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Invest ‘15
Foreword In preparing this information booklet for your review, the Funds and Investment Services team at ISOLAS has, to the extent possible, sought to provide an analysis of some issues we consider might be relevant to Swiss-based readers. With the recent signing of a memorandum of understanding between the Gibraltar Financial Services Commission and the Swiss Financial Markets Supervisory Authority we now envisage that this will enable the opportunity for a working solution to be provided to Swiss managers. A Swiss manager seeking to gain a passport of his fund or seeking a passport and to provide investment services, will now be able to market to professional investors throughout the EU through a Gibraltar AIFM solution or a Gibraltar MiFid solutuion. In principle, an AIFM management company may be appointed and may now delegate certain portfolio management functions to a Swiss manager (subject to the approval of that manager). Although there are factors to be considered here, at a high level this is the European distribution solution that may now be oered from Gibraltar, providing a fully equivalent solution to that of other European countries. It is hoped that the information contained within this booklet will give you a flavour of what Gibraltar as a jurisdiction has to oer: a European domicile for funds and their managers, an entry point for Swiss External Asset Managers into Europe from a well-regulated, transparent and internationally cooperative jurisdiction with access to financial markets and the right to access the EU single market in financial services.
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Contents Setting up an Investment Firm in Gibraltar
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Issues and Options for Swiss Fund Managers Targeting Europe
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European Lawyer reference series: Gibraltar Hedge Funds - Thomas Reuters
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Comparison chart, Gibraltar EIF & Luxembourg SIF
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Comparison between and Experienced Investor Fund (EIF) & a Private Scheme
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Gibraltar Funds Industry - a complete platform through ISOLAS
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Setting up an Investment Firm in Gibraltar
Introduction
Financial resources
This briefing looks at the regulatory issues that investment firms need to consider when seeking authorisation under the Markets in Financial Instruments Directive (“MiFID”) from the Gibraltar Financial Services Commission (“GFSC”). This briefing also discusses pre-application matters that firms need to consider and the application process itself.
Investment firms will be required at all times to meet a “base” capital requirement of €50,000, €125,000 or €730,000. The base capital amount increases in line with the perceived riskiness of the activities and depends on a number of detailed factors. Such investment firms are also subject to certain risk-based capital requirements, which are dependent on the types of regulated activities they are proposing to undertake.
Regulatory issues to consider The need for authorisation and activities for which permission is needed The performance of investment services or activities as a regular occupation or business on a professional basis shall be subject to prior authorisation by the GFSC. Applying for GFSC authorisation means applying for permission to carry on certain types of regulated activities in respect of certain types of financial instruments. There are three main types of investment firms under MiFID. • Category 1 - Investment firms are permitted to deal as principal, agent and arrange deals for investors, give investment advice and hold/control customer money and assets. • Category 2 - Investment firms are permitted to deal as agent and arrange deals for investors, give investment advice and hold/ control customer money and assets. • Category 3 - Investment firms are only permitted to arrange deals for investors and give investment advice. 4
Investment firms will also be required to perform periodic assessments of the adequacy of their capital and financial resources and document the assessment process and associated conclusions in detail. This assessment is known as an Internal Capital Adequacy Assessment Process (ICAAP). Timing The GFSC has six months from the date on which it receives the completed application to make its determination. The GFSC have established shorter service standards. The current service level standards are: • To provide an initial respond to an application within 8 weeks of a complete application being received. • To provide an in principle decision within 18 weeks of receipt of a complete application.
Fees Category Description Application Fee Annual Fee Category 1 Unrestricted £11,000 £13,188 Category 2 Money-Holders £8,250 £9,980 Category 3 Arrangers £6,050 £7,354 The use of the passport Passporting of financial services is a European Union mechanism, which allows for firms authorised to provide financial services in one jurisdiction to provide them in another without the need for authorisation in this second jurisdiction. This it can do by establishing a branch or providing cross-border services. The benefit of being a MiFID investment firm is the right (subject to satisfying the relevant conditions) to be able to do this. There are, however, procedures to be followed under the rules of the GFSC, such as notifying the GFSC of the intention to exercise passporting rights. Pre-application matters There are a number of issues, which an investment firm needs to consider before making an application. Amongst other things, the investment firm will need to ensure that its business idea will work from a regulatory perspective. In particular, an investment firm seeking authorisation is required to pass the GFSC’s “fit and proper” test. The term “fit and proper” is not defined. However, the term includes amongst other considerations the concepts of honesty, solvency and competence. This extends to the conduct of a business both in its dealings with the public and in the ordering of its internal affairs. An overriding requirement is for the four eyes (two individuals) criterion to be met on a continual basis and that individuals so assigned to fulfil these roles do so over the entire operations of the investment firm. The four eyes criterion need not be satisfied at Board level alone. It is feasible for these functions to be conducted through the senior management of an investment firm. These provisions are designed to ensure that at least two minds are applied both to the formulation and implementation of the policy of the investment firm. Both must demonstrate the qualities and application necessary to influence strategy, day-to-day policies and their implementation, and both must actually do so in practice. Both persons’ judgements must be engaged in order that major errors leading to difficulties for the business as a whole are less likely to occur. Further, they must have sufficient experience and knowledge of the business and the necessary authority to detect and deal with any imprudence, dishonesty or other irregularities in the investment firm. Compliance is a major factor for the GFSC and the investment firm must ensure the establishment and maintenance of effective systems and controls for compliance with all applicable requirements and standards under the regulatory system and for countering the risk of financial crime. All investment firms must have the compliance oversight function and the money laundering reporting officer function. Whilst the GFSC does not oppose outsourcing, it does not encourage it either and the investment firm must be prepared to take the necessary steps in order to mitigate outsourcing risks. The application pack Under MiFID, applications for an authorisation shall be in such form as the GFSC may require. An application pack is required to be submitted with all the relevant documents. The application pack must consist of: • Application Fee • Application Form • Business Plan • Financial projections for the next 3 years
• Individual Questionnaire (for each individual holding a notifiable position) • Body Corporate Questionnaire (for each entity holding a notifiable position) • Trust Questionnaire (if applicable) • ICAAP
Investment management platform There are a number of service providers which can provide investment firms with a turnkey cost efficient solution to setting up an investment management business in Gibraltar through the provision of administrative and operational support in order to assist with some of the burdens. This provides a very good solution to an investment firm as it could be provided with the support functions and resources that will be required for the substance requirements to be met, as well as the required operational and staff support. Finding this staff, or moving staff to Gibraltar is certainly an option in order to meet the MiFID requirements but a simpler option is to outsource the staff, office premises/equipment and IT infrastructure and disaster recovery requirements to one of these service providers. How can ISOLAS help? ISOLAS have a specialist Funds & Investment Services Team which works solely on the structuring and preparation of GFSC applications of all types. Our team routinely assists a broad range of investment firms in preparing their applications for authorisation and developing associated documentation. We typically co-ordinate the completion of the various forms, assist with drafting supplementary documents (including business terms and conditions) and liaise with the GFSC and other parties during the preparation and post-submission stages. 5
Issues and Options for Swiss Fund Managers Targeting Europe
e European Union’s Alternative Investment Fund Manager’s Directive (AIFMD) has provided for comprehensive changes in the regulatory framework that applies to alternative investment funds within the European Union. Indeed, it has even changed the landscape of what an ‘alternative investment fund’ (AIF) actually is as the definition has extended to capture structures that might not have previously been caught. At the same time, the regulatory landscape in Switzerland has continued to evolve and develop at a fast pace. e most relevant question now is whether an AIFMD solution is required for a non-EU manager, to obtain access and distribution to the significant EU market, and if so, what are the available solutions? is can be broken down into two separate stages. 1. What is the effect of AIFMD on a Swiss manager of a Fund (an AIF) that is based in the EU, or outside of the EU both now, and in the future? 2. What are the options for such a manager to gain access to professional investors in the EU market now, and in the future? e current position Example 1 - Option for a licensed Swiss Manager with a Gibraltar or European AIF until 2015 EUROPE
SWITZERLAND
An EU Alternative Investment Fund
A Swiss Manager as the AIFM
e above option reflects the maintenance of the status quo in many circumstances. e revised Swiss Collective Investment Scheme Act (CISA), which is in line with AIFMD may or may not apply to the Swiss manager. Regardless of whether it does apply or not, the result will be as follows: Result 1 - No AIFMD requirements, but no passporting of the Fund within Europe until 2015 at the earliest. Objective of European distribution cannot be met. Note also that under the revised CISA in Switzerland, a co-operation and exchange agreement between FINMA and the home regulator of the foreign fund needs to be in place for the Swiss manager to be authorised, if the foreign law requires such agreements. Example 2 - Option for a licensed Swiss Manager with a Gibraltar or European AIF after 2015 EUROPE
An EU Alternative Investment Fund
SWITZERLAND
A Swiss Full AIFM (FINMA Regulated manager)
Delegated licensed manager
From 2015 it is expected that the passporting system will be extended to permit a non-EU manager to passport their managed AIFs throughout the EU. However, non-EU managers will need to obtain authorisation from the regulatory authorities in a ‘member state of reference’ selected by the manager. It is expected that non-EU managers should be required to comply with all of the provisions of the Directive. Result 2 - is may achieve the result of the manager being able to passport and sell the Fund, but the Swiss Manager will end up meeting AIFMD requirements, without an automatic AIFMD passport, and will need to go through additional mechanisms and requirements in order to achieve the same objective.
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Example 3 - Option for a licensed Swiss Manager with a sub-100 EUR Million Gibraltar or European AIF up to 2018. EUROPE
SWITZERLAND
An EU Alternative Investment Fund (under 100 EUR M)
A Swiss Licensed delegated investment manager
is is a standard business continuity example for a Swiss manager with below 100M of assets (and no limit on the amount of delegated tasks subject to the Fund meeting its own requirements). Result 3 - e manager can continue to do business but should be able to continue to operate within existing private placement regime’s that exist in the individual EU member states in which the interests in the fund are sold. However the manger will become subject to additional investor disclosure and regulatory reporting requirements. e Swiss manager will not have any passporting rights, and it is expected that such private placement regimes will be phased out in 2018. On that basis, this option is unlikely to be a long term solution. Example 4 - Option for a licensed Swiss Manager sub or over 100M EUR and obtaining AIFMD passport. EUROPE A Gibraltar EIF that is compliant as an AIF under AIFMD
A Gibraltar AIFM Solution
SWITZERLAND
A Swiss delegated Licensed investment manager
e availability of the above option is subject to a number of factors. However, there are a number of developing Gibraltar solutions that support the requirement for local substance as AIFM’s that are appointed to the Fund, and with delegation taking place down to the Swiss delegated investment managers who may potentially be Swiss SROs. e extent of the delegation and delegated functions needs to be considered in the context of the AIFM being considered a letter-box entity which is not permitted. Result 4 - is provides a working solution to a Swiss manager seeking to gain a passport and market to professional investors throughout the EU. e solution is available now, and provides a long term planning option for such managers. Managers may consider establishing their own operations or using existing platform providers which act as AIFM management companies meeting the substance requirements. Action points for Swiss managers intending to actively market their Funds to EU investors. ere are a number of points that Swiss managers should take into account when considering the above. e list below is not intended to provide an exhaustive list of considerations, but rather to raise awareness of the active considerations that should be taken into account by Swiss managers intending to actively market to EU investors. •
Calculate your global assets under management (AUM) of all AIFs in accordance with the AIFMD (that is, including leverage) to determine whether the non-EU AIFM is above or below the relevant AIFMD threshold of EUR100 million or EUR500 million (as the case may be).
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Where your global AUM is under the relevant threshold (that is, the non-EU AIFM is a “sub-threshold” AIFM), then it is likely that only limited disclosure requirements will apply; however, you should seek local legal advice to confirm the requirements of each of the territories in which you are intending to market. ere are Member States that require sub-threshold non-EU AIFMs to make a notification or registration where such non-EU AIFMs wish to market their AIFs within that Member State.
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Identify the Member States into which the AIFs are intended to be marketed and understand the rules that apply.
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Seek local legal advice in respect of whether each of the Member States has a private placement regime for the marketing of AIFs. Countries such as France and Italy have private placement regimes, but they are very restrictive and may not be workable for many nonEU AIFMs. Some Member States may not have implemented the AIFMD yet and so the pre-AIFMD fund marketing rules in those Member States might still govern any marketing activity.
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Check whether the Member State regulator has entered into cooperation arrangements with the AIFM’s and, as applicable, AIF’s home countries and that the AIFM’s and AIF’s home countries are not on the FATF blacklist.
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Carry out an analysis of the AIF’s offering documents and amend/supplement such offering documents so that the AIFMD standard of disclosure is met. Consider how to address the ongoing disclosure requirements (e.g. through investor reports).
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Seek local legal advice in each Member State to ensure that any additional local law disclosure requirements are included in the AIF’s offering documents.
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Establish whether, apart from additional disclosure, the relevant Member States impose additional substantive requirements, such as depositary requirements. For Member States which impose depositary requirements (e.g. Germany and Denmark), check if existing entities (e.g. prime brokers, administrators) are able or willing to carry out the relevant functions; new entities may have to be appointed otherwise. Amend agreements with such service providers as needed.
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Obtain advice on the notification or registration process, likely timing and fees for each relevant Member State, and prepare filings accordingly.
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Determine the first date on which the AIFMD Annex IV Report will be expected by the relevant Member State regulator(s).
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Determine the first date on which the AIF’s annual report will be due. Consider in particular the remuneration disclosures and address any issues in relation to such disclosure.
Action points for Swiss managers that intend to rely on reverse solicitation (i.e. managers that do not intend to actively market to EU-investors) • Consider Swiss CISA concept of ‘distribution’ and the definition of a qualified investor (along with how individuals may or may not qualify as ‘qualified investors’ in Switzerland). •
Check whether Member States have local law restrictions or have otherwise given specific guidance on reverse solicitation.
• Have internal systems and policies in place to obtain confirmations of the initial enquiry from investors prior to marketing AIFs to those investors. • Consider how to address the issue of investors with whom the AIFM has a pre-existing relationship (for example, a former investor in the AIFM’s AIFs, or a prospective investor who has been on the AIFM’s contact list since before 22 July 2013). • Review arrangements involving third parties, including capital introduction and investment consultancy or introducer relationships. Assess each type of arrangement on its own facts and merits. • Work with advisors to draft appropriate disclaimers for offering documents, and consider requiring representations from investors in subscription or other documents as to the reverse solicitation. •
Consider whether your website itself contains information that amounts to the marketing of AIFs and address such issues accordingly.
Consider the long-term planning options available to you, and consider the Gibraltar Option • If the Swiss manager wishes (in 2014 and 2015) to market throughout the whole of the EU on the basis of the AIFMD marketing passport, then an EU option will be required, and there is no alternative. To take advantage of this, and the benefits of such a passport after 2015, consider restructuring the business, for example, by establishing a Gibraltar AIFM that manages a Gibraltar or EU AIF which can be marketed to EU investors. Contact us to discuss the requirements for such an application, or to discuss alternative options that may be available through AIFM service providers specifically adapted to facilitate these working models. • Where the Swiss manager does not wish to establish an AIFM in the EU, or consider the alternative AIFM management company solutions that may allow you to manage an EU AIF, then the earliest that the AIFMD passport will become available is late 2015 (assuming ESMA delivers a positive opinion regarding the operation of the passport and the European Commission “activates” the passport for nonEU AIFMs/AIFs). Similarly, this will be subject to the additional requirements set out in outline under Example 2 above. Gibraltar options for Swiss External Asset Managers - MIFID We appreciate that not all Asset Managers manage their clients through collective investment schemes and may not be as closely considering the implications of AIFMD. However, one of developing and current issues within Switzerland relates to how a Swiss manager can provide cross border services from Switzerland, into the EU. Historically, a Swiss manager may have had an existing relationship with a number of clients from within Switzerland, but may today need to maintain those relationships by travelling into and throughout the EU, visiting clients while offering investment services that are captured by European regulatory requirements. Within Europe, the Markets in Financial Instruments Directive (MiFID) has been an essential foundation of capital markets regulation in Europe since its implementation in November 2007. Today, in order to facilitate onshore and cross -border services that can be rendered from Gibraltar, across the EU, ISOLAS have worked with a number of service providers in developing platforms that seek to provide such solutions. e needs of each client may of course be different, but we would recommend that you contact us to explore options in this area. Gibraltar’s position within Europe is quite unique, and although services provided from Gibraltar are not subject to VAT (which is not applicable in Gibraltar) a Gibraltar MiFID Financial Services firm is able to passport and offer its services throughout the EU, but headquarter itself within Gibraltar which enjoys a low taxation basis at the corporate level (10%) and personal level. Please contact us for further information. 8
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European Lawyer Reference Series: Gibraltar Hedge Funds - omson Reuters
1. REGULATION OF FUNDS 1.1 Funds domiciled in the jurisdiction 1.1.1 Brief overview of fund regulatory regime (i) Name of regulator Gibraltar’s historical link to the United Kingdom is clear. However, its position as a self-governing territory, with its own elected government, means that Gibraltar law is enacted independently of the United Kingdom. Although Gibraltar maintains an independent tax status it is also a member of the European Union and has been since the accession of the United Kingdom on 1 January 1973 by virtue of Article 229(4) of the treaty establishing the European Economic Community (as amended). As such, it is positioned as a small, but alternative fund domicile within the European Union and is quite unique. Gibraltar is required to transpose all European directives and as such, operates internationally recognised, and EU standard Anti-Money Laundering and Organisation for Economic Co-operation and Development (OECD) conventions. Gibraltar investment firms are granted full EU passporting rights and Gibraltar will be required to transpose the Alternative Investment Fund Managers Directive (AIFMD) allowing Gibraltar ‘AIFMs’ to establish Gibraltar (EU) funds and operate within the scope and passporting framework of the Directive. Neither Gibraltar AIFMs, nor Gibraltar funds will be considered to be ‘third country’ for the purposes of AIFMD. e backbone of financial regulation anywhere in the world is a sound and clear legislative framework. In Gibraltar, the Financial Services Commission Act 1989, introduced Gibraltar’s first formal financial regulatory body. An updated version of the Act was published in 2007 and contains the legal framework under which investment funds are regulated from the initial start-up phase. e Financial Services Commission (the FSC) is a statutory body corporate, with a governing body made up of Commission members. It consists of the Chief Executive as ex-officio member and seven other persons, with at least two of these persons having significant experience of regulation and supervision of finance services business in another jurisdiction. e FSC’s objective is to provide financial services regulation in an effective and efficient manner in order to protect the public from financial loss and enhance Gibraltar’s reputation as a quality financial centre. (ii) Statutes/policies under which funds are regulated e Financial Services (Collective Investment Schemes) Act 2011 (the Act), the Financial Services (Collective Investment Schemes) Regulations 2011 and Gibraltar the Financial Services (Experienced Investor Funds) Regulations 2012 (the EIF Regulations) are the principle pieces of legislation under which funds are regulated in Gibraltar, and form the statutory footing for the creation of experienced investor funds, private funds, UCITS funds and nonUCITS retail funds. A ‘collective investment scheme’ is defined by the Act as any arrangement with respect to property, the purpose or effect of which is to enable persons taking part in the arrangement, whether by becoming owners of the property or any part of it or otherwise, to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or
sums paid out of such profits or income. e arrangement must be such that the participants do not have day-to-day control over the management of the property subject to the arrangement, whether or not they have the right to give directions and must possess one of the following characteristics: •
the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;
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the property is managed as a whole by or on behalf of the operator of the scheme.
ere is no requirement within this definition for the application of any principles of risk spreading, and such principles do not apply in law to the operation of the Experienced Investor Fund regime in Gibraltar. However, the Collective Investment Scheme Regulations which transposed into Gibraltar law the Directive 2009/65/EC (UCITS IV) do include the requirement of the manager to ensure a prudent spread of risk, and the Gibraltar law directly transposes the UCITS investment restrictions provided for in the Directive and also replicated in other European jurisdictions. e EIF Regulations were updated in 2012 with the aim of aiding and maintaining the growth of Gibraltar’s Experienced Investor Fund (EIF) which is the jurisdiction’s most popular fund model, aimed at experienced or sophisticated investors. Gibraltar’s EIF regime was introduced originally in 2005 and, as such, Gibraltar was one of the first movers to establish such a regime, which has subsequently become popular in Europe. In accordance with the EIF Regulations, a fund may be established as an EIF if it is a collective investment scheme and: •
it is established as a company formed or re-domiciled under the Gibraltar Companies Act; or
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as a unit trust established under and governed by Gibraltar law, the trust deed of which stipulates that the trust is subject to the jurisdiction of the Supreme Court of Gibraltar; or
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as a protected cell company; or
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as a limited partnership under the Limited Partnership Act; or
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in any other form recognised under the law of Gibraltar that may be approved by the FSC, either generally or with respect to a particular fund (in order to deal with specific re-domiciliation scenarios or events); or
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as a legal entity established in a European Economic Area State in a form recognised under the law of Gibraltar that may be approved by the FSC.
e fund must also comply with the EIFs requirements set out in the EIF Regulations which are dealt with in more detail below. Gibraltar’s hedge fund regime has been made more attractive through the existence of certain legislation relating to netting and insolvency setoff. While Gibraltar does not have a dedicated netting statute, Gibraltar’s new Insolvency Act (which has been published but requires a Legal Notice to bring it into force) does allow for insolvency set-off. Where close out netting is in connection with a financial collateral arrangement, the netting provision takes effect regardless of whether a party to the arrangement is subject to insolvency proceedings. By virtue of the new Insolvency Act, 9
provisions of the Financial Collateral Arrangements Act 2004 (which transposes into Gibraltar legislation Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements) prevail over conflicting provisions of the Insolvency Act. is would apply to situations where a broker takes security over a hedge fund’s portfolio as collateral. Subscribers to a fund will undergo due diligence and client acceptance procedures routinely carried out by the fund’s administrator. e FSC has issued a set of guidance notes which set out the requirements in respect of systems of controls that firms need to have in place in order to prevent the misuse of the financial services sector for criminal activity. e notes reflect the revised 40+9 Financial Action Task Force (FATF) recommendations as well as the provisions of the 3rd Money Laundering Directive.
2 Almost half of Gibraltar’s EIFs are structured as hedge funds investing in tradable securities, commodities and currencies. e remaining funds mainly run real estate, private equity and fund of fund strategies. Non vanilla or exotic investment strategies make up 9% of EIFs, with approximately one in seven funds employing a mixed strategy.
(iii) Statistics on number of funds established and their regulatory classification as at 31 December 2012
No person can be accepted as a participant of an EIF without providing written confirmation that he is an experienced investor within the meaning specified in the Regulations and that he has received and accepted the investment warning required by the Regulations to be contained in the fund’s offer document. is declaration is typically contained within the subscription agreement for units in the fund.
Ten licensed fund administrators in Gibraltar administer roughly £3 billion of assets in approximately 150 local and foreign funds. It should be borne in mind that funds established as protected cell companies are counted as one fund in Gibraltar despite being able to establish a number of separate cells or sub-funds beneath them. Similarly, private funds are not included within the totals above as they are effectively unregulated private schemes. e new AIFM regime will require an additional layer of reporting to the regulator as such scheme will be caught by the definition of an alternative investment fund (AIF). Gibraltar fund administrators comprise accountancy firms, specialist fund administrators and corporate service providers. Fund administration in Gibraltar has enjoyed a sharp increase in the number of funds and capital managed since the sector’s humble beginnings in 2006.
1.1.2 Expert/professional investor fund regimes (i) Requirements to qualify for the regime e EIF regime has enjoyed considerable success since its introduction in 2005. As with other jurisdictions the EIF is targeted at investors who are experienced enough to assess the risks and be able to assess the offer being made to them to invest in the fund. e bulk of this chapter relates to the existing EIF regime in place in Gibraltar.
1 Source: Gibraltar Funds and Investments Association (GFIA) Investor Guide 2013 2 Source: Gibraltar Funds and Investments Association (GFIA) Investor Guide 2013
e EIF Regulations governing the establishment of an EIF are structured to allow a flexible regime where the onus is on the counterparties to the scheme, all of whom are regulated. e Gibraltar regulator has, for example, introduced a licensing regime for EIF directors to ensure the suitability of such directors to act in their capacity as licensed fund directors. e industry has also recently (2013) issued a Corporate Governance Code for the directors of Gibraltar Collective Investment Schemes in consultation with industry and the regulator that is intended to add weight to the corporate governance framework for funds in Gibraltar. Similarly, the fund administrator, depositary and auditor must all be regulated. In terms of investor qualification for the regime, the EIF Regulation define an experienced investor is a person or body who, at the time of the investment, falls into one of the following categories:
1 Gibraltar EIFs invest globally in a wide range of asset classes.
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a person or partnership whose ordinary business or professional activity includes, or it is reasonable to expect that it includes, acquiring, underwriting, managing, holding or disposing of investments, whether as principal or agent, or the giving of advice concerning investments;
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a body corporate which has net assets in excess of €1 million or which is part of a group which has net assets in excess of €1 million;
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an unincorporated association which has net assets in excess of €1 million;
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the trustee of a trust where the aggregate value of the cash and investments which form part of the trust’s assets is in excess of €1 million;
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an individual whose net worth, or joint net worth with that person’s spouse, is greater than €1 million, excluding that person’s principal place of residence;
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a participant who has a current aggregate of €100,000 invested in one or more EIFs;
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a participant who invests in a minimum of €50,000 in an EIF and who has been advised by a professional adviser to invest in the fund and the fund’s administrator has received confirmation of such advice;
an EIF. Each EIF must pay an initial registration fee of £2,500. is fee must be paid at the same time as the fund files all the documentation required for registration with the FSC (in most cases post launch).
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a participant who is a professional client, as defined under the Financial Services (Markets in Financial Instruments) Act 2006;
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a participant in a fund that has re-domiciled to Gibraltar where the FSC has permitted the inclusion of such participant either in An annual fee of £840 is then payable within 28 days from 1 April respect of a specific fund or generally in respect of funds or a in any financial year. category of funds from a certain jurisdiction.
A few of the above were added in the recent 2012 update to the Regulations. Of particular note is the last section which facilitates the redomiciliation of funds into Gibraltar where the investors in such fund may have qualified as experienced/professional/expert in the territory of the re-domiciling fund, but may not have qualified under the EIF Regulations in Gibraltar. Similarly, the €100,000 minimum was extended to capture investment across one or more EIFs and a reduced €50,000 minimum was included for professionally advised investors. e minimum €100,000 investment can also be dispensed with where the participant can show that any of the other criteria have been met (each of the criteria being mutually exclusive). e inclusion of the definition of a professional investor under MiFID was also intended to capture and qualify a larger potential investor base and to provide compatibility with a number of distribution regimes, and with AIFMD.
Applications to obtain a licence as an EIF director need to be accompanied by a fee of £250, while each EIF director needs to pay an annual fee of £250 within 28 days from 1 April in any financial year. (v) Documents required for filing In order for an EIF to be established in Gibraltar, the fund is required to file the following documents with the FSC: •
a written notification registering the fund as an EIF in the approved form with the £2,500 registration fee;
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a copy of the fund’s private placement memorandum (PPM) or offering document or prospectus;
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a legal opinion from a Gibraltar lawyer of at least five years standing, that certifies that the fund complies with the applicable laws and EIF Regulations;
(ii) Registrations, permits, licences required
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the fund’s constituting documents; and
EIFs are, of course, structured as collective investment schemes. e Act determines that establishing, acting as the manager (or administrator) of, or otherwise as the operator of, or winding up a collective investment scheme is a restricted activity. e Act prohibits carrying out such restricted activity without authorisation. at is, unless the person holds an authorisation granted by the FSC with respect to that restricted activity, or the person is deemed to be authorised by any provisions of the Act or the Regulations.
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any other documents requested by the FSC.
In essence, a fund is established in Gibraltar through the drafting and approval of the relevant documentation by legal counsel, along with input from the fund directors, administrator, investment manager and other service providers throughout the drafting and establishment process. e FSC does not review nor comment on the documentation prior to the establishment of the EIF (see below under ‘Regulatory timescales’ for further information). is provides the promoter with greater control over the process, and a very fast time to market.
As referred to above, the framework of the regime requires that the EIF appoint two licensed EIF directors, as well as a licensed and regulated administrator, depositary (in the case of an open-ended fund), and auditor. As such, the FSC are satisfying themselves that the EIF and its service providers are fit and proper to provide the services that they provide to the EIF, through the licensing regimes applicable to those service providers.
Following an EIF registration the FSC may request further documentation or, on certain occasions, amendments to the fund’s offering document. ere is, however, no regulatory downtime to the authorisation of an EIF.
(iii) Name approval
(vi) Regulatory timescales
e Act imposes a control over use of names, and in particular for an EIF that is using a restricted word or phrase. On this basis, a request for name approval of a company with the name ‘fund’ in its name needs to be sent to the FSC, and prior written consent obtained before the company is registered with Companies House. e following details need to be provided to the FSC at the name approval stage:
ere are two unique options available to EIFs in Gibraltar. ese are that documents may be filed either:
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promoters/principals;
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proposed launch date;
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name of directors and EIF authorised directors;
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within 10 (working) days of an EIF being established (that is, after the event) notifying the FSC of the establishment of the fund; or
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at least 10 (working) days before the fund is established to enable the fund to be registered with the FSC prior to being launched.
ese two options are established in law under the EIF Regulations. efirst option represents one of the main benefits of Gibraltar’s existing regime. Following recent changes in other European • fund administrator; jurisdictions, it is now the only domicile in Europe that offers the pre-launch authorisation regulatory routes for the fund. at is, that • depositary/bankers; the promoter is able to fully control its own timeline to launch and • whether the fund is to be set up as an open-ended or closedthe fund may be launched (and begin raising capital) prior to ended structure; receiving regulatory approval or being required to file any form of application with the regulator. e fund is, of course, required to file • proposed investment objective/strategy. the relevant documents with the regulator within 10 working days (iv) Licence fees - initial and ongoing post launch if such a route is followed. is is permitted on the basis that the framework in place in Gibraltar requires the counterparties e Experienced Investor Funds (Fees) Regulations 2010 (the Fees Regulations) set out the current applicable fee schedule applicable to to the fund to be regulated, and that the requirements for 11
compliance with the regime, set out in the EIF Regulations, is also complied with. e fund is then able to submit an opinion with its notification (not application) to the regulator from a lawyer of at least five years’ professional standing, confirming that the fund has met all the structural and legal requirements set out in the Act Gibraltar 128 european lawyer reference series and the Regulations. Certain documents in relation to the EIF must also be submitted with the opinion to the FSC for registration within 10 working days of its launch or, if prior approval is specifically preferred, at least 10 days prior to launch, which is a separate option available. e majority of Gibraltar funds opt for the post-authorisation route, however, alternative or exotic fund structures and strategies are generally discussed with the regulator ahead of time. Once launched, the fund may immediately begin its activities, including promotion, capital raising and investing. A launch meeting marks the fund’s authorisation and launch. As part of the launch meeting, it is determined that the fund meets all relevant provisions of the EIF regulations and the fund is deemed authorised. At launch the fund’s initial board meeting usually also takes place and the operator agrees that all the necessary contracts are completed allowing the fund to launch and commence operations under the EIF regime. is is effectively a fast track notification process for EIFs, which makes it possible to establish the fund within a short timeframe. In the event that the promoter decides to notify the FSC in advance of the launch of the fund, the FSC may, no later than 10 days of receipt of the notification, either issue a written notice to the applicant requiring such further information, documents and explanations as it may require or issue a written notice to the applicant requiring such changes as it considers necessary to comply with the relevant provisions of the Act and the Regulations. e FSC may also simply issue a written notice to the applicant confirming that the EIF is deemed to be authorised. If no response is received, the fund shall be deemed to be authorised 10 days after the delivery of the notification. If the FSC issues a written notice requiring further information or a written notice requiring changes to be made to comply with the Act or the Regulations, the fund shall not be considered authorised until the FSC is satisfied that the requests of their written notice have been satisfactorily met and issues a written notice to the applicant confirming that the fund is authorised. (vii) Content requirements for offering memorandum
•
the full name and address of the persons who manage and control the EIF (including their relationship to the EIF), the administrator of the EIF, the depositary or trustee of the EIF, the investment manager of the EIF, if any, and any other person or persons performing any function in relation to the EIF;
•
in the case of a fund established as a company, details of its registered office, the place and date of its incorporation and details of its share capital;
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details of the manner in which each of the service providers specified above may be appointed and replaced;
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the name and address of the auditor of the EIF, and the legal adviser to the EIF;
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any conflicts of interest that may exist in relation to the EIF;
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the investment objective and investment strategies to be employed by the EIF, including the EIF’s approach to borrowing and gearing, and any investment or borrowing restrictions applicable to the EIF;
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the manner in which changes likely to have a material effect on participants may be made to the EIF and notified to the participants;
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the basis upon which dealing in the EIF is to take place, if applicable;
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in the case of a closed-ended EIF, the basis upon which any subsequent offerings in the EIF may be made, and the manner, if any, in which the units in the EIF are to be cancelled and redeemed;
•
the basis upon which the value of the EIF is to be calculated and the basis upon which the value of units in the EIF is to be determined;
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the manner in which units in the EIF are to be created, issued and paid for and, in the case of an open-ended fund, cancelled and redeemed;
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the manner in which meetings of unit holders are to be convened and managed generally and the manner in which voting by unit holders is to be conducted;
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the fees, charges and expenses payable from the property of the EIF;
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the address at which the most recent audited financial statements of the EIF may be inspected;
An EIF is required to issue an offer document that complies with the provisions of the EIF Regulations.
• e document must contain such information as would reasonably be • required and expected by participants, and potential participants, and their professional advisers for the purposes of making an informed judgment about the merits of participating in the EIF and the extent of • the risks of participating in the fund. e FSC’s responsibility is not to separately check the documentation for compliance with the requirements. Any breaches subsequently identified may result in the • fund ceasing to qualify as an EIF. e FSC places great importance on the declarations/warranties made by the directors of the fund and the legal opinion issued that confirms compliance with the EIF Regulations. e offer document of an EIF must contain the following information: •
12
an explanation of the structure of the EIF, including brief particulars of the constituting documents of the EIF and details of how to obtain complete copies of the constituting documents;
•
the address, where the register of unit holders can be inspected; the manner in which any voting rights in underlying assets held by the EIF will be exercised; the arrangements for the safe custody of the assets of the EIF, including disclosure, if applicable, of prime broker arrangements; in the case of an umbrella fund or a protected cell company, as the case may be, details of the ‘ring-fencing’ of assets within subfunds, or, if there is no such arrangement, a statement to the effect that ‘in the event of the experienced investor fund being unable to meet liabilities attributable to any particular sub-fund out of the assets attributable to such sub-fund, the excess liabilities may be met out of the assets attributable to the other sub-funds’ and an explanation of the manner in which such liabilities may be apportioned; a statement to the effect that ‘further information in relation to
the regulatory treatment of experienced investor funds in Gibraltar may be obtained from the Gibraltar Financial Services Commission’. •
details of the relevant authorisations to act of each of the service providers;
• the process for notification and remedy of breach of any investment or borrowing restrictions applicable to the EIF; • the manner in which errors in valuation likely to have a material effect on participants will be dealt with and notified to the participants;
there are no such limits introduced by law. (ix) Requirements for local/non-local service providers As would be expected, a director or controller of an EIF is able to delegate functions to an administrator, investment manager, investment advisor or depositary of the fund. Taking each of these in turn, the following requirements apply: Administrators
Prior to the introduction of the 2012 EIF Regulations an administrator of a Gibraltar EIF was itself required to be licensed and regulated in Gibraltar under the Act. Changes to 2012 EIF • the name and address of the EIF’s agent for service (if any); Regulations mean that foreign fund administrators may now be approved as administrators of Gibraltar EIFs subject to being able to • disclosure of who manages the investment activity of the fund; meet certain conditions. e foreign administrator must be • details of the directors’ experience and qualifications; established in a jurisdiction where it is regulated in accordance with a legislative and regulatory regime that provides at least equivalent • details of any intention to delegate functions to an administrator, protection to the regime in Gibraltar. e foreign administrator is investment manager, investment advisor or depositary. required to apply in advance to become approved, either generally, Every offer document must also contain the following statement: or in respect of a specific fund (for example, in relation to a redomiciliation into Gibraltar). As well as meeting the requirements ‘e (directors of the company/trustee/person responsible for the management and control in any other form approved for the purpose by set out above, the administrator will typically be required to demonstrate sufficient ‘substance’ in its home territory. Assets under the Authority as permitted by regulation 7) have/has taken all administration exceeding €2 billion will be a strong indicator that reasonable care to ensure that the facts stated in this document are true the sufficient substance requirement is met, although this is not a and accurate in all material respects, and that there are no other facts standalone test. Approved administrators are then listed on the FSC the omission of which would make misleading any statement in the website, although they are not licensed or regulated by the FSC in document, whether of facts or of opinion. e (directors/trustee/person Gibraltar. e foreign administrator is also required to appoint an responsible for the management and control in any other form approved agent for service in Gibraltar. e local agent will act as a point of for the purpose by the Authority as permitted by regulation 7) accept contact locally for the FSC and other stakeholders of the fund. responsibility accordingly.’ Depositary Nothing in any of the constituting documents of an EIF may exclude the jurisdiction of the courts of Gibraltar with respect to an action concerning the EIF. In the event that an offer document is issued in a language other than English a statement should be included in both the original offer document and the translation stating which version will take precedence in the event of a dispute. A copy of an English language version of the document will need to be lodged with the FSC. e offer document of every EIF must also contain the following investment warning in a prominent position: ‘is [fund] has been established in Gibraltar as an experienced investor fund. It is suitable only for those who fall within the definition of “experienced investor” contained in the Financial Services (Experienced Investor Funds) Regulations, 2012. Requirements which may be deemed necessary for the protection of retail or nonexperienced investors, do not apply to experienced investor funds. By acknowledging this statement you are expressly agreeing that you fall within the definition of an “experienced investor” and accept the reduced requirements accordingly. You are wholly responsible for ensuring that all aspects of [this fund] are acceptable to you. Investment in experienced investor funds may involve special risks that could lead to a loss of all or a substantial portion of such investment. Unless you fully understand and accept the nature of [this fund] and the potential risks inherent in [this fund] you should not invest in [this fund]’. (viii) Restrictions on investments/leverage ere are no investment or leverage restrictions for an EIF. e offer document should be transparent regarding what the EIF will invest in and should set out the specific risks for that type of investment(s) as well as stating whether leverage will be used and if so to what extent. EIFs will therefore only be subject to the investment or leverage restrictions that are set out in their offering document but
An EIF must have a depositary unless: (i) it is a closed-end fund; or (ii) the FSC makes a determination to that effect. EIFs may work with any authorised depository or broker that is deemed acceptable to the FSC. Usually a credit institution based in Gibraltar will be appointed although unlike some other European jurisdictions it is not a legal requirement for such depositary to be located or registered in Gibraltar. e Depositary (wherever based) must be authorised to act as a collective investment scheme depositary in the territory that it is based. Directors An EIF requires two directors who hold Class VIII licences issued under the Financial Services (Investment and Fiduciary Services) Act, and who are authorised to act as EIF directors. Application for such a licence requires the applicant to submit an individual questionnaire and to accompany this with a summary detailing their fund-related experience and the prescribed £250 application fee set by the Fees Regulations. e FSC would expect fundrelated experience to include, but not be limited to, involvement providing significant services to a fund, oversight of fund-related activity or a position of responsibility within a fund. On the basis that the EIF has appointed the two licensees, a third, or any number of additional directors may be appointed without being subject to approval or regulation by the FSC. It is of course expected that the licensees are themselves satisfied with the fitness and probity of any additional members of the board, and that the board and its individual members are able to demonstrate a collective skill set that allows them to fully understand the activity of the EIF. In terms of the number of directors on a board, the board is expected to be of sufficient size and expertise to oversee the operations of the fund. e Gibraltar Code of Conduct for fund directors recommends a 13
minimum of three directors, with ideally a majority of the board being independent of the investment manager and/or promoter. Investment manager An EIF may be managed by a third party investment manager or ‘selfmanaged’ by its board. ere are no minimum capital or solvency requirements for the EIF in either event. e investment manager or adviser may be from any jurisdiction provided that it complies with and is authorised or otherwise legally entitled to provide such services in the territory in which it is based. Where no investment manager is appointed, the directors assume responsibility for the funds investments. Typically the board will arrange itself so that the day-to-day management function is delegated to an ‘investment director’ who is then subject to the supervision and oversight of the other members of the board. No separate investment services licence for this function is required in addition to the licence issued to the EIF itself. Auditor An EIF is required to undergo an annual audit by an auditor approved under the Financial Services (Auditors) Act. Most global audit firms have an operating presence in Gibraltar. (x) Ongoing filing/consent requirements e EIF Regulations provide that details of material changes should be notified to the FSC within 20 (working) days of the change taking place. It is the responsibility of the EIF’s controller to ensure that all material changes to information originally provided are notified to the FSC. e term ‘material change’ is typically defined to include a change that affects the rights of the holders of units in the Fund, such as changes to any material relationships the Fund holds, changes to the structure of the Fund, or changes to investment objective, strategy or restrictions applicable to the Fund. Similarly, any change in relation to fees applicable to an investor would also be considered material. In accordance with the Regulations, an annual return must be submitted to the FSC by the controller in respect of each EIF. Audited financial statements are also to be submitted within six months of the fund’s year end, together with a form containing the EIF’s general compliance and statistical information. 1.1.3 Other regimes relevant to hedge funds, eg, fast track regime for listed funds, private placement regimes, selfcertificate regimes (i) Private schemes A private scheme, or a ‘private fund’, is characterised within the Financial Services (Collective Investment Schemes) Regulations 2011 (the CIS Regulations) as a collective investment scheme that is not listed on a stock exchange and is not authorised to have more than 50 investors. Such schemes do not require authorisation by, or registration with, the FSC, and are therefore considered unregulated. However, it should be noted that moving forward, these schemes will be caught (as collective investment schemes) by the definition of an Alternative Investment Fund (AIF) under AIFMD. is will introduce a series of reporting requirements to the FSC, although the private scheme will itself remain unregulated. e main characteristic of a private scheme is that the promoter or agent of may only offer the fund to an identifiable category of persons whose number is fewer than 50. In general terms, an identifiable category could be the friends, family or close clients of a promoter of the fund. A private scheme must remain private for at least one year following the offer date. As such, it can only be 14
‘converted’ into an EIF (if required) after a one-year period. ere can be a number of uses for the private scheme, typically as an incubator for an EIF or to formalise arrangements between small groups of investors who are pooling assets and delegating control. ere are no restrictions under the CIS Regulations on the type of vehicle which can be used to establish a private scheme. Structures commonly used for private schemes are private limited companies, unit trusts and limited partnerships. e common practice in Gibraltar is to establish a private fund as a Gibraltar limited company, issuing two share classes; ordinary shares which carry voting rights, and redeemable preference shares, which are valued in accordance with the investments made by the fund, but have limited voting rights. As an unregulated scheme, there are no statutory requirements for the production of audited accounts or filings (although if established as a Gibraltar private limited company, it will be required to file annual returns to the Registrar of Companies in accordance with the Gibraltar Companies Act). However, industry practitioners in Gibraltar ordinarily insist on these elements as a matter of investor protection and good corporate governance. Furthermore, an offer to invest in a private scheme must include sufficient information to allow the potential investor to make a reasonable evaluation of the offer. is requirement is typically met through the production of an offering document. ere are also no requirements for licensing of directors on the board nor any requirement to appoint an investment manager. e schemes may be internally managed by their board. In addition, as long as the appointed directors follow the investment objectives as stated in the offering document of the private fund, there are no statutory investment or leverage restrictions applicable to it other than the restriction on the limited nature of promotion. ere are also no statutory restrictions on the type of investor who can participate or the minimum investment. e units of private schemes may not be listed on a stock exchange. (ii) UCITS and non-UCITS retail schemes e CIS Act also provides possibilities for Undertakings for Collective Investment in Transferable Securities (UCITS) and nonUCITS retail schemes. UCITS, when combined with our EU membership and efficient tax system can make Gibraltar an appealing jurisdiction for the domiciling of UCITS funds and UCITS management companies. A UCITS management company is able to passport its services from the member state where it is domiciled to another member state where it wishes to provide services. A non-UCITS retail scheme is a non-passportable retail scheme licensed and regulated by the FSC. (iii) Prospectus Act 2005 Although the Prospectus Act 2005 which transposes the Prospectus Directive 2003/71/EC into Gibraltar law does not create a fund regime, it does allow for the establishment of closed ended collective investment undertakings that are able to offer their interests of securities. Such a fund must submit a prospectus in accordance with the provisions of Schedule 5 of the Prospectus Act, and submit this to the FSC. e FSC is then required to notify the fund of its decision for the approval of such prospectus within 10 working days. ere are no legal requirements for the appointment of an administrator, depositary or other party, although the fund is required to be structured in such a way as to be able to issue securities that fall outside the exempted securities covered by the Act.
Once approved, the prospectus (along with any supplements) will be 2. Taxation valid for public offer provided the competent authority of each host 2.1 Taxation of the fund member state is notified. 2.1.1 Income tax and capital gains 1.2 Regulatory treatment of funds not domiciled in the Income tax in Gibraltar is levied on a territorial basis, under the jurisdiction ‘accrued and derived in Gibraltar’ principle. In most cases Gibraltar 1.2.1 Restrictions on/consequences of holding board meetings in does not levy tax on investment or passive income wherever derived. thejurisdiction Gibraltar does not typically tax dividends, interest, royalties from intellectual property, income from debentures or capital gains, ere are no restrictions on board meetings for foreign funds being making Gibraltar an attractive alternative for foreign investors. e held in Gibraltar. Taxation principles relating to mind and management and permanent establishment will be relevant vast majority of Gibraltar funds undertake activities which fall considerations. outside the Gibraltar tax regime on general principles, either because their income consists of: 1.2.2 Licensing requirements if local service providers are appointed (1) exempt investment income; Local service providers that provide investment management, fiduciary, custody or administration services will fall within Gibraltar regulatory and licensing regimes, regardless of the domicile of the fund. A foreign domiciled fund will not be subject to licensing requirements in Gibraltar simply by virtue of the fact that a Gibraltar service provider is appointed (unless it is actively marketing in Gibraltar). 1.2.3 Ability to market fund interests in the jurisdiction A fund established in any jurisdiction wishing to market itself in Gibraltar must file the relevant notification with the FSC. In the case of a UCITS established elsewhere in the EU the relevant notification is forwarded by the home supervisor of the UCITS in question, and the home supervisor will then contact the FSC accordingly. ere is a one-off recognition fee of £400 and no annual fee. As part of the notification Part B of Commissions Regulations (EU) No584/2010, transposed through the Financial Services (Collective Investment Schemes) (Miscellaneous Provisions) Regulations 2011 in Gibraltar. A local agent must also be appointed and expected to act as a contact point for local investors, and to receive notices and correspondence from the FSC. It is expected that a similar notification regime will apply to the distribution of alternative investment funds to professional investors under AIFMD. Annex III of AIFMD sets out the documentation and information that such notification will need to contain. e position will be different for non-EU AIFM’s which may market subject to the conditions of Article 42 of AIFMD which imposes: •
reporting and disclosure requirements;
•
appropriate cooperation arrangements for the purposes of systemic risk oversight and in line with international standards be in place between the FSC, the competent authorities of the EU AIFs concerned and the supervisory authorities of the third country where the non-EU AIFM is established and, in so far as applicable, the supervisory authorities of the third country where the non-EU AIF is established, in order to ensure an efficient exchange of information that allows competent authorities of the relevant member states to carry out their duties in accordance with the AIFMD; and
•
that the third country where the non-EU AIFM or the non-EU AIF is established is not listed as a non-cooperative country and territory by FATF.
(2) trading income from a trade conducted outside of Gibraltar or income which accrues and derives outside of Gibraltar; or (3) capital gains on the disposal of assets. erefore no special exemptions are required in the case of most funds. e general provisions of Gibraltar tax law are such that a fully taxable company or other entity undertaking international business does not suffer tax in Gibraltar. is is significant because a fund structured as a fully taxable company should be able to benefit from the Parent and Subsidiary Directive 90/435/EEC (PSD) and the Interest and Royalties Directive 2003/49/EC (IRD), whereas exempt vehicles in many cases are denied such benefits. erefore, there should be no withholding taxes on dividends paid by a subsidiary in another EU member state to a Gibraltar parent company. Also there should be no withholding taxes on royalties paid from a group company to a Gibraltar company. It is possible to obtain a specific certificate of exemption from income tax under Rule 3(17) of the Income Tax (Allowances, Deductions and Exemptions) Rules, 1992, where a fund is a licensed EIF, but in most cases this should not be necessary. e vast majority of Gibraltar funds undertake activities which fall outside the Gibraltar tax regime on general principles, either because the income consists of exempt investment income, income from a trade conducted outside Gibraltar, income which accrues and derives outside Gibraltar, or capital gains on the disposal of assets. 2.1.2 Corporate tax A Gibraltar fund may, however, obtain a confirmation from the Gibraltar Commissioner of Income Tax that the fund is not subject to corporate tax on its investment income. Gibraltar corporate tax is levied at 10% although most investment funds are, in any event, unlikely to be liable for corporate tax in Gibraltar as set out above. 2.1.3 Double tax treaties Gibraltar is a well-regulated onshore finance centre located within the European Union. Similarly to many other niche international finance centres, Gibraltar does not have bilateral double tax treaties in place with other countries. e Government of Gibraltar is currently investigating the feasibility of implementing certain double tax treaties. Notwithstanding this, Gibraltar funds can make use of the PSD and IRD from many jurisdictions, including Luxembourg, which is particularly popular. PSD provides for no withholding taxes on dividends payable by a subsidiary in an EU member state to a Gibraltar parent company. IRD provides that there should be no withholding taxes on interest or royalties paid from a group company to a Gibraltar company. is is particularly advantageous in private equity fund structures investing on a pan-European basis. 15
2.1.4 Tax Information Exchange Agreements e Government of Gibraltar has signed Tax Information Exchange Agreements (TIEA) with 26 countries based on the Organisation for Economic Cooperation and Development (OECD) model. Under each TIEA, the Gibraltar Government will be required to respond to the relevant country’s Government’s request for information relating to tax which could include such information as details of beneficial ownership of companies, settlors and beneficiaries of trusts and so on. 2.1.5 VAT While it is within the European Union, Gibraltar is outside the common customs area and the VAT area. is would mean that an investment firm or fund established and operating in Gibraltar and providing services from Gibraltar would not be subject to VAT which is simply not applicable. ere are many situations where the VAT saving can provide a material benefit to a business, or where services or operations may be offered from Gibraltar to take advantage of this. is compares very favourably to many other EU fund jurisdictions. 2.2 Taxation of investors not resident in the jurisdiction ere are no withholding taxes in Gibraltar on dividends, capital gains or interest except in the limited case of certain interest payments to UK resident individuals under the EU Savings Directive 2003/48/EC (ESD). Also under the ESD, if the proportion of debt claims in the underlying portfolio of the domestic fund is greater than 15%, then there are either withholding or reporting obligations for the fund. erefore, generally non-Gibraltar resident shareholders in a corporate vehicle will not suffer any taxes in Gibraltar. Other interests, such as limited partners or unit holders, similarly will not suffer any Gibraltar taxes on income from a fund which does not accrue and derive income from Gibraltar. 2.3 Taxation of investors resident in the jurisdiction Gibraltar resident shareholders will not suffer tax on income from a fund which does not accrue and derive income from Gibraltar. ere is no tax payable on investment income other than trading receipts. In addition, where a fund is marketed to the general public, such as a retail UCITS fund, there is no tax on income arising from such fund. 3. Fund structures co mmonly used for hedge funds do miciled in the jurisdiction
however, significant exemptions afforded to both small and medium sized companies. Small companies are only required to file an abridged balance sheet and there is no need in the case of such companies to produce a profit and loss account or auditor’s report. 3.2 Unit trust A unit trust is not considered as having a distinct legal personality and would typically be structured to take advantage of the tax transparency of the trust vehicle. In certain circumstances tax transparency enables investors to benefit from fiscal arrangements between their jurisdiction of residence and the jurisdiction of the investments. A unit trust follows the basic fundamentals of Gibraltar trust law and is created by a trust deed between the manager of the scheme and the trustee of the scheme. e trust deed is the constituting document of a unit trust and is the agreement that the trustee will hold the assets of the scheme on trust for the investors. 3.3 Limited partnership A Gibraltar limited partnership would typically allow an investor to participate as a limited partner, whereas the general partner would usually be a Gibraltar limited company. A Gibraltar limited partnership has a distinct legal personality and most tax authorities accept them as tax transparent. e Limited Partnerships Act has been amended recently so as to remove the upper limit on the number of partners so that there is no maximum number of investors that may become limited partners. 3.4 Single fund structure EIFs are structured as either closed-ended or open-ended companies. Openended funds require constituting documents to allow redemptions of shares at the prevailing net asset value (NAV). Typically, an EIF will issue ordinary shares which carry most of the voting rights and participation shares which carry the economic rights. Participation shares are the units purchased by investors at the NAV price. e ordinary shares are usually issued to the investment manager or to the directors, depending on who manages the fund. A closed-ended fund locks in investors for a predetermined length of time, usually subject to one or more extensions. Closed-ended funds are usually used for private equity or property funds where investment is dealspecific rather than being intended to facilitate continuous trading by the fund. 3.5 Protected cell companies
Protected cell companies (PCC(s)) have been in existence in Gibraltar since 2001 under the PCC Act, and have proved to be an Funds can be created using a number of different structures and may extremely popular vehicle for Gibraltar funds and for the include foreign structures approved by the FSC where management establishment of multiple sub-funds (or ‘cell(s)’). e vehicle is made and control is located in Gibraltar. ere are five main structures up of a single body corporate, consisting of a core company, with an used to establish such funds, as listed below. internal ‘umbrella’ structure consisting of any number of cells. Each 3.1 Private limited company cell can then be used for specific investment objectives or strategies, or even for specific clients, as and when required. e number of cells A Gibraltar private limited company can be either limited by shares that can be created under Gibraltar law is unlimited. e driving or limited by guarantee (with or without share capital). For a private force behind establishing such a vehicle is that, provided that the company the minimum number of shareholders is one and at least applicable legislation is complied with, the assets and liabilities one director is required, although additional requirements may apply attributable to a particular cell can be legally segregated and ‘ringfor a particular structure and the Code of Conduct in Gibraltar for fenced’, making the assets of a cell available only to the creditors and fund directors recommends the appointment of three directors. shareholders of that particular cell. is avoids the risk of crossPrivate companies are also required to maintain a registered office in contamination between the cells. Jurisdictions which do not have this Gibraltar where the statutory books are kept. A Gibraltar limited segregation within a statutory framework (the PCC Act in Gibraltar) company can be incorporated within two to three days. However, attempt to remedy this issue by way of limited recourse provisions in upon payment of an additional fee, same day incorporation can be agreements entered into by the investment company and other third effected. Clearance of the company’s name is required prior to parties, or by establishing wholly-owned limited liability subsidiary incorporation. All limited companies (except those which are noncompanies through which each sub-fund conducts its trading. e profit making) are required to file accounts at Companies House in cost and practical benefits of the PCC legislation has led to a growing respect of each financial year. is requirement follows the provisions number of jurisdictions attempting to follow suit. of the EU fourth and seventh company law directives. ere are, 16
Comparison Chart, Gibraltar EIF & Luxembourg SIF EXPERIENCED INVESTOR SPECIALIZED FUNDS (EIFs) (GIBRALTAR) INVESTMENT FUNDS (SIFs)(LUXEMBOURG) Restricted to ‘Experienced Investors’. MINIMUM INVESTMENT/ Under the legislation, Experienced QUALIFICATION Investors are persons or bodies who: •
have a net worth of €1m aside from their residential property, or investors whose normal business activity includes investment related activity; OR
•
have a current aggregate of €100,000 invested in one or more EIF’s; OR
•
invest a minimum of €50,000 in the EIF and have been advised by a professional adviser to do so; OR
•
are professional clients as defined under MiFID (this is a wide professional investor definition); OR
•
where the fund has re-domiciled to Gibraltar and special qualifications are obtained from the Regulator for those ‘incoming’ investors to qualify as experienced.
Restricted to ‘Well informed’ investors. A participant must invest a minimum of €125,000 in the Fund. Institutional and/or professional investors also qualify. e €125,000 minimum can only be waived if the participant receives a positive assessment from a credit institution, an investment firm or a management company confirming their ability to adequately appraise an investment in the SIF.
COMPARISON
Minimum investment can be dispensed with under the EIF regulations where the participant can show that he has a net worth above €1m (or satisfy any of the other criteria). With SIFs the minimum requirement must be met or else positive assessment is required. Minimum investment as a standalone can be €50,000 in the EIF (subject to the investor being appropriately advised). In SIF €125,000 minimum cannot be adjusted. €100,00 standard minimum is an aggreagete in Gibraltar (i.e. can be met by separate subscriptions to different funds/cells). SIF has €125,000 as a standalone per investment.
ese requirements are not cumulative so it is sufficient for an investor to invest €100,000 and not have to prove any of the other conditions. AUTHORISATION/ In Gibraltar, authorisation is a TIME ‘notification’ procedure, OR a ‘prior TO LAUNCH approval’ procedure. Under notification procedure, the fund is launched and the regulator is informed of the launch within 10 days, confirming that it has met all the requirements. is is a unique procedure and there is no regulatory down time. e legal opinion from a senior Gibraltar counsel is filed with the documents stating that the EIF was set-up in accordance with the applicable financial services legislation.
Until recently, no prior approval was necessary to launch a SIF, however this has now been abolished (Bill of law No. 6318 amending the Luxembourg law of 13th February 2007, passed on 6th March 2012). e new law will require all new SIFs to be approved by the CSSF before they can start trading.
e CSSF must now, prior to launch, approve the constitutive documents of the Fund, the choice of depositary, the identity of the members of the management body of the SIF and the identity of the members of the management body of the SIF. As of yet e fund can also apply for ‘prethere are no specific guidelines on how approval’. at is, at least 10 days long the authorisation process may before the proposed launch the fund documents are filed with the regulator take. so that this can be approved.
Gibraltar offers the opportunity to have the fund launched prior to authorisation from the regulator. is allows managers to clearly define their launch process and timeline without any regulatory uncertainty. Alternatively, the process of prior approval is also available for absolute clarity and within a defined time framework. It is clear is that as a result of the change of law, the SIF has lost one of its predominant characteristics; the absence of a prior approval requirement in view of launching the SIF. ere are also technical differences involved in terms of the delegation of functions which are more restrictive within the SIF framework, in particular to natural persons.
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Comparison Chart, Gibraltar EIF & Luxembourg SIF EXPERIENCED INVESTOR SPECIALIZED FUNDS (EIFs) (GIBRALTAR) INVESTMENT FUNDS (SIFs)(LUXEMBOURG)
COMPARISON
DIRECTORS
An EIF must have been at least two approved (by the Financial Services Commission) Gibraltar resident directors appointed to the board of directors.
No domicile requirement but they must be of high repute, have sufficient experience in that type of SIF and obtain authorisation from the regulator, the Commission de Surveillance du Secteur Financier (CSSF) .
In Gibraltar you will appoint 2 authorised and licensed EIF Directors who serve a specific purpose. Other Directors appointed (for example, the client) are not subject to licensing or approval. In Luxembourg all directors would need to be approved and this involves a separate application process.
MINIMUM SIZE
No minimum.
Minimum subscribed capital of €1,250,000 (within 12 months) plus may be increased by grand ducal regulation to €2,500,000.
No minimum in Gibraltar and no timeframe for raising minimum amounts.
OFFERING DOCUMENT
An EIF must issue an offering document that is consistent with industry standards and which will allow an investor to make an informed investment. e offering document must comply with the minimum requirements imposed by the financial services legislation.
e SIF or its management company must submit an issuing document to the CSSF. It must contain all the relevant information required for an investor to make an informed judgment on the proposed investment in the SIF.
Similar requirements. Differences recently introduced in Gibraltar law introduce additional clarity on role of controllers of the fund and certain processes that must be included from an investor perspective standpoint all of which are positive.
ELIGIBLE ASSETS
Unlimited.
Unlimited to an extent but Luxembourg law provides that the collective investment of funds must be made in assets ‘in order to spread the investment risks’.
Both very flexible.
Required by law to comply with the concept of risk diversification/riskspreading (Art 4 and CSSF Circular n° 07/309 )
No Gibraltar equivalent. No legal requirement in Gibraltar.
Fee for EIFs compared to SIFs is higher but the subsequent annual fees are substantially lower (see below)
DIVERSIFICATION No requirement.
In Luxembourg, in principle a SIF may not invest more than 30% of its assets or commitments to subscribe securities of the same type issued by the same issuer. e same restriction applies to short sales (30%). e CSSF may require the SIF to comply with additional investment restrictions, and may on justification grant exemptions.
INITIAL FEE
Initial fee of £2,750 payable to the FSC.
Filing duty of €1,500 for a single SIF and €2,650 for an umbrella structure SIF payable to the CSSF .
ANNUAL FEE
Annual fee of £998 payable to the FSC.
CSSF annual fee of €1,500 for a Annual fee in Gibraltar lower for any single SIF and €2,650 for an umbrella type of fund and substantially lower structure SIF. in the case of a PCC/umbrella fund.
ON-GOING TAX
None.
Subject to an annual subscription tax at a rate of 0.01%, such tax being determined on the total net assets valued at the end of each calendar quarter.
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No Gibraltar equivalent. Additional on-going tax for SIF.
Comparison Chart, Gibraltar EIF & Luxembourg SIF EXPERIENCED INVESTOR SPECIALIZED FUNDS (EIFs) (GIBRALTAR) INVESTMENT FUNDS (SIFs)(LUXEMBOURG)
COMPARISON
DIVISION OF ASSETS/ MULTIPLE STRATEGIES
An umbrella fund structure can be set up as a protected cell company under the Gibraltar Protected Cell Companies Act 2001.is enables the establishment of one single legal entity with different and completely segregated cells, or sub-funds which are traded as individual investment funds. e assets and liabilities of each cell are “ring-fenced” from those of the other cells. Cells within the umbrella fund can be utilised until the purpose of their creation is achieved at which point the specific cell can be closed and the assets distributed to the cells’ investors as appropriate. Under Gibraltar law there is no limit on the number of cells that may be created within a protected cell company.
Protected cell companies do not exist as a concept in law, however, there is an option to create multiple compartments which are contractually segregated each corresponding to a different part of the assets and liabilities of the SIF. Each compartment can have a specific investment policy and creditors and investors have recourse to the assets of the specific compartment only.
In Luxembourg there is no equivalent to the PCC Act, which can be viewed as a considerably more sophisticated piece of legislation. is enshrines the segregation of the Cells in statute, rather than by contract.
CUSTODIAN/ DEPOSITARY
An EIF that is open ended must have a depositary. Its role is to ‘keep the assets that are under its control safe and accounted for’. Where an EIF has a depositary, it may be based in Gibraltar or in any other country. If the depositary is licensed outside of the EEA, the FSC would need to confirm that they have no objections.
Assets of a SIF must be held with a Luxembourg custodian bank (registered office in Luxembourg or established in Luxembourg, Art 16). Custodian must be a credit institution.
Gibraltar has a more flexible regime in this respect.
MANAGEMENT No legal requirement to appoint an investment manager. Fund may be self-managed and no minimum capital requirements for manager, or self managed entity. If an Investment Manager is appointed they can be anywhere in the world provided they are authorised to provide the services they are providing from that country.
e Common Fund (FCP) has no legal personality and must be managed by a ‘Management company’ which must be situated in Luxembourg (registered office in Luxembourg).
Gibraltar has a more flexible regime in this respect.
ADMINISTRATION e administration of an EIF can either be performed by an authorised Gibraltar resident collective investment scheme administrator or a foreign administrator in a jurisdiction with a legislative or regulatory regime of equivalent standing to Gibraltar in relation to the administration of funds
Central administration must be situated in Luxembourg, but certain functions (including NAV calculation, preparation of financial statements) may be outsourced to third parties for a more efficient conduct of business.
e individuals who effectively conduct the business of a management company must be of good repute and be sufficiently experienced in relation to the specific SIF and the management company must have an initial capital of at least €125,000. New changes to the EIF legislation make Gibraltar more flexible, although ultimately, control will always need to be shown to be in the fund domicile. e flexibility to appoint foreign administrators to a Gibraltar Fund provides a series of new opportunities.
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Comparison Chart, Gibraltar EIF & Luxembourg SIF
REPORTING
EXPERIENCED INVESTOR SPECIALIZED FUNDS (EIFs) (GIBRALTAR) INVESTMENT FUNDS (SIFs)(LUXEMBOURG)
COMPARISON
An EIF shall have an annual audit of its financial statements performed by a statutory auditor. e audited financial statements are required to be made available to the FSC.
Additional reporting requirements in Luxembourg.
AMENDMENTS All material changes to information provided to FSC, notified within 20 business days of change taking place.
Annual audit reports also required. Additional financial information in accordance with Circular CSSF 07/310 to be provided on a monthly/yearly basis. is information is used for statistical purposes and for purpose of supervising the SIF’s concerned. Any change of documents and any change of director requires CSSF approval.
Similar, but no requirement for approval in Gibraltar. Simple notification.
Dividends to a non-Luxembourg resident are not generally subject to withholding tax.
Similar and in practical terms no withholding tax will be applicable to most SIF’s, EIF’s.
e offer document also must contain information on the manner in which changes likely to have a material effect on participants will be notified to participants. DIVIDENDS
No dividend withholding tax applies when distributing a dividend to a non-Gibraltar resident.
NOTE: e above is not intended as tax advice or otherwise. Information relating to the jurisdiction of Luxembourg has been taken from information readily available from the Association of Luxembourg Fund Industry, CSSF circulars relating to the SIF legal framework, and from general market commentary and should not be taken as legal advice.
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Comparison between an Experienced Investor Fund (EIF) & a Private Scheme
LEGAL FORM
EXPERIENCED INVESTOR FUNDS (EIFs) (GIBRALTAR)
PRIVATE SCHEME
An EIF may be established as a limited company, protected cell company, unit trust or limited partnership.
Private schemes are generally established as limited companies.
CONDITIONS Promotion of an EIF must be restricted to investors who FOR are deemed to be Experienced Investors under Gibraltar’s SUBSCRIPTION financial services legislation. Under the legislation, Experienced Investors are investors who: * have a net worth of €1m aside from their residential property, or investors whose normal business activity includes investment related activity (i.e. investment professionals); or
May be promoted if the following conditions are satisfied: * the offer is addressed directly to the identifiable category of persons by the promoter or his agent; * the members of this category of persons are the only persons who may accept the offer; * the prospective investors must have sufficient information in order to evaluate the offer; and
* have a current aggregate of €100,000 invested in one or more EIF’s; or
* the scheme will remain a private scheme for a year from the date of offer.
* invest a minimum of €50,000 in the EIF and have been advised by a professional adviser to do so; or
In practice, as long as the investors are friends, family or close clients of the promoters, or, perhaps, employees of a firm, a company can establish itself as private scheme.
* are professional clients as defined in the Financial services legislation; or * invest in a fund that has re-domiciled to Gibraltar where the Financial Services Commission has allowed the inclusion of such investor either in respect of a specific fund or generally in respect of funds or a category of funds from a certain jurisdiction. ese requirements are not cumulative so it is sufficient for an investor to invest €50,000 or €100,000 (as the case may be) and not have to prove any of the other conditions. DIRECTORS
An EIF must have been at least two approved (by the Financial Services Commission) Gibraltar resident directors appointed to the board of directors.
DEPOSITARY
An EIF that is open ended must have a depositary. Its role No requirement to appoint a depositary. is to provide safekeeping of cash and securities that the EIF owns. Where an EIF has a depositary, the depositary shall be such person as the Financial Services Commission may authorise to act as depositary (if Gibraltar registered). However a registered office in Gibraltar is not required and if an EIF wishes to maintain a foreign depositary the EIF is required to ascertain that the Financial Services Commission has no objections (not unreasonably objected to by the Financial Services Commission).
ADMINISTRATOR e administration of an EIF can either be performed by a Gibraltar resident collective investment scheme administrator authorised for this purpose or an external administrator established in the European Economic Area or in a jurisdiction with a legislative or regulatory regime that provides at least equivalent protection to Gibraltar in relation to the administration of funds and which has obtained the consent of the Financial Services Commission to be used as an administrator of EIFs in general, or a specified EIF.
No applicable requirements and a private scheme can be managed by a single director.
Not a legal requirement although without a fund administrator there is a significant potential liability for the operator or manager of the private scheme if there are multiple investors involved with regular reporting/subscriptions/redemptions.
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Comparison between an Experienced Investor Fund (EIF) & a Private Scheme EXPERIENCED INVESTOR FUNDS (EIFs) (GIBRALTAR)
PRIVATE SCHEME
OFFERING DOCUMENT
An EIF must issue an offering document that is consistent Private schemes generally produce an offering document with industry standards and which will allow an investor in order to ensure that the investors have sufficient to make an informed investment. e offering document information in order to evaluate the offer. must comply with the minimum requirements imposed by the financial services legislation.
REPORTING
An EIF shall have an annual audit of its financial statements performed by a statutory auditor. e audited financial statements are required to be made available to the Financial Services Commission.
Accounts require publishing at Companies House in accordance with EU accounting requirements. A private scheme would be exempt from appointing an auditor and the audit of accounts if it qualifies as a small company.
TAXATION
An EIF may obtain an exemption from the Commissioner of Income Tax on any tax on investment income. ere is no capital gains tax, inheritance tax, or wealth tax in Gibraltar. ere is a stamp duty of £10 on the creation of share capital of a company and on any increase in share capital.
e option of obtaining an exemption is available to a private scheme. However, because Gibraltar has a territorial basis of taxation, under the Gibraltar Income Tax Act, income tax is only payable upon income which accrues in or is derived from Gibraltar.
LIMITATION None ON NUMBER OF INVESTORS UMBRELLA STRUCTURE
On the above basis, many Gibraltar companies are not liable to pay tax in Gibraltar as they do not do business inside the Gibraltar economy. 50
An umbrella fund structure can be set up as a protected cell is option is not available to private schemes. company under the Gibraltar Protected Cell Companies Act 2001.is enables the establishment of one single legal entity with different and completely segregated cells, or subfunds which are traded as individual investment funds. Each cell can be used for specific investment objectives and strategies or even for specific clients and the assets and liabilities of each cell are “ring-fenced” from those of the other cells. Cells within the umbrella fund can be utilised until the purpose of their creation is achieved at which point the specific cell can be closed and the assets distributed to the cells’ investors as appropriate. Under Gibraltar law there is no limit on the number of cells created.
AUTHORISATION For an EIF it is sufficient for the fund to incorporate, None. PROCESS appoint its service providers, produce its offering document and resolve to establish itself as an EIF. ere is no regulatory pre approval necessary prior to establishment. Instead within 10 (working) days of establishing itself, an EIF must notify the Financial Services Commission of its establishment and provide a copy of the EIF’s offering documents and the memorandum and articles, and a legal opinion from a senior Gibraltar counsel stating that the EIF was set-up in accordance with the applicable financial services legislation. Alternatively, an EIF has the option to notify the Financial Services Commission at least 10 (working) days before the EIF is established in order to establish itself as such. Further a form signed by the administrator and the license fee should be provided. REGULATORY STATUS 22
An EIF is subject to the regulation of the Financial Services Commission.
Unregulated.
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Disclaimer: Please note that the information and any commentary on the law contained in this document is only intended as a general statement and is provided for information purposes only and no action should be taken in reliance on it without specific legal advice. Every reasonable effort is made to make the information and commentary accurate and up to date, but no responsibility for its accuracy and correctness, or for any consequence of relying on it, is assumed by the author. Further this document is not intended to amount to legal advice.
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