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Investment managers wishing to market and distribute alternative investment funds in Europe must now consider the implications of the AIFMD

What U.S. Fund Managers Need To Know when Setting Up an Irish Fund Structure

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Ireland is widely regarded as one of the key strategic locations by the world's leading players within the funds industry and 2016 proved to be another successful year for the country. Ireland’s track record as a regulated and internationally recognised jurisdiction, along with its wealth of professionals with expertise and experience in retail and alternative investments, offers a compelling set of advantages for U.S. fund managers considering where to domicile an Undertakings for Collective Investments in Transferable Securities (“UCITS”) fund or an alternative investment fund (“AIF”). This article aims to provide U.S. fund managers with practical information on why Ireland should be considered when choosing a location for their funds, the regulations that apply to various fund structures within the country and how to set up a fund there.

WHY IRELAND

Ireland is a significant centre for international banking, funds and insurance. The country’s international financial services sector has witnessed dramatic growth and phenomenal success since its launch over 30 years ago.
Post-Brexit, Ireland will be the only English-speaking member of the European Union with the euro as its currency. In addition, Ireland is an internationally recognized open and tax-efficient jurisdiction and has the lowest headline corporate tax rate in the Organization for Economic Co-operation and Development (“OECD”). With a 12.5% corporate tax and no taxes on funds or investors, Ireland has a favourable tax environment that ensures the best outcome for the fund and the investor.
Ireland offers managers access to the EU-wide marketing passport for UCITS and AIFs. Currently 18 of the top 20 global asset managers have their funds domiciled in Ireland and over 800 fund managers from 50+ countries have their assets administered in Ireland. (1)

In a recent survey conducted by Economist Intelligence Unit, over 200 asset managers were asked their views on the leading European investment fund domiciles and the most important factors which guide a domicile decision. The 3 jurisdictions which performed best overall in the survey were Ireland, Germany and Luxembourg. Ireland received the combined overall highest number of preferences across each of the categories surveyed with 71% of global asset managers indicating that, if starting over, they would choose Ireland as one of their top 3 European fund domiciles. (2)

EUROPEAN INVESTMENT FUNDS – UCITS or AIF?

European investment funds are either regulated as UCITS funds under the UCITS directive or as non-UCITS or, as they are now more widely known, AIFs under the Alternative Investment Fund Managers Directive (“AIFMD”).
The first step for any U.S.-based investment manager that is considering establishing a fund in Ireland is to determine whether the fund will fall into the UCITS or AIF category. To do this, it is necessary to consider the activities of the fund, its scale, its investors or shareholders, and its goals or investment policies.

Is the fund UCITS or AIF?

Irish Domiciled Funds €BN

Irish Domiciled Funds €BN

UCITS FUND CONSIDERATIONS

General restrictions regarding eligible investments – Investments in transferable securities, for example equities and bonds, must have good liquidity and must, in general, be traded on a regulated market. If a security is not traded on a regulated market, then the fund must give consideration to its liquidity and assess its negotiability. In general, a UCITS will not be permitted to invest in any closed-end funds unless the closed-end fund meets certain corporate governance and regulatory requirements.

Investments in financial derivatives are permitted subject to several conditions. The risk profile of the derivatives must not diverge from the UCITS investment objectives. A UCITS may invest in a financial index subject to several conditions regarding its components, calculation, valuation and publication. Due diligence must also be performed by the UCITS.

UCITS 10/5/40 rule stipulates that no more that 10% of the net assets of the fund may be invested in instruments of any one issuer. Also, 40% of the net assets must not contain exposure exceeding 5% to individual issuers.

Distribution – Over 75% of the assets of Irish domiciled funds are held in UCITS. Irish UCITS are distributed in over 70 countries worldwide.

Top 25 countries where Irish funds are registered for sale

Top 25 countries where Irish funds are registered for sale

AIF CONSIDERATIONS

If you wish to set up a fund with a greater risk appetite, a wider range of possible investments and greater access to borrowings, then the appropriate structure is the AIF. The AIF benefits from many of the same regulatory ones as a UCITS such as investor confidence, custodial safekeeping and oversight. However, as AIFs tend to be aimed at professional investors, the AIF allows for a far wider range of investments, derivatives and strategies. Over 40% of global hedge fund assets are serviced in Ireland, making it the largest hedge fund administration centre in the world.

Investment managers wishing to market and distribute alternative investment funds in Europe must now consider the implications of the AIFMD on the distribution of their funds in Europe. All AIFMs located in the EU whether they manage EU or Non-EU AIFs are subject to the AIFMD. AIFMD also captures marketing within the EU of AIFs managed by an AIFM located outside the EU.

Distribution – There are 2 ways to sell AIFs to European investors:

  1. A fund promoter can use the “AIFMD passport” if the promoter has an AIFM based in an EEA member state with a European-domiciled AIF or alternatively the fund promoter establishes an EEA-domiciled self-managed AIF (which is authorised both as the fund and the AIFM). Since mid-2015, the European Commission has been evaluating the possibility of allowing the use of the marketing passport for non-EEA AIFs.
  2. Non-EEA managers with structures (see below) may continue to be distributed in various European countries using National Private Placement Rules (“NPPRs”) for as long as they remain available for use. However, these NPPRs are constantly evolving across territories and are due to be assessed by the European Commission between the end of 2017 and July 2018.

LEGAL STRUCTURES FOR IRISH FUNDS

Numerous legal structures are available for both UCITS and AIF funds. The choice of legal structure will depend on the fund preferences, market requirements and operational considerations.

The legal structures available include unit trust, investment company, investment limited partnership, common contractual fund and the Irish collective asset management vehicle (the “ICAV”). These existing legal structures are established under Irish Law and as such are subject to its provisions.

IRELAND’s IRISH COLLECTIVE ASSET MANAGEMENT VEHICLE LEGISLATION PRESENTS NEW OPPORTUNITIES FOR FUND MANAGERS

The introduction of the ICAV legislation that was introduced in March 2015 increases the range of fund vehicles in Ireland available to promoters.

The ICAV is a new corporate vehicle designed for Irish investment funds. It sits alongside the public limited company (“plc”), which has been the most successful and popular of the existing Irish collective investment fund vehicles to date. An ICAV can be incorporated with the Central Bank of Ireland and provides a tailor-made corporate fund vehicle for both UCITS and alternative investment funds.

  • Meeting the needs of the asset management Industry

    The ICAV is not a company under the Irish Companies Acts, but rather a corporate entity with its own facilitative legislation that has been drafted specifically with the needs of collective investment schemes in mind. This should result in lower administrative costs for an ICAV. In addition, an ICAV can also select the regulatory regime to apply and can be structured as a UCITS or an AIF. The governing requirements for the preparation of financial statements for an ICAV follow the requirements for UCITS and AIFs. The ICAV also offers flexibility in terms of which accounting standards can be used in the preparation of financial statements, including U.S., IFRS, Japanese and Canadian.
  • “Check the box”

    The ICAV is able to elect its classification under the U.S. check-the-box taxation rules and as a result can be treated as a partnership for U.S. tax purposes. This avoids the adverse tax consequences for U.S. taxable investors which arise where the structure is deemed to be a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. The ICAV thereby enhances the attractiveness of Irish funds to investment managers seeking to market their funds in the U.S.
  • Re-domiciliation of offshore funds to Ireland

    Given the ICAV’s ability to “check the box” for U.S. tax purposes, there is an opportunity for existing offshore funds to re-domicile to Ireland and continue to maintain favourable tax treatment for their U.S. taxable investors. Irish legislation provides for the efficient and effective re-domiciliation of funds to Ireland. It allows offshore corporate funds from certain prescribed jurisdictions to migrate to Ireland by re-registering as an Irish UCITS or AIF authorised by the Central Bank of Ireland while maintaining its legal identity. Funds from the following jurisdictions can re-domicile to Ireland in an efficient manner: the British Virgin Islands, the Cayman Islands, Jersey, Guernsey, Bermuda and the Isle of Man.

CONCLUSION

To set up a fund in Ireland you must obtain authorisation from the Central Bank of Ireland (the “CBI”). As outlined above, there are a number of steps involved for your funds that include the following:

  • Choose a fund structure – There are two main fund regimes in Ireland: UCITS and AIFs. There are a number of factors to consider when making this decision including the location of target investors and the investment policy of the fund;
  • Choose a legal structure – The following legal structures are available in Ireland: ICAV, investment company, unit trust, common contractual fund (“CCF”) and investment limited partnership;
  • Required service providers – The CBI is the authority responsible for the authorisation of funds in Ireland. They will approve all the below mentioned service providers. For all Irish funds, a number of service providers must be approved in advance including:
    • Legal firm;
    • An Irish-based depository;
    • An Irish-regulated external auditor;
    • An Irish-based administrator (central administration):
    • A management company (Unit Trust and CCF); and
    • Two Irish resident non-executive directors.

    In the case of a UCITS, the fund promoter and the investment manager (only if different to the promoter) must also be approved by the CBI. For AIFs, the investment manager must obtain approval as an AIFM from the CBI.
  • Fund approval – Once the promoter/investment manager have been approved, the final step is obtaining approval for the fund documentation.

(1) Source: Irish Funds, December 2015.
(2) Source: Economist Intelligence Unit Survey on Choosing a European Fund Domicile, 2014.


Asset Management Intelligence – Q1 2017

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