose vehicles in non-U.S. jurisdictions in U.S. Model Tax Convention on Income, used by Treasury as the order to allow the funds to obtain the most efficient non-U.S. tax template when it negotiates tax treaties. The Treasury sought to treatment of certain investments. In this case, it may be advisable address issues arising from local tax regimes that provide for low to seek a tax ruling from the relevant tax authorities confirming the rates of taxation in certain countries with respect to mobile income, intended tax treatment. such as royalties and interest. The Treasury stressed its concern that taxpayers can easily shift such income across the globe through 6.6 What steps have been or are being taken to implement deductible payments that can erode the U.S. tax base. The draft the US Foreign Account and Tax Compliance Act model is intended to prevent a taxpayer from utilising provisions in 2010 (FATCA) and other similar information reporting the tax treaty, combined with special tax regimes, to pay no or very regimes such as the Common Reporting Standard? low tax in treaty partner countries. With respect to Action 7 (permanent establishment status), the U.S. Congress enacted FATCA as part of the HIRE Act in 2010 in order is reportedly awaiting completion of a report on the attribution of to stop U.S. taxpayers from evading U.S. taxes through undisclosed profits. offshore accounts and investments. FATCA requires foreign

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The U.S. has taken steps with respect to Action 13 (country-by- country (“CbC”) reporting), releasing final regulations requiring Endnotes CbC reporting by U.S. parents of multi-national groups with annual 1. For these purposes a “private fund” is any fund that would be revenues of $850 billion. The Treasury and IRS based the regulations an investment company under the Investment Company Act on the OECD model template for CbC reporting. The U.S. is but for Sections 3(c)(1) or 3(c)(7) of that Act. currently expected to enter into bilateral agreements providing for 2. Certain barriers to accepting non-accredited investors exist. automatic exchange of CbC information beginning in 2018. Rule 506 requires that non-accredited investors have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of

USA 7 Reforms the prospective investment. Non-accredited investors are unlikely to be “qualified clients” that are eligible to be charged performance fees. In addition, Alternative Investment Funds 7.1 What reforms (if any) are proposed? that wish to avail themselves of the opportunity to make general solicitations following the implementation of the The Dodd-Frank Act represented a significant change in the amendments to Rule 506 of Regulation D will be unable to regulatory regime governing Alternative Investment Funds and their accept non-accredited investors. advisers. Prior to the Dodd-Frank Act, many investment advisers 3. Net worth calculation includes personal property and other to Alternative Investment Funds were exempt from registration assets, provided that the value of the individual’s primary under the Advisers Act and as a result did not have to comply with residence, as well as the amount of indebtedness secured the reporting and compliance obligations that apply to registered by the primary residence up to the fair market value of the investment advisers. However, as a result of the Dodd-Frank Act’s primary residence, is excluded, but (i) indebtedness secured changes to the Advisers Act (described in question 1.2), nearly all by the primary residence in excess of the value of the primary residence is considered a liability, and (ii) if the amount of advisers to Alternative Investment Funds that are offered or sold in indebtedness secured by the primary residence outstanding the United States are either required to be registered with the SEC at the time of the individual’s purchase of the interests in an (or state regulatory agencies) or are “exempt reporting advisers” and Alternative Investment Fund exceeds the amount outstanding required to file annual reports with the SEC. 60 days before such time, other than as a result of the Additionally, the Dodd-Frank Act led to the creation of Form PF, acquisition of the primary residence, the amount of such the SEC’s and CFTC’s systemic risk reporting form described in excess is considered a liability. question 1.3. Form PF requires registered investment advisers 4. Providing gifts and entertainment to public officials triggers with over $150 million in private fund assets under management to pay-to-play restrictions in some jurisdictions as well. Please report detailed portfolio-level information about the private funds also note that a number of states and entities have imposed they advise. Unlike Form ADV, Form PF is a confidential form restrictions or outright bans on investment advisers’ use of “placement agents” as intermediaries when contacting public that is reported only to the SEC and CFTC, and may be shared with pension funds. other regulatory agencies and with Congress. The information contained in Form PF is designed, among other things, to assist the 5. The solicitor disclosure is required to include: (a) the name of the solicitor; (b) the name of the adviser; (c) the nature U.S. financial regulators in their assessment of systemic risk in the of the relationship between the solicitor and the adviser; (d) U.S. financial system. a statement that the solicitor will be compensated by the These recent changes have increased the compliance obligations adviser for the referral; (e) the terms of such compensation applicable to advisers. They have also given the SEC a great deal arrangement including a description of the fees paid or to be more information about the Alternative Investment Funds industry paid to the solicitor; and (f) the amount that will be charged in the United States. in addition to the investment advisory fee and the differential attributable to such a solicitor arrangement. Separately, the U.S. executive branch and members of the U.S. Congress have stated that U.S. federal tax reform is one of their top legislative priorities, including significant changes to taxation Acknowledgment of business entities. There is substantial uncertainty as to the The authors would like to acknowledge the assistance of their likelihood, timing and details of any such tax reform and the effect colleague Pamela Lawrence Endreny in the preparation of this of any potential tax reform on Alternative Investment Funds or their chapter. Pamela is a Partner in Skadden’s Tax practice (pamela. sponsors. [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 in Group. She represents investment advisers in connection with the connection with the structuring and distribution of U.S. and non-U.S. structuring and distribution of U.S. and international private offerings private investment products, including multi- and single-strategy hedge of investment funds, including hedge funds, private equity funds and funds, private equity funds and hedge and private equity funds of funds, hybrid funds, and in connection with managed accounts, funds of one including traditional private equity, credit and trading strategies, and and investment advisory agreements. She also represents institutional infrastructure strategies. She also advises clients on the establishment, investors in all aspects of their investments in private investment operation and sale of investment adviser and broker-dealer businesses. funds, managed accounts and investment advisers. Ms. Rips advises clients on related general corporate and regulatory matters, such as With respect to private investment funds, Ms. Cruz advises clients on compliance with the U.S. Investment Advisers Act, the U.S. Investment a broad spectrum of legal issues and considerations relating to the Company Act, and the rules and regulations of 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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