July-August 2011

LEGAL EASE: Battle of the domiciles

Simon-TortellThe regulatory emphasis on the oversight of the “manager” since the beginning of the financial crisis, and even before that, cannot be overstated. Much discussion and variances of opinion were expressed during the period leading up to the Alternative Investment Fund Managers (Aifm) directive, and further discussion revolves around remuneration and taxation. As a consequence, whether the investor is a professional or a retail investor, the manager must be regulated, and if operating or selling funds in the European Union, the manager must act within the confines of MiFID and/or the Ucits Directive, and of course the Aifm, depending on which applies in each particular case. On the other hand, the EU regulator has sugared the pill by providing a passport to hose funds managed by regulated managers and sold to professional investors. This puts funds promoted to retail clients and those promoted to professional clients on the same level and promises to become the next phase in the evolution of a European investment funds industry. If the global success of Ucits sold to retail is anything to go by, that of funds managed by Aifm-regulated managers should ensure that the EU investment funds industry will truly secure its pre-eminence in the global stakes.     By all accounts, managers are keen to participate in this development. The problem for some is that they may have to be present in the EU. Others, already in it, are wary of costs and taxation, and some have moved. Where will they go? Luxembourg’s excellent reputation as a fund domicile was originally built on the presence there of a number of prominent custodian banks which attracted the funds to the domicile, aided by a Ucits rule that required the custodian to be registered in the same country as the fund. On the other hand, Ireland’s reputation was built on the emergence of the administrator as a key figure in the fund world. In the meantime, Malta became a full member of the EU in 2004. The Professional Investor Funds (Pif) regime had been a feature of Malta’s fund offering long before entry into the EU, and consequently the funds business was not at all new to the domicile. In brief, this regime distinguishes between three different types of investor: the experienced investor (minimum investment €10,000), the qualifying investor (minimum investment €75,000) and the extraordinary investor (minimum investment €750,000), who is also distinguished depending on his or her expertise and financial criteria. This regime has been very successful and will undoubtedly be considered very carefully by all managers who wish to purvey professional funds in the EU. In particular, the experienced investor regime, which applies leverage and borrowing restrictions of 100% of NAV (net asset value) and diversification rules, may be described as quasi-retail, but will be attractive to managers because, unlike the Ucits retail regime, it is not otherwise hampered by strict investment restrictions. Luxembourg also has a system known as the Specialised Investment Funds for “qualified investors” (minimum investment €125,000). Ireland offers the possibility to professional clients to invest in “qualifying funds” (minimum investment €100,000). There is, therefore, great competition among the top domiciles for Aifm business. Recent legislative developments in Malta suggest that it is looking to compete on a par. For example, the Companies Act (Sicav Cell Companies) Regulations 2010 has given managers who own an umbrella the chance to create sub-funds with distinct legal personality.  This creates a huge possibility for bringing so-called “managed funds”, owned by the investor, to utilise the services of the umbrella, while owning the shares in the incorporated cell.  Also, the Income Tax Act (Highly Qualified Persons Rules) 2011 means a personal flat-rate taxation of 15% will be applied to income between €75,000 and €5,000,000 to people such as chief executive officers, portfolio managers and actuarial professionals. Additionally, on distribution of a dividend, the effective rate of taxation of a Maltese company and its shareholder is 5%. Malta clearly aims to claim a place with the best and offer a credible alternative to managers in search of the Aifm passport. Simon Tortell is senior partner at Tortell Associates in Malta ©2011 funds europe

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