June 2011

LEGAL EASE: The manager jurisdiction

Simon_TortellThe regulatory emphasis that has been placed 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 Directive (Aifm) and further talk revolves around remuneration and taxation.

As a consequence, whether a professional or   retail investor, the manager must be regulated, and if operating or selling funds in the European Union, must act within the confines of MiFID and/or the Ucits Directive. And, of course, the Aifm, depending on which applies in each case.

On the other hand, the EU regulator has sugared the pill by providing a passport to those funds managed by regulated managers and sold to professional investors. This puts funds promoted to retail and promoted to professional clients on a par and promises to become the next phase in the evolution of a European investment funds industry which, to date, has achieved the highest standards. If the global success of Ucits sold to retail is anything to go by, the potential sucess 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. 

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 the EU are wary of costs and taxation, and some have moved. Where will they go?

Luxembourg’s excellent reputation as a fund domicile was built on the presence of a number of prominent custodian banks which attracted the funds, aided by a rule in the Ucits Directive that required the custodian to be registered in the same country as the fund. Naturally, the beneficial taxation rules applicable to certain types of companies did no harm.

Ireland’s reputation was built on the emergence of the administrator as a key figure in the fund world. The third-party administrator carries out accounting and other investor-related functions and is occasionally part of the custodian group but separate from the latter. The corporate tax rate of 12.5% on profits had much to do with its attraction as a domicile.

In the meantime, Malta became a full member of the EU in 2004. The Professional investor funds (Pif) regime had been a feature of its fund offering long before its entry and, consequently, the funds business was not new to the domicile.

In brief, this regime distinguishes between three types of investor: the experienced (minimum investment $10,000 or €10,000 or equivalent in another currency), the qualifying investor (minimum investment $75,000 or €75,000 or equivalent in another currency) and the extraordinary (minimum investment $750,000 or €750,000 or equivalent in another currency), who are also distinguished depending on expertise and financial criteria.

This has been very successful and will undoubtedly be considered 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 net asset value and diversification rules may be described as quasi-retail, but will be attractive to managers because, unlike the Ucits retail regime, the experienced investor regime is not hampered by strict investment restrictions.

Luxembourg’s system, Specialised Investment Funds (Sif), is promoted to qualified investors with a minimum investment of €125,000. Ireland equally offers the possibility to professional clients to invest in qualifying funds, its minimum is €100,000.

There is, therefore, huge competition for Aifm business, which will be driven by the managers. Recent legislative developments in Malta suggest Malta is looking to compete.

• The introduction of the incorporated cell company: there has always existed doubt whether statutory segregation of sub-funds without proper legal personality would be acknowledged by a court in mainstream jurisdictions which only recognise legal personality positively granted by statute as the manner in which to segregate and ring-fence investors from contagion in other sub-funds of the same legal person (umbrella). Now, the Companies Act (Sicav Cell Companies) Regulations, 2010, has given managers who own an umbrella the possibility to create sub-funds with distinct legal personality.

This also 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. 

• The introduction of the Income Tax Act (Highly Qualified Persons Rules, 2011): the personal taxation of “highly qualified persons” will be charged to tax at a flat rate of 15% on income between €75,000 and €5,000,000.

• The corporate rate of taxation: on distribution of a dividend, the effective rate of taxation of a Maltese company and its shareholder is 5%.

• The performance fee: structured as dividends are exempt from tax.

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, Simon Tortell and Associates, in Malta

©2011 funds europe