guide to setting up Alternative Investment Funds Sep 2008 Europe 2008
Gibraltar Guernsey Ireland Jersey Luxembourg CONTENTS In this issue…
03 Introduction By Sunil Gopalan
04 Gibraltar jurisdiction information
06 Gibraltar By James Lasry, Hassans Partner
09 Guernsey jurisdiction information
10 Guernsey By Peter Harwood, Partner, Gavin Farrell, Partner, Paul Christopher, Partner, and Val Rouse, Associate, Ozannes, Guernsey
15 Ireland jurisdiction information
17 Ireland By Donnacha O’Connor, partner in Financial Services at Dillon Eustace
23 Jersey jurisdiction information
25 Jersey By Bill Gibbon, Funds Group Partner with Voisin and Tom Amy, Head of Funds & SPV Group at Volaw Trust & Corporate Services Limited in Jersey
29 Luxembourg jurisdiction information
31 Luxembourg By Rémi Chevalier and Olivier Sciales, founding partners at Chevalier & Sciales
Publisher
Publisher/Editor-in-Chief: Sunil Gopalan, [email protected] Marketing Director: Oliver Bradley, [email protected] Sales Manager: Simon Broch, [email protected] Graphic Design (Special Reports): Siobhan Brownlow at RSB Design Published by: Hedgemedia Limited, 18 Hanover Square, London W1S 1HX Tel: +44 (0) 20 3159 4000 Website: www.hedgeweek.com
© Copyright 2008 Hedgemedia Limited. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.
EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 2 INTRODUCTION Introduction
The Hedgeweek Guide to Setting up Alternative Investment Funds is a unique online publication that is being made available to the 45,000-strong global hedge funds, real estate and private equity managers and service providers that read Hedgeweek and its family of alternative investment newsletters.
The focus of the Guide is to help managers, promoters and their advisers decide where best to set-up their alternative investment funds.
The Guide draws together in one volume all the major current regulations covering the establishment of alternative investment funds in a comprehensive treatment of the subject covering the major jurisdictions globally.
The first part of this Guide focuses on the jurisdictions in and around Europe and includes an overview on the status of alternative investment fund regulation in each jurisdiction, provided by a key local firm.
We would like to thank the following firms who contributed expert articles and invaluable time and assistance in preparing comprehensive overviews of each of their jurisdictions in this first edition – Hassans (Gibraltar), Ozannes (Guernsey), Dillon Eustace (Ireland), Voisin and Volaw Trust & Corporate Services Limited (Jersey) and Chevalier & Sciales (Luxembourg).
We would also like to thank Hilaire Gomer, who assisted in coordinating this edition, and Simon Gray, our Special Reports Editor.
This Guide will be updated on an annual basis, readers should note that statistical information contained in this edition dates to end-June 2008.
We look forward to your feedback and your participation in forthcoming regional extensions of this Guide.
Sunil Gopalan Editor-in-Chief Hedgeweek
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REGULATOR ● Financial Service Commission, PO Box 940, Suite 943, Europort, Gibraltar.
SERVICE PROVIDERS Law firms ● Hassans International Law Firm, 57/63 Line Wall Road, PO Box 199, Gibraltar. ● Isolas, Portland House, Glacis Road, PO Box 204, Gibraltar ● Triay Stagnetto Neish, Burns House, 19 Town Range, Gibraltar. ● Nunez & Co, Suite 10/4, International Commercial Centre, PO Box 516, 2A Main Street, Gibraltar. ● Ellul Eric C & Co Barristers at Law, Suite 7, Hadfield House, Library Street, Gibraltar. Administrators There are 10 firms licensed as Collective Investment Scheme Administers under the Financial Services (Collective Investment Schemes) Act 2005. ● Capita Financial Administrators (Gibraltar) Limited, Blake House, 19c Town Range, Gibraltar. ● Fiduciary Fund Administration Limited, Suite 23 Portland House, Glacis Road, Gibraltar. ● Grant Thornton Fund Administration Limited, 6A Queensway, Gibraltar. ● Helvetic Fund Administration Limited, Suite 209 Neptune House, Marina Bay, Gibraltar. ● PriceWaterhouseCoopers Accounting Services Limited. PO Gibraltar Box 559, 10/8 International Commercial Centre, Casemates Square, Gibraltar. ● Quest Fund Administration Limited, 260/262 Main Street, Gibraltar. ● Rock Fund Services Limited, Suite 11 1st Floor Portland FUND LEGISLATION House, Glacis Road, Gibraltar. The Financial Services legislation in Gibraltar effectively divides ● SBI, swissBEST INVEST Fund Administration Limited, PO the funds available in Gibraltar into four categories: Box 1254, First Floor, 1 Tuckey’s Lane, Gibraltar. ● Private Funds – Companies Act, Limited Partnerships Act; ● Velay Financial Services Limited, Suite 210 Neptune House, ● Experienced Investor Funds – Financial Services Marina Bay, Gibraltar. (Experienced Investor Fund) Regulations 2005; Depositaries ● Non-UCITS retail funds – Financial Services (Collective There are 10 firms licensed as Collective Investment Scheme Investment Schemes) Act 2005, Financial Services (Collective Managers or Depositaries under the Financial Services Investment Schemes) Regulations 2006; (Collective Investment Schemes) Act 2005. ● UCITS funds – Financial Services (Collective Investment ● ABN AMRO Bank NV, Suite 731-4, Europort, Gibraltar. Schemes) Act 2005, Financial Services (Collective Investment ● Bank J Safra (Gibraltar) Limited t/a Bank J Safra, PO Box 542, Schemes) Regulations 2006. Suite 971 Europort, Gibraltar. ● Credit Suisse (Gibraltar) Limited, PO Box 556, NUMBER OF FUNDS Neptune House, Marina Bay, Gibraltar. ● There are 3 funds registered under the Financial Services ● Lloyds TSB Bank plc, PO Box 482, First Floor, Royal Ocean (Collective Investment Schemes) Act 2005 as authorised Plaza, Ocean Village, Gibraltar. funds in Gibraltar. ● Lombard Odier Darier Hentsch Private Bank Limited, PO Box ● There are 38 funds registered under the Financial Services 407, Suite 921 Europort, Gibraltar. (Collective Investment Schemes) Act 2005 as Experience ● SG Hambros Bank (Gibraltar) Limited, PO Box 375, 32 Line Investor Funds. Wall Road, Gibraltar. ● There are at least 30 Private Funds in Gibraltar. ● The Royal Bank of Scotland (Gibraltar) Limited, PO Box 766, 1 Corral Road, Gibraltar. NUMBER OF FUNDS BY CATEGORY ● The Royal Bank of Scotland International Limited (Trading as The below figures do not include Private Funds Natwest), PO Box 707, 57/63 Line Wall Road, Gibraltar. Hedge:...... 20 ● Turicum Private Bank Limited, PO Box 619, 315 Main Street, Private Equity:...... 3 Gibraltar. Property: ...... 9 Auditors Other Alternative Funds: ...... 2 ● Baker Tilly (Gibraltar) Limited, Suite 5, International House, Funds of Funds: ...... 7 Bell Lane, Gibraltar. Retail / General Public Funds:...... 0 ● BDO Fidecs Chartered Accountants Limited, BDO Fiecs
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Group, PO Box 575, Montagu Pavilion, 8-10 Queensway, sheet total of over £9.6million; (iii) average number of Gibraltar. employees of over 250. ● Benady Cohen & Co Limited, 1st Floor Garrison House, 3 ● Medium Company: same as for large company but profit Library Ramp, Gibraltar. and loss account can be in an abridged format. Medium ● Deloitte Limited, 124 Irish Town, Gibraltar. companies (two of the following): (i) a net turnover of up to ● Grant Thornton, Suite 21, Watergardens 6, 1st Floor, PO Box £19.2 million per annum; (ii) a balance sheet total of up to 64, Gibraltar. £9.6 million; (iii) an average number of employees of up to ● Moore Stephens, PO Box 743, Suite 5, Watergardens 4, 250. Waterport, Gibraltar. ● Small Company: filing of abridged unaudited balance sheet ● PricewaterhouseCoopers Limited, 10th Floor International only. Small companies (two of the following): (i) have a net Commercial Centre, Casemates Square, Gibraltar. turnover of up to £4.8million per annum; (ii) a balance sheet Local stock exchange total of up to £2.4million; (iii) an average number of Not applicable, although one is being set up. employees of up to 50. Local fund industry body Gibraltar Funds Industry Association (the “GFIA”), c/o Hassans REGULATORY FEES International Law Firm, 57/63 Line Wall Road, Gibraltar. Contact: Private: ...... None James Lasry. EIF: ...... £2,500 Promotion agency for funds/financial sector Non-UCITS Retail Fund: ...... £4,000 Gibraltar Funds Industry Association (the “GFIA”), c/o Hassans UCITS:...... £4,000 International Law Firm, 57/63 Line Wall Road, Gibraltar. Contact: James Lasry. OVERALL COST OF FUND ESTABLISHMENT Private Fund:...... £10k – £25k DOUBLE TAXATION TREATIES EIF:...... £20k – £25k Council Directive 90/435/EEC European Parent Subsidiary Non-UCITS Retail Fund:...... £25k – £50k Directive. UCITS: ...... £35ka£50k
TAX INFORMATION EXCHANGE AGREEMENTS REGULATORY APPROVAL TIME Council Directive 2004/56/EC (Mutual Assistance Directive) – Private: ...... None concerning mutual assistance by the competent authorities of EIF: ...... None the Member States in the field of direct taxation, certain excise Non-UCITS Retail Fund:...... 3 – 6 months duties and taxation of insurance premium. UCITS: ...... 3 – 6 months
ALTERNATIVE FUND, MANAGER AND SERVICE OVERALL ESTABLISHMENT TIME PROVIDER INFORMATION Private Fund:...... 1 – 4 weeks EIF: ...... 1 – 6 weeks TYPES OF ALTERNATIVE FUND VEHICLE Non-UCITS:...... 6 – 10 weeks ● Gibraltar limited company (open and close ended); UCITS:...... 6 – 10 weeks ● Protected Cell Company; ● Unit trust; ● Limited Partnerships (LPs have legal personality in Gibraltar).
AVAILABLE TYPES OF CORPORATE VEHICLE ● Open and closed limited companies; ● Protected cell company.
TYPES OF REGULATORY FUND CATEGORY ● Private Funds; ● Experienced Investor Funds; ● Non-UCITS Retail Funds; ● UCITS Funds.
AUDIT REQUIREMENT (Y/N? LOCAL?) Private Fund:...... No but highly recommended / No Experience Investor Fund: ...... Yes / Yes Non-UCITS Retail Fund:...... Yes / Yes UCITS Fund: ...... Yes / Yes
FINANCIAL STATEMENT REQUIREMENTS A fund which is a limited company: ● Large Company: must file full accounts including the balance sheet, profit and loss account, directors and auditors report. Large companies (two of the following): (i) a net turnover of over £19.2 million per annum; (ii) a balance
EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 5 GIBRALTAR Gibraltar By James Lasry, Hassans Partner
The Experienced Investor Fund regime in Gibraltar has advisor license in Gibraltar is a full European Union proven to be an extremely versatile way of setting up a license. This means that the license can be passported fund within the European Union anywhere within the European Union. As such, the normal capital adequacy requirements that exist in other Experienced investors European jurisdictions also apply to the Gibraltar In order to qualify for this regime, marketing must be managers or advisors. A Gibraltar investment restricted to investors who are deemed to be manager/advisor must have a physical presence and experienced under the Financial Services (Experienced staff in Gibraltar. Investor Funds) Regulations 2005 (the EIF Regulations). The EIF regulations define Experienced Investors as Depositaries investors who have a net worth of EUR1m aside from An EIF that is open ended must have a depositary. The their residential property, individual investors whose fund may also appoint brokers to assist with their trading normal business activity includes investment related activity. Neither the depositary nor the brokers need be in activity (i.e. investment professionals) or investors who Gibraltar although in the case of Protected Cell invest a minimum of EUR100,000 in the fund. It is Companies “PCCs” there may be some advantage to important to note that these definitions are individual and having these in Gibraltar, as there is more certainty that a not cumulative so it is sufficient for an investor to invest Gibraltar court will enforce the statutory segregation of EUR100,000 for it not to have to prove any of the other cell assets than a non-Gibraltar court that may not be as conditions. There is no minimum or maximum number of familiar with Protected Cell Companies legislation. investors required for an EIF. Indeed, the Gibraltar Companies Act was amended to allow a fund to trade as Prospectus a private company even with more than 50 shareholders. An EIF must issue a prospectus that is consistent with industry standards and which will allow an investor to Promoters make an informed investment. The prospectus/private Unlike in other jurisdictions there is no requirement for placement memorandum (PPM) must state the fees that the promoters of the fund to be licensed. It is sufficient are chargeable out of the property of the fund, the for the fund administrator to perform the normal know investment objectives, borrowing or investment restrictions, your client and client acceptance procedures for them to if any, and the risks associated with such investment. The be able to set-up a fund in Gibraltar. The reason for this prospectus/PPM is a private document in all cases except is that each fund must have two directors who are if the fund is incorporated as a public limited company. As authorised by the Financial Services Commission (“FSC”) mentioned above, however, there is no legal requirement to act as EIF directors. The EIF directors’ role is to to use a public limited company for a fund in Gibraltar ensure proper governance of the fund. Where the fund is even if the fund has more than 50 investors. a unit trust with a corporate trustee or where the fund is a limited partnership with a corporate general partner, Authorisation and regulatory two directors or the trustee or general partner, as the requirements case may be, must be FSC authorised directors. One of the key unique selling points of the Gibraltar fund Management is the authorisation process. For an EIF it is sufficient for Although many funds in Gibraltar do not have investment the fund to incorporate, appoint its service providers, managers and are managed by their boards of directors, produce its prospectus and hold a board meeting to an EIF may choose to appoint an investment manager in launch itself as a fund. There is no regulatory pre Gibraltar or in any other jurisdiction. It is sufficient under approval necessary for launch. Within 14 days of launch, Gibraltar law that that investment manager or adviser is a fund must notify the FSC of the launch along with a licensed or entitled to give investment management/ copy of the prospectus, the memorandum and articles, a advice in its home jurisdiction. An investment manger or legal opinion from senior Gibraltar counsel stating that
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the fund was set-up in accordance with the EIF The valuation methods for EIFs must be disclosed regulations and other relevant legislation, a form signed within the prospectus. There are no particular rules on by the administrator and the license fee of £2,500. This is valuations other than their disclosure. Although any very significant as it means that effectively there is no internationally accepted accounting standard might be regulatory down time and the fund may be launched as used for the audit, many Gibraltar funds are audited quickly as necessary. The FSC will then review the under IFRS or UK GAAP. submitted documents and may come back with questions or comments. Going forward is necessary for Protected Cell Companies (PCCs) an EIF to ensure that it complies with the EIF regulations. The third unique selling point of Gibraltar is that it is Breach of certain regulations requires the directors possible to set-up a fund in Gibraltar as a Protected Cell and/or administrator of the fund to notify the FSC. Company (PCCs). PCCs are companies, which can The directors authorised (especially the directors) and segregate their assets into cells, which are statutorily, the administrators are charged with ensuring on-going protected and are remote from each other in bankruptcy. compliance with Gibraltar legislation and with corporate This means that if one cell incurs a liability, the creditors governance requirements. An EIF must have a fund of that cell will be unable to satisfy their debt from assets administrator that is authorised and has a presence in attributable to another cell. This is particularly useful to Gibraltar. In addition to the two Gibraltar based EIF investment managers that wish to set-up several funds directors, the fund must also appoint auditors that are with several strategies under one vehicle and save with registered in Gibraltar. Three out of the four “big four” economies of scale. Investors can invest in one or more auditors are based in Gibraltar as are several other firms cells according to their investment strategies. that have ample experience in fund audit. There are no restrictions on borrowing or owning Conclusion investments. A fund may invest in any class of The quick and easy regulatory notification process, the investment and at any percentage given that this is a possibility of setting up PCC funds and Gibraltar’s fund that is targeted to experienced investors who are position within the European Union are all factors that informed and are able to bear the risks of such are certain to make Gibraltar a very interesting and investments. The fund may, however, impose certain competitive jurisdiction for the set-up of funds. ■ restrictions on itself. These are disclosed in the prospectus and, of course, must always be adhered to.
Taxation Gibraltar funds may obtain an exemption from the Commissioner of Income Tax on any tax on investment income. There is no capital gains tax, inheritance tax, wealth tax in Gibraltar. There is a stamp duty of £10 on the creation of share capital of a company and on any increase in share capital. Furthermore, there is no tax in Gibraltar on dividends from quoted securities or on income from trading listed securities. Indeed, a fund may find it more beneficial not to apply for the certificate of exemption from the Commissioner of Income Tax in certain cases and to rely on the regular internal tax regime of Gibraltar which will invest in the majority of cases not tax any income or gains earned by the fund. The reason for this is that Gibraltar, being part of the European Union, can benefit from the European Parent Subsidiary Directive. This means that payments to a Gibraltar company from subsidiaries in certain European jurisdictions (such as Luxembourg) will not be subject to withholding tax. This is another one of Gibraltar’s unique selling points and it is particularly relevant in private equity and real estate funds. There is no withholding tax on payments from a Gibraltar fund to its non-Gibraltarian investors.
EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 7 Harness the power
In a turbulent, fast changing world, there’s a rock-solid offshore location that is cost-effective, well regulated and accessible. And with the unique advantage of being in the European Union. This potent place is Gibraltar.
As a leading law firm, Hassans has steered many clients to the benefits Gibraltar offers, whether they are global corporations or private individuals of means. They find us expert, innovative, commercially-minded and client-focused.
Easy to deal with, too. There may be many miles of ocean between us but we’re only a mouse- click away. Visit our website at www.gibraltarlaw.com or email us at [email protected].
Gibraltar's Premier Funds Team. Hassans have set up more than 80% of funds registered in Gibraltar. For more information please contact: James G Lasry - Partner Head of Funds Team - Hassans International Law Firm 57/63 Line Wall Road Gibraltar. Tel: +350 200 79000 Direct Dial +350 200 79571 Fax: +350 200 77343 Mobile: +350 5760 6000
Banking & Financial • Corporate & Commercial • e-commerce • Litigation • Marine Shipping • Private client affairs • Property • Tax • Trusts Hassans 57/63 Line Wall Road PO Box 199 Gibraltar. tel +350 200 79000, fax +350 200 71966 email [email protected] A member of the TerraLex global network of international law firms GUERNSEY
SERVICE PROVIDERS Open-ended investment funds authorised under the POI Law require a designated manager (who conducts the day to day administration of the fund) and a designated trustee/custodian, both of whom are incorporated in Guernsey and appropriately licensed to conduct category 1 controlled investment business. Closed-ended investment funds (category 2 controlled investments) require a Guernsey licensed administrator. A list of the financial services businesses licensed to conduct controlled investment business can be found on the GFSC website. There are a total of 15 law firms in the Island (although not all undertake fund work) and a directory of firms can be found at www.guernseybar.com. The ‘big four’ accountancy practices are represented in the Island, as well as a number of other investment fund specialists. Local stock exchange Channel Island Stock Exchange LBG; details found at www.cisx.com. St. Peter Port Local fund industry body Guernsey Investment Fund Association; details found at www.gifa.org.gg. Promotion agency for funds/financial sector Guernsey Finance; details found at www.guernseyfinance.com.
DOUBLE TAXATION TREATIES Double taxation treaties exist between Guernsey and Jersey and Guernsey and the UK; details found at Guernsey www.gov.gg/ccm/navigation/income-tax. TAX INFORMATION EXCHANGE AGREEMENTS FUND LEGISLATION Tax information exchange agreement exists between Guernsey The Protection of Investors (Bailiwick of Guernsey) Law, 1987, and the Netherlands and Guernsey and the USA; details found as amended (POI Law) and the Control of Borrowing (Bailiwick at www.gov.gg/ccm/navigation/income-tax. of Guernsey) Ordinances 1959 to 1989 as amended (COBO). The POI Law covers both licensing of persons providing ALTERNATIVE FUND, MANAGER AND SERVICE services to investment funds (custodians, administrators, PROVIDER INFORMATION managers etc) and the authorisation of open-ended investment funds. TYPES OF ALTERNATIVE FUND VEHICLE Closed-ended investment funds require the consent of the Limited company, protected cell company, incorporated cell States of Guernsey Policy Council under COBO. New legislation company, unit trust, limited partnership. (still at the approval stage) amending the POI Law will change this position in due course, whereupon closed-ended TYPES OF REGULATORY FUND CATEGORY investment funds will receive regulatory consent or regulation Open-ended Class A (retail), under the POI Law. Class B (authorised persons and professional investors) and NUMBER OF FUNDS Class Q (qualifying professional investors) The Guernsey Financial Services Commission’s quarterly Closed-ended statistical review to 31st March 2008 found at www.gfsc.gg Also 3 application processes: reveals that there were 290 open-ended funds authorised in ● Traditional approval process (open-ended and closed-ended Guernsey comprising a total of 1,815 sub-funds (total value £71 funds) billion) and 582 closed-ended funds (total value £79 billion). ● QIF (Qualifying Investor Fund) regime (open-ended and closed-ended funds) NUMBER OF FUNDS BY CATEGORY ● Registered closed-ended fund regime (currently closed- Open-ended funds are categorised by type (equity, debt etc), ended funds only). class (A, B, Q) and constitution (OEIC, unit trust, pcc etc) and closed-ended funds are categorised by constitution and main AUDIT REQUIREMENTS investment objective; details found in the GFSC quarterly Local auditors are usually required for both funds and statistical review. Guernsey POI Law licensees providing services to funds. The GFSC may exceptionally allow non-local auditors where REGULATOR particular specialist knowledge is required. In Guernsey the business of investment funds is regulated by the investment business division of the GFSC at La Plaiderie Chambers, La Plaiderie, St Peter Port, Guernsey GY1 3HQ.
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FINANCIAL STATEMENT REQUIREMENTS REGULATORY APPROVAL TIME For open-ended funds, to be prepared and published in ● Traditional approval process: 6 – 8 weeks accordance with the Rules made by the GFSC applicable to the ● QIF regime: 3 days from provision of full and complete class of fund in question. For closed-ended funds, to be filed documentation with the GFSC upon publication. There are no statutorily ● Registered closed-ended fund regime: 3 days from provision imposed accounting standards. Fund managers have freedom of full and complete documentation (assuming that the local to choose whichever accounting standard is thought service provider has completed its own due appropriate. diligence/verification process and is able to provide the necessary certification to the GFSC). REGULATORY FEES ● Open-ended funds, application fee of £2,800 and annual fee OVERALL ESTABLISHMENT TIME of £2,800. Times can vary greatly depending on the nature and complexity ● Closed-ended funds, application fee of £2,400 and annual of the fund structure, and will depend on timing of finalising the fee of £2,400. offering documentation and the material contracts. Additional time will be required where the promoter of the fund is not OVERALL COST OF FUND ESTABLISHMENT known to the GFSC or where the fund structure requires a new Establishment costs can vary greatly depending on the nature licensee to be established. and complexity of the fund structure.
Guernsey By Peter Harwood, Partner, Gavin Farrell, Partner, Paul Christopher, Partner, and Val Rouse, Associate, Ozannes, Guernsey
Whilst Guernsey does not offer an “exempt” investment Class B fund in the traditional sense (i.e. one that is exempt from Class B open-ended funds are not usually for sale to the regulation/registration if the number of investors is less general public but may be marketed to authorised than a stated number) it does offer different types of persons and professional investors. Typically a Class B regulated investment fund, a choice of application fund is established for marketing to institutions and high processes and a flexible regulatory approach that lends net worth individuals. The rules which apply to Class B itself to the establishment of hedge funds in the fund’s documentation and scheme particulars are less jurisdiction. comprehensive than those which apply to Class A funds. In Guernsey an investment fund is either open-ended In particular, there are no prescribed investment or closed-ended. There is a statutory definition for an restrictions other than that the fund’s property must be open-ended fund. If an investment fund is not an open- invested with the aim of spreading risk. Minimum ended fund then it is a closed-ended fund. disclosure requirements apply for scheme particulars but, again, these are less comprehensive than those which Open-ended funds apply to Class A funds. No minimum subscription levels In an open-ended fund, investors are entitled either to are prescribed and there is also a certain amount of have their units redeemed by the fund at its net asset flexibility in that the Guernsey Financial Services value or to sell their units on an exchange at a price Commission (GFSC) may grant derogations from the related to the value of the company’s assets to which the Class B rules. units relate. An open-ended fund may be established as Class A (equivalent to a UK authorised unit trust or Class Q OEIC), Class B or Class Q. Hedge funds which are open- Class Q funds are restricted to qualifying professional ended tend to be established as either Class B or as investors, namely, a government local authority, public Class Q. authority, trustee of a trust with net assets exceeding
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£2 million, company or limited partnership if it, its parent (SPC) in Guernsey to act as principal manager of the or subsidiary have net assets exceeding £2 million or an fund. The SPC will then delegate its administration individual who with his or her spouse has a minimum functions to the local institution. There is no formal GFSC net worth of £500,000. There is no prescribed minimum requirement, however, for there to be a principal individual subscription requirement. manager SPC. In relation to a Class Q fund, subject to The property of the fund must be subject to a spread GFSC agreement, a SPC may be incorporated outside of risk which will be at the discretion of the manager Guernsey. and, in the case of a company fund, the company. The A closed-ended fund is not required to have a criteria for the spread of risk must be specified in the Guernsey resident manager but it will be required to fund’s scheme particulars. appoint a Guernsey resident company, licensed under The documentation requirements are simplified in the POI Law, to carry out its administration functions. relation to Class Q funds and considerable flexibility is The GFSC has adopted (and issued), as regards permitted in respect of this type of fund. hedge funds, a flexible approach to authorisation policy, with particular reference to prime brokers and custody Closed-ended funds arrangements, which provides that: An investment fund will be closed-ended if it has shares ● For institutional and expert investor hedge funds, a which are only redeemable at the option of the directors locally licensed custodian is not required. Instead, a of the fund. Consent is required under the provisions of prime broker, regulated in an acceptable jurisdiction the Control of Borrowing (Bailiwick of Guernsey) and having substantial net worth, may be appointed to Ordinances, 1959 to 1989 (COBO) for a closed-ended the fund and the GFSC will not require the prime fund to issue any securities, units or interests (as the broker to take on the formal duties of oversight over case may be) where the amount raised would exceed the fund’s manager (which would otherwise be £500,000 over a rolling period of 12 months. exercisable by a custodian). The segregation of a Minimum disclosure requirements for a closed-ended fund’s assets from those of the prime broker will not fund’s scheme particulars apply. Ongoing regulation of be required even if the fund’s assets exceed the level closed-ended funds is achieved by means of conditions of credit extended by the prime broker. As a attaching to the COBO consent which require notification consequence of the fact that a locally licensed to the GFSC of any subsequent material changes, custodian is not appointed, certain rules relating to the including to a fund’s parties, its constitutive documents contents of the principal documents or scheme and scheme particulars and the filing of annual accounts. particulars (which are designed to provide checks and A closed-ended fund requires a Guernsey administrator balances on the manager) are not applicable and and, because a closed-ended fund is a category 2 need not be complied with. controlled investment for the purposes of The Protection ● Hedge funds targeted at retail and less sophisticated of Investors (Bailiwick of Guernsey) Law, 1989, as investors do require a custodian (usually a Guernsey amended (the POI Law), regulation of the fund is also licensed institution, unless the GFSC agrees to waive achieved, to a degree, via regulation of its administrator. this requirement on grounds that the regulator of the Closed-ended funds will become regulated under the custodian in its home jurisdiction will monitor the POI Law in due course once amending legislation (still at custodian’s role of oversight of the fund’s manager). the approval stage) is fully brought into force. The GFSC may waive the requirement for the custodian to take control of the fund’s property if a Principal players prime broker, who is regulated in an acceptable Any person providing services (promotion, subscription, jurisdiction and has substantial net worth, holds that dealing, advising, management, administration, custody) property. For this type of hedge fund the prime broker to a fund, and doing so by way of business in or from will be expected to segregate its assets from all fund within the Bailiwick of Guernsey, must be duly licensed assets exceeding those required for collateral against under the POI Law. The Licensees (Financial Resources, credit extended via the prime broker and surplus fund Notification, Conduct of Business and Compliance) Rules, assets must be fully protected against the failure of 1998 apply to those persons licensed under the POI Law the prime broker. and cover such matters as GFSC notification In each case above, full disclosure of the arrangements requirements and standards of conduct of business. and risks arising out of the appointment of the prime An administrator and custodian, both resident and broker and, if that is the case, lack of a custodian, must licensed in Guernsey, are required for an open-ended be set out in the fund’s scheme particulars. fund. The promoter of an open-ended fund has It is usual for a closed-ended fund to have a custodian traditionally established a special purpose company but there is no formal requirement for it to do so. Again,
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any Guernsey resident entity acting as custodian must fund and red herring documents may be issued provided be duly licensed under the POI Law. that appropriate wording has been included. No monies may be raised, however, until consent has been given by Taxation the GFSC. For open-ended funds, technically the issue of With effect from January 2008 the States of Guernsey has draft scheme particulars is not permitted. However, the introduced a zero rate of tax for companies carrying on GFSC will not object to the issue of draft scheme all but a few specified types of regulated banking or particulars provided that such documents make clear that utilities business. authorisation has not been received at the time the draft A company licensed under the POI Law to undertake is issued. Again, no monies may be raised until the controlled investment business of management will authorisation has been given by the GFSC to the fund. therefore be subject to income tax at 0%. Investment funds (both open-ended and closed-ended) Application process – traditional continue to be able to apply to the Administrator of The traditional procedure for establishing a fund in Income Tax in Guernsey for exempt status for Guernsey Guernsey is a three stage process (outline, interim and tax under the Income Tax (Exempt Bodies) (Guernsey) final) which is essentially the same for all types of fund, Ordinance, 1989 provided there are no Guernsey resident whether open-ended or closed-ended. beneficial owners (although an open-ended fund may Application is initially made to the GFSC seeking permit some Guernsey resident beneficial owners outline consent (for a closed-ended fund) or outline without jeopardising its exempt status). An application for authorisation (for an open-ended fund). An outline must exempt status must be made each year to the Income be given of the type of fund proposed, the principal Tax Authority for which the current annual fee is £600. players, the investment policy and the proposed charges The benefit of having exempt tax status is that the to investors. fund will not be considered resident in Guernsey for In the case of a fund promoter who is new to the Guernsey income tax purposes. A company that has Island, the GFSC will also require details of the promoter, exempt status for Guernsey tax purposes is exempt from to include matters such as its operating history, ultimate tax in Guernsey on both bank deposit interest and any beneficial ownership (individuals holding more than 15% income that does not have its source in Guernsey. in particular), group structure and evidence of a Payments of dividends and interest by a company that favourable track record and latest audited accounts. has exempt status for Guernsey tax purposes are Following outline consent, and in order to fill in the regarded as having their source outside Guernsey and detail, the investment fund’s scheme particulars or hence are payable without deduction of tax in Guernsey. equivalent document and constitutive document (the trust In the absence of an exemption, an investment fund deed, limited partnership agreement or memorandum would be treated as resident in Guernsey for Guernsey and articles of association) must be filed, together with income tax purposes and subject to income tax at 0%. A the relevant application fee for closed-ended or open- fund taxed at the zero rate would not be required to ended funds (currently £2,400 and £2,800 respectively). withhold Guernsey income tax from interest or dividends The GFSC will endeavour to respond within 10 working paid by it other than in respect of distributions (including days but does not guarantee to do so. deemed distributions) paid to Guernsey resident It is likely that at this stage the GFSC will raise a list of individuals. points to be addressed by the applicants. Once the Guernsey currently does not levy taxes upon capital points raised by the GFSC have been agreed, certified inheritances, capital gains (with the exception of a true and final copies of the scheme particulars and all dwellings profit tax), gifts, sales or turnover, nor are there other documentation constituting or relating to the fund any estate duties, save for an ad valorem fee for the are submitted. The response time for receipt of final grant of probate or letters of administration. No stamp consent or authorisation following this final application is duty is chargeable in Guernsey on the issue, transfer, usually 48 hours. switching or redemption of shares in a Guernsey company. However, document duty is payable on the Application process – fast track creation or increase of authorised share capital at the There are two separate fast track regimes (each allowing rate of one half of one per cent. of the authorised share approval approximately 3 days after submission of a capital of a company incorporated in Guernsey up to a satisfactorily completed application) which operate along maximum of £5,000 in the lifetime of a company. the same lines, such that the GFSC relies upon a Guernsey administrator to the fund to undertake the due Pre-marketing diligence and other checks that otherwise the GFSC There is no restriction on pre-marketing of closed-ended would itself undertake and to confirm to the GFSC
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certain matters regarding the fund and give certain ● Funds which are approved under the QIF regime have undertakings and warranties. in place measures to ensure that they are only By far the most popular of these has proved to be the available to investors who fall within the qualifying registered (REG) closed-ended fund process, which was investor definitions. The GFSC will assess licensees’ introduced in 2007. systems and controls in place to ensure that that is Registered funds are not restricted to certain types of the case as part of their monitoring of licensees; and investors, although such funds may not be promoted ● The applicant will need to conduct due diligence on directly to members of the public in Guernsey. Providing the promoter and/or investment manager in order to the relevant documents and warranties are delivered to ensure that it is in good standing and will need to its satisfaction, the GFSC will issue COBO consent within consider the track record and experience of the three working days of receipt of an application. directors, controllers and management of the promoter The fund administrator must warrant to the GFSC that: and/or investment manager to ensure that such ● It has performed sufficient due diligence to be persons are fit and proper. satisfied that the promoter and associated parties are The GFSC has issued suggested minimum wording in fit and proper; relation to the warranties to be obtained from potential ● Effective procedures are in place to ensure that the investors regarding their qualified status and the fund is not offered directly to the public within disclosure to be made in the scheme particulars in Guernsey (for which purpose ‘public’ means any respect of the regime. person not regulated under Guernsey’s financial services regulatory laws); and Conclusion ● The fund’s status as a registered fund is specifically The GFSC has a practical approach to investment fund referred to in the scheme particulars and such regulation, understanding that institutional and expert document makes clear that neither the GFSC nor the investors require fewer regulatory protections than retail States of Guernsey Policy Council have reviewed the investors. documentation nor take any responsibility for the fund It has always been, and remains, the case that the or the documentation. Class B framework can accommodate a wide spectrum All warranties made by the administrator must be based of investor markets, from purely retail to exclusively upon documentary evidence which can be produced institutional and the rules themselves give the GFSC the immediately should the GFSC so request. right to grant waivers to individual funds or to a group of The qualifying investor funds (QIF) regime, introduced funds, providing the granting of such waivers would not in 2005 to complement the traditional approval procedure, increase regulatory risk. applies to both open-ended and closed-ended funds. Guernsey is well positioned within the global offshore However, in practice, this is now used only for open- market to provide a competitive alternative to the ended funds following the introduction of the registered Cayman Island’s hedge fund structures. closed-ended fund regime. The geographical position of Guernsey, only 35 Under the QIF regime, the GFSC will grant fund minutes flight from London, means that it is easier for approval within three working days (subject to receipt of directors actually to attend board meetings in person and various documentation, including the scheme particulars, therefore for the fund to demonstrate that its mind, to its satisfaction) provided that an appropriately licensed management and control is exercised in or from Guernsey applicant (usually the administrator) has Guernsey rather than the investment manager’s home certified to the GFSC that: jurisdiction. ■ ● The fund will be restricted to professional, experienced and knowledgeable investors (i.e. qualified investors as defined) including an individual investor who makes an individual investment of not less than US$100,000; ● The applicant has conducted due diligence on the promoter and associated parties and understands them to be fit and proper; and ● The applicant is satisfied as to the fund’s economic rationale and the disclosure of any risks associated with the investment vehicle. In order to ensure that such certification can be made it is necessary that:
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)RUPRUHLQIRUPDWLRQRQZD\VZHFDQKHOSSOHDVHFDOO HPDLODGYRFDWHVVR]DQQHVFRPRUYLVLWZZZR]DQQHVFRP IRELAND
As of June, 2007 there were 2,752 non-Irish funds (including sub-funds) administered in Ireland (Source: Irish Funds Industry Association industry survey and Financial Regulator). As of December, 2007 there were US$1,011 billion in assets in alternative funds administered in Ireland, comprising both Irish and non-Irish funds (Source: Irish Funds Industry Association; Lipper Irish Funds Encyclopaedia).
REGULATOR The Irish Financial Services Regulatory Authority (commonly known as the “Financial Regulator”). The Financial Regulator is a constituent part of the Central Bank and Financial Services Authority of Ireland, formerly knows as the Central Bank. Address: Irish Financial Services Regulatory Authority, Financial Institutions and Funds Authorisation, PO Box 9138, College Green, Dublin 2, Ireland.
Dublin SERVICE PROVIDERS TO ALTERNATIVE FUNDS There are a large number of law-firms which provide legal services to the alternative investment funds industry here, both the leading commercial firms and smaller niche practices. All of the main accountancy firms have large operations here. There are approximately 50 fund administrators active in Ireland, many of which have affiliated custodian operations in Ireland, the majority of which would have alternative investment fund servicing capabilities. There are no available statistics on Irish corporate service providers as generally these entities may not be required to be Ireland regulated in Ireland. Generally, fund administrators or specialised transfer agency companies would provide those FUND LEGISLATION services normally provided by corporate services provides, ● UCITS: European Communities (Undertakings for Collective excluding company secretarial services which are also provided Investment in Transferable Securities) Regulations, 2003; by corporate secretarial affiliates of the law-firms or certain ● Non-UCITS investment companies: Part XIII of the independent firms. Companies Act, 1990; Investment banks involved in prime brokerage do not ● Non-UCITS unit trust: Unit Trusts Act, 1990; typically provide this service out of Ireland and it is more ● Investment Limited Partnerships (non-UCITS): Investment commonly associated with other financial centres such as Limited Partnerships Act, 1994; London and New York. ● Non-UCITS common contractual funds: Investment Funds, There are no official statistics on the number of placement Companies and Miscellaneous Provisions Act, 2005. agents in Ireland. Local stock exchange NUMBER OF FUNDS The Irish Stock Exchange Limited. ● 4,822 Irish regulated funds as of April, 2008 (Source: Local fund industry body Financial Regulator) Irish Funds Industry Association. ● 2,164 non-Irish funds administered in Ireland as of June, 2007 Promotion agency for funds/financial sector (Source: IFIA) Industrial Development Agency and Irish Funds Industry Association. NUMBER OF FUNDS BY CATEGORY All data as of April, 2008 and include sub-funds (Source: DOUBLE TAXATION TREATIES Financial Regulator) Ireland has forty four tax agreements, which provide for the UCITS...... 2926 elimination or mitigation of double taxation with the following Non-UCITS ...... 1,896 countries: Australia, Austria, Belgium, Bulgaria, Canada, China, Retail Non-UCITS ...... 564 Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, Professional Investor Non-UCITS ...... 263 France, Germany, Greece, Hungary, Iceland, India, Israel, Italy, Qualifying Investor Non-UCITS ...... 1,066 Japan, Republic of Korea, Latvia, Lithuania, Luxembourg, Closed-ended funds...... 329 Malaysia, Mexico, the Netherlands, New Zealand, Norway, There are no official statistics available on fund strategies. Pakistan, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, the United ADMINISTERED FUND ASSETS Kingdom, the United States of America and Zambia. 4,822 Irish regulated funds as of April, 2008 (Source: Financial Forth three out these tax treaties have exchange of Regulator). There are no up-to-date official statistics available information clauses that are based on the OECD Model Treaty. on fund strategies as such. The numbers of Irish registered Switzerland is the only country without such a clause. Malta is funds by regulatory category are provided above. the only EU Member State with which Ireland does not have a tax treaty.
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TAX INFORMATION EXCHANGE AGREEMENTS Qualifying Investor Funds will no longer have to prepare semi- Isle of Man signed 28th April, 2008 but is subject to annual unaudited accounts. implementation by secondary legislation. There is one in negotiation with Jersey. REGULATORY FEES Under the European Savings Directive, all European Member Currently, EUR 2,200 per year for each fund plus EUR 550 per States and a number of dependant territories are required to sub-fund up to a maximum of EUR 4,950. This is reviewed on exchange certain information and/or impose a withholding tax an annual basis by the Irish Regulator. on particular types of payments made to certain individuals. Andorra, Liechtenstein, Monaco, San Marino and Switzerland are OVERALL COST OF FUND ESTABLISHMENT not participating in automatic exchange of information but are Legal costs will vary from law-firm to law-firm and depending exchanging information on a request basis. Their participation is on the type of fund and other factors. There is no up-front confined to imposing a withholding tax. The other dependant regulatory fee. There is a small government levy for territories that are participating are Anguilla, Aruba, British Virgin incorporating corporate funds and other initial statutory filings. Islands, Cayman Island, Guernsey, Isle of Man, Jersey, Montserrat, Netherlands Antilles and Turks and Caicos Islands. REGULATORY APPROVAL TIME ● Qualifying Investor Funds: 24 hours following filing of ALTERNATIVE FUND, MANAGER AND SERVICE prospectus, constitutive document, principal service PROVIDER INFORMATION agreements, application request, completed regulatory application forms and various confirmations assuming TYPES OF ALTERNATIVE FUND VEHICLE promoter, investment manager, administrator, custodian and ● Open-ended or closed-ended investment company with fixed directors have already been approved by the Regulator and or variable capital; the application is within normal prescribed parameters and ● Open-ended or closed-ended unit trust; any derogation requests have been obtained in advance. ● Open-ended or closed-ended common contractual funds; ● Professional Investor Non-UCITS: if promoter approval is ● Open-ended or closed-ended investment limited partnerships. required, this must be obtained generally before the fund Each of the above may be established as single or multi- application is submitted to the Regulator. The promoter portfolio funds. Investment companies and common contractual approval will generally take between one and two weeks. fund sub-funds have statutory ring-fencing. Each of the above Once promoter approval is obtained, and the fund application may be established as single or multi-class funds. is submitted, the Regulator endeavours to respond to the initial application within two weeks and subsequent responses from AVAILABLE TYPES OF CORPORATE VEHICLE the fund each time within one week. Normally, two to three ● Single portfolio company sets of comments can be expected, depending on the nature ● Segregated portfolio company (umbrella) of the fund, resulting in the application spending around four ● Variable or fixed capital company weeks in total with the Regulator. ● Retail Non-UCITS: Similar to Professional Investor Fund TYPES OF REGULATORY FUND CATEGORY above. ● UCITS (no minimum initial subscription requirement); ● UCITS: Similar to Retail Non-UCITS, but in addition, self- ● Retail Non-UCITS (no minimum initial subscription managed UCITS and UCITS common contractual fund and requirement except for private equity funds, in respect of unit trust management companies must be approved as part which it is EUR 12,500); of the process of seeking regulatory approval for the UCITS, ● Professional Investor Non-UCITS (minimum initial which generally can result in the addition of two to four subscription of EUR 125,000); weeks to the overall timing. ● Qualifying Investor Non-UCITS (minimum initial subscription of EUR 250,000, investor wealth tests and risk OVERALL ESTABLISHMENT TIME acknowledgement); In each case from a standing start (i.e. fund promoter, The following additional fund categories are not widely used investment manager and directors have not been previously either due to their tax status (non-designated funds) or the approved by the Irish regulator, but fund service providers have narrow investor requirements (collective investor funds): been chosen) to fund authorisation. ● Non-designated funds (no minimum subscription requirement: UCITS only available as variable capital investment companies and Tends to take approximately 3 months may not be sold to the public, these are private investment Non-UCITS fund vehicles and are subject to Irish corporation tax at a ● Retail: approximately 2 months; rate of 10%/12.5% on income/capital gains); ● Professional Investor Funds: approximately 2 months; ● Collective investor funds (available to life assurance ● Qualifying Investor Funds: 1 month. companies, pension funds and other collective investors: tax exempt, does not have to be sold publicly).
AUDIT REQUIREMENT (Y/N? LOCAL?) Yes, annual, local
FINANCIAL STATEMENT REQUIREMENTS Yes, all semi-annual unaudited and annual audited. At the time of writing, the Irish Regulator has just announced that
EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 16 IRELAND Ireland By Donnacha O’Connor, partner, Financial Services, Dillon Eustace
Investor restrictions In relation to Professional Investor Funds and Irish Funds are not required to have a minimum number Qualifying Investor Funds, an exemption from the of investors, however, on the whole, Irish regulated tax minimum initial subscription requirement and, in the case transparent funds must, depending on the category of of Qualifying Investor Funds, the investor criteria, is fund, and the specific wording of the legislation, be available to directors of the fund, the investment offered directly or indirectly to the public or must be management company, directors of the investment available to the public. management company, the promoter and its affiliates, The following additional fund categories are not widely and employees of the investment management company used either due to their tax status (non-designated funds) who are directly involved in the fund’s management or or the narrow investor requirements (collective investor are senior employees with experience in the provision of funds): investment management services. ● Non-designated funds (no minimum subscription All Qualifying Investor Fund investors must certify in requirement: only available as variable capital writing to the fund that they meet the minimum criteria investment companies and may not be sold to the listed above and that they are aware of the risk involved public, these are private investment fund vehicles and in the proposed investment and of the fact that inherent are subject to Irish corporation tax at a rate of in such investments is the potential to lose the entire 10%/12.5% on income/capital gains); sum invested. ● Collective investor funds (available to life assurance Please see Investor restrictions above in relation to companies, pension funds and other collective non-designated funds and collective investor funds. investors: tax exempt, do not have to be sold publicly). Promoter requirements Investor restrictions Before the Irish Regulator will accept an application for UCITS must be offered in European Economic Area, but the authorisation of an Irish investment fund, the may also, but not alternatively, be offered elsewhere. Regulator must be satisfied that the fund sponsor or UCITS and Non-UCITS established as common promoter is of good repute, has a minimum level of contractual funds may not be offered to natural person financial resources and a relevant track-record in investors. Apart from that, there are no substantive Irish collective investment schemes. With limited exceptions, restrictions in relation to the nature or quality of UCITS the promoter is required to be regulated by a supervisory investors outside of those related to contractual capacity. authority recognised by the Irish Regulator. Promoters are There are no Irish restrictions in relation to the offering required to have audited shareholder funds of not less of Irish Non-UCITS retail funds other than as provided than EUR 635,000. The requirements are essentially the above in relation to common contractual funds. Non- same for all categories of Irish fund though for retail UCITS Professional Investor Funds are required to funds, experience in the distribution of retail funds or impose a minimum initial subscription requirement of access to a retail distribution network will be an EUR 125,000 otherwise there are no Irish restrictions. additional consideration. Non-UCITS Qualifying Investor funds are required to apply a minimum initial subscription requirement of EUR Investment manager requirements 250,000 and investors must meet a wealth test on a self- Before the Irish Regulator will accept an application for certification basis; natural persons must have minimum the authorisation of an Irish investment fund, the net worth (which excludes main residence and proposed discretionary investment management household goods) in excess of EUR 1,250,000 and non- company(ies) of the fund must be cleared in advance. natural persons must own or invest on a discretionary Acceptable investment management firms include those basis at least EUR 25,000,000 or have beneficial owners which are regulated under the Markets in Financial which are qualifying investors in their own right. Instruments Directive (MiFID) (Directive 2004/39/EC) and
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non-EU firms regulated by a supervisory authority Prospectus. Resignations of Directors from Irish funds recognised by the Irish Regulator. and their management companies/general partners must In relation to Irish UCITS, the investment managers be notified immediately to the Financial Regulator. must be authorised or registered for the purpose of asset management and must be subject to prudential Prospectus/offering documents supervision. In addition, where a non-EU investment All UCITS and Non-UCITS must issue a prospectus, manager is proposed to be appointed, there must be a which must be dated, and the essential features of which form of co-operation agreement in place between the must be kept up to date. Investors must be offered a Irish Regulator and the supervisory authority of the third copy of the Prospectus, free of charge, prior to country that regulated the investment manager. subscribing for units in the relevant fund. Any changes to the Prospectus must be made by prior approval of the Custodian/depository bank Regulator or, in the case of Qualifying Investor Funds, requirements provided that the changes fall within certain parameters, prior notification to the Regulator. Any material changes The assets of Irish regulated funds must be entrusted to to the Prospectus must be notified to investors in the a trustee (depository) for safe-keeping. The trustee must fund’s subsequent periodic reports. The overriding be a credit institution authorised in Ireland, an Irish regulatory consideration is that the Prospectus should branch of an EU credit institution or an Irish incorporated contain sufficient information to enable investors to make company which is wholly owned by an EU credit an informed decision whether to invest in the fund. In institution (or equivalent from a non-EU jurisdiction) particular, the investment objectives and policies of a provided that the liabilities of the Irish company are fund must be clearly described in the prospectus with guaranteed by its parent. sufficient information to enable investors to be fully The prescribed role of the custodian is to ensure, as a aware of the risks they are entering into. Separate general rule, legal separation of non-cash assets and to prospectuses may be issued by funds established as ensure that certain core aspects of the management of umbrella funds in respect of each of their sub-funds. the fund are carried out in accordance with applicable Separate prospectuses may not be issued in respect of legislation, regulatory conditions and the fund’s separate share classes, except in the context of constitutive documents, for example, valuation, sale, Qualifying Investor Funds provided that the Prospectuses issue, repurchase and cancellation of fund units. In are consistent with the other Prospectus(es) for the addition, the trustee must enquire into the conduct of the fund/sub-fund of an umbrella fund (except in relation to management company, investment company or general that information which is class specific). partner in each annual accounting period and reporting thereon to the fund’s unitholders. Fund registration/licensing requirement Director requirements Both UCITS and non-UCITS investment companies are Broadly speaking, units of Irish investment funds that are required to have a minimum of two Irish resident available for public participation may not be sold or Directors on their boards. Common contractual funds purchased nor may sales or purchases be solicited and unit trusts are required to have an Irish management without the fund having sought and obtained company and such management companies are required authorisation of the Irish Regulator under domestic funds to have at least two Irish resident Directors on their legislation. boards. Investment limited partnerships are required to have an Irish General Partner and such entity is required Fund regulation requirements at to have at least two Irish resident Directors on its board. launch The board of Directors of a fund or its management company/general partner cannot have Directors in Before an Irish investment fund can launch, the fund common with the board of the trustee company of the must be in possession of a written authorisation from the fund. All Directors appointed to such entities must be Irish Regulator pursuant to the relevant Irish legislation. approved in advance by the Irish Regulator pursuant to a There are no minimum capitalisation requirements except fitness and probity regime applicable to all regulated in the case of UCITS investment companies which have financial services sectors in Ireland on the basis that the not appointed Irish management companies, which must Regulator is satisfied that each has appropriate expertise have a minimum capital of EUR 300,000 prior to and integrity and is of good repute. The names and authorisation by the Regulator. biographies of the directors must appear in the fund’s
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Ongoing fund regulation the securities of any one issuer, no more than 10% of its requirements net asset value in any class of security issued by a single issuer and net maximum potential exposure The ongoing core regulatory requirements can be broken through efficient portfolio management techniques and down into: borrowings cannot exceed 25% of net asset value. There are exceptions and specific restrictions for retail Disclosure Non-UCITS funds of funds including funds of unregulated Please see Prospectus/offering documents above in relation funds, feeder funds, real estate funds, private equity to the Prospectus. funds and managed futures funds. Each fund must issue annual audited financial In the case of Professional Investor Funds, the statements and semi-annual financial statements, standard investment and borrowing restrictions comprising a balance sheet, income statement (in the applicable to retail Non-UCITS can be disapplied to the case of the annual audited financial statements only), a extent agreed with the Regulator. As a general rule of portfolio statement and statement of changes in the thumb, the quantitative limits are doubled. composition of the portfolio during the period and any The Regulator disapplies all but a small number of significant information which will enable investors to normally insignificant restrictions in relation to Qualifying make an informed judgement on the development of the Investor Funds. fund and its results. Duty to act in investors’ best interest and to avoid Valuation and pricing conflicts of interest Fund assets must be valued on the basis of market The fund’s prospectus must contain a description of the prices where available or, where unavailable, generally at potential conflicts of interest which could arise between probable realisation value calculated by a competent the management of the fund and the fund, with details, third party appointed by the fund or its management where applicable, of how these are going to be resolved. company/general partner with the objective of achieving Any transaction carried out with a fund by a promoter, fair value, the appointment of which is approved by the manager, trustee, investment adviser and/or associated trustee. The valuation rules must be set out in the fund’s or group companies of these must be carried out as if Prospectus and must be set out, or referred to, in the effected on normal commercial terms negotiated at arms fund’s constitutive document. The calculation of the length and transactions must be in the best interests of fund’s net asset value, including the the investors. updating/confirmation of the prices of the underlying securities must be carried out in Ireland by staff located Regulatory Reporting in Ireland, in the absence of a derogation from the The fund must submit a monthly report within ten days Regulator. Valuation rules must be applied consistently of its effective date, setting out the fund’s net asset throughout the life of a fund. The valuation policy is value, net asset value per unit and net subscription and ultimately the responsibility of the board of Directors of redemptions in the fund’s units during the month. The the fund/management company/general partner. annual and semi-annual financial statements of the fund must be submitted to the Financial Regulator within four Client asset protection: independent custody of assets and two months respectively of the balance sheet date. Requirements are outlined in Custodian/depository bank requirements above. Reporting to investors The annual audited financial statements and semi-annual Trustee as fiduciary of investors unaudited financial statements must be made available Applicable rules are outlined in Custodian/depository bank to investors free of charge upon request and must be requirements above. available for inspection at a specified location.
Portfolio regulation Changes to the Fund The Regulator imposes diversification requirement and Any change to the Prospectus or any material service concentration requirements on Irish UCITS, non-UCITS agreement of the fund is subject to approval by the retail funds and Professional Investor Funds. Regulator. Any change to the investment policy of the A retail Non-UCITS’ general investment restrictions fund as disclosed in the prospectus must be notified in prohibit it from investing more than 10% of its net asset advance to investors enabling them to redeem their units value in securities which are not listed or traded on an in the fund prior to the implementation of the change. approved market, more than 10% of net asset value in Material changes to the investment policy of the fund or
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any change to the fund’s investment objective are subject In the case of Qualifying Investor Funds, application is to prior investor approval. made on the business day prior to the proposed date of authorisation and no formal review of the documentation Enforcement is undertaken by the Regulator. The Irish Regulator has comprehensive powers of In all cases, before making an application, the enforcement. The Regulator enforces on the basis of proposed promoter of the fund must have been cleared periodic reporting requirements, a requirement for the by the Irish Regulator, as must the proposed investment Directors/management company/general partner and manager. Non-discretionary investment advisers are not trustee to deal with the Regulator in an open and co- required to be cleared by the Irish Regulator. The operative manner and inspections, the frequency of Directors of the proposed fund must be approved in which is based on risk assessment or on complaint. The advance by the Regulator. Any management company or Financial Regulator has independent statutory powers of general partner being appointed must be approved in enforcement that are not dependent upon judicial action. advance by the Regulator. In the case of a UCITS, the risk management procedures of the UCITS relating to the Service provider conditions fund’s use of derivatives must be approved in advance All Irish investment funds are required to appoint an Irish and must the fund’s management company or, if it is not Administrator (or Irish management company) which will appointing a management company, the fund’s business perform certain minimum activities in Ireland such as the plan. The proposed Administrator and Custodian of the calculation of the net asset value of the fund and its Fund must be in possession of the relevant license or dealing price, maintenance of the books and records of approval from the Regulator, and this will be an approval the fund and maintenance and updating of the fund’s under investment services legislation or banking shareholder register. regulation. Any derogations from the regulatory Irish investment funds are also required to appoint a requirements that a fund requires must be obtained in trustee. The trustee must have its registered office within advance of submitting the formal application for Ireland or have established a place of business in Ireland authorisation. if its registered office is in another Member State of the European Union. The trustee fiduciary duties may not be Service provider role in delegated to a third party and must be performed by the authorisation/ongoing regulation trustee appointed in Ireland. The custody functions may however be delegated to a custodian located (inside or) Authorisation outside of Ireland. UCITS, retail Non-UCITS and Professional Investor Funds All Irish funds are required to appoint an investment are authorised by application from the fund, or in the manager (or Irish management company) that will be case of a unit trust, common contractual fund or limited responsible for the investment management of the Irish partnership, its management company or general partner fund’s assets. The conditions applicable such as appropriate. The custodian and administrator will be companies’ clearance to act by the Irish Regulator as required to make certain certifications to the Regulator as described in Investment manager requirements above. part of the authorisation process. Irish Professional Investor Funds and Qualifying In the case of Qualifying Investor Funds, which are Investor Funds are entitled to appoint prime brokers. effectively authorised by means of a self-certification Prime brokers must be regulated to provide prime process, the fund/management company/general partner brokerage services and each prime broker or its parent makes the formal application, which is undertaken by its company must have a credit rating of not less than Irish legal advisers; the trustee certifies that the A1/P1. information contained in the application, as it relates to the trustee, is accurate. Regulatory procedure All fund authorisations must be obtained pre-launch. Ongoing Post-authorisation changes to fund documentation The Irish Administrator/management company will be require the approval of the Regulator. generally be responsible for carrying out the minimum To obtain this authorisation, the fund, or in the case of activities referred to in Service provider conditions above a unit trust, common contractual fund or limited and for preparing the regulatory reporting and financial partnership, its management company or general partner, statements referred to at Ongoing fund regulation must apply to the Irish Regulator in writing. In the case requirements above. of UCITS and Non-UCITS retail and Professional Investor The Custodian will prepare the report referred to in Funds, this application is initially made in draft form. Custodian/depository bank requirements above for
EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 20 IRELAND
inclusion in the fund’s annual audited financial Ireland on the issue, transfer, repurchase or redemption statements. of units in a fund. Many of the key services provided to The Administrator, Custodian and management Irish funds (eg. fund administration, investment company are each expected to deal in an open and co- management, etc) are exempt from Irish VAT. operative manner with the Regulator and to participate in such meetings as the Regulator considers necessary to Taxation of investment managers review its operations and its business developments. Generally 12.5% on fee income derived from investment management services. Leverage restrictions The Irish tax authorities impose a 20% withholding tax ● UCITS: 100% of net asset value; on dividends and other profit distributions. However there ● Retail Non-UCITS: 25% of net asset value other than are significant exemptions under domestic law from this managed futures which in respect of which leverage is withholding tax in relation to: controlled by a margin to equity restriction of 50%; ● Payments made to persons resident in EU Member ● Professional Investor Funds: 100% of net asset value; States and tax treaty countries; and ● Qualifying Investor Funds: unlimited. ● Payments made to companies resident outside the EU In each case, the extent of leverage must be disclosed in or a non-tax treaty country provided more than 50% of the Prospectus of the fund. the recipient company is ultimately controlled by persons resident in a treaty country or EU member Taxation of funds state (other than Ireland), once certain declarations are A fund that is authorised in Ireland is not subject to Irish put in place. tax on its income or gains with the exception of non- designated funds in respect of which please see Investor Valuation rules restrictions above. There are no Irish withholding taxes These are described in Ongoing fund regulation on distributions to investors provided they have made the requirements above. ■ appropriate tax declaration of non-Irish residence to the fund. There are no Irish withholding taxes on Donnacha O’Connor, partner in Financial Services at distributions made to certain categories of Irish investors. Dillon Eustace, can be contacted on: There is no stamp duty or subscription tax is payable in [email protected].
EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 21 PRIVATE
Dillon Eustace focuses on providing advice and innovation in For more information, contact: alternative investment products such as single and multi-strategy David Dillon, Andrew Bates, Donnacha O'Connor, hedge funds, private equity vehicles and real estate. Etain deValera, Stephen Carty or Peter Stapleton at: 33 Sir John Rogerson’s Quay, Dublin 2, Ireland. Tel:+353 1 667 0022, Fax:+353 1 667 0042, With one of the largest alternative investment teams in Ireland, e-mail: [email protected] with in-depth experience from all sectors of the industry, Dillon Eustace advises on all aspects of alternative investments or Brian Dillon or Gregory Noone at: Dillon Eustace, Tokyo. including product design, launch, listing, tax and compliance for Tel: +813 5219 2042 Fax: +813 5219 2021 international and domestic managers, prime brokers and other e-mail: [email protected] service providers. [email protected] or Andrew Lawless at: Dillon Eustace, Boston. Tel: +1 617 217 2866 Fax: +1 617 217 2566 e-mail: andrew.lawless @dilloneustace.ie www.dilloneustace.ie
DUBLIN CORK BOSTON TOKYO
In alliance with Arendt & Medernach JERSEY
REGULATOR Jersey Financial Services Commission (JFSC), PO Box 267, 14-18 Castle Street, St Helier, Jersey, JE4 8TP, Channel Islands. Tel: +44 (0)1534 822000.
SERVICE PROVIDERS Lawyers See www.jerseyfinance.je or www.jerseylaw.je Fund administrators & custodians See www.jerseyfinance.je Trust & company administrators/corporate service providers See www.jerseyfinance.je Accountants See www.jerseyfinance.je Local stock exchange Channel Island Stock Exchange: www.cisx.com Local fund industry body Jersey Funds Association: www.jerseyfunds.org
St Helier Promotion agency for funds/financial sector Jersey Finance Limited: www.jerseyfinance.je
DOUBLE TAXATION TREATIES Double taxation agreements exist with the UK and Guernsey, and a limited agreement with France exempting a resident of either country from tax in the other country on profits from shipping and air transport.
TAX INFORMATION EXCHANGE AGREEMENTS Jersey Jersey, along with its fellow UK dependent territories Guernsey and the Isle of Man, is part of the EU’s information-sharing regime, whereby financial institutions are obliged to pass FUND LEGISLATION details of income on investments by nationals of EU member Collective Investment Funds (Jersey) Law 1988 and Control of states to their home tax administrations. Borrowing (Jersey) Law 1947. Jersey has signed a memorandum of understanding with Service providers Bahrain (November, 2002), designed to facilitate co-operation on Financial Services (Jersey) Law 1998. issues such as applications for licences from financial institutions and the investigation of irregularities, and is one of NUMBER OF FUNDS 24 signatories to a memorandum of understanding with IOSCO, Overall ...... 1,370 the International Organisation of Securities Commissions Collective Investment Funds ...... 1,139 (October 2003), to share information about the illegal use of of which Expert Funds ...... 401 securities and derivatives markets. Specialist funds...... 957 The JFSC has signed memoranda of understanding with the of which private equity/venture capital ...... 273 regulators in Dubai, Qatar, the Netherlands, the Cayman Islands of which property...... 157 (2006), Cyprus, Canada, Ireland and the British Virgin Islands of which derivatives...... 17 (2007) formalising arrangements for co-operation, information- of which traded endowment policies ...... 28 sharing and investigative assistance. of which hedge/alternative investment funds ...... 409 of which other...... 73 TYPES OF ALTERNATIVE FUND VEHICLE COBO (private) funds...... 231 ● Company (no minimum authorised or issued share capital, and no par value shares are available); ADMINISTERED FUND ASSETS ● Limited Partnership (no maximum imposed on the number of Administered fund assets total ...... GBP246.0bn limited partners); of which Collective Investment Funds ...... GBP231.7bn ● Unit Trust. of which COBO funds...... GBP14.4bn Specialist fund assets...... GBP136.6bn AVAILABLE TYPES OF CORPORATE VEHICLE of which private equity/venture capital ...... GBP22.6bn ● Limited Liability Company (open-ended or closed-ended); of which property...... GBP31.3bn ● Incorporated Cell Company; of which derivatives ...... GBP173m ● Protected Cell Company. of which traded endowment policies...... GBP1.4bn of which hedge/alternative investment funds ...... GBP62.4bn TYPES OF REGULATORY FUND CATEGORY of which other...... GBP18.8bn Recognised (as of March 31, 2008, source: Jersey Financial Services The Recognised Fund legislation, modelled on the Commission) corresponding UK legislation, was introduced in order to
EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 23 JERSEY
demonstrate that the regulation of Recognised Funds in Jersey ADMINISTRATION ensures investor protection at least equivalent to that afforded Fees payable for the establishment of a fund structure will vary investors in the UK under the Financial Services and Markets greatly depending on the complexity of the structure, the Act 2000 (FSMA). The UK authorities have declared Jersey a knowledge and assistance provided by the promoter of the designated territory and any fund granted a Recognised Fund fund, and the fund category selected. certificate may seek authorisation under Section 270 of the Based on a simple corporate fund structure, where the fund FSMA to market directly to the general public in the UK. A is an expert fund and has no unusual operational features, Recognised Fund may only take the form of a unit trust or an establishment costs are likely to be as follows: open-ended investment company. Legal fees ...... £10,000 minimum Unclassified Funds Administrator fees...... £5,000 minimum An unclassified fund established in Jersey may be open-ended Regulator fees ...... £2,000 or closed-ended and may have a corporate structure or be a Ongoing fees in relation to management and administration unit trust or a limited partnership. It is the JFSC’s policy that of the structure will be driven by the services required from the each unclassified fund is regulated to the extent and in a Jersey administrator, including the expected frequency of board manner considered appropriate to the nature of the particular meetings, fund size, investor reporting requirements and fund. The categories of Unclassified Fund are: general investment activity. Such costs are likely to start at ● Very Private/COBO-only Funds; £20,000 for a small fund with few investors, low activity, quoted ● Collective Investment Funds; investments and standard reporting. ● Expert Funds (lighter regulation through self-certification); ● Listed Funds (listed on an approved exchange); REGULATORY APPROVAL TIME ● Unregulated Funds (Exchange Traded or Eligible Investor). ● Unregulated fund – notify the JFSC with no regulatory involvement, therefore no extra regulatory approval time. AUDIT REQUIREMENTS ● Expert Funds and Listed Funds – 3 working days. Depends on type of regulatory fund category: ● All other Unclassified Funds – up to 20 working days. ● Expert Funds and Listed Funds require an auditor to be appointed; OVERALL ESTABLISHMENT TIME ● The JFSC will normally require a Collective Investment Fund This will generally vary dependent on the status of the to be audited; promoter, the complexity of the structure and type of regulatory ● Unregulated Funds do not need an auditor. fund category. Most funds can be established in four to six weeks from inception. FINANCIAL STATEMENT REQUIREMENTS Depends on type of regulatory fund category. Normally required for all fund types except for Unregulated Funds.
REGULATORY FEES Collective Investment Funds (Jersey) Law, 1988: Application Fees payable in respect of permits granted under Article 7 or certificates granted under Article 8B of the Collective Investment Funds (Jersey) Law, 1988, shall be: ● £1,000 in respect of each Recognised Fund in relation to which the applicant is a functionary; and ● £1,000 for each application for a certificate for a certified fund and an additional £1000 in respect of each fund service provider in relation to a certified fund; and ● £500 for every additional pool of assets (as defined in the Collective Investment Funds Permit Fees Notice) added to an existing umbrella fund, which is a Recognised Fund or Certified Fund. The minimum annual fee payable in respect of a collective investment fund is £2,000, although it is determined according to the total number of pools of assets in the fund at the time the fee is payable and therefore may be higher. Financial Services (Jersey) Law 1998: The application fee in respect of registrations to conduct fund services business granted under the Financial Services (Jersey) Law 1998 is £1,000. These applications are issued on a license basis and the fee is only payable once, for the function being undertaken (e.g. administrator license). The annual fee payable in respect of a Jersey fund service business to which a license is granted under the Financial Services (Jersey) Law, 1998 is £2,000.
OVERALL COST OF FUND ESTABLISHMENT AND
EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 24 JERSEY Jersey By Bill Gibbon, Funds Group Partner with Voisin and Tom Amy, Head of Funds & SPV Group at Volaw Trust & Corporate Services Limited in Jersey
Jersey is a high-quality location for fund management innovative schemes and hedge fund-type products aimed and administration with more than four decades of at sophisticated, high net worth, professional and experience in servicing the investment funds market. The institutional investors. There is no restriction on the establishment and operation of investment funds in number of investors in an Expert Fund and no Jersey is governed principally by two pieces of requirement for the creation of a local management legislation, namely, the Control of Borrowing (Jersey) Law, company linked to the fund’s promoter. 1947 as amended, (the “Borrowing Law”) and the The authorisation of an Expert Fund requires a Jersey- Collective Investment Funds (Jersey) Law, 1988 as based monitoring fund functionary, in most cases the amended, (the “CIF Law”). Together the two statutes administrator, to take primary responsibility for self- provide the framework for appropriate investor protection certifying that a proposed fund meets the structure and whilst retaining the flexibility to adapt quickly to changing documentation criteria for an Expert Fund. This helps market conditions. minimise the regulatory role of the JFSC in the The island’s fund industry has doubled in size over the establishment of the fund. The functionary also certifies past five years and stood at GBP246bn at the end of that appropriate disclosures have been made in the March 2008. More than half of this amount is fund’s documentation, particularly in respect of the represented by specialist and alternative funds. Much of offering document’s disclosures of investment and the recent growth is down to the impact of Expert Funds, borrowing strategies. which were introduced in 2004 to offer a streamlined An application for establishment of an Expert Fund regulation product for funds targeting expert investors. must be lodged with the JFSC, completed by the Earlier this year, Jersey introduced Unregulated Funds, regulated Jersey functionary and countersigned by the for vehicles targeting sophisticated institutional investors, directors of the fund, the general partner or trustee. If the as well as funds already subject to oversight on a fund meets the Expert Fund guidelines and all regulatory recognised stock exchange. checks are satisfied, the appropriate consents and The environment for funds in Jersey has also been certificates will be issued by the JFSC on an expedited enhanced by the transfer on November 14, 2007 of the basis, normally within three days. regulation of fund functionaries from the CIF Law to the From April this year, funds will receive a certificate of Financial Services (Jersey) Law 1998 (the “FSJ Law”), approval from the JFSC rather than a permit as formerly, which has improved the interaction between the Jersey while the functionary receives a license to provide Financial Services Commission (the “JFSC”) and fund services to the designated fund. The license for each service providers. functionary sets out the terms of approval and ongoing This change enshrines the shift in focus of fund requirements on the fund – principally continuing to have supervision by the JFSC from product-by-product two resident directors, complying with the terms of the regulation to the licensing of fund service providers on the Expert Fund Guide, and notifying the JFSC of any island. The regulation of funds has been separated from material change that might alter the terms of the original the regulation of fund functionaries, who no longer need permit/certificate. The monitoring functionary has to apply to the regulator for a license under the CIF Law ongoing responsibility for overseeing compliance by the for each new fund they intend to act for, as long as they investment manager with the fund’s investment principles are already registered to undertake the proposed activity. and notifying the JFSC of any breach of the terms. In an expert fund, no particular investment or leverage Expert funds restrictions are imposed by the regulator provided that The publication of the Expert Fund Guide by the JFSC on the functionary believes the strategies have been fully February 3, 2004 opened the door to establishing disclosed to investors. The JFSC should be informed if
EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 25 JERSEY
there is an intention to leverage more than 200 per cent, Most Expert Funds can benefit from regulatory providing the reason for this. flexibility regarding custody of assets provided that it can The fund’s board, general partner or trustee is demonstrate adequate safekeeping procedures, although ultimately responsible for the management and control of open-ended Expert Funds must use a Jersey custodian. the fund. A fund company must have two Jersey-resident An open-ended Expert Fund that is a hedge fund may directors, who must be approved by the regulator and appoint a prime broker that is part of a group with a must have relevant fund experience. There is no credit rating of A1/P1 or better. requirement for the investment manager to be Expert Funds must have a regulated Jersey represented on the board of directors, but it is normal administrator (or manager/trustee) with a physical practice. presence in the island whose role includes taking Investors in Expert Fund must receive and accept an reasonable measures to monitor the investment investment warning acknowledging that the fund is manager’s adherence to the investment and borrowing suitable only for expert investors and to confirm their restrictions set out in the fund’s prospectus. The awareness that it involves special risks and is subject to functionary must also maintain sufficient records in limited regulatory oversight. Investors must also confirm Jersey to fulfill its obligations to the regulator. that that they are either investing USD100,000, are a professional investor as defined by the Expert Funds Unregulated funds Guide or a high net worth individual with USS1m in The Unregulated Fund regime introduced on February 19 assets excluding their principal residence, but including 2008 allows eligible funds to merely notify the JFSC of assets jointly held with a spouse, or fall within another their establishment, rather than going through a full category of “expert investor”. authorisation process. There are two forms of Most Expert Funds rely on the professional investor unregulated fund, the Unregulated Eligible Investor Fund exemption or the minimum subscription level. In practice, and Unregulated Exchange Traded Fund. most Jersey-domiciled hedge funds have a higher Unregulated Eligible Investor Funds are available to minimum subscription level, typically USD500,000, investors injecting a minimum of USD1,000,000 or although directors retain the discretion to reduce the equivalent into the fund, or that meet the criteria of a threshold for particular investors. The JFSC has sophisticated investor, and investors must acknowledge confirmed that applications to extend the definition of in writing their acceptance of the risks involved. In ‘expert investor’ to carried interest investors is likely to addition, the fund must ensure that its investors meet the be treated sympathetically and that those involved in legal requirements for investment. The fund may be establishing and providing services to an Expert Fund open-ended or closed-ended and take the form of a should be able to invest in the fund without having to company or cell company, unit trust or partnership. meet the expert investor criteria. An Unregulated Eligible Investor Fund is not required The investment manager should be regulated in an to have a Jersey-based administrator or custodian, nor OECD or associate member jurisdiction, although a non Jersey-resident directors, and it is not required to appoint OECD-based investment manager may also be approved auditors in Jersey or elsewhere. The fund may list only if it can demonstrate a relevant track record in an on a stock exchange that permits restrictions upon appropriate strategy and is well known to investors. Any transfers of interests, to ensure that only eligible jurisdiction with a memorandum of understanding with investors can access the fund. the JFSC or where the local regulator can provide Unregulated Exchange Traded Funds are not regulated suitable assurances to its Jersey counterpart is likely to by the JFSC on the basis that they are already regulated be acceptable. by an approved stock exchange. An Unregulated An investment manager should operate a “four eyes” Exchange Traded Fund may only take the form of a principle in its investment procedures. They should closed-ended fund, but may be established as a possess relevant experience in relation to the investment company or cell company, unit trust or partnership. It is strategies followed by the Expert Fund, be solvent, and also not required to appoint auditors. have no previous record of regulatory infractions. Investment managers that do not meet these criteria Listed funds fully may be approved on a case-by-case basis by the Introduced in 2007, the Listed Fund Guide provides a JFSC. There is no capital adequacy requirement unless fast-track procedure for the establishment of closed- the investment manager is resident in Jersey, in which ended funds that are listed on recognised stock case it must have a substantial share capital and comply exchanges or markets such as the Channel Islands with the Jersey code of practice for fund service Stock Exchange. The investment manager of a listed business. fund must be established in an OECD jurisdiction or one
EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 26 JERSEY
with which the JFSC has entered into a memorandum of exempt company tax system currently in place. A small understanding, or that is otherwise approved by the proportion of companies can be subject to the 10% regulator. special rate of corporate income tax under the zero/ten system and it is proposed that the 10% rate will apply to Cell companies ‘specified financial services companies’. Changes to the Companies (Jersey) Law, 1991 on The “Zero-Ten” taxation rules have been structured so February 1, 2006 introduced two new forms of company, as to ensure that Jersey fund companies (and fund Protected Cell Companies (“PCCs”) and Incorporated Cell managers established in Jersey but with no physical Companies (“ICCs”), suitable for the establishment of presence) are not adversely affected compared to the multi-class investment funds, companies for a series of current exempt company rules where a company is not structured finance transactions and specialist insurance deemed resident in Jersey. vehicles. There are no taxes, registration fees or duties payable Both types of company can create individual to the Jersey authorities in respect of the establishment segregated cells with their own assets and liabilities, or administration of a Unit Trust. By extra-statutory distinct and ‘ring-fenced’ from those of other cells and concession neither the trustee nor the assets of a Unit from the cell company itself. The key legal principle for Trust will be liable to Jersey income tax on the income of both PCCs and ICCs is that assets of each individual cell a Unit Trust arising outside Jersey or, by concession, are not available to the creditors of any other cell. bank interest arising in Jersey. In addition, distributions A PCC is a separate legal entity, however protected paid to non-residents will not be subject to any cells do not have legal personality independent of the withholding. However, the manager will be required to PCC. ICCs are similar to PCCs, however each deduct Jersey income tax from distributions made to any incorporated cell is a separate corporate entity with the Jersey unit holders. ability to appoint separate boards of directors. A Limited Partnership is tax transparent. Profits and Once a cell company has been created, repeat losses of the Limited Partnership are attributed to the transactions can be carried out more speedily, offering partner themselves who will be taxed according to their advantages for funds and securitisations structures proportionate share of profits and losses. where initial documentation can be complex but may be The Limited Partnership itself will not be subject to replicated in future offerings. In addition, Jersey assessment for income tax and a non-resident partner regulatory consent can be obtained in advance for the will not be liable to Jersey income tax except on Jersey broad structure of a fund or securitisation and later source income (but excluding by concession, bank updated when new cells are added to the structure, deposit interest). Interest receivable by a non-resident offering potential cost savings. partner from a loan made to a Limited Partnership is not Jersey source income. Hence, provided a Limited COBO-only funds Partnership has no Jersey resident partners (a general “COBO Only Funds” are those where the number of partner is treated as non-resident for these purposes) such offers is less than 50 and where the fund is not and no Jersey source income, no tax return is required to listed. Consent will be required from the JFSC under be submitted. ■ the Borrowing Law and in considering this, the JFSC will perform a preliminary review of the “promoter” behind the scheme as well as a review of the private placement memorandum prior to the issue of a COBO consent. In considering a promoter, the JFSC will analyse the track record, reputation and experience of the promoter as well as such issues as spread of ownership and financial resources. The JFSC will also have an ongoing regulatory role and the COBO consent will set out various conditions, which the fund will need to comply with.
Taxation of Jersey funds From 2009, the States of Jersey are to implement a standard rate of corporate income tax of 0% and a special rate of corporate income tax of 10% into the Island’s existing tax system, which will replace the
EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 27 Two innovative firms...
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LE?I?DB7Meki[":edHeWZ" Ij>[b_[h"@[hi[o@;''7M" ?WdIjhWd]#_WdijhWd]6le_i_dbWm$Yeceh 9^Wdd[b?ibWdZi$ 8_bb=_XXed#X_bb]_XXed6le_i_dbWm$Yec J[b0!** & '+)*+&&)&& HeX[hj9^h_ij[di[d#hY^h_ij[di[d6lebWm$Yeceh Jh[lehDehcWd#jdehcWd6lebWm$Yec Le_i_d7ZleYWj[iIeb_Y_jehi DejWh_[iFkXb_Y_iWbWmÄhch[]kbWj[ZXoBWmIeY_[joe\@[hi[o$ LebWmJhkij 9ehfehWj[I[hl_Y[iB_c_j[Z_ih[]kbWj[ZXoj^[@[hi[o<_dWdY_WbI[hl_Y[i9ecc_ii_ed$ LUXEMBOURG SIF FCP...... 376 SICAV ...... 269 Others...... 4 Total...... 649 (situation as for 31/03/08) Luxembourg ADMINISTERED FUND ASSETS Total FCP...... 700.961 SICAV...... 1,192.403 Others ...... 2.071 Total...... 1,895.445 2002 Law, Part I FCP ...... 528.144 SICAV...... 952.208 Others...... 0 Total...... 1,480.352 2002 Law, Part II FCP ...... 99.017 SICAV...... 191.647 Others...... 1.950 Total...... 292.614 SIF FCP...... 73.800 SICAV...... 48.558 Others ...... 0.121 Total...... 122.479 Luxembourg (in bn EUR) REGULATOR FUND LEGISLATION Commission for the Supervision of the Financial Sector (CSSF), ● Law dated 20 December 2002 (2002 Law) relating to 110 route d’Arlon, L-2991 Luxembourg. undertakings for collective investment and amending the law of 12 February 1979 concerning the value added tax as SERVICE PROVIDERS amended; Law firms ● Law dated 13 February 2007 (SIF Law) relating to 16 law firms specialised in investment funds. Specialised Investment Funds; Administrators ● CSSF Circular 02/80 relating to funds pursuing alternative ● Etablissement de droit public Luxembourgeois: 2 investment strategies ; ● Sociétés anonymes de droit Luxembourgeois: 100 ● CSSF Circular 91/75 relating to undertakings for collective ● Sociétés en commandite par actions de droit investment; luxembourgeois: 3 ● Grand-ducal regulation of 8 February 2008, concerning ● Sociétés coopératives de droit luxembourgeois: 2 certain definitions of the law of 20 December 2002 relating to ● Caisse rurales: 13 undertakings for collective investment (as amended). ● Banque d’émission de lettres de gage: 5 ● Succursales d’établissement de crédit d’origine non NUMBER OF FUNDS communautaire autorisées au Luxembourg sur base de Overall ...... 3,012 funds l’article 32 de la loi modifiée du 5 avril 1993: 8 By category ● Succursales d’établissement de crédit d’origine Total FCP...... 1,730 communautaire et assimilés autorisées au Luxembourg sur Total SICAV:...... 1,270 base de l’article 30 de la loi modifiée du 5 avril 1993: 34 Total Others ...... 12 ● Succursales d’établissement financier d’origine Total ...... 3,012 communautaire autorisées au Luxembourg sur base de 2002 Law, Part I l’article 31 de la loi modifiée du 5 avril 1993: 1 FCP ...... 1,093 Accountants/auditors SICAV ...... 607 5 major firms Specialised in this field (Deloitte, KPMG, Ernst & Others...... 0 Young, PWC, ATOZ). Total ...... 1,700 Local stock exchange 2002 Law, Part II Luxembourg Stock Exchange (LSE). FCP ...... 261 Local fund industry body SICAV ...... 394 Association of Luxembourg Fund Industry (ALFI). Others...... 8 Promotion agency for funds/financial sector Total...... 663 Luxembourg Fund Labelling Agency (LuxFLAG). EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 29 LUXEMBOURG DOUBLE TAXATION TREATIES SIF Law With 51 countries (as at June 2008): South Africa; Germany; ● Audited annual financial statement (must be available to Austria; Belgium; Brazil; Bulgaria; Canada; China (P.R.); Korea investors within 6 months of the end of the financial year) (Republic of); Denmark; Spain; Estonia; United States of America; Finland; France; Greece; Hong Kong; Hungary; REGULATORY FEES Mauritius; Indonesia; Ireland; Iceland; Israel; Italy; Japan; CSSF fees Malaysia; Malta; Morocco; Mexico; Mongolia; Norway; Funds set up under the 2002 Law Uzbekistan; Netherlands; Poland; Portugal; Czech Republic; ● EUR 2.650 for a single compartment fund Romania; United Kingdom; Russia; San Marino; Singapore; ● EUR 5.000 for a multiple compartment fund Slovakia; Slovenia; Sweden; Switzerland; Thailand; Trinidad & Funds set up under the SIF Law Tobago; Tunisia; Turkey; Ukraine; Vietnam. ● EUR 1.500 for a single compartment fund And a Convention in 2006 with the 9 of the 10 EU Member ● EUR 2.650 for a multiple compartment fund States which joined in 2004 (Czech Republic, Estonia, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, Slovakia). OVERALL COST OF FUND ESTABLISHMENT Regulatory fee: TAX INFORMATION EXCHANGE AGREEMENTS Funds set up under the 2002 Law ● Application of the EU Savings Directive, which came into ● EUR 2.650 for a single compartment fund effect on 1 July 2005; ● EUR 5.000 for a multiple compartment fund ● Introduced in clauses in each double taxation treaty. Funds set up under the SIF Law ● EUR 1.500 for a single compartment fund ALTERNATIVE FUND, MANAGER AND SERVICE ● EUR 2.650 for a multiple compartment fund PROVIDER INFORMATION Luxembourg and EU-domiciled UCIs ● Listing fee: EUR 1.250 TYPES OF ALTERNATIVE FUND VEHICLE ● Visa fee (for EU-domiciled funds other than in Luxembourg) Open-ended investment company EUR 1.250 ● Investment company with variable capital (société ● Maintenance fee d’investissement à capital variable) (SICAV); EUR 1.875 for 1st line of quotation ● Investment company with fixed capital (société EUR 1.250 for 2nd line of quotation d’investissement à capital fixe) (SICAF). EUR 875 for 3rd line of quotation Close-ended investment company EUR 500 for the 4th and following lines of quotation ● Close-ended SICAF; Non EU-domiciled UCIs ● Close-ended FCP (Fond Commun de Placement). ● Listing fee: EUR 2.500 Common Contractual Fund (similar to unit trust in UK law) ● Visa fee: EUR 2.500 ● Common fund (fonds commun de placement) (FCP). ● Maintenance fee EUR 2.500 for 1st line of quotation AVAILABLE TYPES OF CORPORATE VEHICLE EUR 1.875 for 2nd line of quotation Under the 2002 Law EUR 1.250 for 3rd line of quotation SICAVs under the 2002 Law must be set up as public limited EUR 625 for 4th and following line of quotation companies (S.A.s). Under the SIF Law REGULATORY APPROVAL TIME (BY THE CSSF) SICAV / SICAF may be set up as a: Funds set up under the 2002 Law ● Public limited company (S.A.) 4/8 weeks. ● Partnership limited by shares (S.C.A.) Funds set up under the SIF Law ● Private limited liability company (S.à.r.l.) No prior authorisation required. ● Co-operative organised as an S.A. AUDIT REQUIREMENT ● Audit requirements governed by Article 113 of the 2002 Law and Circulars 02/77 and 02/80 ● Luxembourg regulation requires that all Luxembourg Funds be audited annually by a Luxembourg auditor, approved by the CSSF ● The auditor must be a member of the Luxembourg Institute of Auditors (Institut des Réviseurs d’entreprises – IRE) FINANCIAL STATEMENT REQUIREMENTS 2002 Law ● Audited annual financial statement (is to be published within 4 months of the financial year end, and be available 15 days prior to the annual general meeting of shareholders) ● Unaudited semi-annual financial statement is to be published and sent to the CSSF within 2 months of the period end EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 30 LUXEMBOURG Luxembourg By Rémi Chevalier and Olivier Sciales, founding partners at Chevalier & Sciales The Grand Duchy of Luxembourg became in a few of funds are excluded from Part I of the 2002 Law: decades one of the leading locations for investment ● Funds of the closed-ended type; funds, being today the world’s second fund centre, ● Funds which raise capital without promoting the sale overtaken only by the USA. Since 1959, when the first of their units to the public within the European Union fund was established, the investment fund industry or any part of it; hugely expanded, counting 3,012 funds in March 2008. ● Funds the units of which, under their constitutional This success originated with the authorities’ encouraging documents, may be sold only to the public in attitude to foreign capital and investment, and was countries which are not member of the European considerably strengthened by its prime location in the Union; and heart of Europe - close to the main markets targeted by ● Categories determined by the CSSF, for which the investment funds -, by its highly qualified multilingual investment policy rules laid down in Chapter 5 of the workforce, as well as by its political, economic and 2002 Law are inappropriate in view of their investment social stability. An appropriate tax regime and the and borrowing policies. enactment of a favourable and well-defined legislation resulted in Luxembourg consolidating in recent years its UCIs position as an international investment fund distribution In contrast, UCIs established under Part II of the 2002 hub, with around EUR 1.9 trillion (about US$ 2.8 trillion) in Law may only market their units in other EU countries net assets at the end of March 2008. after complying with the specific conditions stipulated by the authorities in the country concerned. The criterion Legal and regulatory framework defining whether a UCI is subject to Part I or Part II of The groundbreaking Law of 20th December 2002 shaped the 2002 Law is the planned investment objective, as Part the Luxembourg investment fund market, differentiating I of the 2002 Law applies only to UCI the sole objective between undertakings for collective investment in of which is the investment in transferable securities, transferable securities (UCITS, Part I of the 2002 Law) whereas a UCI may invest in activities such, inter alia, and undertakings for collective investment (UCIs, Part II alternative investments (i.e. Hedge Funds), venture of the 2002 Law). Following the enactment in February capital, and real estate. 2007 of the Law relating to Specialised Investment Funds (the ‘SIF Law’), the Luxembourg investment funds are SIFs now divided into three categories: The SIF Law replaces the legal framework previously ● Undertakings for Collective Investment (UCIs, 663 in applicable to institutional UCIs (the ‘1991 Law’) by March 2008); providing for a separate statutory regime specifically ● Undertakings for Collective Investment in Transferable designated for investment funds dedicated to Securities (UCITS, 1700 in March 2008); and sophisticated investors. The SIF is a lightly regulated and ● Specialised Investment Funds (SIF, 649 in March 2008). tax efficient fund which gives an on-shore alternative to consider (as compared to traditional off-shore UCITS jurisdictions such as the Cayman Islands or the BVI) UCITS are designed for retail investors, and benefit from when deciding on the jurisdiction for setting up a fund the European Passport, enabling them to be freely and the type of fund vehicle to use. Investment funds marketable throughout the EU countries with a minimum created under the SIF Law are subject to each country’s of formalities. Transferable securities are defined in distribution rules. Article 1 of the 2002 Law as either shares or other securities equivalent to shares, bonds and other forms of Regulatory body securitised debt, or any other negotiable securities which The regulatory body is the Commission for the Supervision carry the right to acquire such transferable securities by of the Financial Sector, the CSSF, which authorises and subscription or exchange. In this context, four categories monitors all Luxembourg registered funds. Its annual EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 31 LUXEMBOURG regulatory fees will be, under the 2002 Law, EUR 2,650 for reserved for funds investing in transferable securities or a single compartment fund (instead of EUR 1,500 under the derivatives, and for funds where shareholders/unit- SIF Law), and EUR 5,000 for a multiple compartment fund holders need to purchase or redeem their shares/units (instead of EUR 2,650 under the SIF Law). freely. Interestingly, the cultural background of each country seems to influence the choice as whether to Constitution of a fund/legal create a fund as a FCP or as an investment company, as structures available the FCPs are traditionally widely used in Germany, especially compared to a country like France, where Investment funds may take the form of an open-ended investors prefer to have recourse to SICAVs. legal entity (investment company with variable capital, SICAV, 1,270 in March 2008) a closed-ended legal entity Formation expenses (investment company with fixed capital, SICAF, 12 in The formation expenses will consist for all funds in a March 2008), or of a common contractual fund which has capital duty amounting to EUR 1,250, notary fees, legal a management company (FCP, 1,730 in March 2008). All fees, a CSSF filing duty, fixed, for 2002 Law UCIs, at EUR those different entities may create sub-funds, each with a 2,650 for a single market UCI and EUR 5,000 for a different investment policy. In this context, each multiple compartment UCI. In contrast, the CSSF filing compartment will be deemed to be a separate entity, duty has been fixed, for SIF Law UCIs, at EUR 1,500 for a which implies that the assets of a compartment are single compartment UCI and EUR 2,650 for a multiple exclusively available to satisfy the rights of investors in compartment UCI. The formation expenses may also relation to that compartment. comprise, if a listing to the Stock Exchange is contemplated, its admission fee, fixed at EUR 1,250. SICAV / SICAF A SICAV is a limited liability company whose capital is at Minimum capitalisation any time equal to its net assets, and no formalities are The minimum capitalisation required under both Laws, required for increases and decreases in capital, whereas namely EUR 1,250,000, must, in the case of a SIF, be a SICAF is a limited liability company with fixed capital, reached within 12 months from the approval by the CSSF, open-ended only if the investors can buy and sell shares in contrast with 6 months in the case of an investment at their request and at a price equal to the net asset fund set up under the 2002 Law. value per share. Regulatory control FCP If it is subject to a continuous control by the CSSF, a In contrast, a FCP is a co-proprietorship whose joint fund set up under the SIF Law does not need its prior owners are only liable up to the amount they have approval for being incorporated, while it is still a contributed. A key feature to be noted is that a FCP is condition sine qua non for funds set up under the 2002 deprived from a legal personality and must therefore be Law. If there is no more a requirement for a fund managed by a Luxembourg management company, established under the SIF Law to have a promoter, the whereas SICAVs can be managed by their Board of directors of the fund will still be subject to the CSSF Directors. UCITS in the form of FCPs are managed by approval. This implies that the directors must have good management companies under the conditions laid down repute and justify of adequate experience. in Chapter 13 of the 2002 Law, whereas Chapter 14 of the 2002 Law lays down the conditions under which To comply with the setting-up requirements, investors will management companies are ruling UCIs and SIFs. benefit from the financial facilities offered by the high- profiled Luxembourg economic environment, counting The selection of a legal structure 155 banks registered in 2008 which offer their services in The choice of whether to create a fund as a FCP or as this field. an investment company is mainly based on tax considerations, as a FCP is tax transparent, this concept Investors’ eligibility of transparency being guaranteed in the Luxembourg tax Investment funds set up under the 2002 Law are legislation. Marketing and operational considerations are available to public distribution. Hence, no restriction also relevant in this vehicle as a FCP, being domiciled in applies upon eligible investors, whereas the SIF Law Luxembourg, benefits from the high standard of service introduces a qualified investor scheme. In this context, provided by managers, custodians, legal and tax SIFs are reserved for well-informed investors who are professionals present in Luxembourg. In contrast, the two able to understand and assess the risks associated with other forms, because of their flexibility, are more often investments in such a fund, well-informed investor EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 32 LUXEMBOURG meaning either an institutional investor, a professional expanded to include transferable securities and money investor, or any other investor who has declared in market instruments, bank deposits, fund of funds, writing that he is an informed investor and either invests financial derivatives and, finally, index tracking funds. a minimum of EUR 125,000 or has an appraisal from a bank, an investment firm or a management company Non-UCITS Part II Funds certifying that he has the appropriate expertise, If there are no restricted eligible assets for a UCI, its experience and knowledge to adequately understand the investment policy is subject to the CSSF approval, and investment in the fund. specific rules are laid down in Circular IML 91/75 (as amended by Circular CSSF 05/177), whilst others are Investment restrictions specifically applicable to UCIs pursuing alternative Under the broad principle of risk spreading, all funds are investment strategies. Those rules are laid down in subject to different rules restricting the scope of their Circular CSSF 02/80 which states, inter alia, that: investment policy. Those rules are quite restrictive ● Aggregate commitment in terms of short selling may towards UCITS, somewhat lighter concerning UCIs, and not exceed 50% of assets, and no more than 10% of much lighter when it comes to SIFs. the same type issued by the same issuer may be sold short; UCITS ● Borrowings must not exceed 200% of the net assets; The 2002 Law provides for numerous restrictions upon and investments by UCITS, restrictions which have been ● Counterparty risk, defined as the difference between clarified in recent regulatory developments: the value of assets given as guarantee and the ● Circular CSSF 07/308 lays down rules for the amount borrowed, cannot represent more than 20% of implementation of a risk management framework, the UCI’s assets per lender. relating, inter alia, to the conduct to be adopted by UCITS with respect to the use of derivative financial SIFs instruments. Those rules, rendered necessary Specialised investment funds set up under the SIF Law following the extension, in the 2002 Law, of the list of are not required to comply with any detailed investment financial instruments in which UCITS may invest, restrictions or leverage rules, the SIF Law merely stating precise that a UCITS must self-assess itself as either that a SIF should apply the principle of risk ‘sophisticated’ or ‘non-sophisticated’. A sophisticated diversification. This principle provides that the collective UCITS, being in the obligation of entrusting to a investment of funds must be made in assets “in order to developed risk management unit, is able to make a spread the investment risks”. The CSSF clarified in its significant use of derivative financial instruments. In Circular 07/309 that: contrast, non-sophisticated UCITS, with a much less ● A SIF may not invest more than 30% of its assets or developed risk management unit, can make use of commitments to subscribe securities of the same type derivative financial instruments only for hedging issued by the same issuer; purposes. This Circular also specifies some valuation ● Short sales may not result in the SIF holding a short rules stating, inter alia, that overall risk exposure position in securities of the same type issued by the related to financial derivative instruments should not same issuer representing more than 30% of its assets; exceed the total net asset value, the net asset value and being the total value of the fund’s portfolio less its ● When using financial derivative instruments, the SIF liabilities. Consequently, the UCITS’ overall risk must ensure, via appropriate diversification of the exposure may not exceed 200% of the NAV on a underlying assets, a similar level of risk-spreading. permanent basis; However, it should be noted that the CSSF may, upon ● The Grand-ducal regulation of 8th February 2008 appropriate justification, grant exemptions to these rules clarifies the notion of UCITS as provided in the 2002 on a case-by-case basis. Law, in light of the Commission Directive 2007/16/EC; and Reporting and audit requirements ● The Circular CSSF 08/339 displays the guidelines given Prospectus by the CESR in relation to eligible assets for investment Funds are also in the obligation to issue a prospectus by UCITS, and in this context provides additional containing information concerning the fund and its provide additional clarifications relating to eligible assets management company (presentation, economic and for investment by UCITS covered by Directive commercial information). The Law of 10th July 2005 on 85/611/EEC, as amended. As a result, the range of prospectus for securities specified that the obligation to financial instruments that a UCITS may invest in was publish a full prospectus shall not apply to undertakings EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 33 LUXEMBOURG General chart UCITS III Other UCIs SIF (Part I of the 2002 Law) (Part II of the 2002 Law) under SIF Law Prior approval of CSSF needed for incorporation Yes Yes No Control by CSSF Yes Yes Yes European Passport Yes No No Eligible assets – Transferable securities Unrestricted, but subject Unrestricted – Bank deposits to CSSF approval – Money market instruments – Fund of funds – Financial derivatives – Index tracking funds Eligible investors Unrestricted Unrestricted Well-informed investors – Institutional investors – Potential investors – Other well-informed investors who confirm in writing that they adhere to the status of well-informed investors and either invest a minimum of EUR 125,000 or benefit from an assessment made by a credit institution, an investment firm or a management company certifying their capacity to appraise the contemplated Need for a promoter Yes Yes No Investment restrictions – Provisions of the 2002 Law – Circular IML 91/75 Compliance with risk- – Provisions of the Circular CSSF (as amended by Circular diversification rules: 08/339, investment possible in: CSSF 05/177) – SIF may not invest more – Transferable securities – UCIs pursuing alternative than 30% of its assets or – Deposits investment strategies commitments to subscribe – Money market instruments (circular CSSF 02/80), securities of the same type – Liquid financial assets restrictions relating to issued by the same issuer – Other undertakings for – Short sales – Short sales may not result collective investment – Borrowings in the SIF holding a short – Investment in UCIs position in securities of the same type issued by the same issuer representing more than 30% of its asset Tax Treatment – No income tax – No income tax – No income tax – Annual subscription tax of – Annual subscription tax – Annual subscription tax of 0.05% of the NAV of 0.05% of the NAV 0.01% of the net asset value – Fixed capital duty of EUR1,250 – Fixed capital duty of EUR1,250 – No WHT on dividend – No WHT on dividend – No WHT on dividend distributions and interest distributions distributions payments Issue and redemption of For a SICAV or a FCP, For a SICAV or a FCP, – No requirement that the issue, securities requirement that the issue, requirement that the redemption or repurchase price redemption or repurchase be – Issue, be based on net asset value based on net asset value – Redemption – Can issue shares at a pre- – Repurchase price determined fixed price be based on net asset value – Can repurchase shares below net asset value Disclosure of portfolio Yes Yes No for collective investment of the closed-ended type, as it must be structured in such a way so as to be easily meaning funds excluded from Part I of the 2002 Law. In understood by the average investor. this context such a fund is still in the obligation to publish a simplified prospectus. According to the 2002 Issuing document Law, both the simplified and the full prospectus must In line with a somewhat lighter regulatory regime than include the information necessary for investors to make UCIs governed by the 2002 Law, funds subject to the SIF an informed judgment of the investment proposed to law are only required to produce an ‘issuing document’, them, and especially of the risks attached thereto. The displaying, with no minimum content, the information simplified prospectus is however somewhat more basic, necessary for investors to be able to make an informed EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 34 LUXEMBOURG judgment about the investment proposed to them. The signed double taxation treaties with 51 countries. The issuing documents and any modifications thereto must object of such agreements is to eliminate or reduce be communicated to the CSSF. withholding taxes on foreign income or capital gains. Each of those treaties contains a tax information Financial statement exchange clause. However, it has to be emphasised that A final obligation is to publish regularly a financial only certain of these treaties are applicable to statement, which must describe adequately the financial Luxembourg funds, only 26 of them being applicable to situation of the fund. It must be audited by a SICAVs, whether in the form of a UCITS, UCI or SIF. Luxembourg authorised independent auditor, member of the Luxembourg Institute of Auditors (Institut des Stock exchange listing Réviseurs d’Entreprises - IRE), who is suitably qualified in A fund may be listed on the Luxembourg Stock terms of relevant experience. This auditor is in the Exchange (LSE), all the more since the LSE recently took obligation, if any information provided to investors does a major step by making it easier for foreign funds not truly describe the financial situation of the fund, to (established in the Cayman Islands and the British Virgin report promptly to the CSSF. The same obligation applies Islands for instance) to be listed. A few conditions have if the auditor becomes aware during the audit that any been imposed for a foreign fund to be listed on the LSE, fact or decision is liable to constitute a material breach mainly that the fund promoter must be of good repute, of the Law or regulations, or to affect the continuous have adequate professional experience, and that the functioning of the UCI. functions of investment manager, management company, A difference to draw between the 2002 Law and the custodian and transfer agent must be carried out by a SIF Law is that the obligation to publish a financial separate entity. statement is only annual in the case of a SIF, whereas The Stock Exchange maintenance fee has been fixed an investment fund subject to the 2002 Law must publish at EUR 1,875 for the 1st line of quotation, EUR 1,250 for a such an audited financial statement annually and semi- 2nd one, EUR 875 for a 3rd one, and EUR 500 for the 4th annually. A confidentiality feature in the case of a SIF is and the following lines of quotation. also to be pointed out, as a SIF does not necessarily have to disclose details of the portfolio in addition to the Conclusion information necessary for investors to make an informed The Luxembourg investment fund industry, largely judgment about the evolution of the activity of the fund, benefiting from its location in a strong financial centre, is and there is no more a requirement to publish the net now an internationally Recognised label for investment asset value per share, as it is the case for UCITS and funds. The greatest asset of Luxembourg is undoubtedly UCIs. political voluntarism, demonstrated by a constant anticipation of the need of investors - either in the Taxation of funds transposing of European legislation or in the shaping of A first point to make is that Luxembourg UCITS, UCIs national legislation - in order to create a stable and and SIFs do not pay Luxembourg income and capital favourable environment according to the expected gain taxes, nor is a stamp duty on share issues or development of the market. The SIF Law is perhaps the transfers to be paid. best illustration of this point, as it combines the benefits However, in addition to a capital duty of EUR 1,250 to of the Grand duchy’s tradition of investors’ protection, in be paid upon incorporation, some funds are also subject an innovative framework for investments. ■ to an annual subscription tax. Under the SIF Law this annual subscription tax has been fixed at 0.01% of net Please note that the information contained herein is not assets, compared to 0.05 % for funds under the 2002 intended to be a comprehensive study or to provide legal Law. It is however only of 0.01% for UCIs whose advice, and do not substitute for the consultation with exclusive policy is the investment in money market legal counsel required before any actual undertakings. instruments or deposits with credit institutions. Other We undertake no responsibility to notify any change in funds, such as certain institutional cash funds and law or practice after the date of this document. pension pooling funds, are exempted from this subscription tax, no matter under which Law they are set up under. It should be noted that investors may invest in a SIF by means of equity or debt, hence benefiting from an effective tax optimisation, and that there is no debt- equity ratio to be respected in the case of a SIF. In order to avoid double taxation, Luxembourg has EUROPE Hedgeweek guide to setting up Alternative Investment Funds Sep 2008 www.hedgeweek.com | 35 C&S CHEVALIER & SCIALES Law Firm Chevalier & Sciales is a dynamic firm of highly trained lawyers supported by administrative staff and focused mainly on Investment Funds (UCITS and SIFs), Securitizations, Corporate Law and Private Equity. Chevalier & Sciales has been consistently recommended by the major law firm directories such as Legal Week, Practical Law Company and Legal 500 for Investment Funds, Corporate and M&A and Banking and Finance. 51, route de Thionville L-2611 Luxembourg Tel : (+352) 26 25 90 30 Fax : (+352) 26 25 83 88 www.cs-avocats.lu §MEMBER OF THE INTERNATIONAL LEGAL NETWORK WORLDLINK FOR LAW