Alternative Investment Funds 2018 · 8 Angola Vieira de Almeida: Pedro Simões Coelho & Carlos...

The International Comparative Legal Guide to:

A practical cross-border insight into Alternative Investment Funds work

Published by Global Legal Group, with contributions from:

6th Edition

Alternative Investment Funds 2018

ICLG5LexAdvokátní kancelář KF Legal, s.r.o.Attorneys-at-Law TrustBonn & SchmittBrodies LLPCadwalader, Wickersham & Taft LLPCases & LacambraColin Ng & Partners LLPDavis Polk & Wardwell LLPDillon EustaceDubiński Jeleński Masiarz i Wspólnicy sp.k.FenXun PartnersFerraiuoli LLCFlick Gocke SchaumburgHarvest Advokatbyrå ABLacourte Raquin Tatar

Lenz & StaehelinMaples and CalderMcCarthy Tétrault LLPMori Hamada & MatsumotoPaul, Weiss, Rifkind, Wharton & Garrison LLPPricewaterhouseCoopers LtdRopes & Gray LLPSkadden, Arps, Slate, Meagher & Flom LLP and AffiliatesTaylors (in Association with Walkers)Travers Smith LLPVieira de AlmeidaVivien Teu & Co LLPWebber WentzelWikborg Rein Advokatfirma AS

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

WWW.ICLG.COM

DisclaimerThis publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice.Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication.This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

7 Andorra Cases & Lacambra: Miguel Cases & Marc Ambrós 26

8 Angola Vieira de Almeida: Pedro Simões Coelho & Carlos Filipe Couto 32

9 Bermuda Taylors (in Association with Walkers): Jonathan Betts 39

10 British Virgin Islands Maples and Calder: Richard May & Heidi de Vries 48

11 Canada McCarthy Tétrault LLP: Sean D. Sadler & Nigel P.J. Johnston 56

12 Cayman Islands Maples and Calder: Grant Dixon & Andrew Keast 64

13 China FenXun Partners: Sue Liu 71

14 Cyprus PricewaterhouseCoopers Ltd: Andreas Yiasemides & Constantinos A. Constantinou 77

15 Czech Republic Advokátní kancelář KF Legal, s.r.o.: Mgr. Jakub Joska 86

16 England & Wales Travers Smith LLP: Jeremy Elmore & Emily Clark 91

17 Finland Attorneys-at-Law Trust: Mika J. Lehtimäki 102

18 France Lacourte Raquin Tatar: Damien Luqué & Martin Jarrige de la Sizeranne 108

19 Germany Flick Gocke Schaumburg: Christian Schatz 117

20 Hong Kong Vivien Teu & Co LLP: Vivien Teu & Sarah He 122

21 Ireland Dillon Eustace: Brian Kelliher & Sean Murray 132

22 Italy 5Lex: Francesco Di Carlo & Camilla Fornasaro 142

23 Luxembourg Bonn & Schmitt: Jeannette Vaude-Perrin & Amélie Thévenart 152

24 Mozambique Vieira de Almeida: Pedro Simões Coelho & Carlos Filipe Couto 160

25 Norway Wikborg Rein Advokatfirma AS: Christoffer Bergene & Jens Fredrik Bøen 166

26 Poland Dubiński Jeleński Masiarz i Wspólnicy sp.k.: Tomasz Masiarz & Rafał Lidke 173

27 Portugal Vieira de Almeida: Pedro Simões Coelho & Inês Moreira dos Santos 180

28 Puerto Rico Ferraiuoli LLC: Yarot T. Lafontaine-Torres & Alexis R. González-Pagani 190

29 Scotland Brodies LLP: Andrew Akintewe & Karen Fountain 201

30 Singapore Colin Ng & Partners LLP: Amit R. Dhume & Abel Ho 209

31 South Africa Webber Wentzel: Nicole Paige 217

32 Spain Cases & Lacambra: Miguel Cases & Toni Barios 223

33 Sweden Harvest Advokatbyrå AB: Gustav Sälgström & Emelie Persson 231

34 Switzerland Lenz & Staehelin: Dr. François Rayroux & Dr. Patrick Schleiffer 237

35 USA Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates: Heather Cruz & Anna Rips 245

Country Question and Answer Chapters:

1 A Game of Two Halves: Haves and Have-Nots in Alternative Investment Funds – Stephen G. Sims & Greg Norman, Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates 1

2 The Global Subscription Credit Facility and Fund Finance Markets – Key Trends and Forecasts – Michael C. Mascia & Wesley A. Misson, Cadwalader, Wickersham & Taft LLP 4

3 Adviser Exams: Mitigating Enforcement Risks – Leor Landa & James H. R. Windels, Davis Polk & Wardwell LLP 7

4 Private Equity’s Seesaw: Changing Dynamics in Fundraising Terms – Marco V. Masotti & Lindsey L. Wiersma, Paul, Weiss, Rifkind, Wharton & Garrison LLP 14

5 Financing European Commercial Real Estate Debt Funds – Alternatives and Considerations – Partha S. Pal, Ropes & Gray LLP 18

6 Bringing Foreign Investment Funds into Japan – Yasuzo Takeno & Fumiharu Hiromoto, Mori Hamada & Matsumoto 21

General Chapters:

Contributing EditorStephen G. Sims, Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Sales DirectorFlorjan Osmani

Account DirectorOliver Smith

Sales Support ManagerToni Hayward

Sub EditorHollie Parker

Senior EditorsSuzie Levy Caroline Collingwood

CEO Dror Levy

Group Consulting EditorAlan Falach

PublisherRory Smith

Published byGlobal Legal Group Ltd.59 Tanner StreetLondon SE1 3PL, UKTel: +44 20 7367 0720Fax: +44 20 7407 5255Email: [email protected]: www.glgroup.co.uk

GLG Cover DesignF&F Studio Design

GLG Cover Image SourceiStockphoto

Printed byAshford Colour Press LtdJuly 2018

Copyright © 2018Global Legal Group Ltd.All rights reservedNo photocopying

ISBN 978-1-912509-23-2ISSN 2051-9613

Strategic Partners

The International Comparative Legal Guide to: Alternative Investment Funds 2018

ICLG TO: ALTERNATIVE INVESTMENT FUNDS 2018 1WWW.ICLG.COM© Published and reproduced with kind permission by Global Legal Group Ltd, London

Chapter 1

Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Stephen G. Sims

Greg Norman

A Game of Two Halves:Haves and Have-Nots in Alternative Investment Funds

biggest disruption for private equity in the future [will be] when investors will only invest money if the manager takes no fee on committed capital and you have lower carry”. However, he added: “If you are at the top of the heap in any industry you are reluctant to do anything to change your business model”. That sums up the difference nicely, and also the difficulty for investor industry bodies such as ILPA (the Institutional Limited Partners Association) in staying relevant at a time when investors are struggling to access the best funds. ILPA’s answer appears to be to focus primarily on educating investors and policymakers and on driving best practice and standardisation in reporting and other areas such as the production of model subscription agreements to drive down friction costs of investing, and ensure that investors are equipped to compare fund managers and focus less on driving change in the commercial terms of funds.

Regulation: The Direction of Travel

A lawyer in the alternatives space recently bemoaned the increasing tide of regulation, remarking that he chose to specialise in alternative funds to get away from all the regulation. Regulation has, however, caught up with him and with all of us. In the United States, few fund managers were required to register with the SEC before 2010, and the increase in regulation has been felt mainly through the increased supervisory activities of the SEC, which has taken enforcement action against a number of private fund managers for perceived failings. When the SEC announced that it was looking into compliance with offering and organisational documents by managers, some investors and their counsel were bemused, expecting that the SEC was unlikely to uncover instances of non-compliance where the investors themselves had failed to do so. But the regulator’s focus on disclosure and compliance with fiduciary duties when faced with conflicts of interests, rather than simply compliance with the strict terms of legal agreements, has resulted in actions around failure to disclose unusual fee arrangements such as accelerated monitoring fees, and unequal treatment of investors or allocation of investment opportunities and expenses between different funds managed by investors.Across the Atlantic, European regulation has been characterised by much more prescriptive requirements. These had their origins in the Global Financial Crisis and in politicians’ beliefs, often ill-advised or wrongly-held, that alternative fund managers were responsible for many of the problems that beset the world economy. As a result, managers are held to capital resources requirements more sensibly suited to banks, to long-term remuneration requirements more suited to third-party owned businesses than owner-managed businesses which fund managers typically are, disclosure and

With the football World Cup kicking off in Russia this summer, we can expect to hear various commentators telling us that the beautiful game is “a game of two halves”. At the same time, the world of Alternative Investment Funds shows stark contrasts and divisions. Some managers and investors look poised to capitalise on the environment, while others struggle.

The Importance of Size

News that Blackstone’s real estate arm has added over €40 billion of assets under management to €184 billion, topping the list of global real estate managers for the second year running, will not surprise many readers.i Stepping back, what is staggering is the ease with which the larger fund managers across the illiquid alternatives space are able to raise capital and the terms on which they are able to do so. The last few years have seen the biggest and best managers raise record-breaking funds in ever shortening time frames. Perhaps more significantly, many of these have been able to do so while improving the economics and other terms in their favour. Examples of improved economics include high-profile managers removing the requirement to pay a hurdle or preferred return before receiving carried interest or performance fees, or increasing the management fees payable after the investment period, without there being an obvious justification for the change. Other economic changes, such as higher caps on organisational expenses, can be justified by reference to the enhanced regulatory regimes imposed on managers of alternative investment funds. Non-economic changes can include giving greater discretion to managers to allocate investment opportunities between different funds and managed accounts, or reducing key man obligations to specific funds, and reflect the growth of diversified managers as contrasted to the single product managers that were around when many of the limited partnership agreements governing funds were originally crafted, as well as investors’ reliance on increased oversight by regulators to ensure that managers do the right thing. Others, such as watering down managers’ liability, seem to be more a case of taking advantage of a buoyant fundraising market summarised by one manager as “if you can walk in a straight line at the moment, then you’ll be able to raise a fund”. Meanwhile, less well established managers face a series of obstacles on the fundraising trail. Some of the causes are considered below, but the result is that while ever-increasing amounts of capital are being raised by alternative fund managers, capital is increasingly flocking to the largest players leaving smaller and newer managers fighting over the remains, often offering significant fee breaks and negative control rights to entice investors into their funds. Carlyle co-founder David Rubenstein remarked a few years back that “the

WWW.ICLG.COM2 ICLG TO: ALTERNATIVE INVESTMENT FUNDS 2018© Published and reproduced with kind permission by Global Legal Group Ltd, London

Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates Game of Two Halves

One factor influencing these transactions can be the perceived lack of other identifiable opportunities at attractive pricing. GPs know the assets and are comfortable with them. But another factor may be the increase in managers with multiple product lines and skill sets who are comfortable retaining ownership of assets even though they no longer fit the risk or return profile of the original fund. Investors, too, as highlighted above, are increasingly turning to the larger, diversified asset managers, and at a broader level this strategy can allow investors to hold a more diversified portfolio through a single manager group. Issues around valuations and perceived conflicts of interests can typically be addressed through robust disclosure and third-party valuation mechanisms coupled with giving investors the option to exit or roll over.

Onshore v Offshore: Can Everyone Really be a Winner?

One consequence of the introduction of the EU’s Alternative Investment Fund Managers Directive was that some non-EU managers actively sought to avoid soliciting contributions from EU investors due to uncertainty over the rules and the perceived cost of compliance including in relation to certain disclosure rules. That anxiety appears to have abated, and many non-EU managers have included an EU-based parallel fund in their latest fund offerings. Similarly, some EU-based managers have moved their fund domiciles to the EU in order to benefit from the marketing passport, making it easier to target investors throughout the whole of the EU. This, coupled with a number of other initiatives, may result in significant challenges to the traditional offshore jurisdictions as they seek to maintain relevance in the new, more regulated environment. The BEPS (Base Erosion and Profit Shifting) rules seek to challenge tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low- or no-tax locations and focus on the substance of fund structures. Other initiatives requiring disclosure of beneficial owners may also lessen the perceived advantage held by some of these jurisdictions. It should be noted however, that the jurisdictions themselves often question whether public disclosure is necessary or even disadvantageous, and point instead to the highly regulated nature of the funds industry and the need for service providers to conduct a detailed “know your client” take on procedures and to share the results with the regulators.ii But events such as the (probably) forthcoming Brexit have also focused legislators from the onshore world on making their jurisdictions more attractive to managers. Britain already has a judicial system envied throughout Europe and the wider world for its independence and reliability, and has now turned its mind to updating its archaic laws governing fund vehicles. The limited partnerships law, for example, dates to 1907 and since its inception appears to have been as popular with Scottish crofters (tenant farmers) as with alternative fund managers. Drawbacks or comparative disadvantages within the legislation include public registers of investors, potential taxation on transfers, uncertainty as to the correct establishment and limited liability protections of investors, although the latter two have effectively been remedied by recent legislative changes. So there is much to play for between the onshore and offshore jurisdictions, and of course between the individual onshore and offshore jurisdictions as between themselves. The European Securities and Markets Authority (ESMA) last year issued an opinion, widely seen as a warning shot to regulators not to make it easy for post-Brexit UK managers to establish operations in the EU, seeks to prevent a “race to the bottom” among jurisdictions touting for business.

anti-asset stripping rules that put them at a disadvantage to trade or industry competitors, and a host of other cumbersome requirements that have increased the costs of setting up and running alternative funds, driving investors to the bigger and more established players. At the same time, the European Union has implemented a “Fortress Europe” approach, penalising non-EU managers and funds with rules designed or implemented to make it difficult and in some cases impossible to market non-EU funds to EU-based investors. Interesting responses to the EU’s consultation on opening up the marketing “passport” to non-EU managers made clear that some continental managers feared this would lead to an uneven playing field due to perceived economies of scale and other advantages held by larger non-EU managers. It is assumed that most investors would welcome a greater range of choice, although in that regard the European Commission feels that investors are not as professional as they think they are, and may need greater protection.With this backdrop, what is interesting is the direction of travel. Financial services in the United States may be on the cusp of a de-regulatory phase, as has been seen across other industries in the United States. Market commentary suggests that changes to the Volcker Rule may be afoot. However, in the EU, there seems little prospect for de-regulation. Discussion of a marketing passport for non-EU funds appears to have been shelved as a negotiating tool while Britain negotiates its exit from the EU, and the European approach to regulation can be seen in other initiatives such as the recent call by an influential group of the UK’s MPs to impose mandatory reporting on the risk of climate change to fund managers, and the EU’s General Data Protection Regulation, which has laudable aims but is so strict that it arguably prevents – absent their consent – with prayers being said for the sick at Mass.

GP-led Secondaries and Other Developments

Once apparently the preserve of zombie funds looking for an injection of new life, GP-led secondaries and other exits where the manager retains control of the underlying investment or portfolio are increasingly used as tools by leading fund managers. GP-led secondaries typically allow an incoming investor (or investors) to acquire existing investors’ stakes in a private equity fund. This may be coupled with a commitment to a successor fund being raised by the manager, and is intended to benefit all parties: existing investors are offered the chance to exit, the new investor gains immediate exposure to the manager and its portfolio without having to wait for the manager to deploy new capital, and the manager may be paid performance fees and also receive a shot in the arm for its next fundraising. The sale of an individual asset where the manager retains control, through a fund managed by it, often achieves a similar objective although sometimes with different motivating factors. In this case, at a certain point in the manager’s ownership of the asset, a decision is made that it should be sold. This could be because the fund is coming to the end of its life, or because the (lower) anticipated return on the asset in the future is unlikely to make it ideally suited to the fund’s investment policy. Examples could include infrastructure assets that have been built out and are operating, or real estate assets that have been stabilised. In this scenario, investors may be given the choice of exiting or rolling over into a new vehicle, with an outside investor underwriting the sale. The management and performance fees levied going forward may reflect the different anticipated returns. As with GP-led secondaries there are benefits for each of the parties involved.


Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates Game of Two Halves

Endnotes

i. INREV Fund Manager Survey 2018.ii. See, for example, the letters to The Economist, edition 31

May 2018, from Geoff Cook, CEO, Jersey Finance, and D. Orlando Smith, Premier and finance minister, British Virgin Islands.

Initiatives such as this one, and the perceived dominance of the EU by Germany, bring to mind another footballing quote, this time by Gary Lineker: “Football is a simple game. Twenty-two men chase a ball for 90 minutes and at the end the Germans win”.

Skadden is one of the world’s leading law firms, serving clients in every major financial centre with over 1,700 lawyers in 22 locations. Our strategically positioned offices across Europe, the U.S. and Asia allow us proximity to our clients and their operations. For almost 60 years Skadden has provided a wide array of legal services to the corporate, industrial, financial and governmental communities around the world. We have represented numerous governments, many of the largest banks, including virtually all of the leading investment banks, and the major insurance and financial services companies.

Stephen G. Sims is a Partner at Skadden, Arps, Slate, Meagher & Flom and the European Practice Leader of its Investment Management Group. He is also the Chair of the International Bar Association’s Private Funds Sub-Committee.

Stephen G. SimsSkadden, Arps, Slate, Meagher & Flom LLP and Affiliates40 Bank Street, Canary WharfLondon, E14 5DSUnited Kingdom

Tel: +44 20 7519 7127Email: [email protected]: www.skadden.com

Greg Norman is a Counsel at Skadden, Arps, Slate, Meagher & Flom in its Investment Management Group.

Greg NormanSkadden, Arps, Slate, Meagher & Flom LLP and Affiliates40 Bank Street, Canary WharfLondon, E14 5DSUnited Kingdom

Tel: +44 20 7519 7192Email: [email protected]: www.skadden.com


Chapter 2

Cadwalader, Wickersham & Taft LLP

Michael C. Mascia

Wesley A. Misson

The Global Subscription CreditFacility and Fund FinanceMarkets – Key Trendsand Forecasts

number of highly experienced law firms. Transaction terms moved slightly in favor of the borrowers; not a surprising development at this point in the cycle. Facility borrowing bases (“Borrowing Bases”) largely held to the traditional Included Investor/Designated Investor structure (particularly in the United States). Advance Rates moved slightly higher and concentration limits were relaxed moderately. But these changes were really at the fringe; Facility structures remain quite consistent with where they have been in recent years. Spreads changed very little in 2017.

Industry Developments and Press Coverage

A. ILPA Guidelines. In June 2017, the Institutional Limited Partners Association (“ILPA”) published a guidance paper to their constituents on Facilities (the “Guidelines”). The Guidelines dominated market discussion the remainder of the year, and have been the subject of multiple seminars, conference panels and articles. At the suggestion of market participants, the Fund Finance Association (the “FFA”) published an analysis and set of recommendations on the Guidelines in the Fall (the “FFA Response”). The FFA Response sought clarification on several items in the Guidelines and made suggestions to the Guidelines to ensure they protected Investor interests without unintentionally prescribing key aspects of the utility of a Facility.1 In January 2018, ILPA invited the FFA board of directors to join a call to discuss the Guidelines and the FFA Response with ILPA personnel and several large institutional Investors. The call was productive and both sides received a good explanation of the other’s perspective. ILPA indicated that they do not forecast publishing an updated version of the Guidelines in the immediate future, but may publish some interpretive guidance.

B. Press Coverage. The steady stream of coverage of Facilities in both the private equity and mainstream press continued throughout 2017. Even accounting and consulting firm PwC published a “thought leadership” piece on Facilities.2 The Facility market has seemed to have gotten accustomed to this; these articles cause far fewer fire drills than they did originally. The market does not appear impacted by the published inaccuracies.

C. Bank Hiring. For many years, growth in the Facility market substantially exceeded Lender hiring, leading to growing workloads. That finally shifted in 2017. Many Lenders in the Facility market invested substantially in staffing in 2017, hiring at both senior and junior levels. Several prominent bankers switched firms and many Lenders are advertising open positions. We expect to see additional transitions in 2018. Many bankers also received promotions in 2017 putting upward pressure on compensation.

Introduction

The Subscription Credit Facility (each, a “Facility”) and related Fund Finance markets had a fascinating 2017. On the one hand, everything stayed exactly the same. Like virtually every year since the financial crisis, Facility credit performance remained pristine, with no monetary defaults having become public last year. And the out-paced growth rate continued. But, on the other hand, outside of the four corners of the transactions, change seemed to come daily. This chapter summarizes the key trends in the Facility and Fund Finance markets in 2017 and forecasts developments for 2018.

Credit Performance

To our knowledge, there were again no payment events of default in the Facility or related Fund Finance markets in 2017. Virtually all of our transactions, both Facilities and on the NAV-side, performed from a credit perspective last year. We are for the first time in current memory aware of several funding defaults by limited partners (“Investors”) on their capital calls (“Capital Calls”), but these defaults seemed to be isolated to Chinese Investors grappling with local law monetary policy preventing cash outflows. As we understand it, none of these Investor defaults led to Facility problems.

Resilient Growth

2017 was another very healthy year for private equity fundraising and, correspondingly, the Facility markets. According to Preqin research, private capital raised in 2017 exceeded $750 billion and private equity dry powder climbed to $1 trillion. Many of the major lending institutions in the market (each, a “Lender”) again reported portfolio growth in excess of 20% last year, exceeding our forecasts. While there are certain Lenders that have reached their institutional lending limits for particular Fund sponsors (each, a “Sponsor”) and for the Facility product, the market continued its expansion. Many lenders increased their Facility program limits and new entrants continued efforts to gain traction.

Structural Evolution

In 2017, structural evolution in the Facility market remained very muted. Frankly, very little changed. From a Lender’s viewpoint, private equity fund (each, a “Fund”) limited partnership agreements (“Partnership Agreements”) continued to improve, likely driven by the increasing concentration of Fund formation occurring at a fewer


Fund Finance Symposium at the Four Seasons Hotel in Hong Kong. The 4th Annual European Fund Finance Symposium is scheduled for October 24, 2018, to be held at the Landmark Hotel in London.4 And, in an exciting change, the FFA has announced that the 9th

Annual Global Fund Finance Symposium will move to Miami with an expanded format on March 24–26, 2019.

Conclusion

The Facility market appears poised for another solid year in terms of portfolio growth in 2018. While Facility structures have been trending ever so modestly in favor of Fund borrowers, we continue to believe that the credit profile of market-structured Facility transactions forecasts well for Facility performance in the coming year.

Endnotes

1. A copy of the FFA Response is available at http://www.fundfinanceassociation.com/wp-content/uploads/2017/12/FFA-Analysis-on-ILPA-Guidelines.pdf.

2. A copy of Cadwalader’s response to PwC’s article is available at http://www.cadwalader.com/resources/clients-friends-memos/subscription-credit-facilities--misperceptions-remain-aplenty.

3. An electronic copy of Global Legal Insights – Fund Finance 2018 can be accessed at https://www.globallegalinsights.com/practice-areas/fund-finance-laws-and-regulations.

4. Information on these events is available at the FFA’s website, http://www.fundfinanceassociation.com/.

AcknowledgmentThe authors would like to thank Jeremy Cross, Partner at Cadwalader, Wickersham & Taft, for his invaluable assistance in the preparation of this chapter.

D. Publications. Global Legal Group Ltd., the publisher of this legal guide, published the second edition of Global Legal Insights – Fund Finance 2018, a comprehensive legal guide on the Fund Finance markets. The guide includes 18 product-oriented chapters and 20 jurisdictional updates contributed by many of the world’s preeminent Fund Finance law firms, a substantial improvement over the inaugural edition.3

2018 Market Forecast

From a Facility structural perspective, we expect evolution to continue to be limited to the margins in 2018. Credit performance of Facilities during the financial crisis validated current structures and Lenders have expended significant institutional resources the past several years developing their Facility product programs and policies. Borrowers are familiar with current structures and they seem to be working well. We believe any structural changes will be incremental. While we do expect the rate of Facility growth to slow in 2018 as compared to the 20%+ of the past few years, we forecast 2018 growth in Lender portfolios in the 8%–12% range year-over-year. The historical factors supporting expansion remain sufficiently pronounced. But there are market realities that will push against historical growth rates. Lenders are going to be more focused on their internal policies, form documentation, hiring and staffing, and credit and risk analysis in 2018 as they try to absorb the growth of the past few years. And benchmark interest rates are widely forecasted to increase in 2018, creeping up as a percentage of preferred returns. We also think that the ILPA Guidelines may result in side letter provisions that conflict with certain Lender credit parameters, potentially slowing certain transactions.

Upcoming Events

On March 21, 2018, the FFA hosted the 8th Annual Global Fund Finance Symposium at the Grand Hyatt in New York, New York. And, on June 13, 2018, the FFA hosted the 2nd annual Asia-Pacific

Cadwalader, Wickersham & Taft LLP Facility and Fund Finance Markets


Cadwalader, Wickersham & Taft LLP, founded in downtown New York in 1792, is proud of more than 200 years of service to many of the world’s most prestigious financial institutions and corporations. With more than 450 attorneys practicing in New York, London, Charlotte, Washington and Brussels, we offer clients innovative solutions to legal and financial issues in a wide range of areas. As a longstanding leader in the securitization and structured finance markets, the Cadwalader team features lawyers with a broad range of experience in corporate, securities, tax, ERISA, bankruptcy, real estate and contract law. Consistently recognized by independent commentators and in the league table rankings, our attorneys provide clients unparalleled insight regarding fund finance, asset-backed and mortgage-backed securitization, derivatives, securitized and structured products, collateralized loan obligations, synthetic securities, swap and repo receivables, redundant insurance reserves, and other financial assets.

For more information please visit www.cadwalader.com.

Mike Mascia is Co-Chair of the firm’s Finance Group and a member of the firm’s Management Committee. He has a globally recognized fund finance practice, having represented lenders in subscription credit facilities to real estate and private equity funds sponsored by many of the world’s preeminent fund sponsors. He has been lead counsel on numerous hybrid facilities, and is one of the few attorneys in the United States with experience in both subscription credit facilities and CLO’s. Mike represents lenders on leverage facilities to secondary funds and other credits looking primarily to fund assets or NAV for repayment. Mike is the founder of the annual Global Fund Finance Symposium, now in its 8th year, and he is a founding member and the Secretary of the Funds Finance Association.

Michael C. MasciaCadwalader, Wickersham & Taft LLP227 West Trade StreetCharlotte, NC 28202USA

Tel: +1 704 348 5160Email: [email protected]: www.cadwalader.com

Wes Misson is a partner in Cadwalader, Wickersham & Taft’s Finance Group. Wes’s practice focuses on fund finance and he has represented financial institutions as lenders and lead agents in hundreds of subscription credit facilities and other fund financings, with his experience encompassing both subscription and hybrid facilities. Wes also works with fund-related borrowers on the negotiation of third-party investor documents with institutional, high-net-worth and sovereign wealth investors.

Wes has served as lead counsel on many of the largest and most sophisticated fund financings ever consummated, notably having assisted more than 37 banks as lead or syndicate lender during the past three years with transaction values totaling in excess of $35 billion. Many of the transactions he advises on are precedent setting, carrying unique structures and complex international components – whether that be foreign limited partners or funds, multi-currency advances or foreign asset investment.

Wes has been recognized as a “Rising Star” in the US in the area of Banking and Finance in the International Financial Law Review’s IFLR1000 Legal Directory, and is also a frequent speaker and an accomplished author in the area of fund finance. He has worked extensively with financial institutions to develop form agreements for fund finance transactions, many of which are the dominant forms used in the market today, and to educate bankers, internal legal counsel and credit officers on hot issues and trends affecting the fund finance market.

Wesley A. MissonCadwalader, Wickersham & Taft LLP227 West Trade StreetCharlotte, NC 28202USA

Tel: +1 704 348 5355Email: [email protected]: www.cadwalader.com

Cadwalader, Wickersham & Taft LLP Facility and Fund Finance Markets


Chapter 3

Davis Polk & Wardwell LLP

Leor Landa

James H. R. Windels

Adviser Exams: Mitigating Enforcement Risks

This article will first explore five key SEC priorities for investment adviser examinations and Enforcement actions. It will next focus on how advisers can proactively identify and address OCIE examination risks before those exams are requested. Next, the article will discuss approaches to responding to exam requests given the potential Enforcement backdrop, particularly approaches to responding to requests for documents, emails, and witness interviews that both minimise risk to the adviser and ensure timely, accurate, and complete cooperation with OCIE. Finally, the article will discuss the process for OCIE referrals to the Division of Enforcement, and the circumstances in which an exam deficiency is most likely to lead to a referral.

II Exam Priorities

Exam and Enforcement risk is best minimised by implementing a comprehensive compliance programme covering all aspects of an adviser’s operations and proactively addressing any issues of concern prior to the start of an exam. A review of Enforcement actions and settlements and public statements by SEC officials highlights five key areas which may pose particular risks of referral from the exam process to Enforcement, each of which will be discussed briefly below.

Fee, Expense and Trade Allocation

Allocation of fees, expenses, and trades or other investment opportunities has been a perennial focus of OCIE attention and SEC Enforcement actions. Investment advisers’ responsibility to allocate expenses between the adviser and managed funds, and to allocate fees, expenses, and trades among clients, create a number of potential conflicts of interest between the adviser and its clients. As discussed at length in our June 2017 and 2016 article, Allocating Fees and Expenses: The SEC Is Paying Close Attention,12 the SEC has settled nearly two dozen cases with investment adviser firms regarding fee and expense allocation. Many of these scenarios involved allocations among advisers, client funds, and co-investment vehicles. In its April 2018 Compliance Outreach Program, and accompanying Risk Alert,13 the SEC distilled the findings of over 1,500 adviser examinations into several categories of violations. In broad overview, three key lessons follow:First, the SEC expects that potential conflicts of interest will be disclosed at the time the investor makes an investment decision. Once an investment decision has been made, the SEC appears to believe that disclosures describing how an adviser will act are far less effective in protecting even the most sophisticated investors, unless investors are able to act on such disclosure by consenting or by redeeming.14

I Introduction

In an evolving securities landscape, examinations of investment advisers remain a key priority for the SEC’s Office of Compliance Inspections and Examinations (OCIE). By understanding OCIE’s exam priorities, proactively testing policies and procedures, and prudently managing issues as they arise in the course of exams, investment advisers can reduce the risk that an OCIE exam will lead to an investigation by the SEC’s Division of Enforcement. OCIE conducted a record-setting 2,100 investment adviser examinations in FY 2017, a 46% increase over FY 2016, OCIE’s previous all-time high.1 The percentage of advisers examined has similarly increased over time, from 8% in FY 2012, to 11% in FY 2016, to 15% in FY 2017.2 The nature of OCIE examinations has also evolved as the SEC seeks to use its limited resources to focus on critical risks impacting market participants and examine registered investment advisers that have never previously been examined.3 OCIE Director Peter B. Driscoll recently stated that examinations have become “targeted, shorter, deep dives into high-risk areas that are published in our priorities”.4 OCIE has expended substantial time and effort improving its risk assessment and surveillance capabilities to ensure that it spends its time and resources examining “those firms and practices that pose the greatest potential risk of violations that can harm investors and the markets”.5 These efforts have included developing technological tools that can analyse data provided by all registrants, not just those selected for examination.6 In describing their shift in priorities, both OCIE and the SEC as a whole have emphasised the difficulty of monitoring the investment adviser universe, which has grown 15% in terms of the number of advisers and 40% in assets under management in the last five years.7 Even with a vastly expanded number of examinations, the technical deficiency rate has remained largely stable. In FY 2017, 72% of examinations identified some deficiency, on par with FY 2016’s 72%.8 The number of examinations resulting in a “significant finding”, however, has declined substantially, from 35% in FY 2013 to 27% in FY 2016, and to 20% in FY 2017.9 Similarly, the number of examinations referred to the Division of Enforcement has steadily trickled downward, from 13% in FY 2013, to 9% in FY 2016 and 7% in FY 2017.10 More frequent, risk-based examinations and industry recognition of the SEC’s willingness to take more aggressive Enforcement action when necessary has likely contributed to investment advisers’ proactively examining and updating policies and procedures, in turn increasing compliance and reducing the number of serious infractions. As OCIE Director Driscoll has made clear, the SEC hopes that increased transparency of OCIE’s priorities have encouraged and enabled firms to focus their internal compliance and “anticipate and preemptively solve compliance issues”.11


that review may be interviewed. OCIE often requests significant background information to understand the sources of information used by the adviser and to confirm that there was no improper use of material nonpublic information. Third, OCIE exam teams will likely scrutinise the compliance department’s control and oversight over the use of nonpublic information. Materials analysed will include written policies and procedures, logs of contacts with industry consultants and with personnel of publicly-traded issuers, and records of trainings regarding insider trading. Recent settlements have demonstrated the SEC’s close attention to alleged failures in sufficiently tailoring policies regarding the misuse of material nonpublic information.

Valuation

Valuation methodologies and disclosures are consistently identified as an examination focus in the SEC’s annual publication of national exam programme examination priorities. Kristin Snyder, OCIE’s Co-Head of the SEC’s Investment Adviser/Investment Company Examination Program, reaffirmed the focus on valuation for private fund advisers at a Q&A panel following the SEC’s 2018 examination priority announcement. Investors and the SEC demand reliable calculations of a fund’s value. Advisers can expect to face continued scrutiny of both valuation policies and procedures and the oversight of those policies. The SEC has made clear that particular attention will be paid to advisers’ valuations used to calculate management fees. Examiners will also review whether assets are valued in accordance with investor agreements, disclosures, and the firm’s policies and procedures and whether there have been breakdowns in compliance controls. Difficult-to-value or illiquid instruments will face enhanced scrutiny. Advisers can also expect that OCIE exam staff will devote particular attention to any instances in which the valuation process described to clients is not ultimately followed or the valuation methodologies are modified without being communicated to investors. SEC examiners will expect firms to have a clearly defined, step-by-step valuation procedure which is memorialised in written policies and procedures. Any alternative methods for valuation should be similarly memorialised. OCIE staff will examine whether detailed pricing methodologies exist and are consistently applied. Examiners will also look for documentation of pricing errors, if and when they occur, and a record of how such errors were corrected.With the need for accurate valuation information comes the need for a well-defined and substantial oversight of the valuation process. OCIE will look for a valuation committee that routinely reviews valuation methodologies and, where applicable, pricing decisions and will expect to see clearly defined roles for all those involved in the valuation process, as well as policies and procedures that address monitoring and controls for such individuals.

Advertising

Consistent with the SEC’s focus on investor protection, advertising has been a priority since the SEC launched its advertising review initiative in 2016, which the SEC described as a response to having frequently identified deficiencies in adviser advertising practices. Indeed, many of the “most frequent advertising rule compliance issues” are directly relevant to the kinds of marketing communication that frequently occur between funds and their investors.17 The Advertising Rule prohibits an adviser from publishing or distributing any advertisement that contains any untrue statement of material fact or that is otherwise false or misleading, and the

Second, the SEC expects that disclosures regarding fee, expense, and trade allocations must precisely describe the mechanics of allocation and specify both the types of fees, expenses, and trades that will be allocated and how the adviser will allocate them in specific circumstances. The SEC has refused to allow advisers to point to “catch-all” provisions that permit discretionary allocations of expenses to avoid liability.15

Third, the SEC will require advisers to comply with their established and disclosed allocation procedures. The SEC may bring Enforcement actions against advisers that do not comply with established procedures even in the absence of significant investor harm.16 OCIE’s 2018 Risk Alert highlighted a number of categories of deviation from established procedures. Some, such as charging fees based on improper valuations, charging fees at rates or according to a time schedule different from that disclosed to investors, highlight the importance of careful recordkeeping and operations. Others, such as failing to aggregate holdings that would comply for volume discounts, failing to disclose fee sharing practices, or improperly charging fund expenses, highlight the importance of a well-resourced compliance function that can effectively monitor all aspects of an advisers’ operations. Advisers can expect OCIE to review the sufficiency of adviser’s allocation disclosures and compliance from multiple perspectives. OCIE routinely asks advisers to provide and identify disclosures made to investors at the time they are committing capital and in the course of a fund’s life cycle. OCIE will also request the adviser’s compliance policies and procedures governing allocations and documentation demonstrating compliance with these policies and procedures. To test the adviser’s compliance with its disclosures and policies, OCIE may request financial records showing how the adviser has allocated fees, expenses, and trades for a lengthy period of time. In the event an adviser lacks the necessary records, the SEC may ask the adviser to create charts showing the allocated amounts. Finally, the exam team may ask advisers to explain the rationale behind allocations of particular interest, either by written explanations, by providing contemporaneous documentation, such as email, or potentially in interviews.

Insider Trading and the Treatment of Material Nonpublic Information

Insider trading and the treatment of material nonpublic information remain a top priority for both OCIE and the SEC’s Enforcement Division, and likely will always occupy an important position on the SEC’s exam priority list. Both substantive insider trading issues and the advisers’ insider trading compliance programme are likely areas of scrutiny during an OCIE exam.OCIE exam teams are likely to request general information regarding a firm’s research and investment decision-making process, both through requests for documents and through written questions. The exam team will then drill down into specific relationships and communications that a firm’s portfolio managers and research analysts have with corporate insiders and other market participants. In recent years, this inquiry has included a particular focus on how firms control and monitor one-on-one and small-group communications with corporate insiders.Second, the exam team will likely identify particular transactions for closer review where either there is unusually positive performance or the transaction is outside the scope of the adviser’s ordinary areas of investment focus. The exam team can be expected to review sample investment files and emails relevant to those flagged transactions. Portfolio managers and analysts identified through

Davis Polk & Wardwell LLP Adviser Exams: Mitigating Enforcement Risks


home computers in their professional capacity or must use secure mobile devices, OCIE will seek evidence that, in fact, employees are not using home computers in a professional capacity and cannot accept firm emails on an unsecured personal mobile device. OCIE will also look for risk assessments, such as tests of cyber vulnerabilities or documented understandings of where sensitive data resides and whether it is adequately protected. OCIE will similarly expect advisers to have in place an incident response plan, which should address potential cybersecurity incidents. Because vendors are entrusted with sensitive data, OCIE expects firms to also consider whether to perform due diligence on third parties with access to investor information. If an adviser’s internal review identified cybersecurity deficiencies, OCIE will scrutinise the efforts made to mitigate the issue and expect policies and procedures to have been revised to prevent the same future deficiency.

III The Exam Process

A. Before OCIE Arrives: Exam Preparation

The first step in the OCIE exam process is preparing for an exam – which should begin before an exam is on the horizon. By knowing the areas OCIE likely will focus on during an examination, advisers can identify potential issues and take corrective action, if necessary, before OCIE arrives. The SEC’s focus on transparency, continued effort to effectively allocate its limited resources through risk-based analytics, and advocacy of strong adviser compliance programmes provide an encouraging environment for investment advisers to address potential issues before they develop into an Enforcement action. Cooperation, proactive remediation, and, where appropriate, self-reporting benefit investment advisers, investors, and the SEC alike.There are several key measures advisers should consider taking on a routine basis to best prepare for OCIE exams and prevent subsequent SEC Enforcement actions:■ Evaluate written policies and procedures to ensure they are

in place, properly tailored to your firm’s circumstances, and up to date. As noted above, a key area of OCIE focus is evaluating whether written policies and procedures are in place, sufficiently tailored to the specific firm, up to date, and followed. Advisers should thus regularly review their policies and procedures, with particular attention given to those relevant to the SEC’s priorities. Where applicable, policies should be updated to reflect current best practices. Advisers should also ensure that policies are followed and that steps taken pursuant to policies are documented.

■ Ensure any deficiencies noted in prior OCIE exams have been addressed. Because OCIE is focused on addressing repeated deficiencies, firms should closely examine any issues that have been addressed in prior examinations. All deficiencies previously identified by OCIE should have been fully resolved in a timely manner. Firms should expect OCIE to follow up on those earlier issues, and advisers should be prepared to explain changes made to policies or implementation practices to address those deficiencies, and demonstrate that past deficiencies have not been repeated.

■ Determine if any further action is needed to remedy past deficiencies or to proactively address potential deficiencies. Once risk areas have been identified, the adviser must also determine whether any proactive remedial action is needed. Some remedial steps will be straightforward – updating out-of-date policies or implementing new procedures to follow an emerging best practice. Judgments around other potential remediations may be more complex and nuanced and involve a balancing of considerations, particularly in areas where

definition of what constitutes an advertisement is quite broad.18 The most common and problematic deficiencies involve the sharing of misleading performance results, misleading claims of compliance with voluntary performance standards, cherry-picked profitable stock selections, and misleading one-on-one presentations.19 In a sweep investigation of potential violations of the Advertising Rule, the SEC demonstrated its willingness to bring significant charges against investment advisers when it found 13 investment advisory firms had repeated F-Squared Investments’ false performance data, which had been substantially inflated.20 The 13 firms did not sufficiently substantiate the information that F-Squared Investments had provided, and the then SEC Enforcement Director emphasised that advisers “must verify the information first rather than accept it as fact”.21

Over the course of an exam, OCIE can be expected to scrutinise presentation decks used when meeting with investors, standard due diligence questionnaire responses, investor letters, and other routine marketing communications. Because in-person or telephonic meetings can be just as important as printed disclosures and marketing material, OCIE will also scrutinise compliance manuals and policies and procedures governing these kinds of oral marketing communications. OCIE’s review of advertising materials is, of course, not only targeted at advertising compliance: many of the other exam priorities, such as fee, expense, and trade allocation turn on how an adviser describes its practices to investors in disclosures and advertising material.

Cybersecurity

OCIE first identified cybersecurity as an exam priority in 2014 and, recognising the growing threat of cyber intrusion and the increasing reliance of investors on the internet for account access and securities transactions, the SEC has since placed greater emphasis on evaluating and addressing cybersecurity risk. The SEC has noted the increasing frequency and complexity of cyber-related misconduct affecting the securities markets.22 In August 2017, the SEC described cybersecurity as “one of the top compliance risks for financial firms.”23 OCIE’s cybersecurity concerns have grown as the market becomes increasingly entangled with cyberspace, creating heightened risks for targeted firms, market participants, and retail investors alike. The SEC has noted that the rapid growth of distributed ledger technologies and the cryptocurrency markets present challenges to the staff, requiring additional expertise and a continuously improving programme.24 Accordingly, in its FY 2019 budget request, the SEC has specifically sought additional staff to monitor critical securities market infrastructure for significant cyber events and outages.25 In August 2017, the SEC issued an alert detailing observations from 75 examinations conducted in connection with OCIE’s cybersecurity initiative. The findings were troubling: while nearly all investment advisers had written policies and procedures addressing cybersecurity issues and corresponding protections, those policies were often too general, not tailored to the firm’s business model, or simply not reflective of actual practices at the firm.26 In preparing for an OCIE exam, investment advisers should first ensure that it has in place sufficient written cybersecurity policies and procedures. OCIE’s August 2017 cybersecurity observations have a detailed list of the kinds of policies that OCIE says firms may “wish to consider”. OCIE expects mandatory cybersecurity awareness training for employees and contractors. After examination of the contents of the firm’s policies and procedures, OCIE will consider whether these policies are followed. For example, if there is a policy that states employees cannot use



It is important to maintain thorough records of all materials provided to OCIE. Even though information requests often arrive on short notice with tight deadlines, firms should keep a detailed log of every document or item provided to OCIE, as well as a copy of all materials produced.

C. Responding to Email Requests

OCIE exams frequently include requests for the production of email. Recent practice indicates that OCIE increasingly seeks all emails from selected senior personnel (including portfolio managers and analysts) over extended time periods, resulting in extensive initial email production. Email collection, review, and production can become expensive and time intensive and are fraught with pitfalls, from inadvertent production of privileged material to technical issues in search or production. In contrast to document review in the civil litigation context, the timeline for most OCIE exams typically makes it impossible and unduly expensive to review, before producing, every email of multiple employees sent or received over a broad time period. It is essential, however, to have steps in place to protect privileged information and obtain a general understanding of what information is being produced and what the exam team may focus on. The essential parts of a review strategy include the following:■ Identify potentially privileged material before production.

Producing privileged materials to the SEC without taking reasonable steps to avoid production risks waiving the privilege with respect to the documents or potentially over the entire subject matter of the communications. Advisers should therefore take reasonable efforts to remove privileged material from the production before the documents are produced to OCIE. Among other search approaches, advisors should consider identifying relevant attorneys, and documents or communications sent to or from those attorneys, or created by or for counsel, should be searched for and analysed. This narrowing of criteria can help identify the documents that most require review so that privileged material is not inadvertently produced.

■ Develop a search strategy to identify highly relevant documents, ideally before production. An additional search strategy will be needed to identify the key non-privileged documents in the production. This search, which will likely feature search terms and may be narrowed to particularly significant document custodians over a particular time period, will depend on the relevant exam priorities and the factual context of the exam. Ideally, the search strategy employed will yield a small document set that is manageable to review before production or before follow-up communications are required with OCIE.

D. Requests for Interviews

OCIE frequently requests one or more interviews with an adviser’s personnel in the course of an exam. Initial interviews routinely cover general questions about the entity and the activities to be examined, which allows the exam staff to develop a preliminary understanding of the firm’s compliance practices and its adherence to policies and procedures. To the extent that the exam staff has identified particular areas of focus, they may request supplemental interviews. The topics of such interviews may suggest that the exam team is giving increased scrutiny particular aspect of the adviser’s business or a particular transaction. Such targeted interviews require a shift in thought process and preparation, with witness preparation demanding careful attention. ■ Treat OCIE interviews with the same care you would

afford to an interview or deposition in an Enforcement investigation. While there should be no lessening of

OCIE and Enforcement priorities appear to be evolving. Whether or not a decision is made to remediate, it is essential to be prepared to explain to OCIE the firm’s decision and decision-making process.

■ Develop a regularised procedure for OCIE exams, including a process to manage interactions with examiners, document production, and responses to requests. Advisers should designate a coordinator to serve as a primary point of contact for the OCIE staff in order to maintain clear communication and ensure that requests are dealt with promptly. This also facilitates proper recordkeeping and improves the ability to efficiently produce documents upon request.

Perhaps the best way to ensure that the above exam preparation steps occur on a routine and regularised basis is to make them part of an adviser’s regular compliance procedures. By integrating this prospective review into a regular compliance review, advisers can ensure that steps are taken regularly, systematically, and with ample time to assess and implement any remedial action. This is only possible, of course, if advisers ensure that their compliance function has sufficient resources to proactively address potential exam issues, allowing the firm to substantially lessen resource expenditure, disruption and risk later on.

B. Responding to Written Requests

OCIE exams ordinarily commence with a series of written requests for documentation and information. Before responding to written requests from OCIE, investment advisers should consider the full context of each request and the potential Enforcement implications. Although responding to such requests can seem like a rote exercise, initial requests offer critical insight into what OCIE may have identified through its pre-exam risk assessment as issues for enhanced scrutiny. OCIE inquiries should not be viewed through the adversarial lens of civil litigation, however. Rather, written requests should be approached as an opportune time to begin building a cooperative relationship with OCIE examiners through timely and accurate responses:■ Consider the aim of written requests and evaluate whether

additional information should be provided. An adviser’s goal in responding to a request should be both to fulfil the request and to ensure that the adviser has provided a complete and accurate response to OCIE. When a written request is received, an investment adviser should first consider the aim of that request. Does the request relate to the examination and Enforcement priorities identified above? How does the request relate to the firm’s business and strategies? What would someone in an Enforcement capacity be looking for in the responses? By reflecting on these questions, an adviser can better determine whether there is information outside the scope of the request that might be provided to ensure that OCIE has a complete and accurate picture of the adviser’s practices.

■ Evaluate follow-up requests with particular care to identify potential target areas. Follow-up requests offer even more refined insight into OCIE’s thinking. These requests enable advisers to determine whether the OCIE inquiry is, in fact, aimed at the issues initially believed to be the focus. By their nature, follow-up requests suggest OCIE’s interest has been piqued: a follow-up request for fee allocation data for the past X years, for example, is a strong indication that OCIE has flagged this area as high-risk for the firm and is taking careful look at the issue. Follow-up requests should also prompt advisers to more closely consider whether there exists additional information that, while not directly responsive to the request, would be relevant to the general line of inquiry and may be beneficial to proactively share.



adviser benefited, and whether the deficiency was caused by a good faith error or technological glitch or whether it resulted from mal-intent or compliance programme shortcomings. The particular facts and circumstances will drive every judgment, but if a firm is faced with an ambiguous or borderline position on the merits of an issue, which resulted in determinable financial costs to investors to the benefit of the adviser, prompt remedial action should be strongly considered.

■ Consider the form of potential remedial action. Remediation can take many forms: enhancing policies and procedures, making additional client disclosures, amending fund agreements, and making financial payments. Determining how to handle possible remediation begins with fully understanding the relevant facts and applicable laws and regulations and how they might apply to the circumstances. There is often ambiguity about this, as applicable laws and regulations frequently do not address the situations that arise and OCIE’s expectations may be based on industry best practices which are evolving. Given the complex judgments required to reach a remediation decision, investment advisers should begin considering remediation options as soon as issues arise. Waiting for OCIE to raise a concern and then appearing to remediate only because OCIE has focused on the issue does not put the firm in the most favourable position.

■ Consider how remediation may be perceived as OCIE evaluates whether to refer the matter to Enforcement. When corrective action is undertaken appropriately, the risk of an issue being referred to Enforcement may be reduced. Alternatively, the decision not to remediate an issue which OCIE clearly believes should be remediated can substantially increase the risk of a referral to Enforcement, which in turn could lead to substantially greater financial and reputational costs for the adviser. Remediation itself does not, however, create a “safe harbour” to avoid Enforcement, and there are many situations where OCIE will refer an issue to Enforcement even when an adviser remediates in the course of an exam.

■ Remedial action should generally not be seen as an admission of noncompliance. Advisers may focus unduly on whether taking remedial action will constitute a concession, thereby increasing the likelihood of an issue going to Enforcement, or whether, if there is an Enforcement investigation, the firm will not receive credit for taking remedial action in a settlement, resulting in an additional sanction by Enforcement. While every set of circumstances is different and should be evaluated accordingly, advisers should not overthink the extent to which taking remedial action will impact potential future Enforcement actions. Instead, advisers should focus on making the best decision with the available information. It is highly unlikely that positive remedial steps taken during an OCIE exam will have greater negative ramifications later on. Even if the issue is referred to Enforcement, if the SEC’s process works as it should, the firm should receive full credit, or even greater credit, if the issue was remediated promptly and appropriately.

F. Referrals to Enforcement

At the conclusion of an exam, OCIE will provide a deficiency letter which identifies where the SEC views potential violations of laws and regulations and invites the firm to respond in writing and take appropriate action in response to the issues raised.27 Firms should take full advantage of this opportunity and make as thorough a submission as possible. The firm’s submission will be closely considered by both OCIE and, in situations where OCIE has determined that Enforcement action should be considered, by Enforcement as well. Ultimately there

cooperation and transparency with OCIE, preparation for interviews should be thorough and comprehensive. The interviewee’s statements about what occurred and why will become part of the permanent record of the matter and will follow the adviser to any Enforcement action that may arise out of the exam. If the interviewee’s statements are inaccurate for any reason, it may be difficult to correct them at a later stage or dispel any misunderstandings they may have caused. Advisers must therefore carefully consider the background of an interview request, understand the intended scope of the interview, gather documents and emails relating to the relevant transactions or events, and determine a preparation approach with the interviewee.

■ Carefully consider which adviser personnel can best serve as interview subjects. OCIE may request to conduct an interview on a particular subject or transaction rather than to interview a specific person. Advisers and their counsel should consider who among the adviser’s personnel with knowledge of the subject would best present a complete and accurate account of the relevant facts, and have sufficient “big picture” perspective to situate a transaction or occurrence in the adviser’s overall business. For example, junior employees may have had direct “hands-on” involvement in a particular transaction but may lack the perspective or experience to provide a complete report to OCIE. Conversely, a senior employee may be able to present the best overview of a subject but may lack detailed firsthand knowledge of a relevant occurrence. Advisers and their counsel should carefully balance these considerations when selecting interviews subjects.

■ Prepare for OCIE interviews just as you would prepare for a deposition. Ideally, advisers would provide interview subjects with relevant documents and conduct preparation meetings in advance of the interview. The purpose is to understand fully what the witness recalls and what the witness would state in response to questions. Mock Q&A sessions are also an indispensable part of preparation, as an investigative interview – like a deposition – is very different from an ordinary conversation. While the short timetable for OCIE interviews may limit the ability to conduct as extensive preparation as for a litigation deposition, advisers and their counsel should develop a preparation process that ensures the witness will be prepared in the fundamentals of the interview process and relevant facts.

E. Remedial Action

Whether to take remedial action in the course of an exam can be one of the most important and difficult decisions to be made in the context of managing the risks of subsequent Enforcement action. Where it is feasible to take corrective action before the conclusion of an exam, advisers should weigh the following considerations in making this judgment:■ Carefully assess the merits of the underlying deficiency.

If OCIE identifies a deficiency, investment advisers should thoroughly assess the nature and cause of that deficiency. Advisers should first examine relevant fund agreements and client disclosures with the goal of identifying opposing arguments on whether there was a violation of those agreements and disclosure. Recognising that the SEC may expect increased levels of detail in agreements and disclosures, advisers should consider the strength of the firm’s position on the merits.

■ Consider whether adviser clients may have been harmed by any deficiencies, and if so, how clients may be made whole. In situations where there is a close question on the merits and financial remediation is contemplated, firms need look closely at whether clients were harmed, whether the



15. Id.16. Id.17. National Exam Program Risk Alert, The Most Frequent

Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers (Sept. 14, 2017) (“Advertising Risk Alert”) available at https://www.sec.gov/ocie/Article/risk-alert-advertising.pdf.

18. The Advertising Rule states that an “advertisement shall include any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory service with regard to securities”. Advisers Act Rule 206(4)-1(b).

19. Advertising Risk Alert. 20. SEC Press Release No. 2016-167, Investment Advisers

Paying Penalties for Advertising False Performance Claims (Aug. 25, 2016), available at https://www.sec.gov/news/pressrelease/2016-167.html.

21. Id.22. Stephanie Avakian, The SEC Enforcement Division’s

Initiatives Regarding Retail Investor Protection and Cybersecurity (Oct. 26, 2017) available at https://www.sec.gov/news/speech/speech-avakian-2017-10-26.

23. National Exam Program Risk Alert, Observations from Cybersecurity Exams (Aug. 7, 2017) (“Cybersecurity Risk Alert”) available at https://www.sec.gov/files/observations-from-cybersecurity-examinations.pdf.

24. SEC FY19 Budget at 28.25. Id. at 4. 26. Cybersecurity Risk Alert. 27. Under Section 4E of the Exchange Act, which was added as

part of the Dodd-Frank act, OCIE must provide the deficiency letter not later than 180 days after the conclusion of the exam, unless senior OCIE employees extend the deadline for an additional 180 days after providing notice to the Chairman and Commission. 15 U.S.C. § 78d-5(b).

28. SEC FY 2019 Budget.

AcknowledgmentThis chapter builds on a Davis Polk webcast entitled “How to Reduce the Risk That Your OCIE Exam Becomes an Enforcement Investigation”, which the authors presented with Davis Polk litigation partner Amelia T.R. Starr and Davis Polk litigation associate Marc Tobak. The webcast is available at https://www.davispolk.com/publications/webcast-how-reduce-risk-your-ocie-exam-becomes-enforcement-investigation. Ms. Starr’s practice focuses on a wide variety of commercial litigation, securities litigation, regulatory enforcement proceedings and insolvency matters. She has a detailed knowledge of the funds industry, representing the largest fund managers on issues revolving around breach of contract, breaches of fiduciary duty, valuation disputes, trade allocation practices, securities and fraud claims, insider trading and other misconduct. (Tel: +1 212 450 4516 / Email: [email protected]). The authors would also like to thank Davis Polk litigation associates Marc Tobak and Danielle Hustus for their assistance in the preparation of this chapter.

will be a process involving both groups within the SEC to decide whether Enforcement should open an investigation. It is possible to ask for additional meetings or calls with the SEC as this process progresses, but firms should assume that their written submission will be the principal basis on which the SEC makes its decision. In FY 2017, 7% of investment adviser exams resulted in a referral to Enforcement.28 While it is impossible to predict with certainty whether a particular issue will result in a referral to Enforcement, the following factors may be relevant:■ Referral to Enforcement is more likely where investors

have been injured. OCIE is more likely to refer matters to Enforcement in instances where there has been a recognisable injury to investors which is traceable to a clear violation of the securities laws, in particular to inadequate disclosures or an undisclosed conflict of interest between the adviser and clients. Injuries to markets through misuse of material non-public information and fraud or intentional misconduct generate similar Enforcement attention.

■ Referral to Enforcement is more likely if the deficiencies identified relate to areas of SEC policy focus. The SEC may also identify particular areas – such as the subject matter areas referred to above – that present emerging trends in wrongdoing and want to take a public position on an issue. As a result, Enforcement referrals may be more likely as a policy or deterrent matter. If the issue is of interest to the SEC and the SEC sees value in an Enforcement settlement creating precedent on the issue, this can result in referrals even when there has been remedial action and cooperation.

IV Conclusion

With OCIE focused on more targeted, deep-dive examinations into high risk areas, the potential for Enforcement investigations following on to exams has never been higher. Accordingly, investment advisers should take scrupulous care in preparing for and managing the exam process.

Endnotes

1. U.S. Secs. and Exchs. Comm’n, Fiscal Year 2019 Congressional Budget Justification Annual Performance Plan (Feb. 12 2018) (“SEC FY19 Budget”), 30, available at https://www.sec.gov/reports-and-publications/budget-reports/secfy19congbudgjust.

2. Id. at 105.3. Id. at 27. 4. Melanie Waddell, SEC to Probe Adviser, BD Fiduciary

Compliance With ReTIRE Initiative, ThinkAdviser, Mar. 3, 2017, available at https://www.thinkadviser.com/2017/03/03/sec-to-probe-adviser-bd-fiduciary-compliance-with/?slreturn=20180411160149.

5. Improving Investment Adviser Compliance, Peter B. Driscoll (Sept. 14, 2017) (“Driscoll Speech”) available at https://www.sec.gov/news/speech/speech-driscoll-2017-09-14.

6. Id.7. SEC FY19 Budget at 27.8. Id. at 106.9. Id.10. Id.11. Driscoll Speech.12. Leor Landa & James H.R. Windels, Allocating Fees and

Expenses: The SEC is Paying Close Attention, 5 Int’l Comp. legal guIde to alternatIve Inv. (2017).

13. Id.14. Id.



Davis Polk & Wardwell LLP (including its associated entities) is a global law firm with offices strategically located in the world’s key financial centres. For more than 160 years, our lawyers have advised industry-leading companies and global financial institutions on their most challenging legal and business matters. Davis Polk ranks among the world’s preeminent law firms across the entire range of its practice, which spans such areas as capital markets, mergers and acquisitions, credit, antitrust and competition, litigation and enforcement, private equity, tax, financial regulation, investment management, insolvency and restructuring, executive compensation, FinTech, intellectual property and technology, real estate, and trusts and estates. Davis Polk has more than 800 lawyers in offices located in New York, Menlo Park, Washington DC, São Paulo, London, Paris, Madrid, Tokyo, Beijing and Hong Kong. For more information, please visit: www.davispolk.com.

Mr. Landa is a partner in Davis Polk’s Investment Management Group. He advises a wide range of clients on the development, formation, marketing and operation of private investment funds, including private equity funds, hedge funds, hybrid funds, real estate funds, secondary funds, funds of funds, fund and advisory platforms and asset allocation products. He also regularly provides regulatory and compliance advice to his private fund clients.

He advises fund managers on compensation and profit-sharing arrangements. He also advises on structuring and executing private equity, structured equity and public market transactions, as well as acquisitions of investment advisers. Mr. Landa also represents several large institutional investors that invest in private funds.

Representative private fund clients have included Strategic Partners, Credit Suisse, Avenue Capital, Oaktree Capital, Mudrick Capital, Hitchwood Capital, Perella Weinberg Partners, Royal Capital, Reverence Capital, Scopus Asset Management, Citadel, Fore Research, Morgan Stanley & Co. and J.P. Morgan & Co.

Leor LandaDavis Polk & Wardwell LLP450 Lexington AvenueNew York, NY 10017USA

Tel: +1 212 450 6160Email: [email protected]: www.davispolk.com

Mr. Windels is a partner in Davis Polk’s Litigation Department. He has experience in a wide variety of federal and state court commercial litigation matters and arbitrations, regulatory enforcement proceedings and internal investigations. Mr. Windels represents public and privately held corporations, financial institutions, hedge funds, accounting firms, and corporate directors and officers.

Representative clients over the last 20 years include Alliance Capital Management, Banco Santander, Barclays Capital, Credit Suisse, Delta Air Lines, Deutsche Bank, Digicel Group, Highbridge Capital Management, J.P. Morgan & Co., Lehman Brothers International (Europe), Metalmark Capital Partners, Morgan Stanley & Co. and PricewaterhouseCoopers LLP.

James H. R. Windels Davis Polk & Wardwell LLP450 Lexington AvenueNew York, NY 10017USA

Tel: +1 212 450 4978Email: [email protected]: www.davispolk.com



Chapter 4

Paul, Weiss, Rifkind, Wharton & Garrison LLP

Marco V. Masotti

Lindsey L. Wiersma

Private Equity’s Seesaw: Changing Dynamics in Fundraising Terms

“Early Bird” Discounts. In addition, some private equity funds provide a discount on management fees to limited partners who come in at the first closing (or early in the offering), sometimes only with respect to the pre-step down rate but other times with respect to both the pre-step down and post-step down management fee rates. “Early bird” discounts may be combined with size-based discounts. In some cases, these “early bird” discounts apply only to a portion of a limited partner’s commitment (for example, the first $100 million of the commitment) or the total amount of capital from all investors that may be subject to the discount may be limited (for example, the discount may only be available to the first $200 million of commitments, even if additional capital comes into the first closing of the fund). In our experience, a small number of private equity funds offer “early bird” discounts on management fees, and it is often the case that firms are able to extract a better overall fee arrangement by offering only size-based discounts that incentivise larger commitments.

Performance-Based Sharing of Profits

While the carried interest rate has remained largely unchanged at the traditional 20% level, there have been some modifications at the margins of how carried interest is calculated.Distribution Methodology. The deal-by-deal distribution methodology remains the market norm for U.S.-based private equity funds. Under this methodology, proceeds attributable to an investment are distributed to the limited partners until they recover the capital they invested in the deal generating the distribution and any capital they invested in other deals that have been disposed of at a loss prior to the preferred return and carried interest being paid, as opposed to receiving a return of all contributed capital as in an all-capital-back or “European” waterfall. Typically, the limited partners also receive a return of the capital that they contributed to fund an allocable portion of the fund’s expenses at this step of the waterfall. However, there is increasing precedent for a hybrid model in which limited partners receive a return of all expenses paid to date, or all organisational expenses (as opposed to an allocated portion of those expenses), at this step.Preferred Return. In our experience, 8% remains the most common preferred return rate. However, a few top performing general partners have successfully argued for the removal of the preferred return. While the overwhelming majority of funds will continue to offer a preferred return, it may be time to revisit the conventional 8% rate to better reflect today’s low interest rate environment. Further, given the increased use of subscription line credit facilities, some limited partners are pushing to have the preferred return clock start ticking when the fund draws on a subscription line credit facility (rather than

The private equity fundraising market remains robust and competitive. 2017 was a record year and 2018 has not showed signs of slowing down. The negotiation of terms between general partners and limited partners is taking place in a market divided between highly prized and oversubscribed offerings, on the one hand, and firms that are struggling to reach their target sizes, on the other hand. As a result, the negotiating leverage of general partners and limited partners differs greatly from fund to fund even though overall market terms seem largely unchanged. The available dollars in the marketplace appear to be heading increasingly to the same privileged group of firms. At the same time, the fundraising process has become – more than ever – a balancing act between the increasingly bespoke requests of individual limited partners and the need to create a pooled vehicle that serves a wide array of partners for a decade or more. In this context, a number of important trends have emerged in today’s private equity marketplace.

Alternative Management Fee Arrangements

General partners are experiencing varying degrees of pressure from limited partners to lower, adjust or calculate differently their management fees. For their part, general partners are responding by offering alternative fee arrangements and discounts that are consistent with their business goals of attracting large and diverse investors, building strategic relationships and closing funds quickly. As a result, there is growing market precedent for fee discounts based on size, relationship or being an “early bird” (i.e., first closer). Some general partners are creating multiple classes with varying rates of management fees, including options like a reduced management fee in exchange for a higher carried interest, management fee “holidays” early in the life of the fund and “J-curve” mitigating interests that “back-end load” management fees. While there is precedent for fees to step down after the commitment period, the trend of further lowering fees during a fund’s winding-up period has gathered momentum. Limited partners routinely seek to have fees lowered, or at least renegotiated, during the winding-up period to address concerns about “zombie” funds that continue to accrue management fees.Size-Based Discounts. Based on our experience, it is increasingly common to provide a discount on management fees based upon the size of the limited partner’s capital commitment. Discounts are typically granted in increments of 10 to 25 basis points per tier of commitment (for example, a fund may offer a management fee rate of 2.0% for commitments under $150 million and 1.75% for commitments over $150 million). The investor community seems to be increasingly at ease with differing economics based on size.


Key Person Triggers. In the event that one or some combination of principals cease to dedicate the requisite amount of time and attention to the fund, limited partners may often terminate the commitment period, usually after the expiration of a specified suspension period during which the general partner may put forward proposals for replacing the departed principals and resume the fund’s investment activities. The specific parameters of key person terms, including which principals are covered and the extent of their time commitments, are necessarily tailored to the dynamic realities of each individual firm. As more firms have experienced key person departures and as the industry matures, some limited partners are increasingly requesting that the key person provisions cover a broader group of professionals (including those with less seniority). At the same time and due to the growth and institutionalisation of their businesses, some general partners have sought increased flexibility in the mechanisms and procedures for replacing individual key persons or in their ability to otherwise cure a key person event.No-Fault Termination Rights. Limited partners typically have the right to terminate the commitment period and/or terminate the fund for any reason. Although rarely invoked, the existence of these provisions gives a measure of leverage to limited partners during circumstances where a private equity fund encounters adversity. In our experience, the voting threshold required for no-fault termination is between 75% and 85% in interest of the limited partners. Limited partners sometimes argue for a lower threshold, but the market seems to be settled at a higher threshold – which in our view provides balance and alignment in a committed product while providing investor protections.GP Removal – for Cause. The limited partners’ right to remove the general partner of the fund is often limited to circumstances in which the general partner and/or the investment professionals have taken actions constituting “cause”. The threshold for actions meriting removal for “cause” is typically high, such as fraud, gross negligence, willful misconduct or material violations of securities laws; however, in our experience, there has been renewed focus on the parameters around GP removal for cause. The limited partner vote required for a removal of the general partner following an action constituting cause is typically that of a majority or supermajority of limited partners. The economic consequences of a GP removal for cause range from requiring a replacement general partner to purchase the carried interest at fair market value to applying a discount (or “haircut”), typically ranging between 20% and 50%, to future carried interest distributed to the removed general partner with respect to investments made by the fund while it was the general partner. GP Removal – without Cause. In today’s marketplace, limited partners are more frequently requesting the right to remove the general partner without cause. General partners are typically highly resistant to this proposal, which, in addition to being generally inconsistent with the notion of a “committed” vehicle, would effectively allow the limited partners to hand the portfolio created by the general partner to another firm to manage. When a private equity fund does provide for removal of the general partner without cause, it is typically upon the vote of a large supermajority of limited partners, although some limited partners have pushed for this right at thresholds of as low as 75% in interest of the limited partners. In our experience, the majority of private equity funds still do not permit removal of the general partner without cause and, where it is permitted, the requisite voting percentage is often higher than 75%.

Succession: Handing over the Keys

General partners are increasingly confronted with succession issues in their businesses. Although many private equity firms

when capital is actually called from the limited partners). However, general partners are typically successful in resisting this request given the intended alignment of interests between limited partners and general partners on the benefits of the use of a subscription line credit facility. The preferred return is conceptually intended to be calculated on the actual contributions of capital to the fund. In the context of a subscription line credit facility, calculating the preferred return on amounts drawn under the facility would cause a misalignment of the benefits associated with its use. General Partner Catch-Up. Because the basic deal is that the general partner should receive the applicable carried interest percentage of all profits, private equity funds uniformly provide for a “catch-up” of profits due to the preferred return to limited partners. In our experience, this “catch-up” rate is split fairly equally between 100% and 80% to the general partner, while a few firms have agreed to general partner catch-up rates below 80% (such as 50%).Carried Interest Percentage. The traditional 20% of profits going to the general partner remains by far the most common carried interest percentage. A few general partners with exceptional track records have been able to negotiate for a carried interest percentage of as high as 25% or 30%. Some general partners have also offered classes of interests that trade a lower management fee rate for a higher carried interest percentage. Additionally, a few funds provide for tiered carried interest percentages depending on the performance of the fund. For example, the carried interest may be 20% until the fund reaches a performance threshold based on the IRR of the fund and, thereafter, the carried interest may be increased to 25%.General Partner Clawback. Historically, the general partner clawback obligation was calculated only once, at the end of the life of the fund. However, limited partners have become increasingly concerned that the clawback obligation may not be due for many years after losses begin to accrue in the fund or that the general partners (or the ultimate carry recipients) who have received carry distributions during the early years of a fund may not have the means to satisfy their clawback obligation upon the liquidation of the fund. Interim clawbacks may be requested by some limited partners to address this concern and, in our experience, a significant number of private equity funds provide for interim general partner clawbacks during the life of the fund, frequently starting at the end of the commitment period and occurring as often as annually thereafter. When interim clawbacks are provided, there is typically a true-up mechanism allowing the general partner to recover any excess clawback amounts paid by the general partner (for example, if an unrealised loss is ultimately recovered) so that the general partner is not inadvertently shortchanged to receive less than 20% (or the other applicable carried interest percentage) of the profits.

Investor Protections: Taking Away the Keys

The non-economic terms of a private equity fund are meant to achieve a balance between giving the general partner sufficient flexibility to exercise its duties and responsibilities to the fund, on the one hand, and adequately protecting the limited partners, on the other hand, given the limited partners’ passive role in the fund. Limited partners typically seek to ensure that appropriate mechanisms are in place to work through unforeseen conflicts as well as changes to the investment team. These protections are usually provided either via limited partner consents or through action by a limited partner advisory committee. While limited partner advisory committees can be a useful tool to the general partner, and other limited partners are often eager to have the advisory committee weigh in on a variety of matters, their members are sometimes reluctant to decide certain types of matters put to them. To avoid operational bottlenecks, both general partners and limited partners need to exercise care in deciding which types of matters will be required to be brought to the advisory committee.

Paul, Weiss, Rifkind, Wharton & Garrison LLP Private Equity’s Seesaw


routinely request information about general partner ESG policies, including whether ESG forms a part of the investment process, whether an ESG officer has been appointed and what the sponsor’s reporting practices are. Side letter requests with respect to ESG matters are becoming more common as well. In addition, some general partners are coupling the growing investor interest in ESG issues with the launch of niche funds. While the market for social impact funds (funds dedicated to addressing one or more ESG issues while seeking to achieve a return) is still quite nascent, some of the largest institutional sponsors have already raised dedicated social impact funds and we expect this trend to continue.

Transactions Involving Managers

The trend of investors focusing their commitments on an ever-narrowing list of private equity firms and the maturation of these businesses generally are driving consolidation and transactional activity among private equity managers. General partners seem to be increasingly interested in institutionalising their businesses by partnering with other financial institutions (and, in some cases, corporations outside of the financial services industry) through transactions that, at the same time, monetise the value of their firms. These transactions come in a variety of shapes and sizes, but most often involve majority or minority investments in managers, spin-ins and spin-outs of investment teams and, in some cases, strategic partnerships. Importantly, although limited partners seem cautiously comfortable with these types of deals, their reactions are a key factor that should be carefully managed as their consent may be required for certain transactions. The availability of willing buyers in the marketplace is likely to accelerate the rate of transactional activity involving private equity managers in the coming months and years. This trend, coupled with the continued drive towards corporate-style governance features (such as enhanced limited partner advisory committees), suggests that alternative investment managers will operate more like mainstream financial institutions in the future than they have to date.

The Unlikely Standardisation of Terms and Documents

The quest for standardisation of terms and documentation has gathered steam recently. The Institutional Limited Partners Association (ILPA) released a model form of subscription agreement for private equity funds and is at work preparing a model form of partnership agreement. The rationale for standardisation includes an attempt to create a more efficient and fair market. However, considering the level of customisation among firms and the level of negotiation of terms between general partners and limited partners, the private equity market does not readily lend itself to standardisation. Sponsors are composed of businesses of differing sizes, strategies and histories. For their part, the investor base is equally diverse and there is growing demand from some of the largest investors for customised arrangements, co-investments and single-investor products. There are also particularised demands of investors in traditional pooled vehicles, as evidenced by the exponential growth in both the number and length of side letters. As a result, we believe the trend towards standardisation is doomed to failure in the foreseeable future.

Conclusion

There are many more trends at work in the marketplace. In terms of the regulatory environment, offering interests in private equity

remain tightly controlled by a few partners, the ageing of founders, the ambitions of talented “next generation” professionals and the maturation of the industry as a whole are forcing sensitive discussions among partners across the marketplace. Because the key assets of private equity businesses “walk out the door” at the end of each day, general partners increasingly appreciate that a controlled, thoughtful and well-communicated transition process can avoid a talent vacuum and maintain the confidence of investors. Many private equity firms appear to be making operational adjustments – to governance and economics – in a manner designed to foster growth as an institutionalised business. This process is most successful when done over a number of years in a deliberate, orchestrated manner, with careful consideration of related issues presented in the fundraising process, including key person triggers, time commitment covenants and assignment or change of control provisions.

Steady Demand for Co-Investments

Over the past several years, the demand from some of the largest institutional investors, state pension plans and sovereign wealth funds for increased capacity in large transactions has accelerated. Co-investments offer investors more exposure to the asset class and the ability to select specific subsectors within the asset class on potentially more favourable terms (including, in many cases, reduced or no management fees and carried interest). As the co-investment market continues to mature, the process of offering and documenting co-investment opportunities is becoming more elaborate and time consuming. While there are a myriad of other economic, governance, regulatory and tax issues to consider when structuring these arrangements, general partners have shown increasing flexibility in offering these arrangements in order to build goodwill with investors, facilitate consummation of sizeable transactions and enhance diversification at the fund-level. The access to large amounts of nimble capital allows general partners to act more opportunistically, and strategic co-investors often provide access to or insight into markets and industries that may otherwise have not been available to the general partner.

Long-Dated Funds

The formation of private equity funds with longer terms has been a notable feature in the marketplace in recent years. Instead of traditional private equity funds that wind up after 10 years, several general partners have offered fund structures and terms that offer a continuing supply of long-term and patient capital with terms of as long as 20 to 25 years. The expectation is that these private equity funds will make larger investments with longer time horizons than is permitted by the typical middle-market private equity fund. In our experience, these funds often provide for reduced management fees and carried interest rates as compared to a typical middle-market private equity fund. We can expect to see more of these types of products in the coming years as the demand for larger and longer-duration investments is being driven by both general partners and by limited partners with large cash reserves in need of sizeable longer-term allocation opportunities.

Environmental, Social and Governance Programmes

General partners and limited partners alike are increasing their focus on environmental, social and governance (ESG) considerations as part of their investment programmes. Institutional investors



Recognised as one of the premier private equity funds practices in the marketplace, the Paul, Weiss Private Funds Practice serves as industry-leading advisors to a diverse group of private equity firms, ranging from up-and-coming middle market firms to large alternative asset managers. Our business judgment and extensive market knowledge is built on decades of experience working hand-in-hand with private equity managers, investors and other key market participants making us uniquely positioned to offer cutting-edge yet practical advice. We have an established track record of helping our private equity clients achieve their most important objectives and long-term business goals. The full suite of the firm’s resources are at our clients’ fingertips and we work closely across practices to provide seamless advice to private equity funds throughout their lifecycle.

Marco V. Masotti is a partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. For over two decades, Marco has led and built the firm’s private funds group into one of the elite practices in the marketplace. Marco’s clients include a “who’s who” of alternative asset managers. He also counsels many founders and partners of private equity businesses on their strategic initiatives. Ranked Band 1 in Chambers, Marco is described as a “spectacular private funds practitioner who brings deep industry insight to the mega capital-raising mandates” and clients “trust his judgment completely”. In 2016, he was one of four lawyers in the nation named as an Asset Management MVP by Law360. Marco has been featured by The Deal as one of the “Movers & Shakers” in the industry, named by Crain’s New York Business to its annual “40 Under 40” list, and profiled by the New York Observer as one of New York’s top corporate lawyers. Private Equity International named Marco one of “The 100 Most Influential of the Decade”.

Marco V. MasottiPaul, Weiss, Rifkind, Wharton & Garrison LLP1285 Avenue of the AmericasNew York, NY 10019-6064USA

Tel: +1 212 373 3034Fax: +1 212 492 0034Email: [email protected] URL: www.paulweiss.com

Lindsey L. Wiersma is a counsel in the private funds group of Paul, Weiss, Rifkind, Wharton & Garrison LLP, where she focuses her practice on the organisation and operation of a variety of private investment funds in the private equity market, including buyout funds, mezzanine funds, co-investment funds, venture capital funds and funds of funds. In addition to advising on a wide range of fund formation issues, she also advises fund managers on regulatory issues, management company “upper tier” arrangements, investment management M&A transactions, seeding arrangements and secondary transactions.

Lindsey L. WiersmaPaul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the AmericasNew York, NY 10019-6064USA

Tel: +1 212 373 3777Fax: +1 212 492 0777 Email: [email protected] URL: www.paulweiss.com

years. The opportunities presented within an ever evolving and maturing industry have never been more dynamic.

AcknowledgmentThe authors would like to thank Conrad van Loggerenberg, associate at Paul, Weiss, Rifkind, Wharton & Garrison LLP, for his invaluable assistance in the preparation of this chapter.

funds remains complicated and challenging within the United States, in Europe (especially as managers continue to grapple with the Alternative Investment Fund Managers Directive and enhanced data protection rules) and in most major jurisdictions around the globe. While the market currently has an abundance of “dry powder” and frothy deal valuations may signal challenges ahead, 2018 has continued the strong fundraising trend of the last several



Chapter 5

Ropes & Gray LLP Partha S. Pal

Financing European Commercial Real Estate Debt Funds – Alternatives and Considerations

In this chapter, we describe some of the “wholesale” financing structures that we have seen in our professional practice and examine some of the considerations that these pose, both to providers of these facilities and their users. We focus on commercial real estate debt funds, as their use of these facilities is the most common.

Loan-on-Loan Financings

This is the most typical form of wholesale financing structure. In basic terms, a commercial real estate debt fund manager uses capital provided by the limited partners in its fund to originate commercial real estate loans (the “underlying loans”). The underlying loans will be secured by commercial real estate assets and the payment of interest on and the repayment of principal of the underlying loans will be funded by the cash flows generated by these assets. However, rather than funding the underlying loans entirely through the capital from its limited partners, a commercial real estate debt fund manager may borrow money from a third party such as a bank, a pension fund or an insurance company in order to do so in part (the “loan-on-loan financing”). The loan-on-loan financing will be secured on the underlying loans and the security interests that the underlying loans benefit from. Payments of interest on and the repayment of principal of the loan-on-loan financing will be made from the cash flows generated by the underlying loans. The loan-on-loan financier will occupy the position of a senior creditor to the entity that holds the underlying loans. It will be paid first. The limited partners will be paid after the loan-on-loan financier has been paid. However, they are also advantaged because, by using loan-on-loan financing, the commercial real estate debt fund manager makes more efficient use of the capital of the limited partners and can originate a greater volume of loans. The loan-on-loan financing is also cheaper than the limited partners’ capital, enabling the internal rate of return of the commercial real estate debt fund to be enhanced.

Note on Loan Financings

This is essentially the same as loan-on-loan financings, at least in economic terms. This variant is used because some providers of wholesale finance prefer to provide funding through the form of a note with an ISIN, as such instruments are more easily tradeable. While these are the same in economic terms, they are very different in terms of documentation. They involve the entity that holds the underlying loans issuing one or more classes of notes with different levels of seniority. The notes will generally be issued following the conventions of the Eurobond markets. Thus, they will be constituted pursuant to a note trust deed, security will be held and

There can be no doubt that the landscape for European commercial real estate lending has changed markedly since the onset of the Global Financial Crisis. In the pre-GFC era, the main source of finance for commercial real estate assets were banks. Commercial banks made loans which they held on their balance sheets or syndicated to other commercial banks. Investment banks made loans and securitised them by arranging commercial mortgage-backed securities transactions or, in some cases, divided loans into senior and subordinated tranches and sold the subordinated tranches to specialist investors while securitising the senior tranches. The amount of lending by commercial banks far exceeded the amount of lending by investment banks and CMBS was, relatively speaking, a cottage industry.The position now is much more nuanced. The commercial banks and investment banks continue to be active players but the kind of commercial real estate lending that each undertakes is very different. It is unusual, for example, for an investment bank to make a number of small and medium-sized loans and securitise them through a CMBS transaction. Investment banks tend to favour large loans which they can distribute either through a single loan securitisation or syndication. It is similarly less usual for commercial banks to lend to sponsors who are not already established clients. The efficient use of capital is a key priority for both commercial and investment banks. However, the gap has been filled by alternative lenders. In our professional experience, these fall into two main categories and certain additional categories. The first is investment fund managers who are able to raise capital from third party investors (such as pension funds, sovereign wealth funds, endowments, family offices or insurance companies) for investment funds structured specifically for the purpose of making commercial real estate loans (the so-called commercial real estate debt funds). The second are institutional investors themselves, who have always had access to capital but have now created their own commercial real estate lending platforms in order to originate loans themselves. There are also challenger banks which raise capital both from depositors and from shareholders and technology-enabled lending platforms which raise capital from investors on a loan-by-loan basis.This is a welcome development in terms of increasing the sources of debt finance, making the European commercial real estate finance industry more akin to its United States counterpart. However, it has made the industry competitive and lenders have to fight hard to source and secure lending mandates, with pricing coming under pressure. Against this background, commercial real estate debt funds in particular are increasingly seeking to introduce leverage with efficient debt provided by other parts of the commercial real estate finance universe. This reduces their overall cost of capital and enables them to pass on the savings to borrowers, as well as enhance returns to their investors.


the use of these facilities for more than just liquidity management purposes. Indeed, if an investment manager had a particular disposition towards leverage, it could combine a subscription line with asset-based leverage.

Considerations when Using Wholesale Finance

Irrespective of whether a wholesale financing arrangement is structured as a loan-on-loan financing, a note on loan financing, a repurchase arrangement or a securitisation, there are some considerations that both investment fund managers and the providers of these types of credit facility will have to consider. We set out some of these below:(a) structure of the borrowing entity: as a general rule, a

provider of wholesale financing will want the entity to which it lends be restricted in its purpose and activities so that the possibility that it could be subject to financial distress is minimised. Further, an entity borrowing wholesale financing will also need to be established in a place and in a manner where it can receive payments in respect of the underlying loans without any tax withholding by their borrowers and make payments of interest to the provider of the wholesale financing without any deductions for tax reasons. Finally, a provider of wholesale finance will not, generally, want the entity to which it lends to have assets which it is not financing and which are being financed by an alternative provider. Thus, a wholesale financing will impose operational restrictions on a commercial real estate debt fund;

(b) characteristics of the underlying loans: this can be a considerable source of commercial tension. The borrower in a wholesale financing will want comfort that if it originates loans with a certain profile it will be able to access wholesale financing. The provider of wholesale financing will want to make sure that it is fully understands all aspects of the underlying loans before it makes funding available, though it will generally specify eligibility criteria as well (in the absence of compliance with which an underlying loan cannot be financed). The eligibility for funding and the available advance rate are both driven by the qualities of the underlying loans;

(c) security package for the wholesale financier: it would be typical for the wholesale financier to want to take security over all of the underlying loans that it is financing and their related security interests. If a commercial real estate debt fund is making underlying loans in a variety of countries under a variety of laws which have security packages which are also governed under a variety of laws, structuring the security package which satisfies the requirements of the provider of wholesale finance will be complicated. Suppose, for example, that a commercial real estate debt fund has made three loans: the first, governed under English law is made to a Jersey-incorporated borrower which owns an asset in England and has a security package governed by English and Jersey law; the second, governed under German law, is made to a Luxembourg-incorporated borrower that has an asset in Germany and has a security package governed under Luxembourg law and German law; and the third, governed under French law is made to a borrower in the Cayman Islands that owns an asset in France and has a security package governed under French law and Cayman Island law. If the provider of the wholesale financing was adopting a rigorous approach, the security package would have to be tailored to match the underlying assets;

(d) servicing requirements: a commercial real estate debt fund will have its own arrangements in place in relation to servicing the loans that it makes. This will typically involve the appointment of a facility agent and security agent who

enforced through a security agent, where they are cleared through Euroclear and Clearstream, there will be a paying agent and they will be generally be transferable without the restrictions common in credit agreements.

Repurchase Arrangements

Loan-on-loan financing has long been provided in the US through repurchase agreements (agreements under which one party (the seller) sells a financial asset to another party (the buyer) subject to an obligation to repurchase financial assets of that type from the buyer at a future date and for an agreed price). For the generalist, the reason for this was certain provisions of the US Bankruptcy Code. According to these provisions, if a repurchase agreement is structured with particular characteristics, it will not be recharacterised as a secured loan for the purposes of the US Bankruptcy Code and so enforcement action will not be subject to enforcement moratoria applicable to secured loans. Because the same rationale does not apply in Europe, the use of repurchase agreements as a means of structuring wholesale financing has been less prevalent. That said, in our professional experience we have seen US-based real estate debt funds use repurchase agreements to finance European commercial real estate loans that they have originated. These facilities have been used because the real estate debt fund had them in place to begin with. However, we have also seen European banks opt to use a repurchase agreement format to finance a pool of non-performing loans.

Securitisation

While the CMBS market is showing signs of activity, there is as of yet no sign of a multiple loan conduit CMBS making a significant comeback. Nonetheless, there are signs of other securitisation-style products developing. Among those are commercial real estate loan CLOs, a product which is now in use in the US, as well as large loan CMBS.

Subscription Lines

The four variants of wholesale financing described above all rely on the collateral value of the underlying loans and the cash flows that they generate in order to achieve debt service. However, one of the most popular forms of financing for many investment fund managers, irrespective of the underlying investment, is the subscription line. A subscription line is not secured on the assets of an investment fund. Rather, it is secured by the commitments of the limited partners to make capital available. Thus, if a commercial real estate debt fund has five limited partners, all of whom are highly rated institutional investors, the provider of a subscription line will rely on the ability of the debt fund manager to call for such capital and will be secured by such rights. The provider of a subscription line has a much more limited interest in the assets that an investment fund holds. Its main asset-related concern is that if the investment fund holds assets that are outside the investment parameters that have been agreed with the limited partners, the limited partners could refuse to make capital available. It is much more concerned with the ability and requirement that the limited partners honour their capital commitments at the appropriate time. While subscriptions lines have conventionally been used by investment managers for liquidity management purposes (i.e. not having to trouble limited partners with repeated capital calls), their use can have a significant effect in boosting an investment fund’s internal rate of return and so motivate

Ropes & Gray LLP Financing European Commercial Real Estate Debt Funds


purposes, as may a note on loan-on-loan on financing. If this is the case, the transaction will need to be structured to comply with securitisation risk retention requirements, which, in broad terms, will require the real estate debt fund to retain a certain minimum proportion of the economic risk of the transaction.

These are just some of the matters that can have a bearing in structuring a wholesale financing arrangement. However, they illustrate a variety of considerations for both users and providers of their facilities.We anticipate that as the commercial real estate lending market continues to evolve, the market for wholesale financing will continue to evolve as well and will develop its own norms. However, a number of commercial real estate debt fund managers (particularly those who remember the lessons of the Global Financial Crises and are aware of how leverage can destroy equity value) are still cautious about introducing leverage and, of course, there is still no empirical evidence of how these facilities will behave during a downturn.

follow directions from the lenders or the appointment of a servicer who has discretionary servicing powers subject to varying degrees of lender control and oversight. A provider of wholesale finance will need to be comfortable with the servicing arrangements and have the right to intervene in matters such as material amendments to the terms of the underlying loans and what enforcement strategy should be followed if an underlying loan defaults;

(e) cash management requirements: as with any structured lending arrangement, a provider of wholesale finance will require that the rules relating to the management of cash flow is disciplined. Payments of interests and repayments of principal in respect of the underlying loans will have to be collected into controlled accounts and applied in accordance with a priority of payments. It is entirely possible for the provider of the wholesale financing to impose cash trap tests which would prevent distribution of cash flow to limited partners or “turbo” repayment provisions if there was evidence of distress at the level of the underlying loans;

(f) risk for limited partners: in the event that a commercial real estate debt fund uses wholesale financing, it is exposing its limited partners to both the benefits and burdens of leverage. If there were a number of defaults in respect of underlying loans and the provider of wholesale finance had the determinative voice in respect of what enforcement strategy should be adopted, the likelihood is that it would be predisposed towards a strategy which allowed it to achieve recovery at the expense of the limited partners. Similarly, if the wholesale financing was pre-disposed towards default, the position of the limited partners could again be compromised;

(g) recourse to non-financed assets: this is a matter of considerable sensitivity to investment fund managers. In the US repurchase agreement financings, recourse was a common feature so that if the buyer did not achieve satisfaction from the assets that it was financing, it would have the ability to look to other assets that the investment fund or its manager had access to. As the European market has evolved, real estate debt fund managers are evidencing a strong disinclination to accept any form of recourse;

(h) match funding: in the event that the wholesale financing has a shorter lifepsan than the lifespan of the commercial real estate debt fund, the limited parties could be exposed to refinancing risk. This could be a considerable problem in the event that the availability of wholesale finance deteriorates; and

(i) risk retention: strange as it may seem, a loan-on-loan financing may be regarded as a securitisation for regulatory

Ropes & Gray LLP Financing European Commercial Real Estate Debt Funds

Partha S. Pal is a partner in the firm’s real estate group. He is a finance lawyer whose work, for almost 20 years, has focused heavily on the financing of real estate assets, during which time he has led the execution of transactions involving real estate assets in the UK, Germany, France, Italy, Belgium, the Netherlands, Spain, Portugal, Sweden and Finland, as well as in South Korea, PRC and Hong Kong. Mr Pal’s expertise covers both senior and mezzanine lending arrangements and related intercreditor agreements and construction lending, as well as sophisticated capital markets products such as cash-flow and synthetic commercial mortgage backed securities, commercial real estate loan-related wholesale financing arrangements (both loan-on-loan and repurchase agreements) and non-performing loan securitisations. He also advises regularly on regulatory matters relating to investments in securitised products, particularly in relation to risk-retention considerations.

Partha S. PalRopes & Gray LLP60 Ludgate HillLondon EC4M 7AWUnited Kingdom

Tel: +44 20 3201 1641Email: [email protected]: www.ropesgray.com

Ropes & Gray is a preeminent global law firm with more than 1,200 lawyers and legal professionals serving clients in major centers of business, finance, technology and government. Ropes & Gray has a leading international real estate practice advising investors and lenders on structuring and executing complex domestic and international transactions. The team advises on transactions across the risk spectrum from core to opportunity, in multiple geographies and on transactions ranging from asset acquisition to operating businesses. They are also actively involved in post-acquisition repositioning and asset management strategies including redevelopment/refurbishment, lease re-engineering, capex and pre-letting.


Chapter 6

Mori Hamada & Matsumoto

Yasuzo Takeno

Fumiharu Hiromoto

Bringing Foreign Investment Funds into Japan

bilateral trust agreement between a management company and a trustee. As a result, most foreign investment trusts publicly offering units in Japan are established by bilateral trust deeds, as opposed to unilateral declarations of trust.Japanese courts must have jurisdiction over lawsuits relating to any transaction where a Japanese investor has acquired trust units.An agent company for the fund must be appointed in Japan.Usually, one of the distributors of the fund in Japan (i.e., a Japanese securities company) is appointed as the agent company for the offer. The agent company is required to check whether the JSDA requirements have been satisfied before making the public offering, and will disclose the net asset value of the fund to the public after the public offering.The amount of securities sold short must not exceed the net asset value of the fund.As a general rule, the borrowings by the fund must be less than 10% of the net asset value of the fund.The fund and other funds managed by the management company of the fund must not have voting rights in excess of 50% of the total voting rights in any company.The exposure to derivative transactions must be calculated using a reasonable method determined in advance by the management company or the investment manager, and must not exceed the net asset value of the fund.This requirement was introduced on December 1, 2014 with no grandfather provision.The credit concentration risks borne by the fund must be managed using a reasonable method determined in advance by the management company or the investment manager.This requirement was introduced on December 1, 2014. There is a grandfather provision, whereby the requirement will not apply, for a period of five years, to existing funds publicly offering units in Japan on or prior to December 1, 2014.When a foreign investment trust is a master-feeder fund and units of the feeder fund are publicly offered in Japan, the question arises as to whether the JSDA requirements will be applicable only to the feeder fund or also to the master fund – in other words, whether the JSDA will look through to the master fund. Currently, the general practice is to apply the JSDA requirements to the feeder fund only, and not to look through to the master fund. The exception is the credit concentration restriction, which cannot be complied with without looking through to the master fund, due to all of the assets of the feeder fund being invested or concentrated in the master fund.Disclosure – securities registration statement and prospectusThe issuer of a foreign investment trust, i.e., the management company of the fund, must file a securities registration statement

1 Overview of Regulations for Foreign Investment Funds in Japan

While there are many varieties of investment vehicles in the world, in this chapter we discuss unit trust-type investment funds and partnership-type investment funds, as these are frequently used in bringing foreign investment funds into Japan.

1.1 Foreign unit trust-type investment fund

When conducting an offer in Japan, a foreign unit trust that is similar to a Japanese investment trust fund (toshi shintaku) is treated as a foreign investment trust in Japan and is subject to Japanese securities laws; specifically, the Financial Instruments And Exchange Act of Japan (the “FIEA”) in respect of marketing, and the Investment Trust and Investment Corporation Act of Japan (the “ITICA”) in respect of regulatory filings with the Financial Services Agency of Japan (“FSA”).1.1.1 Public offering of a foreign investment trust in JapanBased on a survey conducted by the Japan Securities Dealers Association (“JSDA”), among foreign unit trust-type investment funds that publicly offered units in Japan, those domiciled in Luxembourg or the Cayman Islands had an aggregate market share of more than 80% in the first half of 2017 on a net asset value basis. These are followed by unit trusts domiciled in Ireland.When units of a foreign investment trust are publicly offered in Japan, they must satisfy certain requirements imposed by JSDA, as detailed below.JSDA requirementsJSDA is a self-regulating body of securities companies acting as distributors of foreign investment trusts. A member of JSDA cannot engage in a public offering of units of a foreign investment trust that does not satisfy the JSDA requirements, the so-called standards of selection. The JSDA requirements do not apply to a private placement of units of a foreign investment fund.The JSDA requirements for the public offering of units of a foreign investment trust include the following:■ The net asset value of the fund must be, or after the public

offering in Japan is expected to be, greater than JPY 100 million.

■ The net asset value of the management company of the fund, which is the issuer of units of the fund, must be greater than JPY 50 million.

It appears the JSDA requirements assume that the foreign investment trusts publicly offering units in Japan will be established by a


effective), the FSA statement in a private placement must be filed prior to any solicitation in Japan.Registration requirement for self-solicitationA solicitation of units in Japan by the issuer of a foreign investment trust (i.e., the manager of a bilateral trust deed-type unit trust, or the trustee of a unilateral declaration of trust-type unit trust), is regarded as self-solicitation (jiko boshu) under the FIEA. The issuer will be required to register as a Type 2 financial instruments transaction business. However, if the issuer retains a distributor (usually a securities company) for the securities it will issue, and the issuer itself does not conduct any solicitation, registration will not be required.Issuer – manager or trusteeUnder Japanese law, the issuer of units of a Japanese investment trust is the trust settlor and, in that capacity, will also act as the trust manager.As for the issuer of a foreign investment trust, it will be classified on the basis of the applicable governing law and documents. If a foreign investment trust is established by a bilateral trust deed between the manager and the trustee, and the governing law or document provides that the units of the trust are issued by the manager, the manager will be the issuer of the investment trust. If a foreign trust is established by a unilateral declaration of trust by a trustee, the trustee will be the issuer.

1.2 Foreign partnership type investment fund

Public offering/private placementA foreign partnership-type investment fund, such as limited partnership, is usually treated as a collective investment scheme under the FIEA. Interests in a collective investment scheme are Type 2 securities under the FIEA, while ordinary securities, such as units of an investment trust, are Type 1 securities.A different standard applies to determine if an offer of Type 2 securities in Japan is a public offering or private placement. An offering of Type 2 securities constitutes a public offering if the number of the investors that actually acquire the securities is 500 or more. In contrast, the limit of 49 investors for a private placement of Type 1 securities is based on the number of investors who are solicited, including those who do not acquire the securities. The reason for this is that a fund issuing Type 2 securities (such as limited partnership) is usually formed through discussions with potential investors. As far as we know, most foreign partnership-type investment funds are offered in Japan through private placement.Self-solicitation (jiko boshu)Solicitation by an issuer of interests in a foreign collective investment scheme, such as limited partnerships, is regulated as self-solicitation (jiko boshu) under the FIEA.An issuer of interests in a foreign collective investment scheme who solicits investments in its own securities is required in principle to be registered as a Type 2 financial instruments transaction business. However, if the issuer retains a distributor for the securities it issues, and the issuer itself does not conduct any solicitation, registration will not be required.In foreign collective investment schemes, the general partner of a limited partnership will be the issuer of the securities.Self-management (jiko un-yo)The management of assets by operators of foreign collective investment schemes, such as limited partnerships, is regulated as self-management (jiko un-yo) under the FIEA. A person offering collective investment scheme management services is required to register if the fund to be managed invests more than 50% of its assets in securities or derivatives.

with the regulator in advance of the public offering via EDINET, a web-based disclosure system managed by FSA. The securities registration statement is a disclosure document under the FIEA, for securities that are publicly offered in Japan, and is disclosed to the public through the internet. The securities registration statement becomes effective 15 days after filing. Solicitation of investments in the securities can be made before the securities registration statement becomes effective, but the investment cannot be made until the securities registration statement becomes effective and a mandatory prospectus (kofu mokuromisho) is delivered to the investor.The prospectus of an investment trust consists of a mandatory prospectus and a prospectus upon request (seikyu mokuromisho). The contents of the prospectus upon request are substantially similar to those of the securities registration statement, but with minor adjustments and omissions. The mandatory prospectus is a summary of the prospectus upon request. The mandatory prospectus needs to be delivered to investors on or prior to the purchase of securities. The prospectus upon request is delivered to investors only when the investors specifically request.FSA filingPursuant to the ITICA, the issuer of units of a foreign investment trust that is publicly offered in Japan must file an FSA statement with FSA immediately before the securities registration statement becomes effective. Most of the contents of the FSA statement overlap with those of the securities registration statement and, as a result, the FSA statement is usually prepared by extracting the necessary information from the securities registration statement.The FSA statement is for administrative purposes only, and is not disclosed to the public.1.1.2 Private placement of units of a foreign unit trust in JapanTypes of private placement in JapanThere are two categories of private placement of securities in Japan (minor variations aside): private placement to qualified institutional investors (“QIIs”) only; and private placement to a small number of investors.In a private placement to QIIs only, investors are limited to QIIs. There is no limit on the number of QIIs who can invest in a private placement. However, the QIIs are prohibited from selling their securities to non-QIIs.In a private placement to a small number of investors, the number of investors who are solicited for investment is limited to 49. The number of investors who are solicited for investment but did not actually invest is also counted in the investor number limitation. In addition, the number of investors who have been solicited for investment into securities with the same nature within the last six months is also counted in the investor number limitation. This is intended to avoid a situation where an offering is split into multiple offerings in terms of timing to circumvent the 49-investor limitation. These investors are prohibited from selling securities acquired in the private placement unless all such securities held by a transferor are transferred to a single investor. This restriction ensures that the cap on the total number of investors will not be breached.No securities registration statement or prospectusNeither a securities registration statement nor a prospectus is required if units of a foreign investment trust are offered in Japan by way of a private placement.FSA filingAn FSA statement needs to be filed in the case of a private placement. Unlike an FSA statement in a public offering, which is filed after the securities registration statement is filed, (i.e., where solicitation has begun but before the securities registration statement becomes

Mori Hamada & Matsumoto Bringing Foreign Investment Funds into Japan


The filing must identify all QIIs investing in the collective investment scheme so the regulator can check for abuse of the QII Exemption by putting sham QIIs. It may seem inconsistent to require QIIs to be identified in the filing, which is filed prior to solicitation. However, for practical reasons, the candidate QIIs need to be consulted in a manner not constituting a solicitation, so their names can be included in the filing. It is believed that limited partnership-type collective investment schemes can be organised through discussions with candidate large investors; such discussions are not considered solicitation because details are not yet fixed.Some information in the filing will be disclosed to the public by the regulator (and the applicant will also be required to do so), including the number, but not the names, of the QIIs. The applicant is also required to file with the regulator an annual management report, and disclose such report or its summary to the public. These can be written in English.De minimis exception to self-management for foreign partnership-type investment fundsIf investments from Japan into a foreign partnership-type investment fund are limited, the management activity of the general partner of the foreign partnership investment fund is excluded from the scope of the collective investment scheme management services subject to regulation in Japan. Specifically, the exclusion applies if the following requirements are met:■ all Japanese investors investing in the foreign partnership-

type investment fund are QIIs;■ the number of Japanese investors is less than 10; and■ the total contributions from such Japanese investors are less

than one-third of the total contributions of all investors in the foreign partnership-type investment fund.

Exception to self-management by delegation of entire management authorityIf a general partner of a collective investment scheme delegates its entire investment authority to a discretionary investment manager registered under the FIEA, the management activity of that general partner will be excluded from the scope of collective investment scheme management services subject to regulation in Japan and the registration requirement for discretionary investment managers will not apply. This exception would not be a viable option for a foreign limited partnerships managed outside Japan.

1.3 Reverse solicitation – Investment from Japan into a foreign investment fund without any solicitation in Japan

If a Japanese investor, usually a sophisticated institutional investor, approaches a foreign investment fund (regardless of whether it is a unit trust-type or partnership-type) that has not conducted any solicitation in Japan, and makes an investment in the foreign investment fund, the fund is not subject to Japanese private placement regulations, as there is no solicitation in Japan. For unit trust-type foreign investment funds, an FSA statement is not required.Whether or not there has been any solicitation in Japan is a factual matter; however, it should be emphasised that if the foreign investment fund has any involvement in Japan through a subsidiary, or an affiliate or representative office, there may be a risk that the activities of such entities will be regarded as soliciting investments in the foreign investment fund.

Prior to the enactment of the FIEA, which replaced the Securities and Exchange Act of Japan in 2007, the management of assets by such fund operators was regarded as management of the operator’s own assets, and was outside the scope of the regulation. However, the FIEA now recognise this as management of investors’ assets, extending the law to cover the management activities of fund operators.Qualified institutional investors exemption (tekikaku kikan toshika to tokurei gyomu)GeneralThe registration requirements for carrying out: (i) a Type 2 financial instruments transaction business (for self-solicitation); and (ii) discretionary investment management (for self-management), are waived if the qualified institutional investors exemption (the “QII Exemption”) under the FIEA is available.The QII Exemption is available if the investors of a collective investment scheme consist of one or more QIIs and up to 49 non-QII specified investors. QIIs include banks, insurance companies, securities companies, and other operators carrying out a financial instruments transaction business. Business corporations can be QIIs if they: (i) have securities investments greater than JPY 1 billion; and (ii) make an additional filing with FSA.The rationale for this exemption is that a QII usually has enough financial expertise and bargaining power against fund managers to prevent them from setting up and managing a fund that is one-sidedly disadvantageous to the investors. A QII under the QII Exemption is expected to monitor the fund manager on behalf of the non-QII investors.The QII Exemption has been widely used for not only domestic collective investment schemes, such as nin-i kumiai partnerships and tokumei kumiai partnerships, but also foreign partnerships. However, it was sometimes abused, by putting in a sham QII, such as an affiliate of the general partner or another investment partnership managed by the general partner, which could not be expected to monitor the general partner. The FIEA was amended, and the requirements for the QII Exemption were strengthened, effective March 1, 2016.Under the amended requirements: (i) if the QIIs only consist of (a) a limited liability investment partnership with assets under management, less the amount of borrowings, of less than JPY 500 million, or (b) an affiliate of the general partner, the QII Exemption is not available; (ii) non-QIIs must be sophisticated investors, such as listed companies, corporations with a capital amount or net assets of more than JPY 50 million, foreign corporations, and individuals with investment financial assets of more than JPY 100 million (and having a securities/derivatives account for more than one year); and (iii) if the general partner is a foreign entity, it must appoint a representative in Japan.Where the QII Exemption is used to avoid registration as a Type 2 financial instruments transaction business, additional transfer restrictions apply so that: (i) the QIIs are prohibited from selling their interests in the collective investment scheme to non-QIIs; and (ii) the non-QII specified investors are prohibited from selling their interests unless all such interests held by a transferor are transferred to a single non-QII specified investor. In order to take advantage of the QII Exemption, a filing with the regulator needs to be made in advance. In a self-solicitation, the issuer of the collective investment scheme will make this filing, while in a self-management, the manager of the collective investment scheme will make the filing. Typically, in a limited partnership, the general partner will be the issuer or the manager (as the case may be). The filing is relatively simple and can be prepared in English.



In principle, a foreign partnership will not be subject to tax on profits from the management of partnership assets. However, in 2015, the Supreme Court of Japan ruled that a Delaware limited partnership should be classified as a corporation for tax purposes, generating concerns that Japanese residents investing in the U.S. through Delaware limited partnerships may not enjoy certain tax benefits under the U.S.-Japan Income Tax Convention; particularly, the reduced tax rate, or tax exemption, with respect to U.S. withholding tax on income, such as dividends or interest from investments in the U.S., which are not available if the limited partnership is treated as a corporation in Japan. On February 9, 2017, the National Tax Agency of Japan (“NTA”) stated that it will treat U.S. limited partnerships as pass-through entities under Japanese tax law, seemingly to address the concerns generated by the Supreme Court decision. However, with the apparent conflict between the NTA statement and Supreme Court decision, it remains to be seen how this issue will be handled.

3 Co-Operation or Information-Sharing Agreements with Foreign Governments or Regulators

AIFMDFSA entered into the “Memorandum of Cooperation concerning Consultation, Cooperation and the Exchange of Information related to the Supervision of Funds and Fund Managers” with European securities regulators on July 19, 2013. The memorandum is intended to set a framework of mutual cooperation among regulators, which is required by the Alternative Investment Fund Managers Directive. FSA and its counterpart foreign regulators are expected to exchange regulatory information upon request.FATCAThe Japanese authorities, including the Ministry of Finance, NTA and FSA, and the U.S. Department of Treasury jointly issued the “Statement of Mutual Cooperation and Understanding between the U.S. Department of the Treasury and the Authorities of Japan to Improve International Tax Compliance and to Facilitate Implementation of the Foreign Account Tax Compliance Act (the “FATCA”)” on June 11, 2013, which was amended on December 18, 2013. Japan is a Model 2 country, where financial institutions are required to provide information on accounts held by U.S. persons who agree to such provision of information to the U.S. Internal Revenue Service (“U.S. IRS”). As to information on accounts of U.S. persons who do not agree to such provision of information, the U.S. IRS may request NTA to provide such information pursuant to the treaty. NTA will obtain such information from the relevant financial intuitions pursuant to the local law implementing the treaty, and will provide such information to the U.S. IRS.CRSA law to implement the reporting requirement under the Common Reporting Standard (the “CRS”) of the Organisation for Economic Co-operation and Development became effective from January 1, 2017. NTA collects account information of non-residents from Japanese financial institutions pursuant to the law and provides it to the competent foreign tax authorities under the CRS. As Japan is a Model 2 country under the FATCA, Japanese financial institutions are required to provide account information in a bifurcated manner: to the U.S. IRS as to U.S. persons under the FATCA; and to NTA as to non-residents under the CRS.

2 Taxation

2.1 Taxation of individual investors in Japan investing in a foreign investment trust

Foreign stock investment trustAs to individual investors of a foreign stock investment trust publicly offering units in Japan, distributions are treated as dividend income and subject to withholding tax at the rate of 20%, which rate has been tentatively increased to 20.315% from January 1, 2013 to December 31, 2037 due to an interim tax called the Special Reconstruction Income Tax (for the reconstruction of the area damaged by the Great East Japan Earthquake in 2011). If a foreign withholding tax is already imposed on the distributions, the amount after deducting the amount of foreign withholding tax will be subject to Japanese withholding tax. Individual investors will be able to choose among aggregate taxation, separate self-assessment taxation and not requiring self-assessment taxation. The tax credit for dividends, which is intended to avoid double taxation due to the imposition of corporate tax on the issuer and income tax on the dividends, is not available to foreign investment trusts.Profits from the sale (including repurchase by the investment trust) of the units of a foreign stock investment trust are treated as capital gains and taxed at the rate of 20% (tentatively 20.315% for the reasons stated above). Losses from sale can be: (i) aggregated with (a) profits from sale, or (b) dividends of listed stocks or units of other publicly offered investment trusts; and (ii) carried forward for three years.Foreign bond investment trustA bond investment trust is an investment trust whose portfolio is strictly limited to bonds. An investment trust that does not meet the requirements of bond investment trust is classified as stock investment trust.As to individual investors of a foreign bond investment trust publicly offering units in Japan, distributions are treated as interest income and subject to withholding tax at the rate of 20% (tentatively 20.315% for the reasons stated above). From January 1, 2016, individual investors are able to choose between separate self-assessment taxation and not requiring self-assessment taxation. If a foreign withholding tax is already imposed on the distributions, the amount of foreign withholding tax will be deducted from Japanese withholding tax.Profits from the sale (including repurchase by the investment trust) of the units of a foreign bond fund were not subject to Japanese tax until December 31, 2015. Since January 1, 2016, the profits have been treated as capital gains and taxed at the rate of 20% (tentatively 20.315% for the reasons stated above). Losses from sale were not given any tax treatment until December 31, 2015. However, from January 1, 2016, such losses can be: (i) aggregated with (a) profits from sale, or (b) dividends of listed stocks or units of other publicly offered investment trusts; and (ii) carried forward for three years.2.2 Taxation of investors in Japan investing in foreign

partnership type investment trustJapanese partnerships are not subject to taxation. However, the partners will be subject to taxation on profits from the management of partnership assets.



We are one of the largest full-service law firms in Japan, with our principal office in Tokyo, branch offices in Osaka, Nagoya and Fukuoka, and overseas offices in Beijing, Shanghai, Singapore, Bangkok and Yangon, and an MHM desk in Jakarta. Our clients include multinational corporations from sectors such as insurance, finance, telecoms, information technology, real estate and manufacturing.

The firm advises on complex cross-border transactions, particularly in mergers & acquisitions and finance. The firm has strong international capital markets, Japanese real estate investment trusts and asset management practices, and is a leader in the development of the Japanese syndicated loan and securitisation, and growing private equity market in Japan. Our firm is widely regarded for its expertise in insolvency and restructuring, and complex litigation, arbitration and regulatory proceedings, IP, IT and antitrust. The firm’s IP practice is known for its work in the rapidly developing telecommunications, media and technology field. Other core practice areas include antitrust, tax and labour law.

Yasuzo Takeno is a partner at Mori Hamada & Matsumoto. Since the early 1990s he has had extensive experience in advisory work for both domestic and foreign investment managers and investment funds businesses, including structuring, public offerings and private placements of offshore investment funds in Japan. He has represented issuers of foreign investment trusts established in the Cayman Islands, Luxembourg, Ireland and other jurisdictions, providing advice on legal and execution issues where issuers offer their units, either publicly or privately, in Japan. His investment fund work also covers legal advice on the day-to-day management of investment fund businesses. As well as his work dealing with asset management, his practice spans corporate finance activities and financial regulation. He obtained his LL.B. from Waseda University in 1985 and his M.Litt. from Oxford University, Worcester College, in 1993. He was admitted to practise in Japan in 1987 and speaks Japanese and English.

Yasuzo TakenoMori Hamada & MatsumotoMarunouchi Park Building2-6-1 Marunouchi, Chiyoda-kuTokyo 100-8222Japan

Tel: +81 3 5220 1844Fax: +81 3 5220 1744Email: [email protected]: www.mhmjapan.com

Fumiharu Hiromoto is of counsel at Mori Hamada & Matsumoto and advises on an extensive range of financial transactions and financial regulatory matters, including asset management, investment funds (including public offerings and private placements of foreign-domiciled investment funds), real property investments (including inbound investments using a TK-GK (a collective investment scheme) or a TMK (specified purpose company for asset securitisation) with leveraged debt financing), healthcare property investments (including hospitals and nursing care facilities), banking, derivatives and dispute resolutions relating to financial transactions. He received his LL.B. from The University of Tokyo in 1995 and his LL.M. from Columbia University School of Law in 2003. He also worked with Kirkland & Ellis in Chicago from September 2003 to August 2004. He was admitted to practise in Japan in 1997 and New York in 2004 and speaks Japanese and English.

Fumiharu HiromotoMori Hamada & MatsumotoMarunouchi Park Building2-6-1 Marunouchi, Chiyoda-kuTokyo 100-8222Japan

Tel: +81 3 5223 7723Fax: +81 3 5223 7623Email: [email protected]: www.mhmjapan.com



Chapter 7

Cases & Lacambra

Miguel Cases

Marc Ambrós

Andorra

■ Technical Communication 28/SGOIC of 29 November 2011, on transactions with related entities and individuals.

■ Technical Communication 35/SGOIC of 31 July 2014, on publicly available tariffs.

■ Technical Communication 189/09 of 27 July 2009, on registration of foreign collective investment undertakings.

As Andorra is not a member of the European Union, the freedom to provide financial services in the European Economic Area does not apply (the “community passport” is not recognised). Consequently, all financial activities directly carried out within the Andorran jurisdiction are subject to prior authorisation by the INAF.

1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body?

Only Andorran financial entities which are authorised to manage OICs can be management companies of Andorran AIFs.The INAF is the regulatory and supervisory authority of such entities. Accordingly, they must comply with licensing requirements.

1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body?

The INAF is responsible for authorising the establishment of Andorran AIFs. They acquire the condition of OICs when they are registered before the INAF. The distribution of foreign AIFs, if this is considered active commercialisation, will also trigger registration obligations.

1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different types of funds or strategies (e.g. private equity v hedge)) and, if so, how?

There is no specific distinction between open-ended and closed-ended AIFs under Andorran legislation. The only categorisation regulated by Law 10/2008 and the INAF’s technical communications is as follows: (i) money market funds; (ii) fixed-income funds; (iii) mixed fixed-income funds; (iv) equity funds; (v) mixed equity funds; (vi) guaranteed funds; (vii) real estate funds; (viii) alternative funds; (ix) private equity funds; (x) securitisation funds; and (xi) other funds.Notwithstanding the aforementioned, the different types of OIC are subsumed within two general categories: (i) OICVMs; and (ii) other

1 Regulatory Framework

1.1 What legislation governs the establishment and operation of Alternative Investment Funds?

The establishment and operation of Alternative Investment Funds (AIFs) are governed by Law 10/2008 Regulating Andorran Collective Investment Schemes, dated 12 June 2008 (Law 10/2008). The Law includes the constitution of collective investment schemes in the Principality of Andorra and regulates their functioning and distribution. Depending on the type of investor, the purpose of the vehicle and the advertising involved, various schemes may be found from fully regulated collective investment vehicles to closed Alternative Investment Funds.As Andorra is not a member of the European Union, Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers, this does not apply. Consequently, the Andorran legal framework, dating from 2008, does not define AIFs as European regulations do. With the exception of undertakings for collective investment in transferable securities, “organismes d’inversió col·lectiva en valors mobiliaris” (OICVMs), which are aligned with the UCITS Directive, the definition of AIFs comprises other open-ended and closed-ended collective investment schemes (“organismes d’inversió col·lectiva” – OICs), such as alternative funds per se (also known as hedge funds), real estate funds and other OICs as a catch-all term for private equity entities or those which, because of the composition of their assets and diversification risk policies, cannot be included in any other regulated categories.Obtaining a specific performance objective and fundraising are the distinguishing elements of AIFs.In addition, the Andorran National Institute of Finance (INAF) – the regulatory and supervisory authority of the Andorran financial system – is competent to issue technical communications and recommendations in order to develop regulations and standards regarding activity related to OICs. Furthermore, its constitutive law grants the INAF the ability to set the applicable fall-back of international standards for interpretational and prudential supervision purposes. The most relevant technical communications regarding AIFs are the following:■ Technical Communication 7/SGOIC of 27 May 2011, on

rules for ethics and behaviour.■ Technical Communication 20/SGOIC of 27 May 2011, on

clarification regarding Law 10/2008.■ Technical Communication 23/SGOIC of 27 May 2011, on

classification of OICs.


And

orra

1.9 What co-operation or information sharing agreements have been entered into with other governments or regulators?

In June 2011, Andorra signed a Monetary Agreement with the European Union. The Monetary Agreement not only recognises the euro as the official currency of the Principality of Andorra, the right to issue euro coins and the obligation to grant euro banknotes and coins with legal tender status issued by the Eurosystem and the Member States which have adopted the euro but represents the cornerstone of the legal changes envisaged for the next 10 years. This is because the Monetary Agreement requires that the Principality of Andorra adopt, within certain timeframes, a substantial part of all the EU financial legislation.Furthermore, in September 2013, the International Organization of Securities Commissions (IOSCO) protocol for multilateral agreement on consultations was signed.A Memorandum of Understanding (MoU) was signed between Andorra and Spain on 4 April 2011. The MoU: (i) constitutes an agreement for consolidated cooperation in the supervisory framework between the INAF and the Bank of Spain; (ii) establishes the terms of the protocol for the relationship and collaboration between both authorities; and (iii) enables the supervisory authority of the country of origin to request information on consolidated risks of banking groups from the relevant authority of the country where the entity has subsidiaries.Andorra signed, on 12 February 2016, the Multilateral Competent Authority Agreement with the European Union to automatically exchange information under the Common Reporting Standard.

2 Fund Structures

2.1 What are the principal legal structures used for Alternative Investment Funds?

It can be either an investment fund or an investment company. Investment funds can only be managed by a management company, whereas an investment company can be managed directly or by delegating management to an authorised institution, provided that the shareholders’ meeting or the board of directors, by delegation, decides it.

2.2 Please describe the limited liability of investors.

Investors are liable for the debts of the AIF to the extent of their contributions. Consequently, under normal circumstances, an AIF’s creditors cannot claim against the investors’ assets.

2.3 What are the principal legal structures used for managers and advisers of Alternative Investment Funds?

Investment fundsAs mentioned above, only Andorran financial entities which are authorised to manage OICs can be management companies of Andorran AIFs. Such entities must be established as an Andorran limited company. Management companies must have a minimum equity share capital of EUR 300,000, fully subscribed and paid-in. In addition, they must have a board of directors of at least three members. Management companies are obliged to comply with specific solvency and core capital ratio provisions.

undertakings for collective investment schemes (Altres OICs), which includes real estate OICs, alternative OICs and other OICs.The Andorran regulatory regime does not distinguish either between different strategies of the funds.

1.5 What does the authorisation process involve and how long does the process typically take?

Prior to the distribution of Andorran AIFs and their subscription, they must be registered before the INAF. Indeed, the regulation of funds is subject to the INAF’s approval in the authorisation and registration process of the OIC which would take around three months.The documentation which is required in order to obtain authorisation, prior to the establishment of an Andorran AIF, is the following:■ The prospectus.■ The agreement between the management company and the

depositary entity.■ A technical document detailing the particular features of the

AIF and the specific investment programme.■ The depositary entity of the OICs being invested in (only for

subordinated funds).■ An explanatory memorandum of the control levels conducted

by the management company (only for alternative funds).■ A service delegation agreement.The authorisation also requires the INAF’s approval regarding the management company and the choice of the depositary entity.

1.6 Are there local residence or other local qualification requirements?

As mentioned above, only Andorran financial entities which are authorised to manage OICs can be management companies of Andorran AIFs.

1.7 What service providers are required?

According to applicable law, there must be a depositary entity with which the securities, cash or any other asset, subject to the activity of any AIF, are deposited.In the case of investment funds, they must be managed by a management company (in the case of investment companies, the appointment of a management company is optional). Functions of management, administration and control can be provided by the management company itself or by a third party.Investment companies must also have a suitable administrative and accounting system and internal control procedures, including risk management procedures, together with IT control and safety procedures, money laundering bodies and procedures.An AIF must be audited and can be marketed by the management company or by a local licensed distributor.

1.8 What rules apply to foreign managers or advisers wishing to manage, advise, or otherwise operate funds domiciled in your jurisdiction?

All financial activities carried out in Andorra are reserved to local licensed entities that compose the Andorran financial system. Therefore, foreign managers or advisers wishing to manage, advise or otherwise operate funds in Andorra have to obtain the relevant licence from the INAF.

Cases & Lacambra Andorra


And

orra

3.2 What are the key content requirements for marketing materials, whether due to legal requirements or customary practice?

Advertising must be clear, sufficient, objective and not misleading and must state explicitly that it is an advertisement.Prior to the investment, the latest published reports and the simplified prospectus – and, if requested, the full prospectus – must be delivered free of charge to the investors.Marketing materials should contain: (i) a reference to the full prospectus and where it can be consulted; (ii) information regarding the managing company, the custodian and their authorisations to operate; and (iii) relevant information about the product’s main characteristics, which must not lead to confusion regarding its content.Marketing materials may also contain past performance information, in which case they should: (i) include a disclaimer stating that past performance does not condition future performance, or similar; and (ii) designate where and how to access quarterly and annual reports. They should avoid any expression or argument that may lead the investor to believe that there is a guaranteed positive return, unless there is a minimum return guaranteed, in which case all its elements should be clearly exposed (object, duration, conditions, commissions, etc.).Also, the typography, format and content of marketing materials should be transparent, clear and accurate; and should not be comparative or estimative.When marketing activities are conducted through the internet, information shall be displayed in such a manner that the investors have access to the full prospectus prior to subscription.

3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator?

All marketing materials shall be registered before the INAF prior to its publication. Any marketing materials shall include the fund’s registration number before the INAF.

3.4 What restrictions are there on marketing Alternative Investment Funds?

Alternative Investment Funds for well-informed investors cannot be made available by any disclosure means not specifically addressed to this investor profile.

3.5 Can Alternative Investment Funds be marketed to retail investors?

According to Law 10/2008, the INAF can restrict the marketing of AIFs to well-informed investors, in case of a low liquidity level or a high risk of loss for the AIFs. The marketing of AIFs which are limited to well-informed investors is prohibited to retail investors, whose definition is aligned with the Markets in Financial Instruments Directive (MiFID).

3.6 What qualification requirements must be carried out in relation to prospective investors?

Investment in an AIF reserved for well-informed investors requires a limited level of protection. Pursuant to Law 10/2008, “well-informed” investors are those which meet the criteria of being

Investment companiesAn investment company must be established as an Andorran limited company and can be self-managed or delegate to a management company the management of all or part of the assets of the institution.Both the management company and the investment company may contract intermediaries or financial agents, who must have the relevant authorisation for rendering such services.

2.4 Are there any limits on the manager’s ability to restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds?

In general, both subscriptions and redemptions are made on the basis of the net asset value, which is subject to the subscription/redemption fees and other possible costs borne by the investor. Moreover, subscriptions and redemptions (which set the value date of the request) are made through contributions or charges to the OIC. These circumstances must be set out in the prospectus.Both the management company and the investment company can justifiably limit redemptions, according to the prospectus, which may establish certain limitations, including the provisional suspension of redemptions, in exceptional cases, in the investors’ interests. In addition, the INAF may temporarily suspend subscription and redemption when value determination is not possible.Regarding real estate funds, investors may subscribe or request the redemption of their units at least twice a year.

2.5 Are there any legislative restrictions on transfers of investors’ interests in Alternative Investment Funds?

There are no Andorran legislative restrictions on transfers of investors’ interests in AIFs.

2.6 Are there any other limitations on a manager’s ability to manage its funds (e.g. diversification requirements, asset stripping rules)?

Andorran AIFs are composed by Common AIFs and AIFs for well-informed investors.Common AIFs have to comply with some diversification requirement:■ they cannot invest more than 20% of its assets in financial

instruments of the same issuer;■ they may be leveraged to up to 200% of its net asset value;

and■ they are able to engage in short selling of securities with

some restrictions.On the other hand, AIFs for well-informed investors are only subject to limits established in their own prospectus.In the Andorran funds law, there are no specific asset stripping limitations.

3 Marketing

3.1 What legislation governs the production and offering of marketing materials?

The production and offering of marketing materials are governed by Law 10/2008 and the Technical Communication 7/SGOIC, 27 May 2011, on rules for ethics and behaviour.



And

orra

4.3 Are there any restrictions on borrowing by the Alternative Investment Fund?

Under Andorran legislation, there are no restrictions on borrowing by AIFs.

5 Disclosure of Information

5.1 What public disclosure must the Alternative Investment Fund or its manager make?

The management company of an AIF must publish a prospectus of each of the AIFs it manages, as well as quarterly reports (for Altres OICs it is not necessary to report on a quarterly basis, according to the INAF criteria). The simplified prospectus and annual reports must also be disclosed.Such information must be published in accordance with the prospectus.Andorran AIFs and foreign AIFs which are going to be distributed in Andorra must be registered with the special INAF registry.

5.2 What are the reporting requirements in relation to Alternative Investment Funds or their managers?

Management companies (for each of their managed AIFs) and investment companies are obliged to prepare annual reports which shall be published and submitted to the INAF and to the investors. In addition, it is also compulsory to prepare quarterly reports which must be submitted to the INAF.Management companies and investment companies must report to the INAF any decrease in net assets (if it is less than 10%).Finally, as mentioned above, prior to the marketing of AIFs, management companies and investment companies must send to the INAF a copy of the marketing materials.

5.3 Is the use of side letters restricted?

There are no Andorran provisions regarding the use of side letters. However, using specific language to determine obligations and duties, mentioning their binding character, as well as their signing by the parties, is advisable.

6 Taxation

6.1 What is the tax treatment of the principal forms of Alternative Investment Funds identified in question 2.1?

All the different forms of Alternative Investment Funds have the same tax treatment. All of them are subject and not exempt to corporate income tax, but the tax rate is 0%. Consequently, no tax burden is supported by the fund for any kind of income.

6.2 What is the tax treatment of the principal forms of investment manager / adviser identified in question 2.3?

The management company/investment manager does not have any special tax treatment and it is subjected to corporate income tax at the standard rate of 10%.

either: (i) institutional investors; (ii) professional investors; or (iii) other investors who confirm in writing that they adhere to the status of “well-informed” investors and who either: (a) invest a minimum of EUR 50,000; or (b) have been assessed by a credit institution, an investment firm or a management company which certifies the investors’ ability to understand the risks associated with investing in the AIF.With the exception of those limited to well-informed investors, AIFs can be marketed to retail investors.

3.7 Are there additional restrictions on marketing to public bodies such as government pension funds?

There are no restrictions in the Andorran jurisdiction. National and regional governments, the INAF, public institutions, central banks and other international institutions are expressly recognised as professional investors.

3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process?

There are no specific restrictions in the Andorran jurisdiction.

3.9 Are there any restrictions on the participation in Alternative Investment Funds by particular types of investors, such as financial institutions (whether as sponsors or investors)?

There are no specific restrictions on the participation of particular types of investors other than those that may be imposed by the investors’ applicable regulation.

4 Investments

4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment Funds?

AIFs in Andorra are divided into three categories: (i) Real Estate Investment Funds; (ii) common Alternative Investment Funds; and (iii) Alternative Investment Funds only for qualified investors.A Real Estate Investment Fund shall invest at least 90% of its annual average of monthly balances of its real estate assets. Additionally, (i) any asset, including rights on such asset, can represent more than 35% of the total assets in the acquisition moment; (ii) real estate assets being part of the asset state of the fund, rented to legal entities that are part of the same group, cannot represent more than 35% of the assets of the AIF; and (iii) entities belonging to the same group can only acquire a real estate asset when it is a new construction, it is permitted by its bylaws, the managing company informs about it on the prospectus and periodical information, and it does not represent more than 25% of real estate investment fund assets.The rest of the AIFs under Andorran legislation cannot invest more than 20% of their assets in securities or financial instruments from the same issuer.

4.2 Are there any limitations on the types of investments that can be included in an Alternative Investment Fund’s portfolio whether for diversification reasons or otherwise?

Please see question 4.1 above.



And

orra


6.7 What steps are being taken to implement the OECD’s Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 6 and 7, insofar as they affect Alternative Investment Funds’ operations?

Andorra assumed the commitments on CRS/OECD on 18/06/2014 and it will make its first reporting in September 2018 for major value accounts and in September 2019 regarding the rest of accounts.

6.8 Are there any tax-advantaged asset classes or structures available? How widely are they deployed?

This is not applicable in Andorra.

6.9 Are there any other material tax issues for investors, managers, advisers or AIFs?

No, there are not.

6.10 Are there any meaningful tax changes anticipated in the coming 12 months?

No, there are not.

7 Reforms

7.1 What reforms (if any) are proposed?

There are no reforms in the pipeline for the time being.

6.3 Are there any establishment or transfer taxes levied in connection with an investor’s participation in an Alternative Investment Fund or the transfer of the investor’s interest?

This is not applicable in Andorra.

6.4 What is the tax treatment of (a) resident, (b) non-resident, and (c) pension fund investors in Alternative Investment Funds?

a) If the investor is an individual tax resident: (i) no tax on distribution of dividends; (ii) 10% of tax burden for capital gains, unless the investor only holds a stake of less than 25% or have maintained the investments for at least 10 years; and (iii) 10% if the shareholder is a resident legal person.

b) If the investor is an individual or legal person non-tax resident, Andorra does not apply any withholding tax either for income coming from dividends or capital gains distributed to non-residents.

c) Not applicable, since pension funds are not regulated in Andorra as a special class of fund.

6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing an Alternative Investment Fund?

No, this is not necessary in Andorra.

6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting regimes such as the Common Reporting Standard?

The country itself did not sign any IGA, but all the banks assumed the commitments through the corresponding registration before the Internal Revenue Service (IRS).


And

orra

Cases & Lacambra is a client-focused boutique law firm with top-tier specialisation in banking, finance and tax law. We offer bespoke advice and solutions to our clients, which rank among the most highly reputed national and international financial institutions, family offices, investment firms, group companies and high-net-worth individuals.

Miguel Cases is the Managing Partner of Cases & Lacambra and leads the Corporate and Banking & Finance practice. He has extensive experience advising credit institutions and investment services firms, being the legal counsel of several national and international financial institutions, public authorities and investment funds.

Miguel CasesCases & LacambraC/ Manel Cerqueda I Escaler 3–5AD700 Escaldes-EngordanyAndorra

Tel: +376 728 001Email: [email protected]: www.caseslacambra.com

Marc Ambrós is Partner of the Commercial & Corporate law and Financial Services practices at Cases & Lacambra in the Principality of Andorra. He has extensive experience in corporate and commercial matters. He has advised in mergers, acquisitions, joint ventures, private equity, corporate restructuring and refinancing, representing both Andorran and foreign clients in international transactions. He regularly advises during the entire process of a transaction, from both the buying side as well as the selling side perspective using different legal structures. He is also specialised in project and corporate finance issues.

His practice includes advising on regulatory cross-border matters to foreign credit institutions and investment services firms. He has also advised on the incorporation of Andorran supervised entities.

Marc AmbrósCases & LacambraC/ Manel Cerqueda I Escaler 3–5AD700 Escaldes-EngordanyAndorra

Tel: +376 728 001Email: [email protected]: www.caseslacambra.com



Chapter 8

Vieira de Almeida

Pedro Simões Coelho

Carlos Filipe Couto

Angola

The UCI Law does not foresee any de minimis exemption or fast-track authorisation procedure. Accordingly, all fund managers, regardless of the asset under management, will need to comply, in general terms, with the same requirements.Nonetheless, considering the type of AIFs the fund manager intends to manage, i.e. AIFs investing in securities or financial assets or real estate, there will be some specific requirements to be met as regards investment policies, contracts with services providers, etc.


Yes. The setting up of any fund, including AIFs, is subject to authorisation by the CMC, which is the competent regulator to conduct the supervision of AIF management, ancillary service providers, distribution and compliance with the general rules applicable to AIFs, notably those relating to the protection of the investors’ interests.


Yes. In general terms, the UCI Law distinguishes between AIFs investing (i) in securities or financial assets, and (ii) in real estate (real estate investment funds).Both AIF types may be open or closed-ended, but the real estate investment funds may also be of a mixed type, thus allowing the coexistence of both features in the same AIF.In general terms, open-ended AIFs are addressed to the retail market, while closed-ended AIFs target affluent or professional investors, thus in open-ended AIFs the scrutiny of the CMC tends to be tighter.Furthermore, depending on the type of AIF at stake and if such is open or closed-ended, different investing limits and portfolio composition limits will apply.


In a nutshell, the authorisation for the setting up of an AIF is filed with the CMC.In requesting such authorisation, the relevant AIF’s manager must provide the CMC with the AIF’s documentation, notably



The activity involving the management, investment and marketing of Alternative Investment Funds (AIFs) is mainly regulated by the Undertakings for Collective Investment Law (Regime Jurídico dos Organismos de Investimento Coletivo), enacted by Decree no. 7/2013 of 11 October 2013 (UCI Law) and CMC Regulation no. 4/2014 on Undertakings for Collective Investment (Regulation no. 4/2014), which sets forth more specific rules regarding certain aspects of the UCI Law and the Angolan Securities Law (Lei dos Valores Mobiliários or ASL), enacted by Law no. 12/05 of 23 September 2005, as amended from time to time. Lastly, please note that venture capital merits a specific legal framework, set forth by Decree no. 4/15 of 16 September (Venture Capital Law).The Angolan Securities Exchange Commission (Comissão do Mercado de Capitais or CMC) is the main regulatory body in relation to the aforementioned matters.


Yes. Fund managers, as non-credit financial institutions, are subject to the CMC’s supervision, notably in respect of prudential matters and in what concerns most of the rules governing their management of AIFs’ activity.Therefore, the fund managers’ authorisation procedure will be conducted before the CMC pursuant to Law no. 13/05 of 30 September 2005, on financial institutions, and thus any entity wishing to provide alternative fund management services ought to be authorised by and registered with the CMC. Financial institutions, provided the authorisation to provide fund management services has been obtained, as well as management companies of collective investment undertakings, may perform fund management services. In any event, this is without prejudice to the application of a registration with the CMC requirement, on top of the aforementioned authorisation requirement, prior to the beginning of the provision of management services.On the other hand, the foregoing is also without prejudice to the possibility of an investment company (i.e. collective investment undertakings with legal personality) ensuring its own fund management.


Ang

ola

Furthermore, the AIF may also have, but is not legally compelled to have, distributors or entities that will market the AIF, the existence of such entities being more usual in the case of open-ended AIFs.


In accordance with the Banking Law, the same rules established for national managers will apply to foreign managers. However, the foreign managers will need to be properly authorised to conduct is activities in Angola and will need to have a local establishment.


There is no specific protocol or sharing agreement signed by the CMC with other governments or regulators in respect of AIFMs or AIFs. However, the CMC signed a general (low-detail) understanding protocol with the Portuguese Securities Exchange Commission (Comissão do Mercado de Valores Mobiliários or CMVM) on September 2006, including some information sharing provisions.

2 Fund Structures


An AIF may take one of two forms or structures, both subject to the licensing procedures described in question 1.5 above:■ Contractual structure with no legal personality. This is the

classic structure and requires that the AIF is managed by a separate fund manager. The investors’ or participants’ interests in these funds are called units (unidades de participação).

■ Collective investment company endowed with legal personality (sociedade de investimento). Collective investment companies which mainly invest in securities are classified as SIMs (sociedades de investimento mobiliários), while those which mainly invest in real estate are classified as SIIs (sociedades de investimento imobiliário). Both SIMs and SIIs may be self-managed or have appointed a third party as their manager, which must be a duly authorised investment fund manager. Participants in these collective investment companies will hold shares (ações).

In Angola, AIFs are usually set up under the contractual structure with no legal personality.In an overall assessment of the pros and cons of both structures, it is possible to verify that the contractual structure has a longer track record in Angola, being the preferred choice for the setting up of AIFs as it offers an affordable, simple and well-known model for AIFs in Angola.Conversely, the collective investment company endowed with legal personality is clearly a more complex model that allows, however, greater control for the investors over the management of the AIF.


Legally, the assets of an AIF are only liable for its debts, thus it will not be liable for the investors, fund manager, depository, distributors or other AIFs’ debts. Likewise, investors are not personally liable

the prospectus (if applicable) in simplified and full versions, which must also include the AIF’s regulation, subscription form, and an announcement on the beginning and ending of the subscription period.In addition, the CMC must also be given copies of the agreements to be executed between the management company and (i) the depositary, (ii) the distributors or entities that will market the AIF, and (iii) any other entities that will render services to the AIF or to the AIF manager.Documents evidencing the acceptance of the rendering of the relevant services by all entities involved in the AIF’s activities must also be delivered to the CMC.Furthermore, in the case of a closed-ended AIF, if applicable, the authorisation application for the public placement of the units/shares shall too be provided. On the other hand, in the case of open-ended AIFs, the fund manager shall provide a copy of a bank guarantee, in an amount no less than 20% of the AIF’s NAV, in order to secure the necessary liquidity to pay potential redemption requests placed by the investors.An authorisation is given within 45 days of the receipt of either the application, with all necessary documentation having been provided in attachment thereto, or of any additional information or amendments to the documents required by the CMC. If at the end of such a period the applicants have not yet been notified of the deferral of their application, the authorisation is considered to have been tacitly refused.However, considering that CMC has discretion to request further information, which will halt the term for granting the authorisation and that are few AIF being constituted in Angola, the term for completing the process may vary significantly from case to case.The CMC may refuse the authorisation, inter alia, if the applicant does not submit the required documentation or if the AIF manager at stake engages in irregular management of other investment funds.After the authorisation has been granted, an AIF will be fully set up from the moment the first subscription is settled.


Considering that the vast majority of AIFs in Angola are set up under the contractual form with no legal personality, it is required that such AIFs be managed by a separate fund manager, which needs to be incorporated and have its centre of main interests and effective management located in Angola.Furthermore, the fund manager must have in place several internal policies aimed at addressing the risk of its activity, remuneration issues, outsourcing, internal control and evaluation of the assets pertaining to the AIFs under management, all being subject to the control of the CMC and, to a certain extent, the depository, and entailing permanent record-keeping by the fund manager.Lastly, the employees of the fund manager with technical functions, as well as the management, shall have the proper qualification and professional aptitude in accordance with high-level standards. Pursuant to Regulation no. 4/14, it shall be assumed that persons that have held office with similar functions within the financial sector have the necessary professional competence.


An AIF is legally required in Angola to have: a fund manager, except if it is endowed with legal personality, in which case such an AIF may perform its own management; a depository; an auditor; and, in the case of real estate AIFs, real estate appraisal experts.

Vieira de Almeida Angola


Ang

ola

of AIF, if any, established in the UCI Law and by the obligation to conduct its activity in the best interest of the investors.The UCI Law has a list of acts that a manager cannot carry out, such as granting loans, execute certain transactions on its own account, execute transactions relating to the assets held by the AIF with related parties, e.g., entities of its group, the depositary, etc.

3 Marketing


Please refer to question 1.1 above, plus the General Marketing Law, approved by Law no. 9/02 of 30 July 2002.


The UCI Law and Regulation no. 4/14 provide minutes that the legal documents of the AIF (prospectus and regulation) must abide by.In respect of marketing materials, there are no minutes available; however, it is customary for the fund manager and other distribution entities to provide information on the investment policy, markets targeted, main features (identification of the relevant entities, terms and conditions of the investment, links to the legal documents) and historic returns of the AIF.Pursuant to Regulation no. 4/14 the marketing material shall contain the following warnings:■ “Reading of the prospectus and regulation of the AIF is

recommended, before investing in it.”■ In cases where the marketing material discloses return figures,

“past returns do not guarantee future returns” and “the disclosed returns are subject to taxation”.

■ In cases where the figures have a reference period of less than a year, “[t]his UCI has less than 12 (twelve) months. In order to analyse the performance of an UCI, it is recommended the analysis of at least 12 (twelve) months”.

Lastly, as a general note, in accordance with Regulation no. 4/14, the information contained in the marketing materials must comply with the following principles: objectivity; identification; truthfulness; transparency; balance; timeliness; and comparability.


Yes. All marketing materials are subject to the CMC’s prior approval.


The marketing or distribution (comercialização) of AIFs under the UCI Law occurs when there is a collection of funds with the public in order to be channelled with the investment in the AIF, provided that the activity is: (i) addressed to undetermined investors; (ii) preceded or followed by prospection or gathering of investment intentions with undetermined investors; and (iii) addressed to at least 150 addressees.Therefore, only this kind of marketing will be caught by the regime set out in the UCI Law and Regulation no. 4/14.

for the AIF’s debts and will therefore not, under any circumstances, be burdened by any of the AIF’s debts.As regards collective investment companies endowed with legal personality, they are also subject to the limited liability provisions applicable to commercial companies by special law.


AIFs, which are not self-managed, will need to be managed by a:■ fund manager (non-credit financial institution) authorised to

manage AIFs investing in securities and other financial assets or real estate investment funds (sociedade gestora de fundos de investimento mobiliário); or

■ real estate fund manager (non-credit financial institution), which may only manage real estate funds (sociedade gestora de fundos de investimento imobiliário).


The UCI Law is silent in respect of the ability of the fund manager to restrict redemptions in open-ended funds, but considering that such types of AIFs in general target retail investors, the CMC will most certainly scrutinise this matter. In fact, such a possibility would need to be clearly set out in the AIF’s regulation, which is analysed during the authorisation procedure. Moreover, the minute of the AIF regulation, approved by Regulation no. 4/14, contains a field where the conditions set out for redemptions need to be described, but only seems to refer to the applicable fees, settlement dates and the criteria for the determination of which units/shares will be redeemed. Likewise, Regulation no. 4/14 only seems to foresee conditions under which redemptions may be suspended, but not restricted. As regards the restriction of transfers in open-ended funds, the same rationale described above in respect of the redemption shall apply.Conversely, regarding closed-ended AIFs, mainly those targeting professional investors, we trust that it is possible to establish in the AIF’s regulation restrictions on the transfer of units from investors to third parties.


No. However, the limitations established on foreign investment, which place constraints on transfers abroad of profits or dividends obtained in Angola, should be borne in mind. Therefore, prior to the investment in an Angolan AIF being performed, the thresholds and requirements to be met by such an investment shall be assessed, on a case-by-case basis, as well as the provisions applicable to the transfer abroad of the profits or dividends obtained pursuant to the redemption of the units/shares or liquidation of the AIF.


The ability of the manager to manage its funds will be mainly limited by the investment policy established in the AIF’s prospectus or regulation, as applicable, by the general investment limits by type



Ang

ola

4 Investments


Yes. AIFs can only focus on investment activities and their management and investment shall comply with the general rules applicable to the financial instruments markets.


Yes. The assets eligible for the portfolio of the AIF will depend on its specific type. Therefore, in general terms, an AIF investing in securities or financial assets may have in its portfolio: (i) securities admitted to trading in an Angolan regulated market; (ii) securities admitted to trading in a third country regulated market, provided that such is foreseen in the law, the AIF’s legal documents or approved by the CMC; (iii) units/shares in other UCIs; (iv) bank deposits with a term of up to a year; (v) derivatives traded in regulated markets referred to in (i) and (ii) above; (vi) derivatives traded in OTC, provided that CMC regulations are complied with; (vii) money market instruments, which issue or issuer is subject to regulation for the purposes of investors’ protection or savings schemes; and (viii) other instruments provided in the CMC’s regulations.The derivatives may only be used for hedging purposes and naked short-selling is forbidden. As regards real estate investment funds, they may invest the majority of their assets in real estate, but may also invest in shares of real estate investment companies (sociedades de investimento imobiliário), derivatives, mainly for hedging purposes, units/shares of other real estate investment funds and liquidity instruments. The extent to which the investment in the referred assets is limited will depend on whether the AIF is closed-ended, open-ended or targeting a specific scope, i.e. real estate investment funds investing in house renting, agriculture, livestock, industrial exploration, etc.


Fund managers may obtain loans on behalf of AIFs under their management, but the loan period cannot exceed 120 days, consecutive or not, within a period of one year and up to the maximum of 10% of the AIF’s NAV.The loan to be granted under the terms described above shall be previously authorised by the CMC and the fund manager shall ground the reasoning for the loan, as well as provide the CMC with the loan’s contractual conditions.



The AIF’s legal documents and their updates shall be available in a durable means or on an internet website. Considering that the legal documents shall describe the fund manager’s identity, depository,

Furthermore, the concept of reverse solicitation is not an official exemption from the UCI Law requirements, but rather a tolerated practice, which consists in the investor, on its own initiative and without any previous engagement on the part of the distributor, requesting information on the AIF at stake. However, a case-by-case assessment needs to be conducted, considering that the use of the reverse solicitation expedient may come under the scrutiny of the CMC.Closed-ended AIFs shall register the performance of marketing/distribution activities with the CMC.Lastly, the marketing/distribution of foreign AIFs in Angola is subject to the prior authorisation of the CMC.


Yes. However, it must be noted that special AIFs investing in transferable securities or financial instruments (organismos especiais de investimento coletivo em valores mobiliários) are distributed within specific segments of the market. If it is intended for the distribution to be carried out with non-institutional investors, the fund manager shall provide the CMC with a training plan of the entities in charge of such distribution. Notwithstanding, the CMC may refuse to grant the authorisation for the AIF to be distributed within certain segments of the market, in case it considers that the investors are not sufficiently protected.


There is no particular requirement to be fulfilled in relation to investors in AIFs. Nonetheless, the fund manager shall ensure that the “know your customer and investment adequacy analysis” is properly carried out in relation to the investor, as well as that the anti-money laundering and terrorism financing procedures are respected.


There are no additional restrictions.


No. However, the relationship established between the intermediaries and the AIF shall be put in a written agreement and disclosed in the AIF’s legal documents. Furthermore, the intermediary, when carrying out the fundraising process, needs to act within its authorised scope of activities, i.e. if the fundraising process corresponds to marketing of the AIF under the UCI Law, the intermediary will need to be an authorised institution under the applicable legal terms to carry out the distribution of securities.


No. However, the holding of units/shares in AIFs may have an impact, that needs to be assessed on a case-by-case basis, on the own funds and reserves of the credit and financial institutions.



Ang

ola


There is no special tax treatment or rules applicable in Angola for investment managers or advisers. Therefore, as Angolan-resident entities, they will be subject to the general taxation regime: (i) 30% Industrial Tax on income obtained on a worldwide basis; and (ii) capital gains, interest and dividends are subject to Investment Income Tax under a withholding mechanism (rates may vary from 5% up to 15%).Dividends paid between resident companies in Angola may be exempt from Investment Income Tax provided that a 25% stake is held for a minimum holding period of one year.


There are none.


Income obtained by an AIF’s resident and non-resident or pension funds unit holders is exempt from Investment Income Tax and Industrial Tax on any income obtained, namely those from redemption or distribution of income, as well as gains from the sale of units.


Yes, it is advisable, because the tax regime is quite new and there is still no track record or official guideline on how the Angolan Tax Authorities will enforce it.Moreover, the tax legislation is quite incipient in dealing with finance-structured investments.


On 9 November 2015, the Intergovernmental Agreement (IGA) under Model I to improve international tax compliance with respect to the U.S. Foreign Account Tax Compliance Act (FATCA) was signed between Angola and the USA. Following the approval of the IGA, Presidential Decree no. 1/17, of 20 June, released the Regime applicable to the Tax Reporting of Financial Data within the framework of the Foreign Account Tax Compliance Act. This Presidential Decree established the legal framework applicable to the disclosure of information by financial bodies to the tax authorities.


Angola is not a member of the OECD. Nonetheless, Angolan

auditor, distributors and other services providers to the AIF, the majority of the data in connection with the AIF will be made available to the public.However, the identity of the investors in the AIF is not mandatorily subject to public disclosure.


The fund manager must prepare and publish annual and biennial accounts. These must be made available free of charge on request by the investors.Moreover, the fund manager must publish and send to the CMC:■ The annual accounts within four months after the end of the

financial year.■ The biennial accounts within two months after the end of the

relevant semester.


The use of side letters that set out particular terms and conditions in respect of governance, investment, etc. of the AIF is not specifically addressed by the UCI Law.However, in the case of open-ended AIFs, considering that they usually target retail investors and/or a broader unrestricted scope of investors, the use of side letters which alter any relevant provision of the legal documents shall be deemed illegal, considering that, as a general principle, fund managers need to abide by the AIF’s legal documents during the provision of their services.In closed-ended AIFs, notably in AIFs targeting only professional investors, we trust that there is a wider margin to set out, namely through a side letter, specific provisions in respect of certain matters. However, in general terms, as the provisions of the UCI Law are imperative, any side letter providing for actions in breach of such legal provisions will be deemed illegal and may subject the fund manager to administrative offence proceedings.

6 Taxation


The Angolan tax regime for AIFs set up under the contractual structure with no legal personality and the collective investment company endowed with legal personality has been enacted by Presidential Decree no. 1/14 of 13 October 2014.An AIF is subject to Corporate Income Tax (CIT or “Imposto Industrial”) on the annual profit obtained on a worldwide basis in compliance with the accounting rules, including rents from real estate and investment income. Capital gains and losses which are not realised will not be taxed. The CIT rate is 7.5% for AIFs investing in securities or financial assets and 15% for AIFs investing in real estate. An AIF will be exempted from any other income tax, namely Investment Income Tax and Urban Property Tax. An AIF is also exempt from Stamp Duty and Consumption Tax on bank commissions, and Stamp Duty on capital increases. Additionally, opened-ended real estate AIFs are exempt from Property Transfer Tax and Stamp Duty on acquisition of real estate.



Ang

ola

7 Reforms


At the time of writing, the Angolan legal UCI framework is in the consolidation stage, considering that the legal documents at issue have been recently enacted. Nevertheless, depending on the economic environment and political circumstances in the upcoming years, it may be necessary to update certain aspects of the Angolan legislation in light of developments and international experience, namely those stemming from the Alternative Investment Fund Managers Directive’s implementation in EU Member States and new approaches adopted in the international AIF market.

Representatives were present on 30 June–1 July in an OECD meeting that took place in Kyoto, Japan, with the intent to push forward ongoing efforts to update international tax rules to tackle BEPS. Following this meeting, Angola joined Inclusive Framework on BEPS, on 7 July, as its 83rd member.


There are none, since venture capital investment funds benefit from the same tax regime applicable to AIFs.


There are no other material tax issues.


There are none.



Ang

ola

With over 40 years in the making, Vieira de Almeida (VdA) is an international leading law firm, notable for cutting-edge innovation and top-quality legal advice. A profound business know-how coupled with a highly specialised cross-sector legal practice enable the firm to effectively meet the increasingly complex challenges faced by clients, notably in the aerospace, distribution, economy of the sea, green economy, energy, finance, real estate, industry, infrastructure, healthcare, public, professional services, information technology, emerging technologies, telecoms, third, transports and tourism sectors.

VdA offer robust solutions based on consistent standards of excellence, ethics and professionalism. The recognition of VdA as a leading provider of legal services is shared with our team and clients and is frequently acknowledged by the major law publications, professional organisations and research institutions. VdA has consistently and consecutively received the industry’s most prestigious awards and nominations.

Through VdA Legal Partners clients have access to a team of lawyers across 12 jurisdictions, ensuring wide sectoral coverage, including all African members of the Community of Portuguese-Speaking Countries (CPLP), and several francophone African countries, as well as Timor-Leste.

Angola – Cabo Verde – Chad - Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau – Mozambique –Portugal – São Tomé and Principe – Timor-Leste

Pedro Simões Coelho joined Vieira de Almeida & Associados in 1998 and is currently head of the firm’s investment funds practice and a partner in the Banking & Finance Group. He is also responsible for the Agency & Trust practice and is a member of the firm’s aviation finance team. He has been actively involved in several transactions, in Portugal and abroad, mainly focused on the advising, structuring and setting up of collective investment schemes such as mutual funds and real estate investment funds, infrastructure vehicles, venture capital funds and private equity structures. He has been responsible for several transactions including non-performing loans, asset finance, particularly in the aviation finance field, notably financing, leasing, sale or purchase of aircraft, and capital markets, retail banking, financial services and securities’ law. He has also been actively working in advising fund managers, venture capitalists, brokers, banks and other investment firms on a wide range of regulatory and related matters. In Agency & Trust services, he has been actively working in several securitisations and debt issuing transactions advising several entities notably in their capacity as common representatives and issuers.

Pedro Simões CoelhoVieira de AlmeidaRua Dom Luís I, 28Lisbon 1200-151Portugal

Tel: +351 31 311 3677Email: [email protected]: www.vda.pt

Carlos Filipe Couto joined Vieira de Almeida & Associados in 2011. He is a senior associate in the Banking & Finance practice area, where he has worked on several key transactions, notably on securities issues, banking and insurance sectors. He advises several assets managers in regulatory and legal matters, such as the setting up of collective investment schemes, providing ongoing counsel to the respective fund managers, as well as in respect of sale and purchase transactions in connection with assets under management or their shareholdings Moreover, he also provides advice to common representatives and trustees and has been actively involved in regulatory and contractual matters in connection with banking entities, aviation finance and cross-border factoring transactions. Lastly, he regularly assists insurance companies and intermediaries with regulatory matters, as well as with matters related to pension fund schemes and pension fund managers.

Carlos Filipe CoutoVieira de AlmeidaRua Dom Luís I, 28Lisbon 1200-151Portugal




Chapter 9

Taylors (in Association with Walkers)

Bermuda


The Investment Business Act 2003 (the “IBA”) governs the regulation of ‘investment business’ (described below) in Bermuda. Managers and advisors can be organised anywhere and act as managers and advisors to all forms of funds. There is no requirement for a manager or adviser to be licensed in Bermuda unless they have physical premises and employees in Bermuda. All managers and advisors of authorised and exempt funds (as described below), however, will be required to act in accordance with the IFA in all dealings concerning the fund. The BMA will evaluate whether the manager is a fit and proper person and will take into account the manager’s experience and expertise in relation to the fund.For managers domiciled in Bermuda, there are exemptions available from the licensing regime if they fall within the scope of the Investment Business (Exemptions) Order 2004 (the “Exemption Order”) further described below.“Investment business” services are very broadly defined and include dealing in investments, arranging deals in investments, managing investments, providing investment advice and safeguarding and administering investments. To be deemed to be carrying on investment business “in or from” Bermuda, a person must carry on investment business from a place of business maintained by such person in Bermuda with employees. Therefore, unless the manager maintains an office in Bermuda with employees or has an arrangement that the Minister of Finance by order determines will constitute the carrying on of business in Bermuda, the IBA will not apply.Under the Exemption Order, a person (not being a “market intermediary” (described below)) carrying on investment business shall be exempt from the requirement to obtain a licence under the IBA where such person provides investment business services exclusively to:(i) a high-income private investor: an individual who has had a

personal income in the last two years in excess of US$200,000 in each of the two years preceding the current year or has had a joint income with that person’s spouse in excess of US$300,000 in each of those years, and has a reasonable expectation of reaching the same income in the current year; current year meaning the year in which he or she purchases an investment;

(ii) a high-net-worth private investor: an individual whose net worth or joint net worth with that person’s spouse in the year in which he or she purchases an investment exceeds US$1 million; “net worth” meaning the excess of total assets at fair market value over total liabilities;



The establishment and operation of investment funds in Bermuda (“investment funds” or “funds”) is governed by:■ the Companies Act 1981 (the “Companies Act”);■ the Investment Funds Act 2006 (the “IFA”);■ the Fund Prospectus Rules 2007 (the “Fund Prospectus

Rules”); and■ the Fund Rules 2007 (collectively with the Fund Prospectus

Rules, the “Fund Rules”).The Bermuda Monetary Authority (the “BMA”) is the principal body responsible for the regulation of investment funds, including those listed on the Bermuda Stock Exchange.Investment funds in Bermuda may be structured and organised under Bermuda law in the following ways:(i) a company registered under the Companies Act and stated to

be a mutual fund (“mutual fund company”);(ii) an investment company that is a closed-ended fund (“Closed-

Ended Fund”);(iii) a unit trust scheme; (iv) a limited partnership; and(v) a limited liability company.An investment fund is defined in the IFA to include any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements 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. The IFA only applies to those arrangements where investors are entitled to have their shares/units/interests redeemed in accordance with the fund’s constitution and prospectus at a price determined in accordance with such constitution and prospectus. The IFA therefore does not apply to Closed-Ended Funds, being funds whose investors do not have redemption rights.Mutual fund companies, unit trust funds, partnerships funds and LLCs in Bermuda (collectively “Open-Ended Funds”) are all governed by the IFA and the Fund Rules. The IFA and the Fund Rules are not applicable to Closed-Ended Funds.

Jonathan Betts


Berm

uda

Open-Ended FundsOpen-Ended Funds are within scope of the IFA. The IFA and the Fund Rules establish and maintain the standards and the criteria applicable to the establishment and operation of the Open-Ended Funds, with a view to protecting investors. The IFA requires that Open-Ended Funds, other than Excluded Funds or funds which qualify as an Exempted Fund, must apply to the BMA for authorisation under the IFA under one of the classes: (i) an institutional fund; (ii) an administered fund; (iii) a specified jurisdiction fund; or (iv) a standard fund.Authorised FundsA. Institutional funds. These funds are open only to ‘qualified

participants’ (described below) or each participant must invest a minimum of US$100,000. The funds must have both:■ an investment manager, fund administrator, registrar,

auditor, custodian or prime broker, who may be based anywhere; and

■ a service provider, director or secretary with a link to Bermuda.

A “qualified participant” is defined in the IFA as:(i) a high-income private investor – an individual who has

had a personal income in excess of US$200,000 in each of the two years preceding the current year or has a joint income with that person’s spouse in excess of US$300,000 in each of those years, and has a reasonable expectation of reaching the same level of income in the current year;

(ii) a high-net-worth private investor – an individual whose net worth or joint net worth with that person’s spouse in the year in which he purchases an investment exceeds US$1,000,000;

(iii) a sophisticated private investor – an individual who has such knowledge of, and experience in, financial and business matters as would enable him to properly evaluate the merits and risks of a prospective purchase of investments;

(iv) a body corporate which has total assets of not less than US$5 million held either solely by the body corporate or partly by the body corporate and partly by one or more members of the same group of which it is a member;

(v) an unincorporated association, partnership or trust which has total assets of not less than US$5 million held either solely by such association, partnership or trust or partly by it and partly by one or more members of the same group of which it is a member;

(vi) a body corporate whose members fall within one or more of the above;

(vii) a partnership whose members fall within one or more of the above; and

(viii) a trust whose beneficiaries fall within one or more of the above.

B. Administered funds. These funds require each participant to invest a minimum of US$50,000 or be listed on a stock exchange that is recognised by the BMA. The funds must have both:■ an investment manager, registrar, auditor, custodian or

prime broker, who may be based anywhere; and ■ an administrator licensed under the IFA.

C. Specified jurisdiction funds. These funds are available if both:■ the Minister by order recognises the jurisdiction, outside

Bermuda, in which the fund operates and a particular law, or particular set of laws, of such jurisdiction as applicable to such; and

(iii) a sophisticated private investor: an individual who has such knowledge of, and experience in, financial and business matters as would enable him or her to properly evaluate the merits and risks of a prospective purchase of an investment, and who, in respect of each investment transaction, deals in amounts of not less than US$100,000;

(iv) collective investment schemes approved by the BMA under the IFA (or any provision of law amending or replacing the IFA);

(v) bodies corporate, each of which has total assets of not less than US$5 million where such assets are held solely by the body corporate, or held partly by the body corporate and partly by one or more members of a group of which it is a member;

(vi) unincorporated associations, partnerships or trusts, each of which has total assets of not less than US$5 million where such assets are held solely by such association, partnership or trust or held partly by it and partly by one or more members of a group of which it is a member;

(vii) bodies corporate, all of whose shareholders fall within one or more of the categories of this list, except category (iv);

(viii) partnerships, all of whose members fall within one or more of the categories of this list, except category (iv); or

(ix) trusts, all of whose beneficiaries fall within one or more of the categories of this list, except category (iv).

A “market intermediary” is defined as “a person who engages or holds himself out as engaging in the business of dealing in investments as principal or agent on an investment exchange”.Fund administrators are required to obtain a licence under the IFA to carry on the business of a fund administrator in or from Bermuda. It should be noted that only certain classes of authorised funds require a Bermuda licensed fund administrator (see question 1.3). Incentives are currently being offered by the Bermuda Government to attract asset managers to domicile in Bermuda, such as:■ new business work permits: new companies to Bermuda will

receive up to five work permits for senior positions;■ no term limits (that is, restrictions on the length of time an

employee may stay in Bermuda);■ reduced fees on the purchase of qualified property for

expatriates;■ key executive exemptions from work permit requirements

and the opportunity for these individuals to eventually receive long-term residency for themselves, their spouse and their children; and

■ payroll tax holidays for employers who hire Bermudians to new positions.


Whether a fund is required to be authorised or regulated will depend on whether the fund is structured as:■ an Open-Ended Fund, structured as:

(i) an Authorised Fund, classified as:■ an Institutional Fund;■ an Administered Fund; ■ a Specified Jurisdiction Fund; or■ a Standard Fund;

(ii) an Exempt Fund; or (iii) an Excluded Fund; or

■ a Closed-Ended Fund.

Taylors (in Association with Walkers) Bermuda


Berm

uda

Excluded FundsExcluded Funds are excluded from the requirement to register and the provisions of the IFA in general. An Excluded Fund is an open-ended “private fund” in which the number of participants does not exceed 20 persons and the investment fund does not promote itself by communicating an invitation or inducement to the public generally. No consent or approval is required from the BMA for such a fund. Excluded funds must serve notice on the BMA of the fact that the fund meets the criteria set forth in the IFA and intends to operate as a private fund and therefore qualifies for exclusion as soon as practicable after the establishment of the fund.Closed-Ended FundsClosed-Ended Funds are structured as collective investment vehicles which do not provide for redemption of interests at the option of investors. The incorporation of Closed-Ended Funds in Bermuda is governed by the Companies Act and is subject to the approval of the Registrar of Companies (the “Registrar”) and the BMA. The Registrar and the BMA have discretion to refuse to permit the incorporation or the formation if the proposed beneficial owners are persons that the BMA considers undesirable. Close-Ended Funds under Bermuda law and fall outside the scope of regulation by the IFA and the Funds Rules.Closed-Ended Funds which are structured as a Bermuda Company and offering shares to the public will be subject to the prospectus provisions of the Companies Act.


Yes. Whereas Open-Ended Funds (other than Excluded Funds) are regulated by the IFA as detailed in question 1.3, the IFA does not regulate Closed-Ended Funds. The establishment of a Closed-Ended Fund is governed by the Companies Act relevant statute and the governing documents of the entity. Closed-Ended Funds which are structured as a Bermuda Company and offering shares to the public are subject to the prospectus provisions of the Companies Act. As the IFA does not apply:■ there are no IFA fees or reporting requirements;■ there are no prescribed service providers; and■ there is no requirement for a prospectus or offering document

unless an offer of shares in a Bermuda Company is being made to the public as defined in the Companies Act.

The incorporation of Closed-Ended Funds in Bermuda is subject to the approval of the Registrar and the BMA. The Registrar and the BMA have discretion to refuse to permit the incorporation or the formation if the proposed beneficial owners are persons that the BMA considers undesirable.


The authorisation process, as detailed below, will depend on the classification of the fund:■ Authorised Funds – an application is submitted to the BMA,

including (a) the corporate name and registered or principal office of each service provider, (b) a certificate signed by the operator confirming the fund complies (or will comply) with section 14 of the IFA, and (c) a copy of the fund’s prospectus containing all the information required by the prospectus rules as the BMA may reasonably require for considering the application. Authorisation is granted within 5–7 days if the investment fund meets the requirements.

■ the fund satisfies the requirements set out in the fund rules made by the BMA relating to that class of fund and that jurisdiction.

D. Standard funds. These funds are those that do not fall within any other class of fund. There is no minimum investment or investor qualification test but it must both:■ have an investment manager, registrar and auditor, all of

which can be located anywhere; and■ have a Bermuda-based administrator or custodian.

Exempt FundsFunds meeting certain criteria are eligible for exemption from authorisation under the IFA:A. Class A Exempt Funds. These funds are not subject to review

and approval by the BMA and may commence operations upon filing of their prospectus with the BMA. To be eligible for Class A Exempt Fund status, the Open-Ended Fund must:■ only be open to qualified participants (high-income, high-

net-worth, sophisticated private investors or institutional investors);

■ have appointed an investment manager who:(i) is licensed under the IBA;(ii) is authorised or licensed by a foreign regulator

recognised by the BMA (currently only the US and the EU); or

(iii) for the purpose of the IFA, is carrying on business in or from Bermuda or in a jurisdiction recognised by the BMA, is a person who has gross assets under management of not less than US$100 million or is a member of an investment management group that has consolidated gross assets under management of not less than US$100 million;

■ have appointed an officer, trustee or representative resident in Bermuda who has authority to access the books and records of the fund;

■ have appointed the following persons to provide services to the fund: a fund administrator; a registrar; an auditor; and a custodian or prime broker; and

■ prepare financial statements in accordance with any of the following standards: International Financial Reporting Standards (“IFRS”); the Generally Accepted Accounting Principles (“GAAP”) in Bermuda, Canada, the UK or the US; or any other GAAP that the BMA may recognise.

If the Open-Ended Fund does not qualify for Class A Exempt Fund status, it can submit an application for Class B Exempt Fund status which is granted by the BMA following a review.

B. Class B Exempt Funds. These are Open-Ended Funds that must:■ only be open to qualified participants (high-income, high-

net-worth, sophisticated private investors or institutional investors);

■ have appointed an officer, trustee or representative resident in Bermuda who has authority to access the books and records of the fund;

■ have appointed the following persons to provide services to the fund: an investment manager; a fund administrator; a registrar; an auditor; and a custodian or prime broker. These persons must be, in the BMA’s view, fit and proper (BMA may on application waive any of the above requirements if it is satisfied that appropriate arrangements are in place to safeguard the interest of investors); and

■ prepare financial statements in accordance with any of the following standards: IFRS; GAAP in Bermuda, Canada, the UK or the US; or any other GAAP that the BMA may recognise.



Berm

uda

(a) mutual fund companies – a mutual fund company is a company limited by shares and incorporated with mutual fund objects for the purpose of investing the moneys of its members for their mutual benefit and with both the company and the members having the power to redeem or purchase for cancellation its shares without reducing its authorised share capital and stating in its memorandum that it is a mutual fund. The formation and operation of mutual fund companies is governed by the Companies Act, as amended, and the IFA;

(b) investment fund companies – an investment fund company is a company limited by shares and incorporated without mutual fund objects, where investors do not have the right to demand redemption of their shares. The formation and operation of investment companies is governed by the Companies Act. The IFA is not applicable;

(c) unit trusts – a unit trust fund is a fund under which the property is held on trust for participants. The formation and operation of unit trust funds is governed by the trust deed by which it is established and the IFA;

(d) partnership funds – a partnership fund is a fund under which the participants contribute funds to the partnership to be held on behalf of participating partners of the partnership. The funds are managed by the manager for the benefit of the participants. The formation and operation of partnership funds is governed by the Limited Partnership Act 1883, the Exempted Partnerships Act 1992, the IFA and the applicable partnership agreement; and

(e) limited liability companies – the Limited Liability Company Act 2016 was introduced in October 2016 enabling the formation of limited liability companies (“LLCs”). LLCs are hybrid entities commonly used in the US for private-equity funds and other asset-management structures. The Bermuda legislation is closely modelled on Delaware law so will be very familiar to US fund managers and legal counsel.


An investor in a limited liability investment fund is liable in the amount of any unpaid capital on the investor’s shares. An investor in a limited partnership funds is liable to the amount of its capital contribution and, depending on the terms of the limited partnership agreement, its capital commitment to the fund.


Managers and advisers of investments funds are primarily structured as companies, limited partnerships or LLCs established in Bermuda or in other jurisdictions.


Any restrictions on redemptions of investment funds would be imposed by the investment fund and provided for in its bye-laws and prospectus.


There is no legislative approval required for the transfer of investors’ interests (non-voting) in investment funds. Any transfer of interests in the fund with voting rights requires an application to

■ Class A Exempt Funds – a certification is submitted to the BMA confirming that the investment fund meets the requirements for exemption prior to commencement of the fund’s business (including a copy of the fund’s prospectus). Once notification is filed, exemption is automatically granted.

■ Class B Exempt Funds – an application is submitted to the BMA for exemption (including a copy of the fund’s prospectus). Exemption is granted within 10 days if the fund meets the requirements.

■ Excluded Funds – a notice is served on the BMA confirming that the fund is a private fund and qualifies for exclusion as soon as practicable after the establishment of the investment fund. Once notification is filed, exclusion is automatically granted.

After the appropriate filings detailed above, Class A Exempt Funds, Class B Exempt Funds and Excluded Funds are required, under the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008, to register with the BMA as a Non-Licensed Person.■ Closed-Ended Funds are not authorised or licensed but are

required to comply with the provisions of the Companies Act.


Bermuda investment funds that are structured as exempted companies, limited partnership or LLCs must have:■ either a director, trustee, officer or resident representative

who is ordinarily resident in Bermuda, and who has access to the books and records of the investment fund; and

■ a registered office in Bermuda with certain records relating to the investment fund.


See question 1.3 with respect to each type of fund and the service providers required.


See question 1.2 on the rules and relevant exemptions applicable to domiciled managers and advisors in Bermuda.


To date, Bermuda has 91 treaty partners around the world, has signed 41 bilateral tax information exchange agreements (“TIEAs”) and has 87 co-signatories under the multi-lateral Convention on Mutual Administrative Assistance in Tax Matters.Bermuda has also adopted the OECD Common Reporting Standard (“CRS”) and is a Model II jurisdiction for the purposes of FATCA.

2 Fund Structures


As noted in question 1.1, investment funds in Bermuda may be structured and organised under Bermuda law in four different ways:



Berm

uda

(m) a description of the bases for the determination of the issue and redemption prices (including the frequency of dealings) and an indication of the places where information as to the prices may be obtained;

(n) a description of the basis and frequency of valuation of the fund’s assets;

(o) particulars of any material provisions of any contract engaging the services of any and all directors, trustees, partners, service providers, and any other third parties receiving or likely to receive fees from the fund;

(p) a description of the potential conflicts of interest between the fund, its directors, trustees, partners, and its service providers;

(q) the date of the financial year end of the fund;(r) information on the nature and frequency of financial reports

to be distributed to participants;(s) a statement of the place where copies of the constitution and

any annual or periodic report may be inspected and obtained;(t) particulars relating to the main business activity of the

custodian and any co-custodian; and (u) particulars of the experience of investment managers.The Fund Rules also contain disclaimers in favour of the BMA.The Companies Act provides that companies that are offering shares to the public are required to publish and file a prospectus with the Registrar (unless they fall within any of the circumstances where it is not necessary to publish and file a prospectus under the Companies Act). The prospectus should contain information showing:(a) the names, descriptions and addresses of the promoters,

officers or proposed officers;(b) the business or proposed business of the company;(c) the minimum subscription which, in the opinion of the

promoters, directors or provisional directors, must be raised;(d) any rights or restrictions on the shares that are being offered;(e) all commissions payable on the sale of the shares referred

to in the prospectus and the net amount receivable by the company in respect of the sale;

(f) the name and address of any person who owns five per cent or more of the shares of the company: provided that this paragraph shall not apply to an exempted company or a permit company;

(g) any shareholding in the company of an officer of the company;(h) financial statements of the company prepared in such manner

and containing such information as may be required by rules made under the Companies Act;

(i) a report or statement by the auditor of the company prepared in such manner and containing such information as shall be required by rules made under the Act; and

(j) the date and time of the opening and closing of subscriptions lists.


At the incorporation or formation stage of a fund, the legal documents which are required to be filed with the Registrar are:■ for mutual fund companies and investment companies – a

memorandum of association, a notice of registered office a register of directors and officers, certain extracts from the bye-laws and an annual declaration; and

■ for limited partnerships – a certificate of limited partnership, a certificate of exempted partnership and a notice of registered office.

Thereafter, companies that offer shares to the public are required to publish a prospectus and file the same with the Registrar (unless they

the BMA unless the fund is classified under the IFA and therefore has had a general permission granted pursuant to the Notice to the Public of June 2005 under the Exchange Control Act 1972 and the Regulations thereunder.


Any limitations on a manager’s ability to manage its funds would be imposed by the investment fund and provided for in its bye-laws and prospectus.

3 Marketing


The Companies Act, the IFA and the IBA govern the production and offering of marketing materials.


The IFA provides that the prospectus is required to disclose facts which would be considered material to a prospective investor, such as:(a) the name of the fund and the address of its registered or

principal office in Bermuda;(b) a statement as to whether the fund is registered or licensed,

in any jurisdiction or with any supervisory or regulatory authority, outside Bermuda;

(c) the date of incorporation or establishment of the fund (indicating whether the duration is limited);

(d) where applicable, an indication of stock exchanges or markets where the securities are, or are to be, listed or dealt in;

(e) the names, address, and other relevant particulars of directors, officers, resident representatives, auditors, fund administrators, custodians, registrars, promoters, legal advisers, investment managers, and other persons having significant involvement in the affairs of the fund;

(f) a description of the fund’s investment objectives, including its financial objectives, investment policy and any limitations on that investment policy and an indication of any techniques and instruments, and any borrowing power;

(g) a description of the investment fund’s material risks including, in relation to a mutual fund company registered under section 6 of the Segregated Accounts Companies Act 2000 or a unit trust fund operating segregated accounts, a statement on any potential risks associated with the operation of segregated accounts;

(h) details of the capital of the fund including, where applicable, any existing initial or founder capital;

(i) details of the principal rights and restrictions attaching to the units, including with respect to currency, voting rights, circumstances of winding up or dissolution, certificates, entry in registers and other similar details;

(j) a description of the intentions with respect to the declaration of dividends or distribution of profits;

(k) the procedures and conditions for the redemption and sale of interests and the circumstances in which such redemption may be suspended;

(l) the procedures and conditions for the issue of units;



Berm

uda


There have been no restrictions imposed.

4 Investments


There are no restrictions on the types of activities that can be performed by investment funds, subject to the fund not engaging in activity which is:(i) prohibited under the Companies Act;(ii) not otherwise illegal or in breach of public policy;(iii) outside the powers of the fund’s memorandum of association,

bye-laws and prospectus; and(iv) not compliant with the requirements of the IFA.


Any limitations would form part of the investment fund’s memorandum of association, bye-laws and/or prospectus.


Any restrictions would form part of the investment fund’s memorandum of association, bye-laws and/or prospectus.



At the Registrar:■ the certificate of incorporation and memorandum of

association;■ the address of the registered office;■ the register of Directors;■ any prospectus or offer document required to be filed pursuant

to the Companies Act; and■ certain other filings required pursuant to the Companies Act,

including prescribed bye-laws excerpts. At the Registered Office:■ details of directors and officers. The register of directors and

officers is open for inspection during business hours; and■ register of members*. The register of members is open for

inspection by the members only in respect of its shareholding in the fund.

(*Only in respect of authorised funds.)

fall within any of the circumstances for which it is not necessary under the Companies Act).The IFA contains further filings requirements for Open-Ended Funds with the BMA at authorisation. See question 1.5.


Any person marketing funds in Bermuda is subject to the provisions of the Companies Act. There are no laws in Bermuda that restrict the marketing of shares of a foreign fund in Bermuda. However, there is a general prohibition against exempted and overseas companies “carrying on business in Bermuda” under the provisions of the Companies Act and the IBA, which restricts the marketing of shares of a foreign fund in Bermuda by an exempted Bermuda company owned by non-Bermudians or an overseas company. However, there are limited means through which the marketing of a foreign fund in Bermuda can be achieved. Where the shares are offered in Bermuda on a private basis by a foreign fund that does not have a place of business in Bermuda, that foreign fund is not required to obtain a licence under the Companies Act, provided the foreign fund does not market or travel to Bermuda. While there is a “travelling salesman” exception, which permits limited marketing in Bermuda, reliance on this exception is not advisable as even limited contact in Bermuda may be considered to be carrying on business in Bermuda and inadvertently violate the IBA.It is not easy to be specific as to the permitted marketing activities of a foreign fund, and in many cases the issue will turn on the facts and circumstances. Examples of activities that should be permitted (depending on the circumstances) include external marketing, unsolicited requests, Bermuda Stock Exchange (“BSX”) listing, permit funds, internet marketing, local brokers and foreign funds with a permit to carry on business in Bermuda.Due to an exemption available under the Companies Act, a Bermuda fund is exempted from the prohibition on marketing its shares in Bermuda.


Standard funds or investment companies (as detailed above in questions 1.1 and 1.3) can be marketed to retail investors.


See question 1.3 above. Due diligence must also be carried out on prospective investors. This task is normally delegated to the administrator.




Except as discussed in question 3.4, there are no restrictions.



Berm

uda

6 Taxation


Bermuda is fiscally neutral. There are no corporation, profits, or capital gains taxes payable in Bermuda by an investment fund or its investors. After incorporation the investment fund may apply for, and is likely to receive, an undertaking from Government that in the event of any such taxes being imposed by Bermuda in the future, those taxes shall not apply to the fund until 31 March 2035 (the “Tax Assurance Certificate”).


See question 6.1.


There are no establishment or transfer taxes payable in Bermuda.


See question 6.1. There are no taxes payable in Bermuda in relation to such investors.


Upon the incorporation of an investment fund company as noted in question 6.1, an application should be submitted for a Tax Assurance Certificate to the Registrar. This certificate, once granted, confirms that in the event Bermuda enacts legislation imposing tax computed on profits, income, any capital assets, gain or appreciation, or any tax in the nature of estate duty or inheritance, such tax will not apply to such fund or any of its operations, securities, debentures, or other obligations until 31 March 2035.


Bermuda is committed to being an integral part of the global financial services sector and has reacted quickly to FATCA. Bermuda negotiated a Model II Inter-Governmental Agreement (“IGA”) with the US Government and has also signed a similar Model II IGA with the United Kingdom. Bermuda also passed amendments to its legislation in July 2015 to adopt the OECD’s Standard for Automatic Exchange of Financial Account Information (or Common Reporting Standard (“CRS”)). CRS came into effect in Bermuda on 1 January 2016.


Exempt funds must:■ file a certificate with the BMA annually (before 30 June)

certifying that the fund satisfies the requirements for exemption and will continue to satisfy them, and also file both:(i) a statement of any material changes to its prospectus; and(ii) a copy of its audited financial statements for the preceding

year.Institutional and administered funds must:■ file a report to the BMA on its operations on a quarterly basis,

including information on the fund’s price per share, or unit, net asset value and amounts subscribed and redeemed during the quarter;

■ submit to the BMA, within six months of the financial year end, a statement confirming that the fund has at all times during the preceding financial year been in compliance with the provisions of the IFA, as well as applicable fund and prospectus rules, or setting out the particulars of any breach; and

■ prepare annual financial statements audited by an auditor that is acceptable to the BMA.

Standard funds must:■ file a report to the BMA on its operations on a monthly basis,

including information on a fund’s price per share (or unit), net asset value and amounts subscribed and redeemed during the month;

■ submit to the BMA, within six months of the financial year end, a statement confirming that the fund has at all times during the preceding financial year been in compliance with the provisions of the IFA, as well as applicable fund and prospectus rules, or setting out the particulars of any breach; and


Specified jurisdiction funds must:■ submit to the BMA, within six months of the financial year

end, a statement confirming that the fund has at all times during the preceding financial year been in compliance with the provisions of the IFA, as well as applicable fund and prospectus rules, or setting out the particulars of any breach; and


Closed-Ended Funds and Excluded Funds must file an annual return with the Registrar each year in accordance with the Companies House (in respect of mutual fund companies and investment companies), the Limited Partnership Act 1883 (in respect of partnership funds) and the Limited Liability Company Act 2016 (in respect of LLCs) confirming its amount of assessable capital.


There are no restrictions on the use of side letters but the ability for the investment fund to enter into side letters must be disclosed in the prospectus. The terms of the side letters must not contravene any of the provisions in the bye-laws or prospectus (where applicable).



Berm

uda

This collaborative effort is demonstrated by recent amendments to Bermuda’s partnership legislation that came into effect in December 2015 to provide for greater flexibility in how partnerships conduct business in Bermuda, with a view to strengthening the appeal of Bermuda partnerships for use in private equity fund structures.The changes included, among other things:■ safe harbour provisions: an extension of the list of “safe

harbour” activities that a limited partner can carry out without taking part in the management of a limited partnership (and, therefore, without losing its limited liability status);

■ duty of good faith: providing that a general partner shall at all times act in good faith and in the interests of the limited partnership (unless there is an express provision in the partnership agreement to the contrary) and that a limited partner does not owe any fiduciary duties to the limited partnership or to any other partner when exercising its rights or performing its obligations under the partnership agreement; and

■ board and committee members: permitting members of boards and/or committees of a limited partnership to have the benefit of provisions expressly contained in the partnership agreement in favour of such members (even if they are not party to the partnership agreement) so that, for example, those members will now have the benefit of indemnity and exculpation clauses expressly contained in the partnership agreement.

This is also demonstrated by the BMA’s consultation paper published in April 2018 proposing amendments to the IFA requirement for insurance-linked securities (“ILS”) funds (which are classified as Class A Exempt funds) to appoint a custodian or prime broker. The consultation paper recognises that the appointment of a custodian or prime broker may add only limited value depending on the nature of the ILS transaction. Comments from the public to the consultation paper are due in May 2018 with the BMA intending to submit the proposed amendments for parliamentary approval thereafter.The BMA recently published a discussion paper in March 2018 proposing certain enhancements to the IBA and IFA to better reflect international standards and expectations, including those of the International Organisation of Securities Commissions (“IOSCO”). The discussion paper covers two main areas:■ updates to reflect international standards required to be

imposed on the investment business, investment business funds and the fund administration sectors in Bermuda – such as updates to the licensing requirements under the IBA, particularly Bermuda entities conducting investment business outside of Bermuda; and

■ updates required to reflect current and emerging market expectations and trends – such as increasing the monetary threshold values used to define “high net worth”, “high income” or “sophisticated” investors under the Exemption Order.

The BMA is seeking input from industry partners on the discussion paper with feedback expected before the end of 2018.


Bermuda continues to work on next steps for OECD standards for Base Erosion and Profit-Shifting (“BEPS”) compliance. In 2016, Bermuda became an early signatory to the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports, which puts in place an automatic exchange framework for exchanging country-by-country reports. Bermuda’s tax information reporting portal (automatic exchange of information portal) was opened for accepting common reporting standard (“CRS”) and country-by-country reporting (“CbCR”) notifications and report filings returns in 2017.


See question 6.1. There are no corporation, profits, or capital gains taxes payable in Bermuda by an investment fund or its investors regardless of the asset class or structure.


The stamp duties regime applies to Bermudian residents and local companies (owned and controlled by Bermudians 60/40). It does not apply to non-residents, exempted companies or exempted partnerships.


No changes anticipated.

7 Reforms


The Bermuda Government continues to consider various initiatives as it is committed to working closely with the private sector and the BMA to further develop Bermuda’s fund industry. The aim is to create an environment which is favourable for the quick, cost-effective and efficient establishment of investment enterprises to strengthen Bermuda’s position in the international funds market.



Berm

uda


With a staff drawn from top international law firms, Taylors provides first-class, commercially-focused advice that is attuned to our clients’ requirements and facilitates their business.

Clients include global corporations, financial institutions, capital markets participants, investment fund managers and high-net-worth individuals located throughout the world, but with a primary focus in the Americas.

Taylors is a full-service commercial law office. Core practice areas are:

■ Corporate & Private Equity.

■ Finance.

■ Investment Funds.

■ Insurance.

■ Compliance & Regulatory.

■ Insolvency & Dispute Resolution.

■ FinTech & Digital Assets.

Jonathan Betts is a Partner and head of the corporate and finance practice at Taylors, a full-service law firm which works in exclusive association with Walkers and provides advice on all aspects of Bermuda law.

He advises Bermuda-based and international clients on a broad range of corporate matters, focusing primarily on mergers and acquisitions, private equity and banking and finance transactions. He also advises in relation to the formation of investment funds and insurance matters.

Jonathan has over 20 years of legal experience, having commenced his career in London with leading City law firms Clifford Chance and SJ Berwin and then practised in Bermuda since 2004.

He is widely recognised as a leading corporate and commercial lawyer in Bermuda and is ranked as such by a number of the premier legal publications, including Chambers Global, The Legal 500 and IFLR 1000. Chambers Global identifies Jonathan as one of the top seven corporate and finance lawyers currently practising in Bermuda.

Jonathan BettsTaylors (in Association with Walkers)Park Place, 55 Par-la-Ville RoadHamilton HM 11Bermuda

Tel: +1 441 242 1500Email: [email protected]: www.walkersglobal.com


Chapter 10

Maples and Calder

Richard May

Heidi de Vries

British Virgin Islands

Any person conducting investment business in, or from within, the BVI must be licensed by the Commission or be an approved investment manager or advisor under the Approved Managers Regulations, unless that person is exempt from holding a licence. A licence may be restricted (meaning that securities investment business may only be transacted with particular clients) or unrestricted. A licence may also be issued subject to conditions or may be unconditional.Schedule 2 Part B to SIBA specifically excludes certain activities from the definition of investment business, although those exclusions are unlikely to apply to a person conducting discretionary investment management or investment advisory activities for a mutual fund.Under Schedule 2 Part C to SIBA, a person carrying on investment business may be excluded from the requirement to obtain a licence or to be approved under the Approved Managers Regulations. It is unlikely that such exclusions would apply to a person conducting discretionary investment management or investment advisory activities for a mutual fund.An “Excluded Person” includes:(a) a company carrying on investment business exclusively for

one or more companies within the same group;(b) a person who is a participant in a joint enterprise and

conducts such investment business for the purposes of, or in connection with, the joint enterprise;

(c) a person who is a partner in a partnership and conducts such investment business for the purposes of, or in connection with, the partnership; and

(d) a person who is a director of a company and conducts such investment business for the purposes of, or in connection with, the company,

in each case, provided that the person does not otherwise carry on or hold himself out as carrying on investment business, and does not receive remuneration for carrying on the investment business separate from the remuneration the person receives for acting in the relevant capacity specified.


Only BVI Alternative Investment Funds that fall under the definition of a “mutual fund” require to be regulated under SIBA. Traditional private equity and other closed-ended structures are not regulated, although a BVI manager or advisor to such a fund would require to be regulated. SIBA defines a mutual fund as a company incorporated, a partnership formed, a unit trust organised or other



The Securities and Investment Business Act, 2010, as amended (“SIBA”) and its subsidiary legislation, including the Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015, provides for the regulation of open-ended mutual funds, among other matters. Responsibility for regulation under SIBA rests with the Financial Services Commission (the “Commission”) of the British Virgin Islands (the “BVI”).In addition, the Mutual Fund Regulations, 2010 (the “MFR”) provide further detail regarding the obligations of mutual funds. Public funds are also subject to the Public Funds Code, 2010.


A manager or advisor which is established or, in the case of a foreign company, registered in the BVI and which conducts “investment business”, whether or not that investment business is carried on in the BVI, will fall within the scope of SIBA. Managers and advisors holding a full licence under SIBA are regulated by the Commission and are subject to the Regulatory Code, 2009 (the “Code”); managers and advisors approved under the Investment Business (Approved Managers) Regulations, 2012, as supplemented by the Approved Managers (Amendment) Regulations, 2013 (the “Approved Managers Regulations”), are regulated by the Commission, but are not subject to the Code.“Investment business” is defined as being engaged, by way of business, in any activity which is of a kind that is specified in Schedule 2 Part A and is not excluded by Schedule 2 Part B to SIBA. Those activities include managing investments belonging to another person on a discretionary basis, acting as the manager or investment advisor of a mutual fund and advising in relation to investments, if the advice is given to someone in their capacity as investor or potential investor or in their capacity as agent for an investor or a potential investor and the advice is on the merits of that person (whether acting as principal or agent) buying, selling, subscribing for or underwriting a particular security or exercising any right conferred by a security to buy, sell, subscribe for or underwrite a security. “Investments” are defined in Schedule 1 to SIBA and include most forms of shares and stock, debt instruments, options, futures, contracts for differences, and derivatives.


Briti

sh V

irgi

n Is

land

s

(f) the fund’s name is not undesirable or misleading; and(g) registering the fund is not against the public interest.The Incubator FundAn incubator fund is a mutual fund which is limited to having no more than 20 investors, who must each invest at least US$20,000 as an initial investment, and a net asset value of US$20 million. The fund is authorised to operate for an incubation period of two years, which may be extended to three years on application, without the need to appoint external managers, administrators, custodians or auditors. It must have an authorised representative in the BVI and at least two directors, make semi-annual returns regarding its assets and number of investors and, annually, submit financial statements, which need not be audited, to the Commission. It is not required to have an offering document; however, it must issue written risk warnings to investors in a form prescribed by the implementing legislation. At the end of the incubation period, it must either: (i) convert into a different type of regulated fund; (ii) cease to be an open-ended fund; or (iii) liquidate.The Approved FundAn approved fund is a mutual fund which is limited to having no more than 20 investors and a net asset value of US$100 million. The fund is authorised to operate for an unlimited period, without the need to appoint external managers, custodians or auditors. It must have an external administrator based in a recognised jurisdiction, an authorised representative in the BVI and at least two directors. It must make a return regarding its assets and number of investors and submit financial statements, which need not be audited, to the Commission annually. It is not required to have an offering document; however, it must issue written risk warnings to investors in a form prescribed by the implementing legislation.


Yes; closed-ended funds (such as private equity funds) are not subject to regulation under SIBA, while open-ended funds that fall within the definition of “mutual fund” under SIBA (such as most hedge funds) are subject to regulation under SIBA. The key distinction between open-ended and closed-ended funds is the ability of investors to require the redemption or repurchase of some or all of their investment by reference to the net asset value of the interest they have prior to winding up. Where long lock-up periods, commonly in excess of five years, are part of a fund’s terms, BVI practitioners and the Commission generally consider such investment funds to be closed-ended funds, although this will be fact-specific.


(a) The authorisation process for all funds involves the submission of an application form, together with supporting documents and the requisite fee.

Documents required to be filed for private and professional funds are:

(i) an offering memorandum;(ii) the Application Form F100 (Parts 1, 4, and 6);(iii) the certificate of incorporation of the fund;(iv) the constitutional documents of the fund (which must

contain the applicable fund disclosure required by SIBA); and

similar body formed or organised under the laws of the BVI or the laws of any other country which:(a) collects and pools investor funds for the purpose of collective

investment; and(b) issues fund interests (defined as the rights or interests,

however described, of investors in a mutual fund with regard to the assets of the fund, but does not include a debt) that entitle the holder to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest in the whole or in a part of the net assets of the company, the partnership, the unit trust or other similar body, as the case may be, and includes:

(i) an umbrella fund whose fund interests are split into a number of different class funds or sub-funds; and

(ii) a fund which has a single investor which is a mutual fund not registered or recognised under SIBA.

There are five main categories of mutual funds under SIBA: private; professional; public; incubator; and approved funds. In addition, foreign mutual funds may be registered as Recognised Foreign Funds provided for under SIBA. Of the five main categories of mutual fund, the overwhelming majority are private or professional funds.The Professional FundA professional fund is a mutual fund the constitutional documents of which specify that the fund interests shall only be issued to professional investors and the initial investment by each investor in the fund, other than exempted investors, is not less than US$100,000 or its equivalent in any other currency. A “professional investor” is defined in SIBA as a person: (a) whose ordinary business involves, whether for that person’s own account or the account(s) of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of the property of the fund; or (b) who has signed a declaration that he, whether individually or jointly with his spouse, has a net worth in excess of US$1,000,000 or its equivalent in any other currency and that he consents to being treated as a professional investor. Exempt investors include the investment manager and promoter of the fund and its employees.The Private FundA private fund is a mutual fund the constitutional documents of which specify either: (a) that it will have no more than 50 investors; or (b) that the making of an invitation to subscribe for, or purchase, fund interests issued by the mutual fund is to be made on a private basis only. An invitation to subscribe for, or purchase, shares issued by a mutual fund on a private basis includes an invitation which is made: (i) to specified persons (however described) and is not calculated to result in fund interests becoming available to other persons or to a large number of persons; or (ii) by reason of a private or business connection between the person making the invitation and the investor.The Public FundA public fund is recognised by the Commission, provided that the Commission is satisfied with the following:(a) the fund is a BVI business company or unit trust that is

governed by the trust laws of the BVI and has a trustee based in the BVI;

(b) the fund satisfies the requirements of SIBA and, where applicable, the Public Funds Code with respect to its application;

(c) the fund will, on registration, be in compliance with SIBA and any practice directions issued by the Commission and applicable to the fund;

(d) the fund’s functionaries satisfy the Commission’s “fit and proper” criteria;

(e) the fund has, or on registration will have, an independent custodian;

Maples and Calder British Virgin Islands


Briti

sh V

irgi

n Is

land

s

fund manager and the fund administrator. The Commission may, on written application made by or on behalf of a private or professional fund, exempt the fund from the requirement to appoint a custodian or a fund manager, and an application for such an exemption can be made together with the application for recognition as a BVI mutual fund or at any subsequent time. However, no exemption is available in respect of the requirement to have an administrator.A public fund must at all times have a manager, an administrator and a custodian (unless the fund is exempted by the Commission from the requirement to appoint a custodian). Each functionary of a public fund must be functionally independent from every other functionary of the fund.An incubator fund is not required to have any functionary appointed; an approved fund must have an administrator appointed at all times, but is not required to have any other functionary appointed.The Commission will recognise and accept any functionary of a fund that is established and located in a “Recognised Jurisdiction”. The current list of Recognised Jurisdictions is as follows:

Argentina France MexicoAustralia Germany NetherlandsBahamas Gibraltar New ZealandBelgium Greece NorwayBermuda Guernsey PanamaBrazil Hong Kong PortugalCanada Ireland SingaporeCayman Islands Isle of Man South AfricaChile Italy SpainChina Japan SwedenCuraçao Jersey SwitzerlandDenmark Luxembourg United KingdomFinland Malta United States

Where a functionary of a fund is not established and located in a recognised jurisdiction, the Commission may recognise and accept the functionary if they are satisfied that the functionary’s jurisdiction of establishment and location has a system for the effective regulation of investment business.DirectorsA private, professional, incubator and approved fund must at all times have at least two directors, at least one of whom must be an individual. A public fund must at all times have at least two directors. Only individuals can serve as directors of public funds. Although not required, it is becoming market practice for regulated funds to appoint independent directors. Directors of regulated funds are not required to be based in the BVI.Authorised representativeAll entities subject to approval, recognition, registration or licensing under SIBA are required to appoint an authorised representative in the BVI in order to represent them in their dealings with the Commission, save where the entity has a substantial presence in the BVI.


SIBA provides that no person shall carry on, or hold out as carrying on, investment business of any kind in or from within the BVI unless he or she holds a licence authorising him or her to carry on that kind of investment business. Accordingly, foreign managers or advisers that carry on investment business of any kind (including managing, advising or operating BVI funds) in or from within the BVI will be

(v) a written consent of each of the fund’s lawyer and the fund’s auditor confirming acceptance of each of their appointments by the fund.

(b) Where an offering document is required, offering documents of BVI mutual funds must contain certain investment warnings required by SIBA and such information as is necessary to enable a prospective investor to make an informed decision as to whether or not to invest. The subscription documents must contain an acknowledgment by investors that each investor has been provided with an investment warning and, in the case of a professional fund, a confirmation that the investor is a “professional investor”.

(c) Incubator and approved funds must, at a minimum, submit:(i) Form IB-A2-IAF;(ii) the constitutional documents of the fund;(iii) the offering document, inclusive of investment warning

and investment strategy (optional);(iv) an investment warning (required in the absence of an

offering document); and(v) a written description of investment strategy (required in

the absence of an offering document).(d) Public funds require a prospectus to be approved in advance

of the registration being granted. The prospectus must have been prepared in accordance with the Public Funds Code. In addition, the public fund must satisfy the Commission concerning the matters identified in question 1.3 above.

(e) In terms of timing, following the filing of an application with the Commission, (i) a private or professional fund will generally be recognised by the Commission within five to seven business days of submission of the application, provided the requisite documentation is complete and no exemptions have been applied for (and a professional fund may commence business up to 21 days prior to receiving formal confirmation of recognition, provided it complies with all other requirements of SIBA and submits an application for recognition within seven days of commencing business); (ii) a public fund will generally be registered by the Commission within six to nine weeks; and (iii) incubator and approved funds may commence trading two business days after a completed application is submitted to the Commission.

(f) The fee payable on submitting an application for recognition of a professional or private fund is US$700 and, once recognised, there is an annual recognition fee of US$1,000 payable upon recognition and annually by 31 March until the fund’s certificate of recognition is cancelled. The application fee payable by an incubator or approved fund is US$1,500 and, once approved, there is a fee of US$1,000 payable upon approval and due annually by 31 March until the fund is no longer approved as an incubator or approved fund.


There are no local residence requirements. Each approved, recognised or registered mutual fund must, however, appoint an authorised representative in the BVI to represent it when dealing with the Commission.


Private and professional funds must, at all times, have a fund manager, a fund administrator, and a custodian (collectively described, together with investment advisors and prime brokers, as “functionaries”). The custodian of a private fund or a professional fund must be a person who is functionally independent from the



Briti

sh V

irgi

n Is

land

s

between the assets and liabilities of the limited partnership and so it is common to form a special purpose vehicle to act as general partner to a limited partnership.The LP is commonly used for venture capital and private equity funds with a limited number of investors.The Unit TrustThe concept of a Unit Trust is that subscribers contribute funds to a trustee, who holds those funds on trust whilst they are managed by the investment manager for the benefit of the subscribers, known as unitholders. Each unitholder is entitled to a pro rata share of the trust’s assets.Unit Trusts are relatively uncommon in the BVI and are used (in place of companies) for investors in jurisdictions where participation in a Unit Trust is more acceptable or attractive than owning shares in a company, for example, for regulatory or tax reasons.


The limited liability of investors in a BVI investment fund depends upon the nature of the vehicle used and whether the investor has agreed to contribute additional funds to that vehicle pursuant to the terms of the constitutional and offering documentation.With BVI business companies limited by shares, the liability of the investors is limited to the amount unpaid on their shares or as otherwise provided in the company’s constitutional documents.Limited partners of a BVI LP are not liable for the debts or obligations of the LP under the LP Act (nor are limited partners of an International Limited Partnership liable for the debts and obligations of an International Limited Partnership under the Partnership Act, 1996), (a) save as provided by the terms of the applicable partnership agreement, and (b) subject to the provisions of the LP Act (i) providing that a limited partner who takes part in the management of the LP may lose its limited liability with respect to a third party who deals with that LP and who reasonably believes such limited partner to be a general partner of such LP, and (ii) providing for clawback of capital distributions (together with interest) made to limited partners within six months of the LP becoming insolvent.Investors who are unitholders of an exempted trust must look to the wording of the relevant declaration of trust to provide them with limited liability status and protection.Despite the limited liability nature of an equity interest purchased by an investor, it is common practice for the subscription and offering documents of BVI investment funds to impose payment obligations on investors over and above the obligation to pay for their investment. Such additional obligations regularly include indemnification for misrepresentations and the requirement to repay excess redemption or withdrawal proceeds which were calculated and paid on the basis of unaudited data.


The principal structures used are BVI Business Companies.


Not as a general matter of BVI law; the ability to redeem or transfer equity interests in a fund and any restrictions on such activity will be governed by the constitutional, subscription and offering documents.

required to obtain a licence for such investment business activities. The term “in or from within” the BVI applies to:■ persons occupying premises in the BVI for the purpose of

offering to provide a service that constitutes investment business; or

■ persons soliciting other persons in the BVI (such as a mutual fund) for the purpose of offering to provide a service that constitutes investment business.

Foreign managers or advisers that manage, advise or operate BVI funds but do not carry out such activities in or from within the BVI fall outside of the provisions of SIBA and are not required to obtain a licence from the Commission.


The BVI has Tax Information Exchange Agreements (“TIEAs”) and similar bilateral and multilateral arrangements with 28 countries as at 24 April 2018 and is on the OECD “white list” with respect to the exchange of tax information. In addition, the Commission has entered into bilateral regulatory co-operation agreements pursuant to the EU Directive on Alternative Investment Fund Managers (“AIFMD”) with the competent authorities of 26 of the EU and EEA Member States.

2 Fund Structures


Three types of vehicle are most commonly utilised by BVI investment funds: BVI Business Companies limited by shares; Limited Partnerships; and Unit Trusts.The BVI Business CompanyThe most common vehicle for open- or closed-ended funds formed in the BVI is a BVI Business Company limited by shares.Shares of the same class in a company rank equally with each other. It is also possible to create separate share classes or separate series within the same share class to distinguish between different fee terms, strategies or asset pools; or to calculate, for example, performance fees payable on a “per investor basis” to mirror the capital account concepts found in US funds. The BVI Business Companies Act 2004 is a flexible and modern corporate statute, which provides a clear corporate structure ideally suited to structuring investment funds. In addition, BVI Business Companies may be formed as Segregated Portfolio Companies when used as a regulated investment fund, providing separate legally protected asset and liability cells within one corporate vehicle.The Limited PartnershipThe other major form of investment vehicle available in the BVI is the Limited Partnership (the “LP”), following the recent enactment of the Limited Partnership Act, 2017 (the “LP Act”).The limited partnership concept is similar to that which applies in various states of the United States. A BVI LP has separate legal personality distinct from its partners unless, on the election of the general partner(s) pursuant to the LP Act, it is registered without separate legal personality. Limited partnership structures are popular with United States promoters and their advisors. The general partner of a limited partnership does not need to be a BVI company or person, nor is a non-BVI corporate entity required to be registered as a foreign company to act as general partner. Each general partner is jointly and severally liable for any shortfall



Briti

sh V

irgi

n Is

land

s

(g) the net asset value calculation policy; and(h) details of the fund’s material risks and potential conflicts of

interest.The Public Funds Code sets out the content requirement for Public Funds, which broadly codify the above details.Incubator and approved funds are not required to have an offering document and are required only to issue the statutory risk warnings prescribed in the implementing legislation. Where they do issue an offering document, the Commission would expect that document to describe the investment strategy of the fund and contain the risk warning, as a minimum. In practice, it is common for such offering documents to look similar to those issued by private and professional funds.


The offering document of a private or professional fund and any offering document issued by an incubator or approved fund would usually be filed with the Commission as part of the initial application, but no pre-approval is required. In the case of a public fund, the prospectus would be required to be approved by the Commission prior to its registration as a public fund. Offering documents of a closed-ended fund do not need to be filed or approved.Where a filed offering document of a private, professional, incubator or approved fund is amended, the amended offering document must be filed with the Commission within 14 days of any change where there is a continuing offering. Proposed amendments to the prospectus of a public fund must be submitted to the Commission at least 21 days prior to the issue of the revised prospectus.


Approved, recognised or registered mutual funds, including Recognised Foreign Funds, incorporated as a company are not subject to any restrictions on marketing under BVI statute other than those required for it to qualify for recognition or registration, as the case may be. Closed-ended funds incorporated as a company are not currently subject to any restriction on marketing under BVI statute. LPs are restricted from being marketed to the public in the BVI. All BVI Alternative Investment Funds do, however, remain subject to any securities laws or marketing laws in the jurisdictions in which they are distributed or marketed and the promoters of such funds are subject to SIBA.


Yes, subject to the US$100,000 minimum investment and “professional investor” qualification requirements for professional funds and US$20,000 minimum investment qualification for incubator funds noted above.


None, save for the requirement that investors in professional funds qualify as “professional investors” as described above and that all investors in BVI mutual funds are subject to screening in accordance with the BVI’s anti-money laundering regime.


No, there are no such restrictions.



3 Marketing


There is no obligation to issue an offering document for a private, professional, incubator or approved fund but, where a fund does not do so in the case of private and professional funds, it is required to provide to the Commission an explanation as to why it will not issue an offering document and explain, to the satisfaction of the Commission, how relevant information concerning the fund and any invitation or offer will be provided to investors or potential investors. Where an offering document is issued, it is required to be filed with the application for recognition or approval, and an updated offering document or supplement must be filed within 14 days of any change being made to the filed offering document.SIBA and the MFR require that a public fund have a prospectus which complies with and is updated in accordance with the terms of the Public Funds Code, 2010.Closed-ended funds are not regulated and, as such, there are no specific requirements as to the contents of any offering materials; however, the issuer must ensure that its terms are not misleading and the information disclosed does not constitute a misrepresentation.


The customary minimum disclosure requirements for private and professional funds include the following:(a) details of the date of establishment of the fund, its registered

office, fiscal year, and its directors (or the directors of the general partner or trustee) together with biographies;

(b) a description of the fund’s investment objectives, policy, and restrictions;

(c) a description of the fund’s investment manager or advisor, together with biographies of portfolio managers and information regarding remuneration, management and performance fees or allocations;

(d) the names and addresses of the fund’s other service providers, together with details of the services to be performed and remuneration;

(e) the classes of interests available for investment or issue, together with descriptions of any minimum investment, eligibility requirements, and subscription procedures;

(f) details of the principal rights and restrictions attaching to the fund’s equity interests, including with respect to currency, voting, rights to participate in all or some of the assets of the fund, circumstances of winding-up or dissolution and the procedures and conditions for repurchases, redemptions or withdrawals of such equity interests, including suspensions;



Briti

sh V

irgi

n Is

land

s

the fund’s financial year end, and all mutual funds are required to file a Mutual Fund Annual Return (“MFAR”) within six months of the calendar year end. The MFAR provides general, operating and financial information relating to such regulated funds. For filing obligations of incubator and approved funds, see question 1.3 above.In addition, most Alternative Investment Funds will be required to report certain details regarding their investors on an annual basis to the International Tax Authority of the British Virgin Islands (the “ITA”), in accordance with the provisions of legislation implementing the intergovernmental agreements (known as “IGAs”) entered into between the BVI and the US to implement the US FATCA legislation, and the BVI and the UK to implement similar obligations, as well as under the Common Reporting Standard.Persons holding a licence under SIBA for carrying on investment business in or from within the BVI, such as BVI managers, are required to file, in electronic format, audited financial statements within six months of the licensee’s end of financial year, together with a director’s certificate, an auditor’s report and a report on the affairs of the licensee in respect of the relevant year. The Commission may also require a licensee to submit a Compliance Officer Report on an annual basis.


No. Side letters are commonly used by BVI investment funds. However, certain considerations should be borne in mind in order to ensure that such letter agreements are compliant with BVI law and consistent with the constitution of the fund, a discussion of which is outside the scope of this chapter.

6 Taxation


A BVI fund and all dividends, interest, rents, royalties, compensations, and other amounts paid by the fund are exempt from the provisions of the Income Tax Act in the BVI and any capital gains realised with respect to any shares, debt obligations, or other securities of the fund are exempt from all forms of taxation in the BVI. The Payroll Taxes Act 2004 does not apply to a fund except to the extent that the fund has employees (and deemed employees) rendering services to the fund wholly or mainly in the BVI. No estate, inheritance, succession or gift tax, rate, duty, levy, or other charge is payable with respect to any shares, debt obligation or other securities of the fund. All instruments relating to transfers of property to or by the fund and all instruments relating to transactions in respect of the shares, debt obligations or other securities of the fund and all instruments relating to other transactions relating to the business of the fund are exempt from the payment of stamp duty in the BVI, provided they do not concern BVI situate land. There are currently no withholding taxes or exchange control regulations in the BVI.


The tax treatment for managers and advisors is the same as for funds. Please see question 6.1 above.


No, there are not.




No, there are not.

4 Investments


No, there are not.


No, there are no such limitations.


There are no statutory or regulatory restrictions; however, the fund’s constitutional and/or offering documents may restrict leverage for the fund or a class of shares, as determined appropriate.



Funds constituted as BVI Business Companies are required to file their memorandum and articles of association with the Registry of Corporate Affairs (the “Registrar”). They are also required to maintain a statutory register of members but that register is not required to be filed with the Registrar. In addition, they must maintain a register of directors which must be filed on a private basis with the Registrar. Lenders can take advantage of the priority regime for security by making a public filing with the Registry of any charge over assets of a company entered into by a BVI Business Company.


Private, professional and public mutual funds are required to file, in electronic format, audited financial statements within six months of



Briti

sh V

irgi

n Is

land

s

(iii) enrol on the BVI Financial Account Reporting System where it identifies Reportable Accounts; and (iv) report information on such Reportable Accounts to the BVI International Taxation Authority (“ITA”). The BVI ITA will transmit the information reported to it to the overseas fiscal authority relevant to a reportable account (i.e. the IRS in the case of a US Reportable Account, HMRC in the case of a UK Reportable Account, and the relevant tax authorities in relation to CRS) annually on an automatic basis.


There are currently no legislative provisions in the British Virgin Islands which provide for specific measures in connection with BEPS. As a BVI fund will not be claiming access itself to a tax treaty, Action 6 is not directly relevant to it. However, a BVI fund can be set up in a variety of different legal forms, either as legally transparent or opaque, which facilitate cross-border fund structures, whereby either the fund investors may rely on their own treaty or through investment entities that may be able to rely on their own treaty. Further, the “Global Streamed Fund” proposal identified in the OECD’s Public Discussion Draft dated 24 March 2016 on the Treaty Entitlement of Non-CIV Funds, if adopted, may be of benefit to BVI funds, as the question of whether the fund had treaty access would be irrelevant.


No, there are not. As noted in question 6.1, a BVI fund and all dividends, interest, rents, royalties, compensations, and other amounts paid by the fund are exempt from the provisions of the Income Tax Act in the BVI and any capital gains realised with respect to any shares, debt obligations, or other securities of the fund are exempt from all forms of taxation in the BVI.


No, there are not as the BVI is a tax neutral jurisdiction. See question 6.1.


No, there are no meaningful tax changes anticipated in the coming 12 months.

7 Reforms


There are no material reforms anticipated at this time.


No; see question 6.1 above.


There are no differences in tax treatment between the three. See question 6.1 above.


No, it is not.


The BVI has signed two intergovernmental agreements to improve international tax compliance and the exchange of information – one with the United States and one with the United Kingdom (the “US IGA” and the “UK IGA”, respectively). The BVI has also signed a multilateral competent authority agreement to implement the OECD Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard (the “CRS” and together with the US IGA and the UK IGA, “AEOI”). Amendments have been made to the Mutual Legal Assistance (Tax Matters) Act 2003 and orders have been made pursuant to this act to give effect to the terms of the US IGA, the UK IGA and CRS under BVI law (the “BVI AEOI legislation”). Guidance notes have been published by the government of the BVI to provide practical assistance to entities and others affected by the BVI AEOI legislation. With respect to CRS, the BVI AEOI legislation makes it clear that the CRS commentary published by the Organization for Economic Cooperation and Development is an integral part of the CRS and applies for the purposes of the automatic exchange of financial account information. All BVI “Financial Institutions” will be required to comply with the registration, due diligence and reporting requirements of the BVI AEOI legislation, except to the extent that they can rely on an exemption that allows them to become a “Non-Reporting Financial Institution” (as defined in the relevant BVI AEOI legislation) with respect to one or more of the AEOI regimes. The BVI AEOI legislation requires a BVI Reporting Financial Institution to, amongst other things: (i) register with the IRS to obtain a Global Intermediary Identification Number (in the context of the US IGA only); (ii) conduct due diligence on its accounts to identify whether any such accounts are considered “Reportable Accounts”;



Briti

sh V

irgi

n Is

land

s

With over 50 years in the industry and over 800 staff, Maples and Calder is a leading international law firm advising global financial, institutional, business and private clients on the laws of the Cayman Islands, Ireland and the British Virgin Islands.

Maples and Calder is known worldwide for the quality of its lawyers. This extensive experience, the depth of the team and a collegiate approach are main characteristics of the firm, enabling it to provide the highest quality legal advice on a wide range of transactions.

Maples and Calder has locations in the British Virgin Islands, Cayman Islands, Dubai, Dublin, Hong Kong, London and Singapore. The service provided is enhanced by the strong relationships the firm has developed. For fiduciary and fund service requirements, the firm provides a seamless, “one stop shop” capability through its affiliate, MaplesFS.

Richard is Managing Partner of Maples and Calder’s British Virgin Islands office, and head of the BVI Corporate, Finance and Investment Funds groups. He advises on a variety of corporate transactions including mergers and acquisitions, joint ventures, stock exchange listings and corporate reorganisations. He also advises investment managers and private equity houses on the structuring, formation and financing of investment funds and private equity funds. Richard is a member of a focus group advising the Financial Services Commission on regulatory legislation in the British Virgin Islands.

Richard MayMaples and CalderSea Meadow HousePO Box 173, Road TownTortola, VG1110British Virgin Islands

Tel: +1 284 852 3027Email: [email protected] URL: www.maplesandcalder.com

Heidi is a Partner in the Investment Funds group and works closely with hedge fund managers, private equity houses and their onshore counsel in the hedge fund and private equity sectors. Heidi advises on both Cayman Islands and British Virgin Islands law and specialises in the structuring, formation, ongoing maintenance and restructuring of hedge funds and private equity funds, representing large financial institutions as well as boutique and start-up managers. Her experience includes the establishment of Cayman Islands and British Virgin Islands companies and partnerships and advising on a broad range of corporate and commercial matters.

Heidi de Vries Maples and Calder200 Aldersgate Street, 11th FloorLondonEC1A 4HDUnited Kingdom

Tel: +44 20 7466 1651Email: [email protected]: www.maplesandcalder.com



Chapter 11

McCarthy Tétrault LLP

Sean D. Sadler

Nigel P.J. Johnston

Canada

■ an order or ruling can be obtained from the applicable Securities Regulator which exempts a trade, a security or a person or company from the relevant requirement.

Other LawsIn contrast to securities laws, tax laws applicable to AIFs apply at both the federal and provincial levels. Securities and tax laws will always be engaged in the formation and operation of AIFs. It is also typical that corporation law, limited partnership law, anti-money laundering law, terrorist financing law and privacy law will apply.


The manager of an AIF is the entity responsible for administering the day-to-day operations of the AIF and is generally considered to be the “operating mind” of the AIF. In several Canadian provinces, a manager of an AIF is subject to a duty of care of a fiduciary nature. AIF managers are subject to the Investment Fund Manager Registration Requirement.An entity providing portfolio management services to an AIF is subject to the Adviser Registration Requirement and is also subject to a fiduciary duty of care. If the advice to be provided by the adviser would include advice in respect of exchange-traded commodity futures contracts and options, registration as an adviser under commodity futures legislation may also be required, depending on the province in which the AIF is established.An entity in the business of trading securities of the AIF to prospective investors is subject to the Dealer Registration Requirement.For purposes of the Dealer Registration and Prospectus Requirements of Canadian securities legislation, the term “trade” is broadly defined to include any sale or disposition of a security for valuable consideration, any receipt by a registrant of an order to buy or sell a security and any act, advertisement, solicitation, conduct or registration directly or indirectly in furtherance thereof. The term “distribution” is defined, with reference to the term “trade”, to include a trade in the securities of an issuer that have not been previously issued.For AIFs that operate as private equity funds, it may be possible under current law to structure the AIF in such a way that the Investment Fund Manager Registration Requirement, Adviser Registration Requirement and Dealer Registration Requirement do not apply to the AIF and the offering of its securities.



Securities LawsCanada has a federal system of government whereby the authority to enact legislation is divided between Canada’s federal and its provincial and territorial governments. The Canadian securities laws applicable to Alternative Investment Funds (“AIFs”) are currently regulated solely by the provincial and territorial governments. As a result, each of Canada’s 10 provinces and three territories has its own legislative scheme for regulating the formation and operations of AIFs within its own provincial or territorial jurisdiction and its own securities commission or regulatory authority (“Securities Regulator”) for administering and enforcing such legislation. Securities regulatory requirements therefore vary from jurisdiction to jurisdiction in Canada. In an effort to harmonise Canadian securities laws, the 13 Securities Regulators have, under rule-making authority granted by the provincial and territorial governments, established numerous rules, referred to as national instruments, that operate in a substantially identical manner in each province and territory.Canadian securities legislation generally regulates the activities of an AIF within a province or territory by requiring:(a) those who act as an investment fund manager of an AIF

to become registered as such with the relevant Securities Regulator (the “Investment Fund Manager Registration Requirement”);

(b) those who engage in, or hold themselves out as being engaged in, the business of trading in securities of the AIF to prospective investors to become registered or licensed as a dealer (the “Dealer Registration Requirement”);

(c) those who engage in, or hold themselves out as being engaged in, the business of managing the investment portfolio of the AIF to become registered or licensed as an adviser (the “Adviser Registration Requirement”); and

(d) the AIF that distributes securities to investors to file a prospectus with, and obtain a receipt therefor from, the applicable Securities Regulator(s) (the “Prospectus Requirement”),

unless:■ the securities legislation provides for an express statutory

exemption from the relevant requirement; or


Cana

da

McCarthy Tétrault LLP Canada

more regulated by securities laws and stock exchange requirements than open-ended funds unless the open-ended funds are also qualified by prospectus and available to retail investors, which is not usually the case for an AIF.Closed-ended funds that operate as private equity funds typically do not engage the Investment Fund Manager Registration Requirement or the Adviser Registration Requirement.


The authorisation process differs for the registration of each of the investment fund manager, adviser and dealer. However, each category of registration involves the filing of a Form 33-109F4 for the firm and a Form 33-109F4 for applicable individuals. There are minimum capital, financial statement, insurance and proficiency requirements associated with the authorisation process. The Securities Regulator reviews the filed materials and provides comments or questions on the applications for registration that usually take between eight and 12 weeks to resolve.


Each of the investment fund manager, adviser and dealer categories of registration is available to non-residents of Canada. Non-residents are usually required to satisfy Canadian proficiency requirements and will have to submit to the jurisdiction of the Securities Regulator. Some categories of registration such as investment dealer require (pursuant to the rules of the Investment Industry Regulatory Organization of Canada – the Canadian equivalent of FINRA) the applicant to be incorporated pursuant to Canadian law but are not otherwise required to be resident in Canada.


Most AIFs will utilise the services of an investment fund manager, adviser, dealer or prime broker, registrar and transfer agent, fund accountant, custodian, auditor and lawyer.


For investment fund managers, advisers and broker-dealers located outside Canada, there are exemptions from the applicable registration requirements that permit these firms to do business with Canadian clients that qualify as “permitted clients”, which is a category of client that is similar to, but slightly more restricted than, the accredited investor category of client discussed above.


The Securities Regulator has, for many years, entered into different forms of reciprocal regulatory oversight arrangements with foreign securities regulatory bodies. These arrangements, frequently called memoranda of understanding or “MOUs”, are intended to facilitate the sharing of information about firms and individuals under common regulatory oversight, support collaboration on investigation and enforcement matters, and generally assist in the

If the AIF is formed outside Canada and the investment fund manager and adviser provide services to the AIF from outside Canada, the Investment Fund Manager Registration Requirement and Dealer Registration Requirement may be avoided by relying on exemptions available to non-residents. Ordinarily, the Adviser Registration Requirement will not apply to an adviser resident outside Canada who provides portfolio management services to an AIF domiciled outside Canada but offered to Canadian investors. The manager of an AIF is the entity responsible for administering the day-to-day operations of the AIF and is generally considered to be the “operating mind” of the AIF. In several Canadian provinces, a manager of an AIF is subject to a duty of care of a fiduciary nature. AIF managers are subject to the Investment Fund Manager Registration Requirement.


The AIF is not itself licensed or registered but, as a market participant, an AIF is regulated by the Securities Regulator.AIFs that distribute their securities in Canada must either qualify the distribution pursuant to a prospectus prepared and filed in accordance with applicable Canadian securities laws or conduct the distribution in reliance upon a prospectus exemption. AIFs do not usually qualify their securities for distribution in Canada pursuant to a prospectus because the prospectus clearing process would require the AIF to adhere to rules that would materially restrict the ability to engage in numerous activities that AIFs ordinarily engage in, such as short selling, leveraging and investing in illiquid positions. Accordingly, AIFs typically distribute their securities to investors in reliance upon one of two private placement exemptions from the Prospectus Requirement described below.Canadian securities laws provide an exemption from the Prospectus Requirement where a security is distributed to an accredited investor who acquires the AIF security as principal (the “Accredited Investor Exemption”). Accredited investors are purchasers who are considered to be sophisticated because of their status or financial well-being. Like the US version, Canadian accredited investors include financial institutions; governments; pension funds; securities dealers and advisers; corporations, partnerships and trusts with net assets of $5 million; individuals who, alone or with a spouse, have net assets of at least $5 million; and individuals who meet a financial net worth test of $1 million or an income test of $200,000 in each of the last two years (or, together with their spouse, of $300,000) and a reasonable expectation of exceeding that amount in the current year.Another exemption from the Prospectus Requirement is available where a purchaser is not an individual and purchases an AIF security as principal and the AIF security has an acquisition cost to the purchaser (other than individuals) of not less than $150,000 paid in cash at the time of the trade (the “Minimum Investment Exemption”).


Yes, there are significant differences between the regulation of open-ended and closed-ended funds. Closed-ended funds are usually publicly offered funds that have qualified their securities by prospectus and are traded over a stock exchange and available to retail investors. Accordingly, closed-ended funds tend to be much


Cana

da



If the adviser is registered in Canada or the AIF is formed in Canada, there are several legislative restrictions that pertain to self-dealing and conflicts of interest. If the adviser is not registered in Canada and the AIF is not formed under Canadian law, there are no legislative restrictions on how the manager/adviser manages the AIF.

3 Marketing


All marketing activities intended to solicit purchase orders of an AIF security would likely be considered an act in furtherance of a trade of a previously unissued security under applicable securities laws, and would therefore be subject to the Prospectus Requirement and the Dealer Registration Requirement. The exemptions from the Dealer Registration Requirement are not generally available to intermediaries in the business of selling AIF securities. Accordingly, the marketing intermediary must ordinarily become registered in one of the three dealer categories: investment dealer; exempt market dealer; or mutual fund dealer (if the AIF is an open-ended mutual fund).Generally, securities law of the provinces and territories of Canada does not differentiate between oral, electronic or documentary communication. As matter of procedure, electronic and documentary communication is to be preferred and oral communications are to be made only in a manner entirely consistent with the electronic and documentary materials.


If an offering document is to be used to solicit sales of AIF securities that are to be distributed in Canada in reliance upon either the Accredited Investor Exemption or the Minimum Investment Exemption, the offering document will probably be considered an offering memorandum under Canadian securities laws. Generally speaking, any material prepared in connection with such a private placement, other than a “term sheet” that is limited to describing the terms of the securities being issued rather than describing the business and affairs of the issuer, will be considered an offering memorandum. Purchasers who receive an offering memorandum have a statutory right of action for rescission or damages for any misrepresentation in the offering memorandum. The statutory right of action must be described in the offering memorandum. The term “misrepresentation” is broadly defined to mean: (a) an untrue statement of material fact; or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made.


The offering memorandum must be delivered to the relevant Securities Regulator within 10 days of the distribution of an AIF security. If a foreign prospectus is used as an offering memorandum,

global integration of securities regulatory oversight. The pace of entering into, and the general interest in, MOUs has increased considerably since the onset of the 2008 financial crises. Today, the Securities Regulator has approximately 20 MOUs in place with foreign regulators including the United States Securities and Exchange Commission (“SEC”), Commodity Futures Trading Commission (“CFTC”), Financial Industry Regulatory Authority (“FINRA”), United Kingdom Financial Conduct Authority and Bank of England, European Union, International Organization of Securities Commissions (“IOSCO”) and securities regulators in Australia, China, France, Hong Kong and Italy.

2 Fund Structures


The principal legal structures used in the formation of AIFs are limited partnerships, unit trusts and corporations.


Investors in a corporation have liability limited to the value of their investment. Investors in a limited partnership also have liability limited to the value of their investment, provided they do not take part in the control of the business of partnership. Investors in a trust are likely to have limited liability but there may be some uncertainty which may be addressed by providing where possible, in contracts of the trust, that no recourse is to be had to the personal assets of investors. Some provinces have adopted a statutory limited liability regime for investors in certain public trusts.


Managers and advisers of Canadian AIFs are usually organised as corporations but are sometimes organised as partnerships.


Provided the AIF is not offered by prospectus, there are usually no limits on the manager (other than, in certain cases, for tax reasons) to restrict redemptions in open-ended funds or transfers in closed-end funds.


Yes, most investors acquire AIF securities pursuant to exemptions from the Prospectus Requirement. Any resale of the AIF security would also have to comply with an exemption from the Prospectus Requirement such as the Accredited Investor Exemption or the Minimum Investment Exemption (these exemptions are discussed above).


Cana

da


institutions in AIFs, like most jurisdictions around the world, Canadian regulators have responded to the financial crisis with numerous macro-prudential and micro-prudential initiatives and measures designed to address various systemic risks revealed as a result of the financial crisis. In particular, in Canada, we have seen a mixture of federal and provincial initiatives, that have resulted in, for example, designation of domestically significant financial institutions, new bank capital rules, higher bank capital thresholds, proposed requirements relating to the clearing and reporting of OTC derivatives, new residential mortgage insurance rules, new regulation of the government mortgage insurer and proposed bail-in policies.

4 Investments


Provided the AIF is not offered by way of prospectus and the adviser is properly licensed, there are no restrictions on the types of activities that can be performed by the AIF other than, in certain cases, to comply with tax requirements.


Provided the AIF is not offered by way of prospectus and the adviser is properly licensed, there are no restrictions on the types of investments that can be included in the AIF’s investment portfolio other than, in certain cases, to comply with tax requirements.


Provided the AIF is not offered by way of prospectus and the adviser is properly licensed, there are no restrictions on borrowing by the AIF.



Provided the AIF is not offered by way of prospectus, the only public disclosure that an AIF must make is annual audited financial statements and semi-annual unaudited financial statements. It is possible to obtain an exemption from the requirement to file these financial statements with the Securities Regulator provided that the financial statements are delivered to investors. If the AIF is not formed in Canada, there are no public disclosures other than the Form 45-106F1 discussed in question 3.3 above.


Provided the AIF is not offered by way of prospectus, the key reporting requirements in relation to AIFs are:■ audited annual and unaudited semi-annual financial

statements of the AIF as discussed above;■ Form 45-106F1 trade reports to the Securities Regulator by

the AIF discussed in question 3.3 above;

it is common to attach a stand-alone Canadian “wrapper” to describe the statutory rights of action and to address other related disclosure requirements. The Securities Regulator does not review or approve the offering memorandum.If the securities of an AIF are distributed into a province or territory of Canada in reliance upon either the Accredited Investor Exemption or the Minimum Investment Exemption, the AIF must file a completed Form 45-106F1 exempt trade report with the applicable Securities Regulator within 10 days of the distribution, and the filing of the report must be accompanied by the payment of a prescribed filing fee that varies from jurisdiction to jurisdiction. Alternatively, an AIF can comply with the exempt trade reporting requirements, and filing fee requirements can be addressed by filing the Form 45-106F1 and the related filing fee with the Securities Regulator(s) within 30 days of the end of the AIF’s fiscal year end, in lieu of the 10-day period noted above.


Provided the marketing of the AIF is done pursuant to an offering memorandum in accordance with the Accredited Investment Exemption or Minimum Investment Exemption through registered dealers, there are no other material restrictions applicable to the marketing of AIFs.


Retail offerings in Canada are usually made by way of prospectus. Most AIFs are offered pursuant to exemptions from the Prospectus Requirement. Some AIFs are offered to higher-net-worth retail clients in reliance upon the Accredited Investor Exemption.


When relying on the Accredited Investor Exemption, AIFs and intermediaries should require prospective investors to certify that they are accredited investors.


Some institutional investors such as regulated pension funds have internal and statutory restrictions that restrict the level of investment in, and control over, an AIF.


Intermediaries assisting in the fundraising process will usually be subject to the Dealer Registration Requirement.


While there have not been any specific initiatives coming out of the 2008 financial crisis intended to restrict the role of financial


Cana

da


An AIF that is a Canadian corporation is treated as a taxpayer and pays tax on its taxable income. If it qualifies as a “mutual fund corporation” for tax purposes, tax on capital gains is refundable to the corporation. Dividends from Canadian corporations received by a mutual fund corporation are subject to a 38⅓% tax which is refundable when the corporation pays taxable dividends to its investors. An AIF that is a Canadian corporation will generally be treated as a resident of Canada and beneficial owner of income for the purposes of Canada’s tax treaties, subject to limitation on benefits provisions.Canada also imposes tax on non-residents that carry on business in Canada, that dispose of certain capital properties referred to as “taxable Canadian property” (generally Canadian real property and resource property and certain securities that derive more than 50% of their value from such properties) or that derive certain income from Canadian sources (dividends, rents, royalties, etc.)). A non-resident AIF that engages a Canadian investment adviser with authority to trade on its behalf would be considered to carry on business in Canada unless the requirements of a safe-harbour rule are satisfied.


A manager that is a Canadian corporation is treated as a taxpayer and pays tax on its taxable income. Management fees and performance fees will be treated as ordinary business income.A manager that is a partnership must calculate its income or loss as if it were a separate person resident in Canada. Management fees and performance fees will be treated as ordinary business income. Income or loss of the partnership is allocated in accordance with the partnership agreement to its partners, who include or deduct the relevant amounts as if they earned them directly.If the AIF is a partnership, the manager or an affiliate of the manager may be a partner of the partnership in order to be entitled to a carried interest. In such case, a share of income and gains of the partnership would be allocated to the manager or affiliate and the character of the allocated amount as ordinary income or capital gain is expected to be respected for tax purposes under current tax rules.


No establishment or transfer taxes are imposed on investors. The disposition of an investor’s interest may give rise to a capital gain or capital loss (or to ordinary income/loss if not capital property) that must be taken into account in computing income. See below regarding the treatment of a disposition of an interest in an AIF.


(a) A resident investor in an AIF that is treated as a partnership for Canadian tax purposes, whether established in Canada or a foreign jurisdiction, must take into account its share of the income or loss of the partnership that is allocated to it in accordance with the partnership agreement. The partnership must calculate its income or loss as if it were a separate person resident in Canada. The “at-risk” rules restrict the deductibility of losses from a business or property allocated to a limited partner to the limited partner’s “at-risk amount”. In

■ trade confirms from the dealer to the investor reporting on the trade of the AIF security to the investor;

■ alternative monthly reports (the “AMR System”) from the adviser to the Securities Regulator where the adviser exercises control or direction over 10% or more of a class of securities of a Canadian public company and subsequent reports when investment goes above or below 10%, 12.5%, 15% or 17.5%;

■ early warning reports (the “EWR System”) from the AIF to the Securities Regulator where the AIF acquires 10% (and on any 2% increases or decreases thereafter) or more of a class of securities of a Canadian public company; and

■ insider reports to the Securities Regulator where the AIF acquires 10% or more of a class of securities of a Canadian public company.


There are no prescriptive restrictions on the use of side letters, but investment fund managers and advisers are subject to a fiduciary duty of care and side letters must be examined carefully to ensure that the arrangements contemplated thereby do not breach the fiduciary duty of care owed to all investors. The Securities Regulator has been known to focus on the use of side letters and take action when it is evident that the fiduciary duty of care has been compromised.

6 Taxation


Canada imposes tax on the worldwide income of persons that are resident in Canada.Only 50% of capital gains are taxable and 50% of capital losses are deductible but only against the taxable portion of capital gains. Dividends received from a Canadian corporation are subject to special tax treatment to reflect the fact that they are paid out of after-tax income of the corporation. Such dividends received by a Canadian corporation are generally deductible in computing taxable income, while those received by an individual are “grossed up” and a dividend tax credit is given. Other forms of income (interest, income/loss from transactions in derivatives that are not considered to be hedges of capital property, etc.) are taxed at regular rates. Income or loss must generally be computed in Canadian dollars.An AIF that is a partnership is generally fiscally transparent for Canadian tax purposes. Canadian-resident partners should be entitled to treaty benefits on a look-through basis.An AIF that is a Canadian-resident trust is treated as a taxpayer but, in computing its income, is generally entitled to deduct that portion of its income that is payable in the year to its investors who are required to include such amounts in income. A special tax may be payable by a Canadian-resident trust (other than a “mutual fund trust” for tax purposes which, among other conditions, requires that its activities be limited to investing its funds in property) if it has non-resident investors and “designated income” (comprised of income from Canadian real property, resource property and businesses carried on in Canada and capital gains from the disposition of “taxable Canadian property” (see below)). While a trust should be treated as a resident of Canada for the purposes of Canada’s tax treaties, subject to limitation on benefits provisions, some countries in the past have denied treaty benefits.


Cana

da


from a business carried on in Canada and the investor’s share of capital gains from the disposition by the partnership of “taxable Canadian property” (generally Canadian real property and resource property and certain securities that derive more than 50% of their value from such properties). By reason of having a non-resident investor, the partnership will be subject to a 25% withholding tax on certain income from Canadian sources (dividends, rents, royalties, etc.). Under the current administrative policy of the Canada Revenue Agency (“CRA”), the 25% withholding tax need only be applied in respect of the non-resident partner’s share of the relevant income.

A non-resident investor in an AIF that is a Canadian-resident trust will be subject to a 25% withholding tax on distributions of income (including 50% of capital gains) by the trust. If the trust is a “mutual fund trust” for tax purposes, capital gains distributed by the trust will generally not be subject to withholding tax.

A non-resident investor in an AIF that is a Canadian-resident corporation will be subject to a 25% withholding tax on dividends paid or credited to the investor by the corporation (other than “capital gains dividends” paid by a mutual fund corporation).

A non-resident investor may be liable to tax on the gain arising on a disposition of an interest in the AIF held as capital property if more than 50% of the value of the interest at any time in the 60-month period ending at the time of the disposition is derived from “taxable Canadian property” (see above). A tax clearance certificate may be required from the CRA in advance of the disposition in order that a purchaser does not withhold a prescribed amount (currently 25%) from the purchase price.

Canada’s ability to impose tax on a non-resident may be affected by a bilateral tax treaty between Canada and the non-resident’s country of residence. For example, a tax treaty may reduce the withholding rate from 25% to rates between 0% and 15%, depending upon the relevant income.

(c) A Canadian pension plan that is a “registered pension plan” under the ITA is generally exempt from income tax under the ITA on income derived from, and gains derived from the disposition of an interest in, an AIF.

In the case of non-resident pension investors, certain of Canada’s tax treaties provide exemptions from Canadian withholding tax on interest and dividends. In such cases, dividends from a Canadian AIF structured as a corporation would not be subject to withholding tax. In the case of an AIF treated as a partnership, Canada would view the partnership as transparent and grant treaty benefits on a look-through basis. In the case of an AIF structured as a Canadian resident trust, there would be no relief from withholding tax on distributions of income to a non-resident pension plan even if the income were derived from Canadian-source interest and dividends.


No. Rulings are generally not sought unless there is a specific tax concern.


Canada entered into an Intergovernmental Agreement (“IGA”) with the United States relating to the implementation of FATCA which is substantially in the form of the Model 1 IGA, and the

determining how an AIF established in a foreign jurisdiction should be treated for Canadian tax purposes, the primary attributes of the AIF under the foreign law are determined and compared with the primary attributes of a partnership, trust or corporation under Canadian law.

A resident investor in an AIF that is a Canadian-resident corporation must include, in computing income, dividends received from the corporation. If the investor is a Canadian corporation, such dividends are generally deductible in computing taxable income. Dividends received by an individual are “grossed up” and a dividend tax credit is given. If the AIF is a “mutual fund corporation” for tax purposes, it may pay dividends that it elects to pay out of capital gains which are taxed as capital gains in the hands of investors.

A resident investor in an AIF that is a Canadian-resident trust must include in its income its share of the trust’s income that is payable in the year to the investor. The tax character of capital gains, dividends from Canadian corporations and income from foreign sources and related foreign tax credits will generally be preserved in the hands of the investor if appropriate tax designations are made by the trust.

A resident investor that invests in an AIF that is, or is treated for Canadian tax purposes, as a non-resident corporation will be required to include dividends received in income. If such an AIF is treated as a “foreign affiliate” of the investor (because the investor and/or certain connected persons own more than 10% of the shares of any class or series) and the AIF is a “controlled foreign affiliate” of the investor (because the AIF is controlled by the investor and/or certain specified persons with a connection to Canada), the investor must include in income, on an accrual basis, the investor’s share of the AIF’s “foreign accrual property income”.

If this rule does not apply, it is necessary to consider whether the resident investor’s investment in shares of the AIF is an “offshore investment fund property”. In general, two conditions must be satisfied. First, the share must reasonably be considered to derive its value, directly or indirectly, primarily from portfolio investments of the corporation or any other non-resident entity in certain properties including shares, indebtedness, interests in one or more corporations, trusts, partnerships, organisations, funds or entities and real estate or any combination thereof. Secondly, it is necessary that it can reasonably be concluded, having regard to all the circumstances, that that one of the main reasons for the investor acquiring, holding or having the share was to derive a benefit from portfolio investments in such assets in such a manner that the taxes, if any, on the income, profits and gains from such assets for any particular year are significantly less than the tax that would have been applicable under Part I of the Income Tax Act (Canada) (the “ITA”) if the income, profits and gains had been earned directly by the investor. If so, the investor must include a notional amount in income calculated with respect to the “designated cost” of its investment less the dividends actually received.

Special rules apply in relation to investments by Canadian residents in non-resident trusts. Depending on the structure of the trust, the trust could be treated as a resident of Canada for certain purposes of the ITA and liable to tax in Canada. Alternatively, the trust could be an “exempt foreign trust” in which case the interest in the trust could be an “offshore investment fund property”; if not, the investor would generally be subject to tax on the income of the trust (calculated in accordance with the ITA) as is payable to the investor.

A resident investor must also take into account the gain or loss arising on a disposition of an interest in the AIF which, if the interest is a capital property, will be a capital gain or capital loss.

(b) A non-resident investor in an AIF that is a partnership will be liable to tax on the investor’s share of the partnership’s income


Cana

da


(ii) imposing a 365-day test period for non-residents who realise capital gains on the disposition of shares or other interests that derived their value from Canadian immovable property.Canada has amended the ITA to provide for country-by-country reporting for large multinational enterprises. The CRA is applying revisions to the OECD Transfer Pricing Guidelines recommended as part of the BEPS project.


Generally, there are no tax-advantaged asset classes or structures available.


Canada imposes a 5% Goods and Services Tax, the provinces of Ontario, Nova Scotia, New Brunswick and Newfoundland and Labrador impose the Harmonized Sales Tax which varies from 8–10% and the province of Québec imposes the Québec Sales Tax at a rate of 9.975% (essentially value-added taxes) on certain supplies. Management and performance fees for services provided to a Canadian AIF will generally be subject to GST/HST/QST and no refund will be available to the AIF. An AIF that is a limited partnership may also be required to pay GST/HST/QST on the distribution, or a portion thereof, paid to the general partner.


No, there are no tax changes anticipated.

7 Reforms


As of June 4, 2018, advisers of AIFs that are registered in Canada must ensure that the custodians (Canadian or foreign) that hold cash and securities of an AIF hold such assets in the name of the AIF (and not in an omnibus account for the adviser) and that the custodian meets certain requirements. If the adviser is related to the custodian, the custodial operations should be functionally independent from the adviser.

ITA was amended to provide for the due diligence and reporting regime contemplated by the IGA. The CRA has published extensive guidance. The definition of “Canadian financial institution” in the ITA is narrower than that in the IGA. An AIF that is managed by a Canadian financial institution will generally itself be a Canadian financial institution. Canadian financial institutions (other than those that are treated as non-reporting Canadian financial institutions) will report information about US account holders to the CRA, which will exchange such information with the US Internal Revenue Service (“IRS”). Withholding agents will not be required to withhold the 30% tax on payments to reporting Canadian financial institutions (and certain “exempt beneficial owners” such as registered pension plans). A variety of registered accounts are excluded from the definition of “financial account” and do not have to be reported on. The rules in FATCA relating to recalcitrant accounts are suspended. The new reporting regime came into effect starting in July 2014. Information was first exchanged in 2015.Canada also signed the Organisation for Economic Co-operation and Development (“OECD”) Multilateral Competent Authority Agreement and Common Reporting Standard (“CRS”). The ITA has been amended to provide for the due diligence and reporting regime contemplated by the CRS and the CRA has published extensive guidance. The CRS was effective in Canada as of July 1, 2017 with the first exchanges of financial account information beginning in 2018.


Canada signed the MLI in June 2017 and listed 75 of its 93 tax treaties as Covered Tax Agreements. It originally adopted only the minimum standard provisions and the binding mandatory arbitration provision and registered reservations on all other optional provisions. As an interim measure, it will adopt a PPT rule into its Covered Tax Agreements, intending where possible to adopt an LOB provision (in addition to or in replacement of the PPT rule) through bilateral negotiations. The CRA has not offered any meaningful guidance with respect to the application of the PPT to an AIF or its investors.Domestic ratification procedures for the MLI are in process. As part of such process, Canada announced that it would now adopt a number of optional provisions including (i) imposing a 365-day holding period for shares of Canadian companies held by non-resident companies to access the lower treaty-based rate on dividends, and


Cana

da


McCarthy Tétrault is a Canadian law firm that delivers integrated business law, litigation, tax law, real property law, labour and employment law services nationally and globally through offices in Vancouver, Calgary, Toronto, Montréal and Québec City, as well as in London, UK and New York City, NY, USA.

Sean D. Sadler B.A., J.D., LL.M. is a partner and advises Canadian and non-resident dealers, advisers and fund managers on the offering of their services and products in Canada and on securities law compliance and enforcement matters. He has assisted local counsel in establishing or restructuring investment funds in jurisdictions outside Canada, including Bermuda, the British Virgin Islands, the Cayman Islands and Mauritius. He is a special lecturer in various securities law topics at several Canadian Universities. Sean is a co-editor of LexisNexis’ Annotated Ontario Securities Legislation and a co-author of LexisNexis’ Canadian Securities Regulatory Requirements Applicable to Non-Resident Broker-Dealers, Advisers and Investment Fund Managers. He is a contributor to the Practising Law Institute’s (“PLI”) Broker-Dealer Regulation and Investment Adviser Regulation. He appears in the current edition of Chambers Canada as a leading lawyer in the area of investment funds, the current edition of The Best Lawyers in Canada in the areas of mutual funds law, private funds law and securities law, in the 2014 International Who’s Who of Private Funds Lawyers, in the 2013 Who’s Who Legal: Canada in the area of private funds, in Practical Law Company’s 2011/2012 Investment Funds Handbook as a recommended lawyer in Canada, and has appeared in the Canadian Legal Lexpert Directory. He was called to the Ontario Bar in 1989.

Sean D. SadlerMcCarthy Tétrault LLPSuite 5300, TD Bank TowerBox 48, 66 Wellington Street WestToronto ON M5K 1E6Canada

Tel: +1 416 601 7511Email: [email protected]: www.mccarthy.ca

Nigel P. J. Johnston B.A., LL.B. is a partner in the Tax Group of McCarthy Tétrault LLP in Toronto. His practice focuses on corporate income tax issues, providing tax advice to the investment funds industry and the creation of new financial products. He is recognised as a leading lawyer in the area of corporate tax in the current edition of Who’s Who Legal: Canada. He also appears in the most recent editions of Chambers Global: Guide to the World’s Leading Lawyers for Business and Chambers Canada as a leading lawyer in the area of tax. He is a member of the Taxation Working Group of the Investment Funds Institute of Canada and of the Industry Regulation and Taxation Committee of the Portfolio Management Association of Canada. He was a member of the “Informal Consultative Group on the Taxation of Collective Investment Vehicles” and of the “Pilot Group on Improving Procedures for Cross-Border Tax Claims” organised by the OECD’s Centre for Tax Policy and Administration. He is a member of the editorial board of the Canada Tax Service. He was called to the Ontario Bar in 1984.

Nigel P.J. JohnstonMcCarthy Tétrault LLPSuite 5300, TD Bank TowerBox 48, 66 Wellington Street WestToronto ON M5K 1E6Canada

Tel: +1 416 601 7923Email: [email protected]: www.mccarthy.ca


Chapter 12

Maples and Calder

Grant Dixon

Andrew Keast

Cayman Islands

or exercising any right conferred by a security to buy, sell, subscribe for or underwrite a security. “Securities” are defined to include most forms of shares and stock, debt instruments, options, futures, contracts for differences, and derivatives.Schedule 3 to SIBL specifically excludes certain activities from the definition of securities investment business, although those exclusions are unlikely to apply to a person conducting discretionary investment management or investment advisory activities.Any person within the scope of SIBL conducting securities investment business must be licensed by CIMA, unless that person is exempt from holding a licence. A licence may be restricted (meaning that securities investment business may only be transacted with particular clients) or unrestricted. A licence may also be issued subject to conditions or may be unconditional.A person carrying on securities investment business may be exempt from the requirement to obtain a licence but will still be subject to certain provisions of SIBL. In the case of the exemptions referred to below, which are the exemptions likely to apply to fund managers or advisers, an “Excluded Person” is required to register with CIMA by filing a declaration and paying a fee of CI$5,000 (approximately US$6,097.56), prior to carrying on securities investment business and annually thereafter, confirming that they are entitled to rely on the relevant exemption.An “Excluded Person” includes:(a) a company carrying on securities investment business

exclusively for one or more companies within the same group;(b) a person, whose registered office in the Cayman Islands is

provided by a licensee under the law, carrying on securities investment business exclusively for one or more of the following classes of person:

(i) a sophisticated person (a person regulated by CIMA or a recognised overseas regulatory authority or whose securities are listed on a recognised securities exchange or who by virtue of knowledge and experience in financial and business matters is reasonably to be regarded as capable of evaluating the merits of a proposed transaction and participates in a transaction with a value or in amounts of at least US$100,000 in each single transaction); or

(ii) a high-net-worth person (an individual whose net worth is at least US$1,000,000 or any person that has any assets of not less than US$5,000,000); or

(iii) a company, partnership or trust of which the shareholders, limited partners or unitholders are all sophisticated persons or high-net-worth persons; or

(c) a person who is regulated by a recognised overseas regulatory authority in the country or territory (other than the Cayman Islands) in which the securities investment business is being conducted.



The Mutual Funds Law (2015 Revision) (the “MF Law”) provides for the regulation of open-ended investment funds and mutual fund administrators. Responsibility for regulation under the MF Law rests with the Cayman Islands Monetary Authority (“CIMA”).In addition, the Retail Mutual Funds (Japan) Regulations (2018 Revision) (the “Japan Regulations”) provide a regulatory regime for retail mutual funds that are marketed to the public in Japan.Although not Cayman Islands law, the broad scope and extra-territorial effect of the EU Directive on Alternative Investment Fund Managers (“AIFMD”) will capture most types of Cayman Alternative Investment Funds, regardless of whether they are open-ended or closed-ended and regardless of their legal structure and investment strategy, with very few exceptions, to the extent that they are being marketed or managed in Europe (as such terms are defined for the purposes of the AIFMD). The Cayman Islands has published regulations creating two new AIFMD-consistent regulatory regimes, which will enable Cayman Islands AIFs and AIFMs to take full advantage of the AIFMD if and when the AIFMD passport is extended to the Cayman Islands. The new AIFMD regulations can be brought into force by way of a separate commencement order at the appropriate time.


A manager or adviser which is established in or, in the case of a foreign company, registered in the Cayman Islands and which conducts “securities investment business”, whether or not that securities investment business is carried on in the Cayman Islands, will fall within the scope of the Securities Investment Business Law (2015 Revision) (“SIBL”).“Securities investment business” is defined as being engaged in the course of business in any one or more of the activities set out in Schedule 2 to SIBL. Those activities include managing securities belonging to another person on a discretionary basis and advising in relation to securities, but only if the advice is given to someone in their capacity as investor or potential investor or in their capacity as agent for an investor or a potential investor and the advice is on the merits of that person (whether acting as principal or agent) buying, selling, subscribing for or underwriting a particular security


Caym

an Is

land

s

A master fund is a Cayman Islands entity that issues equity interests to at least one feeder fund (either directly or through an intermediate entity established to invest in the master fund) that is itself regulated by CIMA under the MF Law that holds investments and conducts trading activities for the principal purpose of implementing the overall investment strategy of the regulated feeder. Based on CIMA’s statistics, at the end of 2017, 2,816 of the 10,147 regulated section 4(3) funds were registered as master funds.There is also an exception to the need to register with CIMA for funds (other than master funds), known as “section 4(4) funds”, that are open-ended “mutual funds” for the purposes of the MF Law but which have 15 or fewer investors, a majority in number of whom have the power to appoint and remove the fund’s directors, GP or trustee, as applicable.


Yes; closed-ended funds are not subject to regulation under the MF Law. The key distinction between open-ended and closed-ended funds is the ability of investors to voluntarily redeem or repurchase some or all of their investment prior to winding up. Cayman Islands practitioners and CIMA generally consider that a lock-up period must be at least five years for an investment fund to be regarded as closed-ended at the outset.


CIMA has established an online e-business portal, CIMAConnect, which enables the online submission of mutual fund applications and documentation. An application for a section 4(3) fund involves the submission of:(a) the fund’s offering document, other than in the case of a

master fund, which will often not have an offering document separate from that of its feeder fund(s);

(b) the relevant statutory application form;(c) consent letters from the fund’s auditor and administrator;(d) the relevant fee (currently US$4,268, initially and annually,

other than in the case of a master fund which is currently US$3,049 initially and annually);

(e) an affidavit relating to the authorisation of submission of the online application; and

(f) certain information regarding the fund’s operator (the directors, GP or trustee, as the case may be).

CIMA’s practice with section 4(3) funds is to make the effective date of the application the date on which all application requirements have been submitted and applications must be completed prior to a fund launching in order to be compliant with the MF Law.The authorisation process is more involved for licensed and administered fund applications.


A Cayman Islands regulated mutual fund must appoint a local auditor approved by CIMA.The Directors Registration and Licensing Law, 2014 (the “DRLL”) requires that the directors (both natural persons and corporate directors) of a corporate mutual fund regulated by CIMA under the MF Law or a certain type of “Excluded Person” registered with CIMA under SIBL be either registered or licensed with CIMA. The registration process is undertaken online at the “CIMA Director Gateway”.


Subject to the section 4(4) fund exception described below, an investment fund qualifies as a “mutual fund” and is required to be regulated under the MF Law if:(a) it is a company, partnership or unit trust carrying on business

in or from the Cayman Islands;(b) it issues “equity interests” to investors (i.e. shares, partnership

interests or trust units that carry an entitlement to participate in profits or gains and which may be redeemed or repurchased at the option of those investors prior to winding up); and

(c) its purpose or effect is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from investments.

There are three categories of mutual funds:1. a licensed fund under section 4(1)(a) of the MF Law;2. an administered fund under section 4(1)(b) of the MF Law;

and3. a registered fund under section 4(3) of the MF Law.

1. A mutual fund licence will be granted if CIMA considers that the promoter is of sound reputation, there exist persons of sufficient expertise to administer the fund, who are of sound reputation, and that the business of the fund and any offer of equity interests will be carried out in a proper way. Detailed information is required concerning the directors, trustee or general partner (“GP”) of the mutual fund (as the case may be) and the service providers. However, few investment funds are fully licensed under the MF Law, as this is generally only necessary for retail funds. From the statistics published on CIMA’s website, at the end of 2017 there were only 81 licensed funds.

2. Registration as an administered fund requires the designation of a Cayman Islands licensed mutual fund administrator as the fund’s principal office. The administrator must satisfy itself that the fund’s promoters are of sound reputation, that the fund’s administration will be undertaken by persons with sufficient expertise who are also of sound reputation and that the fund’s business and its offering of equity interests will be carried out in a proper way. The administrator is obliged to report to CIMA if it has reason to believe that a mutual fund for which it provides the principal office (or any promoter, director, trustee or GP thereof) is acting in breach of the MF Law or may be insolvent or is otherwise acting in a manner prejudicial to its creditors or investors. This imposes a quasi-regulatory role and an obligation to monitor compliance on the administrators themselves, and generally higher fees charged by administrators in relation to this category of investment fund. Administered funds have declined in popularity over recent years, from 510 in 2008 to 331 at the end of 2017.

3. Mutual funds registered under section 4(3) of the MF Law are divided into three sub-categories:

(a) where the minimum investment per investor is at least US$100,000;

(b) where the equity interests are listed on a recognised stock exchange; or

(c) where the mutual fund is a “master fund” (as defined in the MF Law) and either:(i) the minimum investment per investor is at least

US$100,000; or(ii) the equity interests are listed on a recognised stock

exchange.

Maples and Calder Cayman Islands


Caym

an Is

land

s

limited liability companies. Whilst such vehicles may be used in fund structures, we have not seen them used extensively to date in such capacity.Exempted companies are by far the most common vehicle for open-ended funds (including master funds). Based on statistics published by CIMA, 92 per cent of reporting funds were exempted companies (including segregated portfolio companies) in 2016. Based on Maples and Calder’s statistical analysis, the exempted company was used as the principal fund vehicle in 80 per cent of North American managed funds, 86 per cent of European managed funds and 75 per cent of Asian managed funds in 2017.However, it is not common to see closed-ended funds established in the Cayman Islands as exempted companies. The ELP is usually the vehicle of choice for closed-ended or private equity funds.The Cayman ELP concept is similar to that which applies in the United States and indeed the Exempted Limited Partnership Law (2018 Revision) (the “ELP Law”) is based substantially on the Delaware equivalent (although a Cayman Islands partnership is not a separate legal person). Whilst exempted companies are extremely flexible in the extent to which voting and economic rights can be mixed and matched across separate classes of shares, companies have certain limitations that do not apply to ELPs. Fewer statutory rules govern the approvals processes within an ELP, which makes them generally more flexible and suitable for closed-ended vehicle purposes.Unit trusts are the vehicle primarily used for investors in Japan, where the demand is driven by familiarity with the unit trust structure and historical local tax benefits relating to trust units as opposed to other forms of equity interest. Such investment funds can elect to comply with the Japan Regulations when applying for a licence under the MF Law that, under current guidelines set by the Japan Securities Dealers Association, permit them to be marketed to the public in Japan.


The limited liability of investors in a Cayman Islands investment fund depends upon the nature of the vehicle used and whether the investor has agreed to contribute additional funds to that vehicle pursuant to the terms of the governing documentation.With exempted companies limited by shares, the liability of the investors is limited to the amount unpaid on their shares pursuant to the constitutional documents of the company and in accordance with the Companies Law (2018 Revision).Limited partners (“LPs”) of an ELP shall not be liable for the debts or obligations of the ELP under the ELP Law, (a) save as provided by the terms of the applicable partnership agreement, and (b) subject to the provisions of the ELP Law (i) providing that an LP who takes part in the conduct of the business of the ELP may lose its limited liability with respect to a third party who deals with that ELP and who reasonably believes such LP to be a GP of such ELP, and (ii) providing for clawback of capital distributions (together with interest) made to an LP within six months of the ELP becoming insolvent where the LP had actual knowledge of the insolvency.Investors who are unitholders of an exempted trust must look to the wording of the relevant declaration of trust to provide them with limited liability status and protection.Despite the limited liability nature of an equity interest purchased by an investor, it is common practice for the subscription and certain transaction documents of Cayman Islands investment funds to impose payment obligations on investors over and above the obligation to pay for their investment. Such additional obligations regularly include indemnification for misrepresentations and the requirement to repay excess redemption or withdrawal proceeds which were calculated and paid on the basis of unaudited data.


Every regulated mutual fund must have an approved local auditor and will generally have an investment manager/adviser and an administrator (which, for an administered mutual fund, must be a licensed mutual fund administrator).Although not required, it is becoming market practice for corporate regulated investment funds to appoint independent directors. Such independent directors are not required to be based in the Cayman Islands but often are, due to the depth of the Cayman fiduciary services industry. Based on statistical analysis conducted by Maples and Calder, 86 per cent of funds launched in 2017 by managers based in North America had at least one independent director. The trend is lower for Asia-based managers, where 84 per cent had at least one independent director. The trend is higher for funds with Europe-based managers, with 100 per cent of the funds launched in 2017 having at least one independent director.The statistics compiled by Maples and Calder reflect a snapshot of the regulated funds established during the relevant period for which Maples and Calder acted as Cayman Islands legal counsel. Although this represents a significant sample size, it is inevitable that these statistics would vary if they were based on all funds established during the relevant period.


Provided that the activities of a foreign manager/adviser, including any transactions entered into, have not been and will not be carried on through a place of business in the Cayman Islands, or the fund is not subject to the Japan Regulations, there are no additional rules.


The Cayman Islands has Tax Information Exchange Agreements and similar bilateral arrangements with 36 countries as of April 2018 and is on the OECD “white list” with respect to the exchange of tax information. In addition, CIMA has entered into bilateral regulatory cooperation agreements pursuant to the AIFMD with the competent authorities of 27 of the EU and EEA Member States. Please also see the description of FATCA/CRS under question 6.6 below.

2 Fund Structures


Three types of vehicle are most commonly utilised by Cayman Islands investment funds: exempted companies; exempted limited partnerships (“ELPs”); and exempted unit trusts. The term “exempted” in this context means that the vehicle is eligible to apply to the Cayman Islands government for an undertaking (lasting 20 or 50 years depending on the type of vehicle) that if any taxation is introduced in the Cayman Islands during the period to which the undertaking applies, such taxation will not apply to the vehicle in question. In return, exempted vehicles are not generally permitted to carry on business within the Cayman Islands.In 2016 the Cayman Islands introduced limited liability companies (“LLCs”), which broadly operate in a similar manner to Delaware



Caym

an Is

land

s

(d) the names and addresses of the fund’s other service providers, together with details of the services to be performed and remuneration;

(e) the classes of interests available for investment or issue, together with descriptions of any minimum investment, eligibility requirements and subscription procedures;

(f) details of the principal rights and restrictions attaching to the fund’s equity interests, including with respect to currency, voting, circumstances of winding up or dissolution and the procedures and conditions for repurchases, redemptions or withdrawals of such equity interests, including suspensions;

(g) the NAV calculation policy; and(h) details of the fund’s material risks and potential conflicts of

interest.


The offering document of a registered mutual fund must be filed with CIMA as part of the initial application; however, it is not technically subject to approval by CIMA prior to its circulation to prospective investors. An amended offering document or supplement must be filed with CIMA within 21 days in the event of material changes, where there is a continuing offering.


Generally, no offer or invitation to subscribe for equity interests in a Cayman Islands investment fund may be made to the “public in the Cayman Islands”. The range of persons that may be considered excluded from the “public in the Cayman Islands” will depend upon the fund’s legal structure and whether or not the fund is regulated under the MF Law, but it is generally likely that Cayman Islands exempted companies, ELPs and exempted trusts engaged in offshore business and foreign companies registered in the Cayman Islands will not be considered part of the “public in the Cayman Islands”.


Yes, in respect of section 4(1)(a)) or section 4(1)(b) funds. In respect of section 4(3) funds, yes, subject to the US$100,000 minimum investment or the equity interests being listed on a recognised stock exchange.


Potential investors will be subject to due diligence and sanction checks in accordance with the Cayman Islands’ anti-money laundering regime.


No, there are not.


No, there are not.


The principal structures are exempted companies and LLCs.


Not as a general matter of Cayman Islands law; the ability to redeem or transfer equity interests in a fund and any restrictions thereon will be governed by the governing documents.


Not as a general matter of Cayman Islands Law; subject to restrictions on the assignment of certain liabilities by LPs pursuant to the ELP Law or the transferee meeting any minimum investment requirements that may apply. Of course, proposed transferees will need to satisfy applicable Know Your Client and Anti Money Laundering requirements.


Not as a general matter of Cayman Islands law (assuming that the fund is not subject to the Japan Regulations).

3 Marketing


The MF Law requires that every regulated mutual fund issue an offering document which must describe the equity interests in all material respects and contain such other information as is necessary to enable a prospective investor to make an informed decision whether or not to invest.To supplement this requirement, CIMA has issued a rule in relation to the content of offering documents for licensed funds, which is generally applied to the offering documents of all regulated funds. Japan Regulations also set out additional disclosure requirements for the prospectus of a retail mutual fund, which are more onerous.


The minimum disclosure requirements for offering documents for regulated mutual funds generally include the following:(a) details of the date of establishment of the fund, its registered

office, fiscal year and its operator together with biographies;(b) a description of the fund’s investment objectives, policy, and

restrictions;(c) a description of the fund’s investment manager or adviser,

together with biographies of the portfolio managers and information regarding remuneration;



Caym

an Is

land

s


No. Side letters are commonly used by Cayman Islands investment funds although certain legal considerations should be borne in mind in order to ensure that such letter agreements are compliant with Cayman Islands law.

6 Taxation


The Cayman Islands imposes no taxation on the income or capital gains of investment funds or their investors and no transfer taxes on the transfer of interests in investment funds. As discussed above, “exempted” companies, limited partnerships, unit trusts and LLCs can obtain undertakings from the Cayman Islands government that if any taxation is introduced during the period of the undertaking, such taxation will not apply to the entity to which the undertaking is given.


Please see question 6.1 above.


No, there are none.


There is no distinction from a Cayman Islands perspective – please see question 6.1 above.


No, it is not.


The Cayman Islands has signed two inter-governmental agreements to improve international tax compliance and the exchange of information – one with the United States and one with the United Kingdom (the “US IGA” and the “UK IGA”, respectively). The Cayman Islands has also signed, along with over 80 other countries, a multilateral competent authority agreement to implement the OECD Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard (the “CRS” and together with the US IGA and the UK IGA, “AEOI”).


No, there are not.

4 Investments


There are no such restrictions on investment strategy subject to applicable local regulatory laws.


No, there are not.


No, there are no such restrictions (assuming that the fund is not subject to the Japan Regulations).



There are no public disclosure requirements for exempted companies or trusts. Although such vehicles are required to maintain statutory registers and make certain filings with the Cayman Islands Registrar and CIMA, those registers and filings are not available to inspection by the general public.The register of limited partnership interests of an ELP is required by the ELP Law to be open to inspection during all business hours by all partners, subject to any express or implied term to the contrary of the limited partnership agreement, or by any other person with the consent of the GP.


Regulated mutual funds are required to file, in electronic format, audited financial statements, an annual Key Data Elements Form (containing a summary of the basic information about the fund) and a Fund Annual Return (“FAR”), in each case within six months of the financial year end. The FAR provides general, operating and financial information relating to such regulated funds. Certain additional requirements apply to funds subject to the Japan Regulations. A manager registered as an “Excluded Person” pursuant to SIBL is required to make an annual filing confirming its exempt status with CIMA but does not otherwise have any reporting requirements.



Caym

an Is

land

s

or a tax information exchange agreement is in place between the Cayman Islands and each relevant jurisdiction. The information reported will be subject to confidentiality restrictions compliant with the requirements of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.Pursuant to the CBCR Regulations, any business unit or permanent establishment of an MNE Group “resident in the Cayman Islands” that are “Constituent Entities” will have registration and/or reporting requirements in the Cayman Islands. An MNE Group means, broadly, with respect to any fiscal year of the Group, a Group that has two or more enterprises for which the tax residence is in different jurisdictions or that has an enterprise that is resident for tax purposes in one jurisdiction and is subject to tax through a permanent establishment in another jurisdiction and, in both cases, that has a total consolidated group revenue of equal to or more than US$850 million during its preceding fiscal year. The notification and first reporting deadlines for a “Constituent Entity” with a Cayman Islands Reporting Entity are 15 May 2018 and 31 May 2018, respectively. The notification deadline for Constituent Entities whose Reporting Entity is not resident in the Cayman Islands is 30 September 2018.As a Cayman Islands fund will not be claiming access itself to a tax treaty, Action 6 is not directly relevant to it. However, a Cayman Islands fund can be set up in a variety of different legal forms, either as legally transparent or opaque, which facilitate cross-border fund structures, whereby either the fund investors may rely on their own treaty or through investment entities that may be able to rely on their own treaty.


Not applicable – please see question 6.1 above.


No, there are not.


No, there is not.

7 Reforms


The Cayman Islands continuously keeps its laws under review to ensure that the jurisdiction remains the leading domicile for alternative investment funds and remains responsive to stakeholder’s needs.

Cayman Islands regulations were issued on 4 July 2014 to give effect to the US IGA and the UK IGA, and on 16 October 2015 to give effect to the CRS (collectively, the “AEOI Regulations”). Pursuant to the AEOI Regulations, the Cayman Islands Tax Information Authority (the “TIA”) has published guidance notes on the application of the US and UK IGAs and the CRS.All Cayman Islands “Financial Institutions” will be required to comply with the registration, due diligence and reporting requirements of the AEOI Regulations, except to the extent that they can rely on an exemption that allows them to become a “Non-Reporting Financial Institution” (as defined in the relevant AEOI Regulations) with respect to one or more of the AEOI regimes, in which case only the registration requirement would apply under CRS.The AEOI Regulations require funds to, amongst other things (i) register with the Internal Revenue Service (“IRS”) to obtain a Global Intermediary Identification Number (in the context of the US IGA only), (ii) register with the TIA, and thereby notify the TIA of its status as a “Reporting Financial Institution”, (iii) adopt and implement written policies and procedures setting out how it will address its obligations under CRS, (iv) conduct due diligence on its accounts to identify whether any such accounts are considered “Reportable Accounts”, and (v) report information on such Reportable Accounts to the TIA. The TIA will transmit the information reported to it to the overseas fiscal authority relevant to a reportable account (e.g. the IRS in the case of a US Reportable Account) annually on an automatic basis.


As part of the Cayman Islands’ ongoing commitment to international tax transparency, the Tax Information Authority (International Tax Compliance) (Country-By-Country Reporting) Regulations, 2017 (the “CbCR Regulations”) were issued on 15 December 2017, with the Department for International Tax Cooperation releasing its Guidance on the Country-by-Country Reporting (“CbCR”) requirements of entities that are resident in the Cayman Islands on 29 March 2018. The CbCR Regulations essentially implement in the Cayman Islands the model legislation published pursuant to the OECD’s Base Erosion and Profit Shifting Action 13 Report (Transfer Pricing Documentation and Country-by-Country Reporting). The CbCR Regulations also reflect the Cayman Islands’ obligations under the OECD Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (the “CbC MCAA”). Pursuant to this initiative, qualifying multinational enterprises (“MNEs”) are required to report annually the information set out in the model legislation for each tax jurisdiction in which they operate. The TIA will automatically exchange such reports prepared by MNE Groups in the Cayman Islands with partner jurisdiction competent authorities in all jurisdictions that the MNE Group operates, provided that the jurisdiction is a co-signatory to the CbC MCAA



Caym

an Is

land

s

With over 50 years in the industry and over 800 staff, Maples and Calder is a leading international law firm advising global financial, institutional, business and private clients on the laws of the British Virgin Islands, the Cayman Islands, Ireland and Jersey.

Maples and Calder is known worldwide for the quality of its lawyers. This extensive experience, the depth of the team and a collegiate approach are main characteristics of the firm, enabling it to provide the highest quality legal advice on a wide range of transactions.

Maples and Calder offices are located in the British Virgin Islands, Cayman Islands, Dubai, Dublin, Hong Kong, Jersey, London and Singapore. The service provided is enhanced by the strong relationships the firm has developed. For fiduciary and fund services requirements, the firm provides a seamless, “one stop shop” capability through its affiliate, MaplesFS.

Grant Dixon is a partner in the Investment Funds group at Maples and Calder in the Cayman Islands. He advises a global client base and specialises in a broad range of fund products, primarily focusing on venture capital, private equity and hedge funds. He also has extensive experience across general corporate, financing and commercial matters.

Grant DixonMaples and CalderPO Box 309, Ugland HouseGrand Cayman KY1-1104Cayman Islands

Tel: +1 345 814 5507Fax: +1 345 949 8080Email: [email protected]: www.maplesandcalder.com

Andrew Keast is a partner in the Investment Funds group at Maples and Calder in the Cayman Islands. He works with a broad range of prominent institutional and start-up private equity, venture capital and hedge fund clients. He advises on all aspects of investment fund work, as well as general corporate and commercial matters. Andrew also advises a number of the leading sponsors and onshore counsel in the Israeli venture capital space.

Andrew KeastMaples and CalderPO Box 309, Ugland HouseGrand Cayman KY1-1104Cayman Islands

Tel: +1 345 814 5371Fax: +1 345 949 8080Email: [email protected] URL: www.maplesandcalder.com



Chapter 13

FenXun Partners Sue Liu

China


The regulatory regime governing Alternative Investment Funds distinguishes between private securities investment funds and private equity investment funds. A “securities investment fund” generally refers to a fund investing in publicly traded securities in the secondary market. On the other hand, an “equity investment fund” refers to a fund investing in securities of private companies and privately offered securities of public companies. In practice, securities investment funds could be open-ended or closed-ended, while equity investment funds are normally closed-ended. Both private securities funds and private equity funds are regulated by the CSRC, and managers of both types of funds are required to be registered with the AMAC. However, certain aspects of regulatory requirements, such as senior management qualification requirements and reporting items, differ in respect of these two types of Alternative Investment Funds.


Alternative Investment Fund management entities meeting qualification requirements prescribed by the CSRC and the AMAC are required to complete registration with the AMAC as private fund managers. Substantively, qualification requirements of private fund managers include:(i) Establishment and business scope. An applicant shall

have been duly established and validly existing in China. In addition, the applicant’s name and business scope, as indicated on its business licence, shall reflect that it conducts private fund investment management business. The operative terms may include “fund management”, “investment management”, “asset management”, “equity investment”, “venture capital investment” and other terms closely relating to the business of private fund management. In addition, an applicant shall not conduct other business that may conflict with its fund management business. Examples of such conflicting business include private and peer-to-peer lending, crowd-funding, factoring, real estate development and internet commerce.



An Alternative Investment Fund established in China is directly governed by the Securities Investment Fund Law (as amended in 2015, the “Securities Fund Law”). The Securities Fund Law applies to both privately offered funds and publicly offered funds, and the discussions herein are directed at privately offered funds. Different aspects of the operation of an Alternative Investment Fund may also be governed by other legislation, such as the Securities Law (as amended in 2014), the Company Law (as amended in 2014) and the Partnership Law (as amended in 2006). In addition, foreign investment into Alternative Investment Funds and related enterprises is subject to applicable foreign investment legislation.


Management entities of Alternative Investment Funds are regulated by the China Securities Regulatory Commission (the “CSRC”). Alternative Investment Fund managers are required to complete registration with, and submit periodic reports to, the Asset Management Association of China (the “AMAC”), an industry self-regulatory body recognised by the CSRC. The AMAC is currently in charge of administering the registration of, and reporting by, Alternative Investment Fund managers.


Alternative Investment Funds are regulated by the CSRC. A fund manager is required to complete and update an online filing with the AMAC for each Alternative Investment Fund it manages; in each case, within 20 business days following the completion of fundraising.


Chin

a

FenXun Partners China


Only Chinese resident entities can register as Alternative Investment Fund managers. Such management entities, however, can be wholly foreign-owned enterprises or joint-venture enterprises among Chinese and foreign equity holders. There is no generally applicable prohibition against foreign entities providing advisory and other services to China domiciled Alternative Investment Funds if such services are provided from offshore jurisdictions. Foreign entities, however, are not permitted to operate a business for profit without establishing an onshore presence.


The CSRC has entered into memorandums of understanding on enforcement cooperation with capital markets regulators of over 60 jurisdictions, including the U.S. and major European jurisdictions. In addition, Alternative Investment Funds are regarded as “financial institutions” that have been obligated to comply with the CRS under the AEOI framework since July 1, 2017.

2 Fund Structures


Alternative Investment Funds may be established as limited liability companies, limited partnerships or through contracts. Foreign-invested Alternative Investment Funds are normally established as foreign-invested limited partnerships and foreign-invested limited companies.


The liability of a shareholder of a limited liability company is limited by the committed capital of such shareholder. Clause 36 of the Company Law provides that the authority of a limited liability company rests with the shareholders’ meeting. Shareholders of the company are entitled to make key decisions, and select directors and supervisors, for the company. The liability of a limited partner of a limited partnership is limited by its capital commitment. Clause 68 of the Partnership Law provides that limited partners shall not execute partnership affairs and shall not represent the partnership. An investor’s rights and obligations in a contractual fund would be provided for in the fund agreement. The liability of an investor would normally be limited to its invested/committed investment amount.


Alternative Investment Fund managers and advisers are commonly established as limited liability companies and limited partnerships.

(ii) Facilities and conditions for operation. An applicant shall have the necessary personnel, premises and registered capital to conduct its operation. Although no minimum registered capital is imposed on an applicant, it should have enough capital to cover its payroll, office rent and other business operation expenses for a reasonable period of time.

(iii) Risk management and internal control systems. The applicant shall have established necessary risk management and internal control systems in accordance with its business operation, which may comprise procedures and policies relating to operational risk control, disclosure obligations, internal trading, insider trading, conflicts of interest, and fund offering.

(iv) Management qualification. In respect of a securities investment fund, the senior management personnel, including the legal representative/executive partner (representative), manager, vice manager, and persons in charge of risk control and compliance, shall have professional fund management qualifications. In respect of a private equity investment fund or a venture capital investment fund, at least two senior management persons, including its legal representative/executive partner (representative) and persons in charge of risk control and compliance, shall have obtained a professional fund management qualification.

The application for registration as a private fund manager needs to be accompanied by an opinion letter issued by a Chinese law firm, which should address, in addition to the qualification requirements listed above, whether the applicant and its senior management have, within the past three years, been subject to criminal penalties, administrative penalties, AMAC sanctions, or have been negatively recorded in the national integrity file database. The procedural registration requirements of private fund managers involve the submission of the required information and documentation through an online platform administered by the AMAC. The AMAC will process an application for registration within 20 business days following a complete submission and post on its website basic information on such registered manager. There is, however, no time frame imposed on assembling a complete submission. Prior to accepting a complete submission, the AMAC may review application materials, request supplementary documentation and conduct on-site inspections and in-person interviews of managerial personnel to verify the application.


Pursuant to Clause 12 of the Securities Fund Law, Alternative Investment Fund managers should be companies or partnerships established under Chinese law. Foreign entities and natural persons are not allowed to be registered as Alternative Fund managers or raise their own funds in China. On the other hand, Alternative Investment Funds duly formed in China are not prohibited from retaining the service of foreign investment managers or advisers.


Pursuant to Clause 88 of the Securities Fund Law, unless otherwise provided in the fund agreement, the fund’s assets should be placed in the custody of a custodian. Qualified fund custodians include commercial banks and securities companies approved by the CSRC. Other service providers routinely involved in the formation and operation of Alternative Investment Funds include placement agents, auditors and legal counsel.


Chin

a


key investor rights, e.g. subscription, redemption and transfer rights, and the relevant restrictions, timing and requirements; (xi) major fees to be borne by the fund and fee rates; (xii) content, methods and frequency of reporting of fund information; (xiii) a clear statement that the document may not be transmitted or circulated to third parties; and (xiv) for funds established as limited partnerships or limited liability companies, a clear statement that the subscription agreement may not replace the limited partnership agreement or the company charter, and that the limited partnership agreement or the company charter shall be entered into and amended in accordance with the Partnership Law or the Company Law, respectively.The fund manager shall be responsible for the truthfulness, completeness and accuracy of the marketing materials. The marketing materials shall not provide for minimum investment returns or projected returns. In addition, fund marketing materials may only be provided to specific qualified investors who have completed the relevant qualification questionnaire and risk evaluation.


The marketing materials and legal documents of an Alternative Investment Fund are not subject to registration or review by regulators. However, company charters and partnership agreements will need to be filed with the applicable offices of the Administration for Industry and Commerce.


Marketing of Alternative Investment Funds may only be conducted privately by registered fund managers or registered fund placement agents, and be directed at specific qualified investors. In addition, an investor will be entitled to a cooling-off period of at least 24 hours before its subscription to the fund interest becomes effective. During the cooling-off period, the fund manager or placement agent may not initiate contact with the investor.


Alternative Investment Fund interests may only be marketed to specific qualified investors. Before initiating marketing efforts in respect of a potential investor, the fund manager and placement agent shall confirm the suitability and qualification of such potential investor.


Prior to directing marketing efforts to a potential investor, a questionnaire needs to be provided to such potential investor in order to determine its identity, investment experience, risk profile and qualification. Alternative Investment Fund interests may only be offered to qualified investors. A qualified investor should: (i) have, if an entity, net assets of not less than RMB 10 million; or, if an individual, financial assets (including bank deposits, stocks, bonds, fund interests and investments in asset management, insurance and futures products) of not less than RMB 3 million or annual income of not less than RMB 500,000; and (ii) invest at least RMB 1 million in a single fund.


There is no statutory requirement, prohibitions or restrictions in respect of redemptions. Such restrictions can be provided for in the constitutional documents and other agreements of the fund.


There is no express statutory restriction against the transfer of investors’ interests. However, such transfers may be subject to other laws and regulations, such as requirements relating to investor qualification, foreign investment, or the transfer of state-owned assets.


Various limitations may apply dependent upon the asset class of the Fund. For example, Alternative Investment Funds are generally prohibited from conducting debt investment or extending credit to portfolio companies.

3 Marketing


The Securities Law and the Securities Fund Law generally govern the offering of fund interests in China. The Interim Measures for the Administration of Alternative Investment Funds, as promulgated by the CSRC on 21 August 2014 (the “Fund Administration Measures”), and the Measures for Administration of the Fundraising of Privately Offered Investment Funds, as promulgated by the AMAC on 15 April 2016 (the “Fundraising Measures”), provide more specific rules and restrictions on Alternative Investment Fund offering and marketing materials. The AMAC may also issue directions and guidelines on particular offering materials.


Pursuant to the Fund Administration Measures and the Fundraising Measures, the content of the marketing materials for an Alternative Investment Fund shall include, but is not limited to, the following information: (i) the name and type of the fund; (ii) the name, registration number and fund management team of the fund manager; (iii) information publicly disclosed or to be publicly disclosed on the AMAC website; (iv) custody of fund assets, other service providers and retention of the investment advisor; (v) outsourcing of fund services; (vi) the investment scope, investment strategies and investment restrictions of the fund; (vii) matching of profits and risks; (viii) risk disclosures; (ix) fund account and account supervisor (to be differentiated from the custodian, the roll of an account supervisor can be performed by commercial banks and securities companies); (x) fees to be borne by investors and fee rates,


Chin

a


securities trading. However, Chinese banks are not in the business of providing subscription credit facilities and regular commercial bank loans are not considered a viable source of financing for fund investment due to the high cost and the funds’ inability to provide security.



Although Managers of Alternative Investment Funds are required to make substantial reports to the AMAC for itself and on behalf of the funds it manages, the AMAC makes very limited public disclosure of such information. Publicly disclosed information of managers include, among other things, the name, address, time of establishment, size, legal representative, senior management, compliance status and managed funds of a manager. Publicly disclosed information of funds include, among other things, the name, address, time of establishment, denomination, manager, custodian and compliance status of a fund. In addition to the foregoing, Alternative Investment Funds may be required to make public disclosures associated with such investments, such as listed securities.


Fund managers are required to submit to the AMAC (i) periodical reports in respect of the funds they manage on a monthly, quarterly and annual basis, (ii) reports of significant events concerning the manager, and (iii) reports of significant events concerning the funds they manage.


The use of side letters is not expressly permitted or prohibited, and side letters are quite common between fund managers and institutional investors.

6 Taxation


An investment fund may be established in the form of a limited liability company or a limited partnership, or through contracts. A limited liability company is subject to entity-level value-added tax at 6% for securities trading and other taxable operations, and income tax at the rate of 25% (certain types of income are taxed at lower rates). A limited partnership is subject to entity-level value-added tax at 6% for securities trading and other taxable operations. However, a limited partnership is not a taxable entity for income tax purposes. Instead, the partners of a limited partnership would recognise income and be subject to income tax at the partner level. Consequently, the tax exemption on dividends and other equity income between resident enterprises does not apply to limited partnerships. A contractual fund does not have an entity form and is not currently taxed.


Investments by government pension funds are regulated separately. For example, investments by the national social security fund are governed by the Interim Measures on Investment by the National Security Fund, which impose certain allocation, approval and reporting requirements on its investments.


Fund managers may directly carry out fundraising for the funds they manage or retain qualified placement agents to conduct fundraising activities. Alternative Investment Fund placement agents are required to register with the CSRC.


Regulation of financial institutions in China is segmented. The main market participants, such as commercial banks, trust companies, insurance companies and securities companies, participate in Alternative Investment Funds in accordance with respective rules and regulations applicable them. It is common for financial institutions to indirectly participate in the private fund industry through subsidiaries or affiliates established for the purposes of carrying out investment and asset management operations.

4 Investments


The business operation of Alternative Investment Funds shall be conducted within the scope of business reflected in its business licence. The constitutional documents and other fund agreements may also prescribe restrictions on fund activities. In addition, regulatory authorities may, from time to time, impose restrictions, such as the prohibition against debt investment and extension of loans imposed by the AMAC and other regulatory authorities in 2018.


The types of investment which may be made by an Alternative Investment Fund include purchase and sale of stocks, shares, bonds, futures, fund interests, and other investment products as agreed in its investment agreement. There are no generally applicable regulatory requirements on diversification.


There is no express regulatory restriction against borrowings by Alternative Investment Funds. Leverage is commonly utilised in


Chin

a



The practice of the SAT, in general, conforms to the approach outlined in Action 6 (treaty abuse). On August 27, 2015, the SAT issued Announcement 60 on the Administration of Treaty Benefits to Non-residents, and brought the claim and reporting procedure more in line with international practice. The SAT had also been vocal about its support for Action 7 (permanent establishment), and had been reported to be in the process of updating the relevant tax treaties. The implementation of the OECD action plans is not, however, expected to have an immediate effect on the operation of Alternative Investment Funds in China.


To promote economic development, municipalities in a number of autonomous regions in China offer lower income tax rates to fund managers. Local tax rebates remain available, but elusive. The Ministry of Finance and the SAT issued the Circular on Tax Policies for Venture Capital Enterprises and Individual Angel Investors on May 14, 2018 (“Circular 55”), which permits, subject to prescribed conditions, venture capital investment enterprises to deduct from their taxable income derived from investments in early stage technology companies up to 70% of qualified investment amounts in such companies.


No, there are not.


No, there are none anticipated.

7 Reforms


No particular reform has been proposed with respect to alternative investment funds. However, recent rule-making demonstrates a policy shift to curb debt levels in the Chinese economy, particularly in the financial sector. The private fund industry may be affected by further regulatory actions in the same general direction.


An investment manager/adviser is normally established in the form of either a limited liability company or a limited partnership. A limited liability company is subject to entity-level value-added tax at 6% and income tax at the rate of 25% (certain types of income are taxed at lower rates). A limited partnership is subject to entity-level value-added tax at 6%. However, a limited partnership is not a taxable entity for income tax purposes. Instead, the partners of a limited partnership would recognise income and be subject to income tax at the partner level.


There are no special establishment taxes levied on Alternative Investment Funds. Income derived from transfers of fund interests will be subject to income tax.


Resident investors are taxed based on their respective tax status. Subject to tax treaty benefits, non-resident investors are generally subject to a 10% withholding tax on income derived from an onshore fund. Domestic pension funds are entitled to special tax treatment.


State and local-level tax authorities do not, as a general practice, issue advance tax rulings on Alternative Investment Funds.


China has signed up to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (as amended by the 2010 Protocol) and has started to implement the CRS under the AEOI framework on July 1, 2017.


Chin

a


FenXun Partners is a Chinese law firm. Well recognised since its establishment in 2009, FenXun has been consistently ranked as a leading team in the financial services sector and in cross-border transactions. In April 2015, FenXun Partners and Baker & McKenzie established a joint operation platform in the Shanghai Free Trade Zone. Baker & McKenzie FenXun (FTZ) Joint Operation Office brings together FenXun Partners’ Chinese expertise and Baker & McKenzie’s international capabilities spanning 47 countries, for the benefit of international and Chinese clients conducting cross-border business.

At FenXun Partners, we understand the interplay between the legal and financial aspects of high-value investments and leverage this knowledge to deliver commercially focused advice. Our attorneys have extensive experience working with Chinese enterprises, institutions and regulators. Many of our attorneys have worked in international law firms, executing deals in the leveraged acquisition, project finance, private equity, distressed asset, pre-IPO, and restructuring spaces in the US, Europe, and other Asian countries.

Ms. Sue Liu has been a partner of FenXun Partners since 2010. Her practice focuses primarily on the asset management industry, advising clients on a wide spectrum of legal issues and considerations relating to the establishment and operation of onshore and offshore private investment funds. Prior to joining FenXun Partners, Ms. Liu had been practising in the U.S., focusing on private fund formation and mergers, acquisitions, equity offerings and public listings involving investment management firms. Ms. Liu has represented some of the largest international investment managers, as well as newly-established fund management houses. Ms. Liu has been consistently ranked as a Band Two Lawyer (Investment Fund, Foreign Legal Consultants (PRC Firms), China) by Chambers Asia.

Ms. Liu graduated from Peking University with an LL.B. (1999) and from Columbia University Law School with a J.D. (2003).

Sue LiuFenXun PartnersSuite 3501, China World Office 21 Jianguomenwai Ave.BeijingChina

Tel: +86 10 56496060Email: [email protected]: www.fenxunlaw.com


Chapter 14

PricewaterhouseCoopers Ltd

Andreas Yiasemides

Constantinos A. Constantinou

Cyprus

are surpassed at the manager’s level where they apply in case of external management. External management may be exercised by a management company (“UCITS Management Company”) authorised by the Open-ended Undertakings for Collective Investment Law 78(I)/2012, as amended (“UCI Law”), or by an investment firm authorised in accordance with Law 87(I)/2017 regarding the provision of investment services, the exercise of investment activities and the operation of regulated markets, as amended, (“Investment Services Law”), or any UCITS management Company or investment firm established and duly authorised pursuant to the legislation of another Member State which transposes the provisions of the Directive 2009/65/EC (“UCITS Directive”) and Directive 2014/65/EU (“MiFID II”), respectively, and to the extent subsequently amended, only if the total assets under the management of such external managers are below thresholds (i) or (ii). An AIFLNP may be externally managed by:(i) the entities outlined above for AIFs (i.e. Cyprus or EU

authorised UCITS Management Company or investment firm excluding a Cyprus or EU authorised AIFM) or a company established in a third country as long as it is authorised to provide portfolio management services and it is subject to prudential regulation regarding the provision of that services, all the aforesaid entities being eligible if only the AIFLNP’s portfolio includes financial instrument(s); or

(ii) any company which, in accordance with its instruments of incorporation, has the sole purpose of the provision of the portfolio management service to the specific AIFLNP and acquires specific authorisation by the CySEC to this end (the “Special Purpose Company” or “SPC”).

If the abovementioned thresholds (i) or (ii) are surpassed, such external manager shall obtain authorisation to operate as an AIFM and all AIFLNPs under its management shall transition to AIFs.A self-managed AIF not operating under the AIFM Law provisions, or an external manager which is not authorised as an AIFM, are subject to registration in the Special Register of sub-threshold AIFMs maintained by the CySEC.Advisers to AIFsThe provision of investment services and activities (subject to exceptions) within Cyprus is regulated by the Investment Services Law which transposes the provisions of MiFID II into Cyprus law. The provision of investment advice in respect of one or more transactions relating to financial instruments is subject to the Investment Services Law. Investment advice may be provided by any duly authorised person. Cyprus entities (i.e. a Cyprus investment firm, a UCITS management company, an AIFM) shall be authorised to this end by the CySEC in accordance with the



Alternative Investment Funds (“AIF(s)”) are governed by the Alternative Investment Funds Law 131(Ι)/2014 (“AIF Law”) and the Alternative Investment Fund Managers Law 56(I)/2013 (“AIFM Law”), both laws as amended. The AIFM Law transposes the provisions of the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”).For the purposes of this chapter, references as to AIFs shall also include the AIFs addressed to a limited number of persons (less than 75) (“AIFLNPs”) unless explicit references to AIFLNPs are made, and references to persons shall mean the investors in the AIFs/AIFLNPs.


Management of AIFsThe responsible authority for the authorisation and supervision of the management of AIFs is the Cyprus Securities and Exchange Commission (“CySEC”). An AIF may be managed by its board of directors (only if an AIF is formed as a variable or fixed capital investment company, “VCIC” or “FCIC”) assuming (i) that the assets of its portfolio, including any assets acquired through use of leverage, in total, do not exceed EUR 100,000,000 (or currency equivalent), or (ii) the assets of its portfolio, where the AIF does not employ leverage and its investors have no redemption rights exercisable during a period of five years following the date of initial investment in the AIF, do not exceed EUR 500,000,000 (or currency equivalent).The self-managed AIF will either voluntarily or if the abovementioned thresholds (i) or (ii) are surpassed, exercise internal management as per the AIFM Law. A self-managed AIFLNP can never exceed thresholds (i) or (ii). In order for an AIFLNP to exercise internal management pursuant to the AIFM Law and/or is allowed to surpass thresholds (i) or (ii), it shall transition to an AIF subject to the prior approval of CySEC.An AIF may be externally managed by an Alternative Investment Fund Manager (“AIFM”) pursuant to the AIFM Law or any AIFM established and duly authorised pursuant to the legislation of another Member State which transposes the provisions of the AIFMD accordingly, either voluntarily or if thresholds (i) or (ii)


Cypr

us

AIFM or internally managed pursuant to the AIFM Law in accordance with section 6 (2)(a)(iii) of the AIF Law) to benefit from the passporting regime as per question 3.4 below.


AIFs are subject to authorisation from the CySEC prior to commencing their operations pursuant to sections 12 and 13 of the AIF Law. The application to the CySEC for granting an authorisation to an AIF must include, inter alia, information on the persons conducting the business of the AIF, its organisational structure, any delegation arrangements in place, declarations by the external manager (if appointed) and depository (if appointed), and a declaration of commitment to the payment of the prescribed initial minimum capital (if applicable).The mandatory documentation, irrespective of the legal structure and type of management of the AIF, consists of the prospectus and the related constitutional documents. Additionally, the CySEC must be satisfied that the persons managing and controlling the AIF are of good repute and relevant experience; hence, the requirement for additional identification documents for each such person is also required. The self-managed AIF must also submit, inter alia, an internal operations manual describing its policies and procedures to be undertaken, a business plan and identification documents in respect of the key officers appointed at the level of the AIF (i.e. internal auditor, compliance officer, risk manager and portfolio manager(s)).The said application must be signed by all the members of the management body of the self-managed AIF or the external manager (if appointed) and shall be submitted by the applicant to the CySEC, upon the payment of the prescribed application fees. The applicant is informed of the result of the application by the CySEC within three months from the date of submission of the application. The CySEC may ask the applicant to provide clarifications or/and any additional information or documents which may be deemed necessary for further assessment of the application.Non-Cyprus AIFs established and operated outside Cyprus can be registered with the CySEC and are allowed to market their units within Cyprus, either by following a prescribed notification procedure or by seeking additional authorisation from the CySEC, depending on the case.


The AIF Law provides for certain local qualification requirements, including but not limited to the following:■ an AIF structured as an investment company or a limited

partnership (“LP”) must have its registered office/central offices and main place of conduct of activities, respectively, located in Cyprus;

■ the external audit of an AIF must be performed by a Cyprus based firm authorised to undertake such duties;

■ the depositary of a self-managed AIF operating under the AIFM Law or of an AIF externally managed by an AIFM must be Cyprus based; and

■ CySEC’s Directive 131-56-02 lays down specific rules in relation to the marketing of units of AIFs from and to Cyprus, as well as in respect to the organisation and the obligations of persons in the marketing network of units of AIFs which are intended to be marketed within Cyprus.

Investment Services Law, and non-Cyprus entities in accordance with the respective applicable law.


AIFs themselves, whether self or externally managed, have to be licensed and authorised by the CySEC pursuant to the AIF Law as described below in question 1.5.


The AIF Law distinguishes between either:■ an AIF of the open-ended type, where its investors have the

right to redeem or repurchase their units upon request, at any time, or at regular intervals which do not exceed one year and are defined in the constitutional documents of the AIF; or

■ an AIF of the closed-end type, where its investors have the right to redeem or repurchase their units upon request, at regular intervals that exceed one year, but shall not extend for more than five years or at a specific time as defined in the constitutional documents of the AIF.

AIFs are treated differently depending on the circumstances, for example:a) the mandatory requirement for the appointment of a local

depositary if the AIF is internally or externally managed within the AIFM Law provisions compared to an AIF established outside the scope of the AIFM Law which can appoint a depository operating in another EU Member State or third country (under conditions) or even waive the depository requirement (AIFLNPs being subject to specific qualifications referred to in paragraph (c) below) in cases where its total assets are not eligible for custody (e.g. real estate or private equity);

b) the reduced duties (no oversight or cash monitoring) of the appointed depositary of an AIFLNP compared to the full scope of duties it has to perform when appointed for an AIF;

c) the requirement for the appointment of a depositary may be waived in cases where the AIFLNP’s (i) total assets do not exceed EUR 5 million (or equivalent currency) or (ii) investors are limited to five in total or (iii) total assets are not subject to custody;

d) the restriction of AIFLNPs to address more than 75 persons or market their units to retail investors compared to AIFs addressed to unlimited number of persons;

e) different requirements, inter alia, in respect of the organisational structure and reporting obligations that apply in relation to AIFs and AIFLNPs;

f) the absence of the minimum capital requirements in respect of an AIFLNP compared to an AIF, the latter being subject to a minimum capital requirement totalling EUR 125,000, unless it is established as a self-managed AIF in accordance with section 6(2)(a)(iii) of the AIF Law, resulting in a minimum capital requirement of EUR 300,000;

g) the ability of AIFs to be listed and traded on a stock market or multilateral trading facility (traded only if established as an investment company addressed to retail investors) compared to the prohibition of the same in respect to AIFLNPs; and/or

h) the restriction imposed on an AIFLNP and an AIF (which is not externally managed by a Cyprus or EU authorised

PricewaterhouseCoopers Ltd Cyprus


Cypr

us

Companies established in a third country are permitted only to manage AIFLNPs where their portfolio(s) include one or more financial instruments, as long as they are authorised to provide portfolio management services and are subject to prudential regulation regarding the provision of that service. A “Memorandum of Understanding and Cooperation” signed between the CySEC and the competent authority of the third country must be in place. Any entity established within EU or in a third country that wishes to provide Investment Advisory services to a Cyprus AIF must comply with the provisions of the Investment Services Law (including any relevant secondary legislation issued by the CySEC) and/or the relevant EU legislation and/or the related and equivalent legislation that the said entity is subject to in its home jurisdiction.


The CyCEC is a signatory party in various bilateral, multilateral and special agreements pursuant to section 29 of the Law 73(I)/2009, as amended, which provides for the cooperation of the CySEC with competent supervisory authorities and organisations abroad. For example, CySEC is a signatory party in:a) a multilateral agreement with the European Securities and

Markets Authority and the International Organisation of Securities Commission for consultation, cooperation and exchange of information purposes; and

b) a bilateral agreement with the respective regulatory authorities of various countries, inter alia, to the Hellenic Republic Capital Market Commission, the Australian Securities & Investments Commission and the Austrian Securities Authority.

In addition, pursuant to section 44 of the AIFM Law, the CySEC signed various “Memoranda of Understanding and Cooperation” with various third countries (i.e. the Cayman Islands, Dubai, Hong Kong, Israel, Japan, Korea, Singapore and the USA) in order to allow fund managers based outside the EU to access EU markets or perform fund management through delegation from managers of the EU.

2 Fund Structures


An AIF can be structured as (i) a common fund (“CF”), (ii) a VCIC or FCIC, or (iii) an LP. An AIFLNP can be structured in the form of (i) a VCIC or FCIC or (ii) an LP.


The liability of the investors varies depending on the legal structure of the AIF:a) if an investment company (VCIC or FCIC), the investors’

liability is limited to the amount invested by way of shares;b) if an LP, the limited partner is only liable in respect of the

contributed amount and the value of participation interest in the LP; and

c) if a CF, the unitholders (being co-owners of each of the assets under the AIF) are liable only up to the amount of their contribution, which is expressed in units of the CF.

Based on ad hoc CySEC guidelines, there are also certain local governance qualification requirements, including but not limited to the following:■ the board of directors of a self-managed AIF, or of the

external manager of the AIF, shall consist of at least four directors, two serving as executive and two as “independent” non-executive directors, the majority of whom must be tax residents in Cyprus;

■ the board of directors of a self-managed AIFLNP or of its SPC, shall consist of at least three directors, one serving as executive and two as non-execute directors, the majority of whom must be tax residents in Cyprus;

■ the board of directors of an externally-managed AIF shall consist of at least two directors;

■ the portfolio and risk management functions of the AIF shall be assessed by the CySEC as to their suitability to undertake any of the said functions, and independence between the two aforesaid functions must be ensured;

■ the self-managed AIF or its external manager is also required to establish a regulatory/anti-money laundering compliance programme and an independent internal audit function; and/or

■ persons who perform functions relating to the AIF including but not limited to persons who market the AIF’s units, the compliance officer (anti-money laundering and/or regulatory compliance officer), the portfolio manager and the risk manager shall be first certified in accordance with the CySEC’s Directive regarding the certification of persons and the certification registers of 2015, as amended (“Certification Directive”). The CySEC may also require the board of directors (in part or in whole) of the self-managed AIF or both (or either) boards of directors of the self-managed fund and their external manager (depending on the circumstances) to be certified as aforesaid. The registered persons are obliged to renew their registration each calendar year and are subject to compulsory continued professional training.


a) Unless an exemption is granted, AIFs are required to appoint a depositary responsible for the safekeeping of the AIFs’ assets, the performance of oversight and cash monitoring. The appointed depositary of an AIFLNP shall only be responsible for the safekeeping of the AIFLNP’s assets. Such an exemption in respect to the appointment of a depository depends on factors such as the underlying structure or management of the AIF; for example, a depository shall always be appointed in relation AIFs managed by an AIFM.

b) A fund administrator, even though not required, may be appointed to render services including but not limited to book-keeping and accounting, net asset value calculation, reporting, filling, maintenance of the register and facilitation of investor transactions.

c) A qualified professional Cyprus based auditor must be appointed having an obligation to perform the audit of the AIFs and report to the authorities of any irregularities which come to their attention while performing their duties.

d) A legal advisor must also be appointed.


Companies established in another Member State and wishing to manage AIFs must be authorised under their national law transposing either one of the following EU Directives: the AIFMD; the UCITS Directive; or MiFID II.



Cypr

us

entities shall prepare and circulate a prescribed three A4-paged Key Information Document (KID) in accordance with the technical guidelines laid out in the Delegated Regulation (EU) 2017/653 (in force since the 1st January 2018). Despite the aforesaid, an open-ended AIF (excluding AIFLNPs) marketed to retail investors must issue a key investors’ information document, the content of which is in accordance with Regulation No. 583/2010; however, such type of AIFs shall be subject to Regulation (EU) 1286/2014 after 31st December 2019. Preparation of a prospectus may instead be required pursuant to Part II of the Law 114(I)/2005, as amended (“Prospectus Law”), and the Prospectus Regulation (EU) 2017/1129 (the “Prospectus Regulation”) to the extent it partly repeals related provisions to the Prospectus Law (until the latter comes into full force on 21st July 2019).


AIFs may only be advertised after their authorisation has been communicated by the CySEC. All announcements and marketing material of an AIF need to be clear, fair and not misleading, and shall be clearly identifiable as such. In any event, such marketing material shall not contradict or downgrade the significance of the information contained in the prospectus of the AIF as laid down in section 77 of the AIF Law and the information referred to in section 30 of the AIFM Law (not applicable to AIFNLPs). The information to be provided to the investors includes but is not limited to:a) a description of the investment strategy and objectives of the

AIF, a description of the types of assets in which the AIF may invest, the techniques it may employ and all associated risks, any applicable investment restrictions, the circumstances in which the AIF may use leverage and the types and sources of leverage permitted;

b) the identity of the manager of the AIF (if applicable), the AIF’s depositary (if applicable), auditor and any other service providers, a description of their duties and investors’ rights;

c) a description of the AIF’s valuation procedure and of the pricing methodology for valuing assets; and

d) a description of all fees, charges and expenses and of the maximum amounts thereof which are directly or indirectly borne by investors.

Specific disclosures in the information to be provided to the investors depending on the classification of the AIF (i.e. Feeder, Money Market, Funds of Funds) are also outlined in the Classification of AIFs of the Republic Directive.AIFs (which also address retail investors and excluding AIFLNPs) shall specify in their advertising communications where and in which language their prospectus may be obtained by the investors and their respective authorisation number. Any advertising communications shall include an explicit reference section that the performance of the investment in units of the AIFs is not guaranteed and the previous returns do not ensure future ones. In case of AIFs with guaranteed performance, the aforesaid reference shall be limited to the fact that the past performance does not guarantee future performance. Specific guidelines are in place in relation to an AIF which replicates a stock exchange index and in case the net asset value of AIFs may have high volatility because of the composition of their portfolio or the management techniques used.


There is no requirement for marketing materials to be registered


Local Managers and advisers of AIFs are structured as companies limited by shares.


By virtue of being an open or closed-ended AIF, its investors have the right to redeem or repurchase their units as described in question 1.4 above. Also, CySEC’s Directive DI 131-2014-03 (“Classification of AIFs of the Republic Directive”) requires for open-ended AIFs (no AIFLNPs included) with no limited liquidity arrangements in place to facilitate redemptions or repurchases either on a monthly (retail investors) or quarterly (non-retail investors) basis.The board of directors of a self-managed AIF or its external manager may be allowed to suspend the redemption or repurchase of units in the AIF in exceptional cases where this is demanded by the circumstances (which may be elaborated in the AIF’s prospectus) or in cases provided in the rules or constitutional documents of the AIF and in any case, if this is justified by the interest of the investors. Transfers in open or closed-ended AIF shall be freely transferable subject to their constitutional documents and their prospectuses. The board of directors of a self-managed AIFLNP or its external manager shall ensure that any transfer of shares or participation interest in the AIFLNP shall not result in a breach of the prescribed limit of 75 investors.


Please refer to question 2.4 above.


Various investment limits, diversification rules and restrictions apply depending on the type of investors (professional, well informed or retail investors), the strategy classification of the AIF (e.g. private equity; loan originating fund, etc.) and the type of structure (open-ended or closed-ended). Such limits and restrictions are governed by the Classification of AIFs of the Republic Directive. AIFLNPs are not subject to investment limits or restrictions.

3 Marketing


The production and offering of marketing materials principally governed by the AIF Law, the AIFM Law and Directive 131-56-02 regarding the terms and the procedure for the marketing of the units of AIFs and AIFLNPs. In addition, units in an AIF/AIFNLP may be considered as packaged retail investment and insurance products (“PRIIPs”) pursuant to the Regulation (EU) 1286/2014. To this end, AIFs/AIFLNPs themselves and persons advising on, or selling, the units of the said



Cypr

us

an “inducement” under the Investment Services Law. If the Distributor’s Consideration is considered to be an inducement for the purposes of the Investment Services Law, the Cyprus distributors may be required to be compliant with the provisions of section 17(3), 24 and 25 of the Investment Services Law and Part IV of the CySEC’s Directive DI87-01; any non-Cyprus distributors may have to be compliant with the respective applicable legislation.


As long as such financial institutions are eligible to invest in the AIF as described in question 3.6, there are no further restrictions.

4 Investments


An AIF is only granted a licence by the CySEC in respect of raising capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors.


A detailed analysis of the limitations on the types of investments that can be pursued by the AIFs are outlined in the Classification of AIFs of the Republic Directive. Retail Investor AIFsThe investments of AIFs addressed to retail investors shall comprise one or more of the following eligible assets:a) Transferable Securities;b) money market instruments;c) units of collective investment undertakings;d) financial directive instruments;e) deposits with credit institutions;f) real estate and real estate related assets;g) mortgage-related securities;h) Collateralized Debt Obligations’ Securities up to 30%;i) commodities up to 20%; and/orj) foreign exchange up to 20%.Examples of general restrictions in respect of AIFs (either self or externally-managed) addressed to retail investors include but are not limited to the following:a) cannot acquire any shares carrying voting rights which would

enable the AIF to exercise significant influence over the management of the issuing body. This restriction is waived in regards to other investment funds, Private Equity AIFs and Real Estate AIFs;

b) cannot raise capital from investors through the issue of debt securities;

c) cannot grant loans or act as a guarantor on behalf of third parties. This restriction does not prevent AIFs from acquiring transferable securities which are not fully paid; and

with or approved by CySEC unless they need to be reviewed and approved by the CySEC for the purposes of authorisation of the AIF, as well as any amendments made thereof.


The self-managed AIF or its external manager may start marketing the units of the AIF to investors within Cyprus upon obtaining authorisation from the CySEC. If the units of the AIF are to be marketed outside Cyprus, then a specific authorisation pursuant to the applicable legislation of the target jurisdiction must be required; if so, the decision provided by the competent authority of the target jurisdiction must be communicated to the CySEC.AIFs that are: (i) either internally managed under the AIFM Law provisions or externally managed by an AIFM; and (ii) are addressed to professional investors, can take advantage of the “passporting” regime and market their units to another Member State without the requirement of additional authorisation by the competent authority of the target member state. Such AIFs shall be subject to a notification procedure submitted to the CySEC.Persons who enter into a contract with the self-managed AIF or its external manager in order to engage in marketing activities on behalf of the AIF shall be first certified in accordance with the Certification Directive as described in question 1.6 above.


Only AIFs addressed to an unlimited number of persons can choose to and this is designated accordingly in order to be marketed to retail investors.


Prospective investors in an AIF shall ensure that:■ they are eligible to invest depending on which investors the

AIF is authorised to address its units to (professional and/or well-informed);

■ they are not considered as ineligible investors by any further restrictions that the AIF may have incorporated in its prospectus; and

■ they have provided acceptable identification and due diligence documentations as requested by the AIF and not be regarded as involved in illegal activities pursuant to the Prevention and Suppression of Money Laundering and Terrorist Financing Law 188(I) of 2007, as amended.


There are no additional or specific restrictions that apply in respect to the marketing to public bodies.


The self-managed AIF or its external manager may enter a contract with distributors for distribution of its units, as intermediaries, within Cyprus. Such distributors may receive a fee, commission or any other non-monetary benefit (the “Distributor’s Consideration”) in exchange for their services to their AIF, which may be considered



Cypr

us

markets or a multilateral trading facility. AIFs incorporated as public liability companies may also be subject to public disclosures in accordance with the provisions of the Companies Law Cap. 113, unless such provisions are disallowed by the AIF Law.


The self-managed AIF or its external manager shall submit to the CySEC and make available to its investors in all selling points of its units:■ the annual report for each fiscal year;■ the half-yearly report for the first six months of the fiscal

year; ■ the Key Information Document; and■ a prospectus.Where an AIF is constituted with multiple investment compartments, the prospectus and annual and half-yearly reports shall be prepared as one single document, for all the investment compartments of the AIF.


There are no explicit restrictions on the use of side letters.

6 Taxation


VCICs and FCICsAn AIF with a VCIC or FCIC legal form that is managed and controlled from Cyprus (i.e. Cyprus tax resident) will be subject to the normal Cyprus taxation rules, including:■ 12.5% uniform corporate income tax for each year

of assessment on all income accrued or derived from all chargeable sources both within and outside Cyprus (i.e. worldwide income basis), subject to available exemptions and deductions as per the law.

More specifically, all relevant expenses incurred wholly and exclusively for the production of (taxable) income constitute deductible expenses whereas, inter alia, dividends, capital gains or profits from the disposal of “securities” constitute tax exempt incomes (subject to conditions). Indicatively, key characteristics of the law include the following (non-exhaustive):■ Deductible expenses: In general, expenses shall be

deductible in computing the chargeable tax basis of the VCIC/FCIC, provided that these are being incurred wholly & exclusively for the production of (taxable) income, unless otherwise stated in the law.

■ Notional Interest Deduction: Availability for Notional Interest Deduction in regards to new corporate equity of the VCIC/FCIC, under conditions and capped at 80% of taxable income.

■ Exemption of profits on disposal of “securities”: The Cyprus tax law explicitly defines the term “securities” to include shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons, incorporated in Cyprus or abroad, and rights thereon. The Cyprus tax authorities have also issued tax technical circulars by which listing (by way of a non-comprehensive

d) if an AIF invests in the units of other investment funds that are managed, directly or by delegation, by the same external manager or by any other company with which the external manager is linked by common management or control, or otherwise, that management company or other company shall not change subscription or redemption fees on account of the AIF’s investment in the units of such other AIFs.

Specific restrictions also apply to AIFs in relation to investments in cash, in other investment funds, in real estate or when the AIF is engaging in financial derivative instrument transactions (whether for investment or hedging purposes) or whether the AIF is classified as a Real Estate, Private Equity, Money Market, Capital or Performance Guarantee, Funds of Funds or a Capital Protection Fund.Professional or Well-Informed Investor AIFsIn respect of AIFs which are addressed to only well-informed and professional investors (excluding AIFLNPs), there is no restriction as to the eligible assets that shall comprise their investments. However, these AIFs are subject to restrictions including but not limited to:a) Cannot raise capital from investors through the issue of debt

securities (subject to derogations).b) Cannot grant loans or act as a guarantor on behalf of third

parties unless where granting of loans or guaranties is permitted subject to the provisions governing the AIF’s classification as a Private Equity, Real Estate or Loan Originating Fund (subject to derogations).

c) Cannot (neither its external manager, if applicable) acquire any shares carrying voting rights which would enable the AIF to exercise significant influence over the management of an issuing body, except to investments in other investment funds, to Private Equity AIFs and to Real Estate AIFs.

Specific restrictions also apply depending on whether the AIF which is addressed to only well-informed and professional investors (excluding AIFLNPs) is classified as a Private Equity, Money Market, Funds of Funds, Real Estate or Loan Originating AIFs.


An AIF addressed to retail investors is permitted to borrow and secure such borrowing on the assets of the AIF where such activities are permitted by its constitutional documents or fund rules. The borrowings, at any given time, shall not exceed the 25% of its net assets. AIFs addressed to only well-informed and/or professional investors are not subject to any borrowing restrictions apart from those that may be included in their constitutional documents or prospectus. In derogation of the aforesaid, a Loan Originating AIF addressed to well-informed and/or professional investors may borrow cash provided that such borrowings fulfils (cumulatively) certain conditions as those are listed in section 79 (f) of the Classification of AIFs of the Republic Directive. Specific restrictions may apply depending on the classification of AIFs.



There is no public disclosure that the AIF must make, except in cases where the AIF is listed on the stock exchange or other regulated



Cypr

us

investors in accordance with their tax residency status and other relevant criteria (please refer to question 6.4 for more details).


As mentioned under question 2.3, investment managers/advisers of Cyprus AIFs are commonly structured as limited liability companies. Such fund management companies typically employ the fund management individuals.The fund management company, if managed and controlled from Cyprus (and, thus, tax resident in Cyprus) or if a foreign company with a permanent establishment in Cyprus, will be subject to taxation in Cyprus generally in line with tax framework applying as for VCICs and FCICs under question 6.1 above.Furthermore, the provision of management, administration and marketing services to an AIF is generally VAT exempt.The individuals that are employed by the fund management company are subject to Cyprus personal income tax at progressive rates, up to a maximum rate of 35% for annual incomes above EUR 60,000, to the extent that they are either Cyprus tax resident, or, if non-Cyprus tax resident, to the extent that they exercise their duties from Cyprus. Various additional benefits are available for expatriates, including a potential exemption for 50% of their income assuming an annual salary that exceeds EUR 100,000 and certain other conditions are met. Also note, it is anticipated that in the near future certain key/high-ranking employees of fund management companies may be entitled to a flat tax rate of 8% on the portion of their salary that is effectively connected to carried interest, subject to conditions (legislation currently at draft stage).


No material establishment or transfer taxes apply with respect to an investor’s participation in a Cyprus AIF.


The Cyprus tax treatment of income earned by investors of an AIF will primarily depend upon their tax residency and domicile status, whether physical or legal persons, and the nature of the income:(a) Cyprus tax resident investors (corporates & individuals) are

subject to the provisions of the Cyprus tax legislation on any income to be received from the AIF.

(b) Non-Cyprus tax resident investors (corporates & individuals) should not be subject to Cyprus tax provided that they do not have a PE in Cyprus. If there is a Cyprus PE, all income attributed to the PE will be subject to the provisions of the Cyprus tax legislation. Moreover, in the near future it is anticipated that legislation will be enacted under which any non-Cyprus tax resident investors that invest in Cyprus AIFs which operate as a LP or CF will not be deemed to have a PE in Cyprus (legislation currently at draft stage).

As regards gains from disposal of units in the AIF, Cyprus and non-Cyprus tax resident investors could be subject to Capital Gains Tax at the rate of 20% in case the AIF directly or indirectly owns immovable property situated in Cyprus (as computed by reference to the values of the underlying properties owned by the AIF which are situated in Cyprus).

list) the financial instruments which should be considered as qualifying “securities” for the purposes of applying the said exemption provisions.

■ Exemption of dividend incomes (except in the case of dividends which are deductible for tax purposes at the level of the payer).

■ Exemption of trading profits from qualifying foreignpermanent establishments (election to tax applies).

Any foreign taxes suffered may, under conditions, be credited against the Cyprus corporate income tax liability on the same incomes. ■ Cyprus tax resident companies are also subject to Special

Defence Contribution (“SDC”), on a gross basis, on certain types of “passive” income.

More specifically, where applicable, SDC is assessed at the rate of 17% on dividends, subject to conditions, at the rate of 30% on “passive” interest income (interpreted to mean interest income not arising in the ordinary course of the business or closely connected thereto) and at the effective rate of 2.25% on rental income. ■ Dividend Income from Cyprus are exempt from SDC,

subject to certain anti-avoidance provisions. ■ Dividend Income from abroad (relevant to dividends

which are not deductible for tax purposes by the paying company. Dividends which are deductible for tax purposes by the paying company are only subject to corporate income tax) are also exempt from SDC subject to conditions.

■ Cyprus tax resident companies are subject to 30% SDC on a gross basis on “passive” interest income, i.e. interest income not arising in the ordinary course of the business or closely connected thereto. “Active” interest income is exempt from SDC (however, it is subject to corporate income tax).

■ SDC on deemed dividend distribution provisions apply only to the extent that the ultimate owners in the VCIC/FCIC are both Cyprus-domiciled and tax resident individuals.

■ Capital Gains Tax (“CGT”) is imposed at the flat rate of 20% on gains arising on disposal of (a) immovable property situated in Cyprus (when the disposal is not subject to corporate income tax), (b) shares in companies not listed on any recognised stock exchange which own immovable property situated in Cyprus, and (c) shares in companies not listed on any recognised stock exchange which indirectly own immovable property situated in Cyprus and at least 50% of the market value of the company’s shares is derived from immovable property situated in Cyprus.

In case of share disposals, only that part of the gain relating to the immovable property situated in Cyprus is subject to CGT.

■ Cyprus does not levy any withholding taxes on any payments of dividend and interest made by Cypriot companies abroad or within Cyprus, except in the cases of (a) dividend payments to both Cyprus tax resident and Cyprus domiciled individuals and (b) ‘passive’ interest payments to Cyprus tax resident companies and Cyprus tax resident and Cyprus domiciled individuals.

■ There is no Cyprus stamp duty on any subscription, redemption, conversion or transfer of units in the AIF.

■ Moreover, in line with relevant European Court of Justice case law, funds are considered to carry out economic activities for VAT purposes and thus have the status of a taxable person. This means that depending on the transactions they carry out they may have the right or obligation to register for VAT purposes.

LPs and CFsLPs and CFs are tax transparent for Cyprus tax purposes. In this respect, the income of the AIF is taxed directly at the level of the



Cypr

us


As described under question 6.1, the Cyprus tax framework provides for a number of available exemptions and/or deductions that are typically relevant also for AIFs.From a structural perspective, even though there is no single specific structure that would be considered relevant or appropriate only for AIFs, given that Cyprus provides an overall competitive tax regime, it is typically possible to structure AIFs in a tax efficient manner, taking into account the activities/investments of the AIF and other relevant criteria.


There are no additional material tax issues specific for AIFs, investors and/or the fund managers.


A number of amendments in the Cyprus tax funds regime are expected in the near future as mentioned in the preceding sections. Such amendments are currently included in draft legislation that are being discussed at Cyprus Parliament level.The most notable amendments in the draft legislation are the following:■ Certain key/high-ranking employees of fund management

companies may be entitled to a flat tax rate of 8% on the portion of their salary that is effectively connected to carried interest, subject to conditions.

■ Non-Cyprus tax resident investors in Cyprus AIFs that operate as a LP or CF will not be deemed to have a permanent establishment in Cyprus.

7 Reforms


A bill is currently presented for debate before the Parliament of Cyprus which aims to further modernise the legislative framework in respect of Cyprus AIFs and it is expected to be legally in force within 2018. The proposed law introduces:■ the ability of the general partner of an LP to elect upon its

establishment for legal personality allowing for internally managed LPs; and

■ a regime for “registered” but not authorised AIFs (“Registered AIFs/RAIFs”) which shall facilitate a quicker and efficient launch at reduced cost; the setting up of a RAIF will need to be notified to the CySEC and be included in a special register that shall be maintained.

Also, additional licensing and supervision regimes are currently drafted for: ■ the sub threshold AIFM – the so-called Mini Manager –

falling under the exemptions of the AIFMD and thus leaving its regulation purely to national law; and

■ the Fund Administration Service Provider which shall regulate independent fund administrators at a national level, offering comfort and the feeling of protection to investors.


There is no requirement to obtain a tax ruling in Cyprus prior to establishing an AIF.Nevertheless, if deemed advisable, certain elements on the tax treatment of the AIF, the fund managers and/or the investors could be secured in advance with a tax ruling or VAT ruling through efficient and streamlined procedures with the relevant authorities. This should be discussed with the tax advisors of the AIF in advance.


Cyprus signed a FATCA Intergovernmental Agreement (“IGA”) with the U.S. Government for FATCA implementation on 5 December 2014. Cyprus is also one of the signatories to the Multilateral Competent Authority Agreement concluded in October 2014 for CRS implementation. Furthermore, the Cyprus Government has introduced local legislation and guidance for the implementation of FATCA and CRS requirements.As such, financial institutions in Cyprus are required to enhance their due diligence procedures and collect additional documentation from their account holders, including CRS and/or FATCA self-certification forms in order to identify whether an account is “Reportable”. Cyprus financial institutions are required to report certain specified account information (e.g. account balance, dividend income, interest income etc.) with respect to “Reportable Accounts” to the Cyprus Tax Authorities which in turn will report such information to the tax administration of the relevant jurisdictions.


To date, Cyprus has already adopted/is in the process of adopting the minimum standards of the OECD’s Action Plan on BEPS, with very few exceptions. In particular as regards Action 6, Cyprus signed on 7 June 2017, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) and included in its provisional notifications thereto the adoption of the Action 6 minimum standards with respect to the Preamble of double tax treaties and the Principal Purpose Test (“PPT”). The next step is for Cyprus to ratify the MLI. As regards Action 7, under Cyprus’ provisional MLI notifications Cyprus did not adopt the Action 7 provisions (which are not part of the minimum standards) although we note that certain of the Action 7 recommendations are included in the recently signed new double tax treaty between Cyprus and the United Kingdom. In recent EU Directives on taxation, the EU in certain areas has gone beyond the minimum standards of the OECD’s Action Plan on BEPS. Cyprus as an EU Member State has adopted/will be required to adopt the relevant measures by the deadlines set out in the respective EU Directives.



Cypr

us

PwC Cyprus, anticipating the growth of the investment funds industry and acting in a proactive manner, has established a specialised department (PwC Fund Services) with the mandate to assist in all aspects of setting up an investment fund (Alternative Investment Funds (AIFs) and Open-Ended Undertakings For Collective Investment in Transferable Securities (UCITS)) and/or a fund manager, the licensing process and the ongoing administration and compliance of the preferred investment fund/manager structure.

The diversified team of PwC Fund Services consists of more than 10 professionals specialising in investment funds, including duly-qualified accountants, CySEC certified practitioners and qualified lawyers. In addition, the team is actively participating in committees of the Cyprus Investment Funds Association (CIFA), i.e. Fund Administration, UCITS, AIFs, anti-money laundering, regulatory and legal committees.

Andreas is a Partner in the Tax and Legal LoS of PwC Cyprus and he is in charge of the Fund Services department. He has graduated with a first class honours degree from the University of Manchester with a Bachelor of Arts degree (BA (Econ)) in Accounting, Finance and Economics and obtained an MBA from the University of Leicester. He is a member of the Institute of Chartered Accountants in England and Wales (ICAEW) and of the Institute of Certified Public Accountants of Cyprus (ICPAC). He is also a holder of an Audit Practicing Certificate in Malta, as well as a founding member of the Cyprus Investment Funds Association (CIFA). He currently serves as the Vice-President of CIFA and president of ICPAC’s Fund Administration Committee. He has also served as the president of the Fund Administration & Custody Committee of CIFA.

Andreas YiasemidesPricewaterhouseCoopers Ltd 43 Demostheni Severi Avenue CY-1080 Nicosia Cyprus

Tel: +357 22 555 035Email: [email protected]: www.pwc.com.cy

Constantinos comes from a financial academic background after studying Economics at the University of Cyprus. He also obtained an MSc in Finance and Investments from the University of Nottingham, which he passed with Distinction. He is a holder of the Advance Certificate in Fund Administration (achieved with Distinction) and a member in the Public Registry of Certified persons maintained by CySEC for the provision of investment and ancillary services. Constantinos is also a member of the Fund Administration & Custody Committee of CIFA. Prior to joining PwC, he was servicing as a Senior Financial Services consultant advising on the structuring, authorisation and ongoing administration of various complex fund structures at a multi-services company in Cyprus.

Constantinos A. ConstantinouPricewaterhouseCoopers Ltd43 Demostheni Severi Avenue CY-1080 Nicosia Cyprus

Tel: +357 22 555 516Email: constantinos.a.constantinou@ cy.pwc.comURL: www.pwc.com.cy



Chapter 15

Advokátní kancelář KF Legal, s.r.o. Mgr. Jakub Joska

Czech Republic


No, there are not.


Depending on the type of the investment fund, the services of an investment company and/or a legal advisor specialised in the field of investment law are required.


Czech Alternative Investment Funds may only be managed by a person licensed by the Czech National Bank unless it is a foreign person that manages these funds on the basis of the so-called European passport. The non-European entities must be authorised by the Czech National Bank in accordance with Sec. 481 of the AICIF. Foreign persons authorised by another EU Member State in accordance with Articles 6 to 8 of the AIFMD (on the basis of the so-called European passport) may manage Czech Alternative Investment Funds through a branch if the conditions set out in Sec. 342 of the AICIF are met or directly if the conditions set out in Sec. 343 of the AICIF are met.


A list of third-country supervisors with whom the Czech National Bank has concluded memoranda of understanding to enhance co-operation and the exchange of information in the supervision of Alternative Investment Fund managers, persons pursuing delegated activities and depositaries are available at: https://www.cnb.cz/miranda2/export/sites/www.cnb.cz/cs/dohled_financni_trh/legislativni_zakladna/investicni_spolecnosti_investicni_fondy/download/seznam_org_dohl_treti_zeme_AIFMD_cz.pdf.

2 Fund Structures


It depends on whether it is a qualified investors fund or a special



Act No. 240/2013 Coll., on Investment Companies and Investment Funds, as amended (hereinafter referred to as “AICIF”).


Yes, they are.


Yes, they are.


The Czech legal system does not recognise the term “alternative investment fund”. Alternative investment funds are classified under other categories of investment funds according to the AICIF, i.e. qualified investors funds and special funds.


It depends on whether it is an autonomous fund, a non-autonomous fund or an entity under Sec. 15 of the AICIF (“administration of property comparable to management”). For a non-autonomous investment fund and entity under Sec. 15 of the AICIF it is only required to be registered in the list of the Czech National Bank and it takes ca. one to two weeks, whereas an autonomous investment fund needs to be licensed by the Czech National Bank which lasts ca. four to six months.


Czec

h R

epub

lic


Investment in an investment fund may only be publicly offered under the conditions laid down by the AICIF, and only if the fund is registered in the relevant list kept by the Czech National Bank.


Marketing documents do not need to be registered or approved by the local regulator but under Sec. 457 of the AICIF the fund’s administrator shall provide the Czech National Bank with the fund rules and inform it about every amendment to them.


Investments in a qualified investors fund may be offered in the Czech Republic publicly, however, only a qualified investor may become a unitholder, a beneficiary, a founder, a shareholder or a silent partner of this fund or in the case of a trust or a comparable facility a person who increases the property of this fund by a contract; this must be expressly stated in the offer.


Yes, if the legal conditions are met.


In simple terms, leaving aside institutional investors and professional customers, a person whose amount of paid-up contribution or paid-up investment in these other funds corresponds in total to the amount of at least EUR 125,000, and who has made a declaration about being aware of the risks involved in the investment in this qualified investor fund, is required.


There are conditions stipulated in Sec. 272 of the AICIF. In the case of pension funds, Sec. 272 (1) (d) of the AICIF states that a qualified investors fund may only be a pension company on the account of a subscriber’s fund, a pension fund or a transformed fund, which it manages.


The use of intermediaries to assist in the fundraising process is regulated by the Act No. 256/2004 Coll., on Business Activities on the Capital Market, as amended (hereinafter referred to as the “ABACM”), which stipulates limitation of the spectrum of investment instruments that the investment intermediary is authorised to distribute together with a limitation of the number of entities it is authorised to cooperate with within the distribution chain and the limitation of the range of services that the investment intermediary is authorised to provide.

fund, and on what assets it invests in. Special funds may only be in the form of an (open-ended and closed-ended) unit fund or a joint stock company (including SICAVs), whereas qualified investors funds may be in the form of an (open-ended and closed-ended) unit fund, a trust, a limited partnership company (including SICAR), a limited liability company, a joint-stock company (including SICAV), a European Company or a cooperative (including European Cooperative Society). An investment fund investing as a money market fund or a short-term money market fund, as well as collective investment funds investing in real estate or in shareholdings in a real estate company may, however, only be open-ended unit funds or SICAVs. It should be added that a suitable legal form for private equity and venture capital funds is SICAR.


It depends on the particular legal form of the fund. The shareholders are not liable for the debts in a unit fund, nor in SICAR. In the case of other legal forms, the liability regime is governed by the Act on Business Corporations.


A joint-stock company.


They can be limited by the fund rules. Details are stipulated in the Government Regulation No. 243/2013 Coll., on Investment of Investment Funds and on Techniques for Their Management, as amended (hereinafter referred to as the “Government Regulation No. 243/2013”.


General rules of the Act on Business Corporations apply depending on the particular legal form of the fund. The AICIF only stipulates that in the case of a SICAR, the transferability of investment certificates may be limited but not excluded by the articles of association.


Yes, such limitations are particularly stipulated in title II and V of the AICIF.

3 Marketing


Act No. 240/2013 Coll., on Investment Companies and Investment Funds, as amended, particularly it part 9.

Czech RepublicAdvokátní kancelář KF Legal, s.r.o.


Czec

h R

epub

lic

There is also a special provision for unit funds stipulating that legal acts whose purpose is to provide an unreasonable advantage to any unitholder to the detriment of the unit fund will not be taken into consideration, unless the AICIF provides for otherwise, or if it would be detrimental to third parties who relied on such legal acts in good faith.

6 Taxation


Investment funds benefit from a tax advantage in the form of a reduced rate of corporate income tax of 5%.


There is no special tax treatment of investment managers or advisors. The income tax rate is 19%.


The tax is levied on the income from the sale of securities and the income from the holding of securities. The tax rate is 15%. The income from the sale of securities may, however, be exempt from tax if certain conditions under Sec. 4 of the Act No. 586/1992 Coll., on Income Taxes, as amended (hereinafter referred to as the “Income Taxes Act”), are met.


Regarding income from sources in the territory of the Czech Republic, resident, non-resident, and pension fund investors are subject to the same tax treatment.


No, it is not.


The FATCA has been implemented in the Czech Republic by Act No. 330/2014 Coll., on Exchanging Information on Financial Accounts with the United States of America for Tax Administration, as amended (hereinafter referred to as the “FATCA Act”). The FATCA Act contains only the necessary provisions and, in many cases, it refers to Act No. 164/2013 Coll., on International Cooperation in Tax Administration and on the Amendment of Certain Related Acts, as amended, and Act No. 280/2009 Coll., Tax Code, as amended.


There are conditions stipulated in Sec. 272 of the AICIF.

4 Investments


Yes, restrictions are stipulated in the Government Regulation No. 243/2013.


Yes, generally, in qualified investors’ funds, both financial means and things whose value can be expressed in monetary terms can be collected, whereas in special funds, only financial means can be collected. Details are stipulated in the Government Regulation No. 243/2013.


Yes, restrictions are stipulated in the Government Regulation No. 243/2013 on the basis of the statutory authorisation.



Special funds must disclose fund rules, key information under Sec. 227 of the AICIF, annual report, auditor’s report, semi-annual report, information on securities of the fund under Sec. 239 of the AICIF and information for investors under Sec. 241 of the AICIF. Qualified investors funds must disclose fund rules, annual report, auditor’s report and information for investors under Sec. 293 of the AICIF.


Management companies submit to the Czech National Bank the statements, reports and other information defined in Decree No. 249/2013 Coll., on Reporting by a Manager and an Administrator of an Investment Fund or Foreign Fund to the Czech National Bank, as amended.


The corporate rule of equal treatment of investors generally applies.

Advokátní kancelář KF Legal, s.r.o. Czech Republic


Czec

h R

epub

lic


An amendment to the Income Taxes Act is currently being discussed by the Parliament envisaging the abolition of the 5% tax advantage for some funds. The amendment concerns investment funds whose shares were admitted to trading on a European regulated market.

7 Reforms


As mentioned above, an amendment to the Income Taxes Act is currently being discussed by the Parliament envisaging the abolition of the 5% tax advantage for some funds. The amendment concerns investment funds whose shares were admitted to trading on a European regulated market.


Based on the Resolution of the Czech Government of 15 May 2017, the Czech Republic will only adopt the BEPS minimum standards. The intention of the Czech Republic is to cover all 87 bilateral double taxation agreements in force.


This is not applicable.





Czec

h R

epub

lic


KF Legal is a Czech law firm that offers its clients legal counselling in specialised fields, in addition to administering comprehensive legal services including business transactions, court and arbitrational proceedings. Its attorneys have many years of experience, having worked in leading law firms, and work flexibly to meet the needs of the clients.

The philosophy of KF Legal is based on the needs and requests of the clients, providing direct services that react to their specific requirements, taking into account not only legal considerations, but also other factors on which the clients place particular emphasis.

KF Legal focuses on conducting the cases as effectively as possible, regardless of their size.

KF Legal’s good knowledge of the Czech and international legal and business environment enables it to offer its clients first-class legal services on attractive and affordable financial terms.

KF Legal provide legal counselling in Czech, English, German, Spanish and French.

Jakub Joska is a graduate of the Faculty of Law of Charles University and he has been an attorney since 2004. Jakub Joska has long specialised in financial law, public contract law and procedural law.

In the area of financial law, Jakub Joska focuses primarily on collective investment law. Since 2006, he has contributed significantly to the practical development of the sector of non-UCITS funds. Jakub Joska is one of the foremost experts in the area of qualified investor funds and their administrators. He has established eight investment companies and many different funds.

Jakub Joska also has extensive experience in licensing and penalty proceedings concerning subjects of the capital market.

Jakub Joska is a member of the Appeal Committee of Czech National Bank, Ethical Committee of Czech Capital Market Association and the member of the Supervisory Board for the Czech Republic for Finance.

Mgr. Jakub JoskaAdvokátní kancelář KF Legal, s.r.o.Opletalova 1015/55110 00 Prague 1Czech Republic

Tel: +420 776 146 946Email: [email protected]: www.kf-ak.cz


Chapter 16

Travers Smith LLP

Jeremy Elmore

Emily Clark

England & Wales

Alternative Investment Fund Managers Order 2014 (SI 2014/1292). The majority of these implementing measures have been introduced by way of updates to the FCA Handbook. The FCA created a new investment fund sourcebook, called “FUND”, as part of its Handbook and this contains most of the FCA’s rules and guidance for UK AIFMs, which adds an additional component to the general regulatory framework set out under FSMA.The European Venture Capital Funds Regulation (VCF Regulation) provides what is essentially “AIFMD Lite” for EU venture capital fund managers. The regime was broadened in 2018, with the aim to make it more attractive following a lacklustre take up.


Many Alternative Investment Funds will be AIFs for the purposes of AIFMD. An AIF is a collective investment undertaking which raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors. Even if a vehicle does not fall within the definition of an AIF, it may be categorised as a collective investment scheme (CIS) under FSMA (a CIS is similar, but not identical, to the European concept of a collective investment undertaking). An example of this is likely to be carried interest arrangements structured through a limited partnership, which are unlikely to be AIFs due to the employee participation scheme exclusion from AIFMD, but which are likely nevertheless to be unregulated CISs for the purposes of domestic legislation.The FCA authorises and regulates persons carrying out specific “regulated activities” in the UK. Acting as the manager of an AIF is a regulated activity, as is establishing, operating (which includes managing) and winding up an unregulated collective investment scheme. A suitably authorised person must therefore be appointed to carry out these activities on behalf of an Alternative Investment Fund.In the UK, only appropriately authorised persons can carry on a regulated activity by way of business. It is a criminal offence to breach this requirement. Any agreement entered into by a person carrying on a regulated activity in contravention of this provision is unenforceable against the other party and the other party is entitled to recover any money paid and to compensation for any loss sustained.AIFMD contains a partial exemption for AIFMs whose total assets under management do not exceed certain thresholds. These sub-threshold firms will not have to comply with the full provisions of



The UK is regarded as one of the leading global asset management centres, with an investment funds industry covering both traditional and alternative asset classes. In the case of funds with alternative investment strategies such as private equity, real estate and infrastructure funds, both the fund manager and the fund itself tend to be domiciled in the UK.Prior to the Alternative Investment Fund Managers Directive (AIFMD), supplemented by its Level 2 Delegated Regulation (Delegated Regulation) and guidelines from the European Securities Markets Authority (ESMA), the framework for Alternative Investment Funds was derived from the Financial Services and Markets Act 2000 (FSMA) and the principal regulatory authority, the Financial Conduct Authority (FCA). However, AIFMD has ushered in a new regulatory environment for many investment fund managers, including private equity firms and managers of hedge funds.AIFMD offers the lofty ideal of pan-European harmonisation of the regulatory and supervisory framework for the non-UCITS (undertakings for collective investment in transferable securities) fund sector, together with the associated freedom to passport management and marketing activities on a cross-border basis. However, no passport is ever free and for Alternative Investment Fund managers (AIFMs), there will be significant costs and burdens; and in common with other Directives, the creation of freedoms within Europe can come at the price of newly erected barriers to truly international business.As noted above, AIFMD applies to the non-UCITS sector. Broadly speaking, UCITS funds have not been used to implement alternative investment strategies and therefore are generally outside the scope of this chapter. Some hedge fund managers may be able to launch products under the UCITS brand if the proposed investment strategy fits into the framework and the UCITS requirements will offer investors greater regulatory safeguards and protections. However, the fact that UCITS funds are subject to mandated investment and borrowing powers means that they are likely to lack the investment flexibility which is available to private funds.AIFMD has been implemented in the UK by various implementing measures – primarily the Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773), the Alternative Investment Fund Managers (Amendment) Regulation 2013 (SI 2013/1797) and the


Engl

and

& W

ales

retail schemes, the fund itself, as well as the manager, will require FCA authorisation. Where a closed-ended investment fund is to be launched (such as an investment trust or real estate investment trust) and its shares listed, the listing on the London Stock Exchange of any such fund, as well as the manager, would need to be authorised by the FCA.


The UK regulatory regime, broadly speaking, does not differentiate between open-ended and closed-ended private funds, assuming that the fund is domiciled within the UK, although, as noted above in the context of sub-threshold firms, the partial exemption from AIFMD will bite at a higher level for non-leveraged closed-ended funds.However, the regulatory categorisation of UK fund managers advising or managing off-shore structures may be different to that which would apply if the entire structure is on-shore.Other regulatory requirements which might apply to a manager of Alternative Investment Funds are linked with the investment strategy being pursued, rather than whether the fund is open-ended or closed-ended (although the relevant strategy might be linked with a particular type of fund). For example, further requirements of UK legislation which are particularly relevant to hedge funds include: rules relating to market abuse and insider dealing; disclosures of interests in shares and related derivatives above certain levels; and disclosures of net economic short exposures to certain financial-sector companies and companies subject to a rights issue.


An application for authorisation under FSMA involves the applicant submitting a considerable volume of information to the FCA. This will include information on the proposed business activities of the applicant, its controllers and individuals who will be undertaking certain core controlled functions, its systems and controls including those relating to the manner in which the applicant monitors its compliance with applicable FCA Rules, its group structure and reporting lines and financial projections for the first year of trading. For those applicants applying for authorisation to manage an AIF, the FCA will require further information about the AIF itself (such as details of the AIF’s risk profile and its use of leverage).Once a complete application has been submitted (together with the requisite application fee), the FCA currently has six months to review the application (this is reduced to three months in the context of applications by AIFMs). During the review process, the FCA is likely to raise additional queries in relation to the information submitted.The FCA has made available a suite of forms for use by UK AIFMs in order to apply for the various permissions and authorisations a UK AIFM is required to apply for. Further applications will also need to be made in relation to any “material changes” to the information submitted as part of the authorisation application.Following authorisation, a successful applicant will need to comply with the applicable conduct of business and prudential rules of the FCA which are relevant to its business. In the context of AIFMs, particular focus is likely to be given to the capital adequacy requirements of, and remuneration principles imposed by, AIFMD.

AIFMD, unlike those firms which are “full-scope” AIFMs. The relevant thresholds are: (i) €500 million, provided the AIF is not leveraged and investors have no redemption rights for the first five years; or (ii) €100 million (including assets acquired through leverage). The exemptions do not remove the requirement for authorisation, and sub-threshold firms will need to apply to the FCA to become a “small authorised AIFM” or, in certain limited circumstances, a “small registered AIFM”. The latter category imposes the lowest regulatory burden on firms, but is only available for internally managed AIFs and certain types of real estate scheme. Sub-threshold AIFMs can opt into AIFMD to be treated the same as full-scope AIFMs, so as to benefit from the AIFMD passporting regime.A regulated entity which conducts all of its activities in its capacity as the manager/operator of an Alternative Investment Fund – whether an authorised AIFM or not – will be exempt from the EU Markets in Financial Instruments Directive (MiFID).Historically, though, many UK resident managers or advisers of off-shore hedge funds would have been subject to MiFID as the manager/operator of the fund was off-shore and the UK regulated entity was merely its delegate in respect of relevant investment management services. This analysis, however, has been somewhat muddied by the “letterbox” test imposed under AIFMD. The consequence of this test is that in some cases the entity which is designated as the manager of an AIF under the fund documentation is not regarded as the AIFM for the purposes of AIFMD (because it is a letterbox). The exact analysis of the letterbox test applicable to any situation is very fact-specific, but the risk is likely to arise from one of the tests set out in the Delegated Regulation, which provides that a manager of an AIF is likely to be deemed a letterbox if it delegates the performance of investment management functions (i.e. investment management and risk management) to an extent that exceeds by a substantial margin the investment management functions performed by the manager itself. The consequence of this is that an on-shore manager of a hedge fund may, depending on the exact structure and division of powers, now find itself as the AIFM for the purposes of the Directive even if it feeds its services into an off-shore manager.


Generally speaking, under the current UK framework, an Alternative Investment Fund itself is not required to be authorised or licensed by the FCA. AIFMD broadly supports the traditional position that it is the manager (or AIFM), rather than the Alternative Investment Vehicle, which is subject to regulation. However, whilst historically there have been very few operational requirements imposed at the level of the fund itself, to the extent AIFMD applies, the AIFM must now ensure that certain requirements are imposed upon the fund, such as: the appointment of a depositary to have custody of certain assets and/or verify title to privately held assets; organisational controls (relating to risk management, compliance and valuation); conduct-of-business rules (relating to due diligence, execution of orders and reporting); and rules relating to companies in which the fund has a substantial stake.This will not be the case if the fund manager is looking to implement an alternative investment strategy through a retail fund (meaning those which are approved by the FCA to be marketed to identified categories of investors, including, in the case of UCITS and non-UCITS retail schemes, the general public). In the case of non-UCITS

Travers Smith LLP England & Wales


Engl

and

& W

ales

www.esma.europa.eu/document/aifmd-mous-signed-eu-authorities – updated, but this includes all of the primary fund jurisdictions including the British Virgin Islands, the Cayman Islands, the Channel Islands and the United States.

2 Fund Structures


There are a wide variety of fund vehicles available in the UK. Certain of these are only available for retail funds, such as the authorised unit trust and the open-ended investment company. Others, such as the investment trust company, are likely to be used for closed-ended structures implementing a traditional investment strategy.However, a private fund domiciled in the UK and implementing an alternative investment strategy will usually take one of two forms. Closed-ended private funds (in particular, those investing in asset classes such as private equity, real estate and infrastructure) are most commonly structured as limited partnerships. This is a form of partnership governed by statute under the Limited Partnerships Act 1907 (LP Act). In April 2017, the LP Act was the subject of extensive reform by the UK Government in respect of private funds by way of the Legislative Reform (Private Fund Limited Partnerships) Order 2017 (PFLP Order). The reforms have been introduced with a view to simplifying the pre-existing law, reducing uncertainty and administrative costs and burdens, and ensuring that the UK remains an attractive and competitive location for private funds in comparison to other jurisdictions. The reforms apply only to a limited partnership that is “designated” as a Private Fund Limited Partnership (PFLP). The new regime is not mandatory: it is open to a limited partnership that satisfies the conditions to be a PFLP to choose not to apply to be designated as a PFLP, in which case the pre-existing limited partnership will apply.In common with other jurisdictions, the limited partnership (including the PFLP) will have one or more general partners and one or more limited partners. The general partner is responsible for the management of the limited partnership (although whether it fulfils this role will largely depend on the regulatory issues described above), but has unlimited liability for the debts and obligations of the partnership over and above the partnership assets. Conversely, the liability of a limited partner will be limited to the amount of capital it contributes to the partnership (and, in the case of PFLPs, there is no requirement for a limited partner to make a capital contribution), provided such limited partner takes no part in the management of the partnership: to the extent the limited partner does take part in management, it will be treated as a general partner and will lose the protection of limited liability. The LP Act contains a white list of matters (“white list”) which limited partners of a PFLP can take part in without jeopardising their limited liability status. A limited partnership (including a PFLP) registered in England & Wales does not have any legal personality separate from its partners and is not a body corporate.One of the fundamental attractions in the UK of a limited partnership structure for private closed-ended funds is that the limited partnership is a flexible vehicle in terms of internal governance and control. The constitutional document (the limited partnership agreement) is a freely negotiable document between the fund manager and the investors.The statutory framework in the UK requires that a limited partnership is registered as such. This entails providing an application for registration to the Registrar for Limited Partnerships,


A fund manager applying for authorisation under FSMA (whether or not as an AIFM) must meet certain threshold conditions. One of these is that the head office of the applicant must be in the UK. Although the FCA will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control.In April 2018, the Department of Business, Energy and Industries Strategy of the UK Government published a consultation on proposed reforms in respect of limited partnerships (the “BEIS Consultation”). Although only consultations at this stage, the proposals contemplate that a limited partnership should have a “meaningful connection” with the UK, either by maintaining a “principal place of business” in the UK for the life of the limited partnership, or by having a service address in the UK. Depending on the outcome of the consultation and the consequent legislation following from it, it is possible the proposals will restrict flexibility in fund structuring by limiting the scope to migrate UK partnerships into other jurisdictions.


Historically, there have been no formal requirements to appoint external service providers to private funds domiciled in the UK (although a manager may have engaged service providers as a matter of choice). However, this is another area of change under AIFMD. One of the most significant changes under AIFMD is the requirement to have a depositary, who will have the responsibilities set out under AIFMD (which include custody, cash movement reconciliations and monitoring certain processes such as issues and redemptions of units and valuations). Independent valuers may also be appointed pursuant to the provisions of AIFMD.


AIFMs authorised in their EEA home Member State (i.e. EEA AIFMs) should be able to exercise management and marketing passport rights in the UK in relation to EEA AIFs. In order to exercise these rights, the EEA AIFMs home Member State competent authority will send the relevant notification forms to the Financial Conduct Authority, the UK’s competent authority for these purposes. At the time of writing, however, it is unclear whether such passporting rights will continue to be enjoyed following Brexit. Firms based in non-EEA jurisdictions wishing to market AIFs in the UK are required to comply with the National Private Placement Regime, as well as the UK’s financial promotion rules.


One of the key determinants in the context of a non-EEA (European Economic Area) manager’s ability to market a non-EEA fund within Europe will be whether information exchange arrangements are in place between the jurisdiction (i.e. Member State) in which the marketing takes place and the jurisdiction in which the fund manager and the fund itself are established. The information exchange arrangements that the FCA has entered into can be found at https://



Engl

and

& W

ales

managers and advisers of Alternative Investment Funds. However, the two most common structures seen in the market are the private limited company and the limited liability partnership (LLP). LLPs have been seen as the preferred structure for asset managers for some time now, as they offer the tax transparency of a traditional partnership whilst giving limited liability to the members of the LLP. Although an LLP is a body corporate, it is inherently a more flexible vehicle than a limited company and therefore can be adapted to suit the particular circumstances of the fund manager’s business and preferred governance structure. Since April 2016, LLPs (together with UK unlisted companies) are subject to a new requirement to maintain a register of people with significant control; such register is to be available for public inspection at their registered offices.Historically, each member of an LLP has been treated as being self-employed for tax purposes. This has meant that LLPs have not needed to pay employer’s national insurance contributions (NICs) on the remuneration of members, and it has also kept members of an LLP outside of the UK employment-related securities (ERS) legislation.Since the introduction of the “salaried member” rules in 2014, however, the position is no longer quite so straightforward. Under these rules, a member of an LLP will be treated as an employee if they: (a) perform services for the LLP in return for a “disguised salary” (broadly, remuneration which is not dependent on the firm’s profitability); (b) do not have “significant influence” over the LLP’s affairs; and (c) make a capital contribution to the LLP which is less than 25% of their annual “disguised salary”. If a member meets all three conditions, they will be deemed to be an employee, the LLP will need to pay employer’s NICs on their remuneration, and the member will be brought within the scope of the ERS legislation.In addition, employees remain outside of the scope of the new income based carried interest rules (see question 6.2), whereas self-employed LLP members must consider the potential application of these rules to their carried interest returns.


Generally, there are no statutory or regulatory limitations on the ability of managers of private funds to restrict redemptions or transfers in either open-ended or closed-ended funds, although contractual restrictions may be imposed.


There are no legislative restrictions on the transfer of investors’ interests. However, in the case of UK limited partnerships, certain filing requirements will need to be met, and details of the transfer advertised, before it is deemed to be effective. These filing requirements do not apply to PFLPs.


The AIFMD provisions relating to the asset stripping have been transposed into UK legislation. The provisions covers situations where an AIF managed by an AIFM subject to full authorisation holds a significant proportion of the shares in, or acquires control of, a private company or an issuer of traded securities, imposing requirements relating to the provision of information to the company

providing certain details including the name of each limited partner and the amount of capital contributed by each limited partner. Any changes to these details during the continuance of the limited partnership must be similarly registered within seven days of the relevant change. There are also formalities that must be followed on assignments of limited partnership interests, such as advertising the transfer in specific publications. In respect of the new PFLP regime, either a new or an existing limited partnership may choose to apply for PFLP status if it fulfils the criteria to qualify as a PFLP. Unlike limited partnerships, there is no obligation to provide details of the partnership’s general nature, capital contribution amounts or term of the partnership (or to notify of any changes to such details).It is also possible for a private closed-ended fund in the UK to be structured as a unit trust. The English law concept of a trust has no equivalent in some other jurisdictions. It is a structure under which title to the fund’s assets is held by a person with legal personality (the trustee) for the benefit of the fund’s investors (the beneficiaries). The document constituting the trust (the Trust Deed) governs the relationship between the trustee and the beneficiaries and, in addition, strict fiduciary duties are owed by the trustee as a matter of law.As noted above, although the UK is the primary European hedge fund centre, the usual hedge fund structure will generally not include the actual hedge fund being domiciled in the UK, because to set up the fund on-shore would lead to tax inefficiencies since the fund would be treated as “trading” rather than “investing” for UK tax purposes. Instead, hedge fund structures will invariably include a company or limited partnership established in an off-shore jurisdiction.


In respect of funds structured as limited partnerships, under statute the liability of a limited partner for the debts and obligations of the partnership is limited to the amount of capital it contributes to the partnership, subject always to the caveat that the investor does not become involved in the management of the structure.This does not relieve the investor of its contractual obligation to advance money, and therefore Alternative Investment Funds operating “just-in-time” drawdown structures will be able to draw the full amount the investor has committed to advance to the fund, notwithstanding the statutory limitation on liability. The UK limited partnership will generally be structured so that the commitment of investors comprises a nominal amount of capital contribution, with the balance being advanced by way of a loan. This structure should avoid amounts distributed to investors being subject to return in the event of the insolvency of the limited partnership.The other fund vehicles available will provide for the limited liability of investors, such that they will not be required to contribute more than the amount which they have committed to invest in the fund.In respect of PFLPs, as there is no requirement for a limited partner to contribute any capital, the entire funding to be contributed by a limited partner in a PFLP can be in the form of capital which can be contributed and repaid at any time without affecting the extent of the liability. This removes the need for the capital/loan split described above.


There are no formal requirements as to the legal structure used for



Engl

and

& W

ales

can be avoided if, broadly, the minimum subscription per investor is €100,000 or if the fund is offered to fewer than 150 investors per EEA state (with higher thresholds proposed by the European Commission as part of the new Prospectus Regulation which is due to come into force in July 2019). The EU Prospectus Directive will also not catch open-ended vehicles, so most hedge funds, for example, would not be caught in any event.The Omnibus Regulation will introduce new requirements for all marketing communications made to investors by an AIFM. These Communications must: (i) be identifiable as marketing communications; (ii) be fair, clear and not misleading; and (iii) present risks and rewards of producing units or shares of an AIF in an equally prominent manner.


Outside of AIFMD, there is no requirement to register marketing or legal documentation with the FCA. However, an AIFM must submit certain marketing information to the FCA (through the FCA’s AIFMD marketing notification form and/or the Management Passporting Forms) 20 working days prior to marketing, and must obtain pre-clearance for any material planned changes to the information provided (the AIFM must give at least one calendar month’s notice of the changes). Material unplanned changes must be notified to the FCA immediately.The Omnibus Regulation will empower national regulators in EU Member States to require notification of marketing communications which: (i) UCITS managers intend to use directly or indirectly in their dealings with investors; and (ii) AIFMs intend to use directly or indirectly in their dealings with retail investors (within the MiFID II definition).


For the purposes of AIFMD, marketing is a direct or indirect offering or placement at the initiative or on behalf of the AIFM to or with investors domiciled within the EU. This is a narrower concept than that of a financial promotion under domestic regulation, which is an offer or inducement to engage in investment activity. The FCA has provided guidance on when it considers an AIFM to be marketing in the UK. There are two situations when an AIFM may not be regarded as marketing an AIF: (i) pre-marketing; and (ii) reverse solicitation. The pre-marketing will be permissible where it is based on draft documentation and the offer document, or other information, is not sufficiently detailed to enable the recipient to make an investment decision or submit a subscription request; for example, a pathfinder document should not amount to marketing. In addition, “marketing” does not include general public statements, the issuance of capital calls or secondary trading. The Omnibus Directive will, however, for the first time, introduce a new definition of “pre-marketing” into the AIFMD. The intention of the proposal is that if a promotional activity does not fall within the definition of “pre-marketing”, it should be treated as “marketing” instead. These new requirements mean that the circulation of draft offering documents (e.g. draft versions of a limited partnership agreement) will constitute AIFMD marketing. This will be a significant change from the current approach in the UK.In respect of reverse solicitation, the FCA guidance states that a confirmation from the investor that the approach was made at its own initiative should be sufficient to rely on this approach. The guidance, however, also states that it must be received prior to making the offer or placement.From 22 July 2014, an authorised AIFM is able to market to professional investors only on the basis of the AIFMD passport.

or issuer, shareholders, employers and employees. The provisions also contain restrictions on distributions, capital reductions, share redemptions and acquisitions by companies or issuers of their own shares for two years after the AIF acquires control.

3 Marketing


Following the implementation of AIFMD, marketing has become one of the more difficult issues a manager of Alternative Investment Funds has to grapple with, as managers need to consider both domestic and pan-European legislation.Under FSMA, the communication of financial promotions is restricted. Generally, financial promotions are permitted if they are made or approved by an entity authorised by the FCA. However, in the context of unregulated collective investment schemes (which will catch most private funds), there are further restrictions which limit even the scope for authorised persons to make financial promotions.Units in unregulated collective investment schemes will, to the extent made by an entity which is not authorised by the FCA, need to be marketed in accordance with the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) or, to the extent made by an entity which is authorised by the FCA, need to be marketed in accordance with either the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) Order 2001 or the provisions of the conduct-of-business rules contained as a component part of the FCA Rules.In addition to the domestic regime, additional marketing restrictions are imposed by AIFMD and the Delegated Regulation. UK AIFMs wishing to market a UK AIF or EEA AIF to retail or professional investors in the UK are required to apply to the FCA to do so. The FCA permits the marketing of a private fund to a wider group of participants than the category of “professional investors” referred to in AIFMD, provided the financial promotion rules referred to above are complied with throughout the entire marketing process.Additional legislation covering, inter alia, marketing, was proposed by the European Commission in March 2018. These proposals include a new directive (Omnibus Directive) which will amend the existing regimes for cross-border marketing of AIFs and UCITS, and a new regulation (Omnibus Regulation) which will introduce new standardised requirements for cross-border fund distribution in the EU.


Under domestic legislation, there are limited content requirements applicable to marketing materials, although there is an overarching obligation to ensure that marketing materials are “clear, fair and not misleading”. AIFMD has changed the rules somewhat, by including prescribed pre-investment disclosures which must be made to prospective investors. Whilst many of these disclosures (set out in Article 23 of AIFMD) are largely consistent with information that has historically been included in marketing materials for private funds, there are specific components of the disclosure regime which were either new or enhanced the level of detail previously provided.The requirements of the EU Prospectus Directive which catch “offers to the public” will generally not apply to the marketing of Alternative Investment Funds on the basis that the requirements



Engl

and

& W

ales


Under MiFID II, from January 2018 local government pension schemes (“LGPS”) are classified as retail investors which can lead to certain additional restrictions on marketing and distributing interests in such schemes. Following lobbying by the industry, however, LGPS are able to utilise a standardised opting-up procedure, such that retail investors can be opted-up to an elective professional status in a relatively straightforward manner.There are no additional restrictions to those which otherwise apply under the financial promotion regime.


There are no restrictions on the use of intermediaries, although if the intermediary is itself carrying on regulated activities for the purposes of the UK regulatory regime, it will need to be authorised by the FCA.


Under the current legislative and regulatory regime, there are no firm restrictions on the participation in Alternative Investment Funds – however, there may be regulatory capital costs to financial institutions in respect of their investment positions.Under AIFMD, AIFMs are limited in terms of the additional activities they are able to undertake, and therefore certain financial institutions may need to restructure their operations to ensure that they are compliant with the provisions of AIFMD.

4 Investments


Generally speaking, there are no restrictions, although the fund manager will need to ensure that the activities it is carrying out in respect of the Alternative Investment Fund are consistent with the scope of permission it has to carry out regulated activities (and with the contractual investment policy of the Alternative Investment Fund).However, AIFMD does impose certain restrictions relating to asset stripping, as described at question 2.6 above.In addition, although not restrictions, there are certain deal disclosure requirements under AIFMD. In this regard, an AIFM must notify the FCA when an AIF’s voting interest in an unlisted company passes through certain thresholds. There are additional disclosure obligations when an AIF acquires “control” of an EU company (the test as to control varies according to whether the investee company is listed or unlisted). Investments by an AIF may also trigger a requirement to make certain information available to the FCA, the investee company and remaining shareholders (including, for unlisted companies, intentions as to the company’s future business and the likely repercussions on employees). In the context of unlisted companies, relevant information must be passed to employee representatives (subject to limited exceptions).

Marketing by small AIFMs (i.e. sub-threshold firms) will be subject to a lighter-touch regime; broadly, UK small AIFMs will be able to market all sub-threshold AIFs in accordance with the domestic financial promotion regime.Off-shore managers of off-shore Alternative Investment Funds may market into the UK on the basis of the financial promotion regime. However, they will be required to comply with the transparency and (if relevant) private equity disclosure requirements imposed under AIFMD.Finally, the Omnibus Directive proposes to insert a new provision into the AIFMD to clarify the circumstances where an AIFM will be considered to have ceased marketing in a Member State.


AIFMD effectively leaves the question of marketing to retail investors to the discretion of Member States (although this is subject to change, as detailed below). The UK has retained provisions which allow marketing to retail investors. If an AIFM is permitted to market to professional investors, it can also market to certain types of retail investors (effectively qualifying high-net-worth or sophisticated investors), provided it does so in accordance with the UK financial promotion regime. The financial promotion regime has changed recently with the effect that, where the promotion is being made in accordance with the conduct-of-business rules contained in the FCA Rules, in addition to the investors having to fall within the terms of the exemptions themselves, the issuer of the financial promotion must undertake a suitability assessment to ensure that the investment is appropriate for the prospective investor. This suitability assessment needs to be undertaken prior to the point at which the financial promotion is issued.The Omnibus Directive will insert new requirements into the AIFMD where any AIFM is marketing to retail investors. The AIFM will be required to put in place “facilities” in the relevant Member State that must perform certain tasks. As the definition of “retail investor” is as defined in MIFID II, this will include investors such as high-net-worth individuals or local authorities who cannot be opted-up to MIFID professional status.From 1 January 2018, alternative investment funds being made available to retail investors must also provide a standardised, short disclosure document – a key information document (“KID”) – to investors under the PRIIPS Regulation. The KID must comply with certain detailed technical standards.


There are no “across the board” qualification requirements which apply in relation to prospective investors, although certain of the bases on which marketing is made under the financial promotion regime (or, where applicable, AIFMD) will require an analysis of the circumstances of the prospective investor.AIFMD introduces a passport which facilitates marketing to professional investors on a pan-European basis. For the purposes of AIFMD, a professional investor is one who could be so regarded under MiFID. Although most institutional investors are likely to be professional investors per se, it may prove difficult to opt people into professional status (it is a higher bar than most UK managers are used to). Investors who are not professional investors will be retail investors.



Engl

and

& W

ales

Control (“PSC”) regime. English limited partnerships are not affected by these changes and remain outside the scope of the PSC regime.The BEIS Consultation published in April 2018 included a proposal for limited partnerships to file annual reports and accounts. Although, ‘qualifying partnerships’ have been subject to the requirement for some time, it has historically been possible to structure partnership based funds such that they are not qualifying partnerships. If enacted in a manner which required all partnerships to file accounts, this could be a concern for the private funds sector due to the commercial sensitivity of the information being made publicly available.


There are no firm restrictions on the use of side letters. However, AIFMD requires disclosures as to how AIFMD ensures the fair treatment of investors and, if side letters are used to provide preferential treatment to investors, a description of the preferential treatment and the type of investors to whom the treatment is made available will need to be disclosed. If the AIFM operates a general most-favoured nations (“MFN”) mechanism, this is unlikely to be an issue; however, if no or a limited MFN process is in place, AIFMD will need to consider its use of side letters in the light of the disclosure requirements under AIFMD.

6 Taxation


UK limited partnerships are not taxable entities for UK direct tax purposes and are instead fiscally transparent. This fiscal transparency means each limited partner is treated for UK tax purposes as owning his proportionate share of the assets of the partnership and is subject to tax on the income and gains allocated to it under the limited partnership agreement (whether or not they are distributed).


The tax treatment of the manager or adviser will depend on whether it is constituted as a company or an LLP. If a company, it will be subject to corporation tax on the fees paid by the fund (at 19% and due to drop to 17% from 1 April 2020). The management team takes its remuneration in the form of salary (taxed at the highest applicable income tax rates, with national insurance contributions due too) and the excess profit can be extracted as dividend income. If the manager is an LLP, it is fiscally transparent, so the profit arising from the fees paid to the manager is automatically taxed in the hands of its members. As noted above, the salaried member rules will be used to ascertain whether a member should be taxed as a self-employed person or an employee. All of the LLP’s members, regardless of where they are resident, must pay UK tax on their share of the LLP’s profits arising from its UK trade as an investment manager/adviser.Her Majesty’s Revenue and Customs (“HMRC”) has broad powers, under new anti-avoidance rules, to tax amounts arising to an individual involved in fund management as trading income, unless such amounts are already taxed as trading income or employment


There are no such limitations.


In the context of private funds, there are currently no statutory or regulatory limitations on borrowing, although contractual restrictions are common. In the context of AIFs covered by AIFMD, certain of the pre-investment disclosures relate to the use of leverage. In particular, an AIFM must disclose: the circumstances in which the AIF may use leverage; the types and sources of leverage permitted and the associated risks; any restrictions on the use of leverage and any collateral and asset re-use arrangements; and the maximum level of leverage the AIFM is entitled to employ on behalf of the AIF.



Alternative Investment Funds structured as limited partnerships will need to comply with the registration requirements under the 1907 Limited Partnerships Act. Limited partnerships designated as PFLPs need only disclose basic details (essentially the fund’s name and address). There may be a requirement on the general partner of a UK limited partnership to file the partnership’s accounts on the basis of the Partnership Accounts Regulations.


AIFMD and the Delegated Regulation require AIFMs to comply with a range of detailed regulatory reporting obligations. Reporting obligations also apply to non-EEA AIFMs seeking to market their funds under national private placement regimes.Broadly, AIFMs will be required to make periodic reports to the FCA in accordance with AIFMD using a set of prescribed forms set out in the Delegated Regulation and in line with ESMA’s final guidelines. The EMSA guidelines, published in November 2013 and finalised in August 2014, were accompanied by a number of electronic reporting templates in XML format, together with guidance on the preparation of systems capable of generating XBRL reports. In addition to the annual reports in respect of each managed AIF, AIFM will need to provide periodic reports relating to the AIFM itself and in respect of each AIF that it manages (including information in relation to investment strategies, main instruments traded, principal exposures, risk profiles and (where relevant) leverage).The FCA has published various guidance papers and Q&As on periodic reporting, setting out what information is required and how, and when, it should be reported. The FCA has an online reporting system, GABRIEL, which assists UK AIFMs with meeting their requirements.From July 2017, fund houses that have any Scottish limited partnerships in their fund structures (commonly used as feeder and carry vehicles) need to make filings under the Persons of Significant



Engl

and

& W

ales

vehicle for Alternative Investment Funds means that income and gains received by the fund are treated as if they had been received by the fund’s investors directly. The taxation of the returns depends on whether the fund is treated as trading or investing.The question of whether or not a fund is carrying on a trade in the UK is largely a question of fact. In practice, this is determined by applying various criteria derived from case law – often referred to as “badges of trade” – to a fund’s transactions. For example, churning investments and investing and divesting opportunistically would be likely to be indicative of a trading activity, whereas holding long for income and capital would be more likely to be considered as an investment activity.Private equity funds (the main users of the limited partnership structure) usually intend to buy and hold securities for the medium to longer term in order to achieve long-term capital appreciation. Consequently, they are more likely to be considered as investing rather than trading.If the limited partnership is treated as investing then, as a result of its tax transparency, profit distributions from the limited partnership retain their character as capital gains or investment income and are taxed accordingly. The tax payable by a particular investor will depend upon its own tax profile. For example, if the fund receives dividend income, this would be taxed in the hands of a UK-resident individual but a UK pension fund investor should not be subject to UK tax on such investment income. Most non-resident investors will only be subject to UK tax on UK-source investment income to the extent that it is subject to withholding tax. Withholding taxes are potentially relevant to both UK interest and UK rental income (but not dividends), but there are reliefs from withholding. Generally, non-resident investors should not be subject to UK tax on capital gains unless: (i) they hold their interest for the purposes of a UK trade; or (ii) they fall into specific rules relating to UK residential property holdings (see below).If the limited partnership is treated as trading for UK tax purposes, UK resident investors and non-UK resident limited partners will be subject to income tax (or corporation tax on trading income) on their share of the partnership’s trading profits. This will be of particular concern for UK pension fund investors (who are only exempt from UK tax on investment income and gains). Non-UK resident investors will be caught because the partnership (or the fund manager) will constitute a taxable presence in the UK through which the non-resident is carrying on a trade, but in many cases the IME may be applicable.Investors should be aware of the annual tax on enveloped dwellings (“ATED”) and the extension of the capital gains tax legislation to ATED-related gains. The ATED rules and the capital gains tax rules will need to be considered carefully when a fund invests in UK residential property. In addition, the UK government has announced its intention to subject non-residents to UK tax on the sale of interests in UK land or interests in UK-land-rich vehicles from April 2019.Where a UK limited partnership receives income from non-UK jurisdictions that levy withholding tax, or receives capital proceeds from the sale of an asset situated in a jurisdiction which might tax that gain, then limited partners may seek to rely on the terms of a double tax treaty in order to obtain relief. Whether such relief is available will depend, in part, upon whether that non-UK jurisdiction treats a UK limited partnership as fiscally transparent.


Generally speaking, it is not necessary to obtain tax rulings prior to establishing an Alternative Investment Fund.

income or fall into exceptions for carried interest or co-investments. Where amounts from the fund arise to another person – such as a priority profit share/fee income arising to the general partner or manager – these amounts can be potentially imputed to the individual fund managers and taxed in their hands if certain conditions are met.In terms of funds structured as limited partnerships, where the general partner appoints a manager to manage the partnership, the fee payable to the manager will in principle attract value-added tax (VAT). This is most often managed by ensuring that the manager and the general partner are in the same VAT group. A recent case heard in the Court of Justice of the European Union (“CJEU”) (the Fiscale Eenheid case (C-595/13)) outlined broad criteria for what constitutes a “special investment fund” (“SIF”) for the purposes of the VAT exemption applicable in relation to SIF management services. It was also strongly suggested by the CJEU that AIFs which satisfy certain qualification criteria can be SIFs. This is a changing area of law and it is not clear how the UK’s tax authority will react to this judgment, although it is possible that its current position on the VAT treatment of management services supplied to AIFs, which satisfy the relevant SIF criteria, will have to change.The UK is not typically used as a domicile for hedge funds, but it is a popular location for investment managers of hedge funds, and this is in part because of the Investment Manager Exemption (“IME”). Provided certain conditions are met, the IME ensures that a UK investment manager managing a non-UK fund will not constitute a permanent establishment of the fund in the UK. The IME enables a non-UK resident fund that is trading for UK tax purposes to appoint a UK-based investment manager without the risk of that part of the fund’s profit that is attributable to the activity of the investment manager in the UK becoming subject to UK tax.The UK rules on the taxation of carried interest have been subject to significant change since 2015 and the general “tax transparency” principle is now overlaid with: (i) a minimum charge of 28% for carried interest (compared with 20% for other types of gains); and (ii) new rules which can recharacterise carried interest receipts as trading income, taxable at the highest marginal rates, where the fund in question has a short average holding period (the “income based carried interest” rules, or “IBCI”). The IBCI rules are complex, but broadly, where the average holding period of fund investments is less than 36 months, the carried interest returns will be treated as trading income. Where the average holding period is 40 months or more, the returns will be treated as investment gains or income. Where the average holding period is at least 36 months and less than 40 months, the returns are treated as a mix of capital gains and income. The new rules do not affect the taxation of the fund itself or external investors.


There are no establishment taxes levied in connection with an investor’s participation in an Alternative Investment Fund. Stamp duties may be payable on the transfer of limited partnership interests if the partnership property includes stock or marketable securities, although there are a number of methods of mitigating the effect of such taxes. Stamp duty land tax may be payable where the partnership property includes land.


The use of tax-transparent limited partnerships as the primary



Engl

and

& W

ales


The tax position of an investor in a UK Alternative Investment Fund will inevitably depend upon its own tax profile – accordingly investors should always seek independent advice on the tax implications of participating in the fund, and managers should advise investors of this fact.As discussed under question 6.6, UK Alternative Investment Funds will need to ensure that they are compliant with applicable due diligence/information reporting requirements under, for example, FATCA and the CRS. Further to the UK’s implementation of FATCA, the CRS and the DAC, UK Alternative Investment Funds will also want to watch the progress of the OECD’s BEPS (Base Erosion and Profit-Shifting) project (discussed under question 6.8 below) and its potential impact on their investment structures.


The UK government has announced its intention to subject non-residents to UK tax on the sale of interests in UK land or interests in UK-land-rich vehicles from April 2019, as detailed at question 6.4 above.

7 Reforms


With the triggering of Article 50 of the Treaty on European Union by the UK Parliament on 29 March 2017, the EU is now obliged to negotiate and conclude within two years an agreement with the UK setting out the arrangements for its withdrawal. At the end of the two-year period (plus any agreed extension), withdrawal takes effect even if no agreement is reached. Until the UK leaves the EU, however, the UK remains a Member State and remains subject to EU law. In December 2017, the UK Government published an updated version of its strategy paper on the UK investment management industry. This paper, “Investment Management Strategy II”, is an important signpost to the UK’s post-Brexit approach to financial services. The strategy sets out a number of objectives, including focusing on the UK’s tax and regulatory environment so that it is stable and competitive, supporting the UK to secure a global leader in innovative investment strategies and international coordination to help the industry attract overseas firms to locate in the UK and promote UK firm overseas. There will be challenges ahead to reconcile this strategy with the agreed position set out in the Phase 1 Brexit negotiations, namely that the UK will maintain full alignment with the rules of the Single Market as between Northern Ireland and the Republic of Ireland. At the same time, the UK will also need to ensure that no new regulatory barriers develop between Northern Ireland and the rest of the UK.Following the significant regulatory changes introduced by AIFMD, it would be comforting to think that there would now be a pause for breath in terms of further changes. However, the direction of travel in terms of the regulatory requirements imposed on firms operating in the Alternative Investment Funds space is clear. There is still considerable uncertainty across the UK fund management industry


The UK entered into a Model 1 Intergovernmental Agreement (IGA) with the US in September 2012 and FATCA has now been implemented in the UK from 15 April 2015. Alternative Investment Funds established in the UK will have to carry out due diligence to identify US investors and non-FATCA-compliant investors, and will then have to report information about such investors to HMRC. Compliant UK funds will not be subject to, nor will they have to operate, FATCA withholding taxes.The UK has also entered into IGAs with the Crown Dependencies of Guernsey, the Isle of Man and Jersey and Overseas Territories (UK CDOT). The IGAs between the UK and the Crown Dependencies and Gibraltar are “reciprocal”, which means that UK funds will have to carry out similar due diligence and reporting exercises in relation to their investors in those jurisdictions.In addition, the Organisation for Economic Co-operation and Development (“OECD”) Common Reporting Standard for Automatic Exchange of Financial Account Information (“CRS”) and the EU Directive on Administrative Cooperation in the Field of Taxation (“DAC”) have now also been implemented into UK law. From 2018 onwards, it is expected that required reporting under UK CDOT will be made exclusively under the CRS. Accordingly, UK funds will need to consider these rules in order to ensure that they are compliant.


Following the publication of the OECD’s final BEPS reports on 5 October 2015, the UK has taken the lead in the development and implementation of new rules relating to BEPS. For example, legislation having effect from 1 January 2017 has been introduced in order to neutralise the effect of hybrid mismatch arrangements in accordance with the OECD’s recommendations under BEPS. Legislation, to restrict the tax deductibility of corporate interest also came into force from 1 April 2017. In addition, the UK has implemented Country-by-Country reporting.The UK signed the multilateral instrument (MLI) in June 2017. As expected, the UK has adopted the principal purpose test in relation to its covered treaties, but has not extended the definition of permanent establishment or narrowed its definition of an independent agent.Funds and asset managers will need to consider the possible impact of the proposed BEPS action points on their structures.


If there is appetite to establish a listed fund, then a UK investment trust should be considered. Provided certain conditions are met, these listed companies are exempt from corporation tax on capital gains, can benefit from the general corporation tax exemptions from dividend income and can potentially deduct dividends paid to investors which represent interest income from their interest receipts.



Engl

and

& W

ales

As to English limited partnerships, the introduction of the PFLP regime has been welcomed as a positive step and should allow the UK to compete with other similar vehicles offered in other jurisdictions. The BEIS Consultation published in April 2018 contains reform proposals for limited partnerships; these included proposals designed to build in effective controls into the life cycle of a limited partnership to combat such vehicles being used for illegal activities. At the time of writing, no draft legislation has been published (and the consultation will remain open to responses until 23 July 2018): once it is, it will need to be examined carefully so as to ensure that there are no unintended consequences for the investment funds industry.After a postponement of a year, the PRIIPs Regulation finally came into force on 1 January 2018. As from that date, it requires that retail investors are provided with a standardised, short disclosure document containing key information about the product (the Key Information Document or KID) where it is made available to them in the EU. There is a transitional period for UCITS until December 2019. Consequently, many manufacturers of the types of funds which have routinely been targeted at the professional market in the past are likely to have tightened up on measures designed to ensure that distribution does not reach any retail investors. The UK Government, in March 2016, also introduced legislation to bring all UK banks within the scope of a new senior domestic managers and certification regime (SMCR). The aims of the new regime are to ensure greater clarity about the responsibilities of senior individuals within firms, as well as greater individual accountability. The FCA has indicated that it intends to extend the application of the SACR to include all non-bank firms, including UK fund managers, authorised under the Financial Services and Markets Act 2000 during 2018.In March 2018, the Regulation amending both the Regulation on European Venture Capital Funds (“EuVECA”) and the Regulation on European Social Entrepreneurship Funds (“EuSEF”) to came into effect. There has been relatively little uptake of EuVECA and EuSEF funds in the UK to date. It remains to be seen whether the changes introduced by the amended Regulation will make these funds more attractive in the UK.In short, practitioners within the industry will need to ensure that they keep abreast of developments and consider whether they should be engaging with the industry in lobbying to try and ensure that any proposed regulatory excesses can be curbed.

about how many of the AIFMD requirements should be interpreted in particular contexts, although broad consensus is starting to form in certain areas. At the time of writing, the timetable for the potential availability of passports under AIFMD for fund managers in non-EEA jurisdictions (which could include the UK, post-Brexit) remains unclear. AIFMD provides that the European Commission must carry out a review of the application and scope of the legislation by 22 July 2017. This review must be based on both a public consultation and discussions with relevant national regulators about their experiences of the application of AIFMD. Where the review indicates that it may be necessary, the Commission may propose amendments to AIFMD, with the expected resulting legislation commonly being termed “AIFMD II”. At the time of writing, the review is yet to be published. The potential amendment of the existing legislation presents potential opportunities to improve certain aspects of the current regime, but could also result in the loss of some flexibility and potentially include some developments that are considered unfavourable by the industry.The Omnibus Directive and Omnibus Regulation will make a number of direct amendments to the AIFMD regimes which are likely to have a significant impact on the marketing activities of AIFs, in addition to amendments to the UCITS and VCF regimes. The proposed timeline for the entry into force of the proposals is not yet clear. If there were a very smooth passage through the legislative process, some parts of the Omnibus Regulation could apply as early as mid-late 2019. However, the more significant provisions, and all of the new provisions in the Omnibus Directive, would be unlikely to apply before mid-late 2021 at the earliest.MiFID has now been comprehensively revised to improve the functioning of financial markets in light of the financial crisis and to strengthen investor protection by way of a recast directive and regulation, commonly referred to as “MiFID II”, which took effect in January 2018. The UK has transposed the MiFID II rules into laws and regulations but there were numerous late clarifications on the scope and application of the MiFID II rules, some last-minute concessions and also last minute finalisation of some key delegated acts. So, it is likely that 2018 will continue to be dominated by MiFID II as affected firms carry on with their implementation and finalisation of MiFID-related changes and adjust to the new requirements.



Engl

and

& W

ales

Travers Smith is a full-service law firm offering UK law advice out of its offices in London and Paris. We develop long-term relationships with clients, offering consistent teams of exceptional lawyers who have a genuine in-depth understanding and interest in the clients’ businesses. Our particular focus is on transactional work and clients within the financial services sector. As a result, we have one of the largest teams of private equity M&A lawyers in London; this is a team that has been helping clients to implement innovative strategies and structures for over 20 years, and we continue to be involved in many challenging and ground-breaking deals. In addition, our market-leading investment funds group brings together fund formation, regulatory, tax, corporate, real estate and finance expertise in an integrated practice encompassing transactional and advisory work for fund managers, executives and investors. The practice operates across the private, listed and retail funds sectors.

Jeremy is an Investment Funds partner at Travers Smith specialising in the structuring, formation and operation of Alternative Investment Funds (with a particular focus on private equity, debt, real estate and infrastructure funds). He also advises on secondaries transactions, co-investment structures, carried interest and other incentivisation arrangements, and works with a wide range of asset management houses and investors on the implementation of their alternative investment programmes.

Jeremy frequently advises on the structuring of investment management businesses, both in relation to their initial formation and subsequent internal restructurings (covering areas such as LLP conversions, general succession planning and spin-outs).

Jeremy ElmoreTravers Smith LLP10 Snow HillLondon EC1A 2ALUnited Kingdom

Tel: +44 20 7295 3453Email: [email protected]: www.traverssmith.com

Emily trained at Travers Smith and is a partner in the Tax Group. She specialises in the taxation of investment funds, acting for private equity houses, hedge funds and real estate funds.

She advises on fund formation and on tax-efficient structures for fund managers, carried interest and LLP conversions. She has particular expertise in tax structuring for non-domiciled investors and fund managers.

Emily also has extensive experience of group restructuring, international tax, joint ventures and real estate taxation. Emily is a member of the British Property Federation’s tax committee, the BVCA’s working group on BEPS and Invest Europe’s (formerly the EVCA) International Tax and Tax Reporting Group. She is the author of the Lexis PSL guide to the taxation of investment funds.

Emily ClarkTravers Smith LLP10 Snow HillLondon EC1A 2ALUnited Kingdom

Tel: +44 20 7295 3393Email: [email protected]: www.traverssmith.com



Chapter 17

Attorneys-at-Law Trust Mika J. Lehtimäki

Finland

A domestic AIFM must apply for an authorisation from the Finnish FSA. If the AIFMA authorisation thresholds are not triggered (see question 1.1), the AIFM is obligated to register with the FSA instead. Registered AIFMs are exempt from a number of the AIFMA requirements but do have to follow e.g. the reporting obligations and the marketing rules. Offering to retail clients is only allowed to authorised AIFMs or if the FSA grants an exemption from certain statutory requirements, the latter being rare. An authorised AIFM is entitled to market fund shares in a Finnish AIF after having notified the FSA accordingly, and after having provided the FSA with the statutorily specified fund documentation. The same applies to EEA AIFs.A Finnish authorised AIFM may also manage a non-EEA AIF provided that it follows the AIFMA, excluding the custody rules and the obligation to prepare an annual report. However, there needs to exist a supervision co-operation agreement between Finland and the AIF’s home state. An authorised AIFM may market non-EEA AIFs only to professional investors after having notified the FSA in writing of the marketing, together with a number of additional documents.An EEA (non-Finnish) AIFM may manage and market Finnish AIFs under the same conditions as Finnish AIFMs (to professional or retail investors) after it has completed a process under which it makes a notification to the competent authority of its home jurisdiction, and receives a subsequent notice from the same competent authority.In addition, a non-EEA fund manager may offer EEA or non-EEA AIFs only to professional investors in Finland, after having notified the FSA and after having received the FSA’s approval, which is subject to more stringent requirements.


The entities subject to the obligations under the AIFMA are the management entities, i.e. the AIFMs. AIFs are not, as such, regulated. However, the AIFMA naturally sets forth a number of filing, disclosure, notification and registration requirements in relation to individual AIFs. However, it is the AIFM that is obligated to fulfil the obligations under the law.


Different rules on the management of liquidity and asset valuation apply, depending on whether the AIFs managed are closed-ended



The Finnish Mutual Funds Act (MFA) (the primary law on Undertakings for Collective Investments in Transferable Securities (UCITS)) classifies Alternative Investment Funds into two main categories:■ undertakings authorised to operate in an EU/EEA (later EEA)

state which, under their domestic law, fulfil the requirements of the EU UCITS Directives (UCITS funds are not discussed here); and

■ other funds including non-UCITS authorised within and outside the EEA (AIFs) managed by Alternative Investment Fund Managers (AIFMs).

The rules on AIFM implement Directive 2011/61/EC on Alternative Investment Fund Managers. The Directive and the relevant regulations have been adopted in Finland through the Act on Alternative Investment Funds (AIFMA) and the implementing regulations. The AIFMA contains a number of exceptions to the scope of its application. The AIFMA authorisation obligation applies to fund managers managing, through one or several funds not covered by the UCITS Directive, more than €100 million for leveraged funds or more than €500 million for unleveraged funds. The latter higher threshold requires also e.g. that any redemption rights are blocked for a period of five years following the initial investment. AIFMs below these thresholds and any funds managed by them are subject to so-called “registration obligation”, which is somewhat less onerous a procedure than applied to the fund managers requiring authorisation (i.e. where the thresholds are exceeded). The AIFMA applies in practice to all fund managers managing funds not covered by the UCITS laws.In addition to AIFM authorisation or registration, AIFMs may need to take into consideration the rules regulating publication of a prospectus approved by the Finnish Financial Supervision Authority (FSA) in relation to the offering of securities (closed-ended funds) under the Finnish Securities Markets Act (this may apply, in addition, to the AIFMA).


Yes, the authorisation or registration obligations apply in practice to all collective investment vehicles not covered by the UCITS rules.


Finl

and

Attorneys-at-Law Trust Finland

may carry out the valuation of the assets of the AIFs internally if its asset valuation function is, operatively and otherwise, independent from the portfolio management functions. If the asset valuation function is carried out internally, the FSA may require a separate asset valuation by an external professional or an auditor.


An EEA (non-Finnish) AIFM may manage and market Finnish AIFs after having completed the notification process. Management of a Finnish AIF may commence on the date the foreign EEA AIFM receives confirmation from its home country authority that the notification has been disclosed to the FSA. Marketing is allowed (of a Finnish or other EEA country AIF) under the same conditions as for domestic AIFMs. Marketing of fund shares to retail clients is only allowed to authorised AIFMs or if the FSA grants an exemption from the requirements on exceptional grounds. In relation to offers to retail investors, all Finnish marketing legislation becomes directly applicable, requiring, e.g., preparation of a Key Investor Information Document. An EEA-based non-Finnish AIFM may market fund shares in non-EEA AIFs to Finnish professional investors under the same rules as Finnish AIFMs.A non-EEA fund manager may offer AIFs to professional investors in Finland after having received approval/confirmation from the FSA. The notification must contain information detailing, inter alia, how:■ the non-EEA fund manager complies for each AIF with

detailed regulatory obligations (extensive);■ Finland and the AIF host country must have in place a co-

operative agreement for controlling systemic market risks;■ the AIF host country is not in the FATF (Financial Action

Task Force) High-risk and non-co-operative jurisdictions list;■ Finland and the AIF host country must have in place an

agreement corresponding to the OECD Model Tax Treaty; and

■ the FSA is provided with information on the fund manager and on all AIFs marketed in Finland for purposes of the statutory reporting obligations.

The FSA may, for an exceptionally weighty reason, grant a licence to a fund manager to offer non-EEA AIFs to retail investors. We have not seen this exception being applied.


The FSA has signed 24 regulatory co-operation agreements with national authorities (as of May 2018) of non-EEA countries in relation to AIFMs. The European Securities and Markets Authority (ESMA) publishes a list of such signed agreements.

2 Fund Structures


The main legal structures used for AIFs in Finland are:■ limited partnerships; and■ limited liability companies (also public limited liability

companies).

funds or open-ended funds. Closed-ended funds have more permissive minimum liquidity requirements and, usually, less frequent valuation requirements. In addition, closed-ended funds may be subject to obligations relating to offers of securities, such as prospectus obligations. Therefore, closed-ended funds also need to take into consideration whether they operate within securities offering exceptions. The AIFMA applies both to private equity and hedge funds.


A domestic AIFM must be a Finnish limited company, have its head office in Finland, and have an initial capital of at least €125,000 (externally managed AIF) or €300,000 (internally managed AIF). The AIFM must have its management and its shareholders approved by the FSA. The application must include a programme of operations, containing a summary description of the organisation of the AIFM and information on the managed AIFs. The content requirements are extensive. The application handling time is three months from the submission, which time can be extended by the FSA with an additional three-month period. The application must contain information concerning e.g.:■ the ownership, management and accountants of the AIFM;■ organisation of operations, salaries and compensation as well

as outsourcing;■ investment strategies, risk profiles and other such features;■ destination countries, rules, custody arrangements; and■ information of the AIFs to be managed and marketed.Marketing of EEA AIFs by a Finnish AIFM follows the standard notification procedure and can be carried out promptly. A notification by a Finnish AIFM intending to market non-EEA AIFs in Finland must contain information detailing, for example, how:■ the AIFM complies with the Finnish marketing rules for

AIFs;■ Finland and the AIF host country have in place a co-operative

agreement for controlling systemic market risks;■ the AIF host country is not in the Financial Action Task Force

(FATF) High-risk and non-co-operative jurisdictions list;■ Finland and the AIF host country have in place an agreement

corresponding to the OECD Model Tax Treaty; and■ the AIFM has disclosed to the FSA information on providers

of certain management tasks for the AIFM.If the AIFM and the AIF are under a registration, instead of an authorisation obligation (see question 1.1), the FSA handling period has been ca. one to three months. Please see also question 1.8 concerning the management of Finnish AIFs by non-domestic AIFMs.


To obtain an AIFM authorisation in Finland, the AIFM must be a Finnish limited liability company and have a Finnish-registered head office. However, as discussed above, the offering of Alternative Investment Funds is made possible to various EEA and non-EEA fund managers (see question 1.5).


An AIFM is generally required to have a nominated depositary and a certified auditor for itself and for each AIF it manages. An AIFM


Finl

and


The organisation of the management of the AIFM is also affected by rules concerning the outsourcing of functions of the AIFM, the most strict rules applying to the outsourcing of portfolio and risk management.AIFMs and AIFs investing in unlisted companies are also subject to asset-stripping rules that apply for 24 months from the acquisition of the control in the relevant company. Such investments are also subject to fairly extensive disclosure obligations to the authorities, the employees and the target company both in relation of the terms of the arrangement as well as the fund’s objectives.

3 Marketing


The AIFMA and the AIFM implementing regulations govern the production and offering of marketing materials of AIFs in Finland. A number of the provisions of the Finnish Investment Services Act (implementing e.g. the EU Markets in Financial Instruments Directive and regulation MiFID and MiFID II) are applied to AIFMs.


The general content requirement is that the AIFM must keep available, in relation to each AIF it offers and markets, material and sufficient information about the funds as well as any changes to such information. The key content requirements are as follows (non-exhaustive):■ a description of investment strategy, objectives and risks of

the AIF;■ information about the AIF, AIFM, depositary, auditor and

service providers;■ information about any delegation of AIFM functions;■ a description of assets which the fund invests into, investment

restrictions and related risks;■ a description of the valuation procedures and liquidity risk

management;■ fees, charges and expenses borne by the investors and the

redemption procedures;■ a description of how the AIFM ensures fair treatment of

investors;■ leverage and the leverage policy;■ its latest annual report;■ a description of outsourcing arrangements and the prime

broker; and■ historical performance and latest net asset value.An AIFM marketing to non-professional investors will also have to provide a key investor information document for each AIF unless the FSA grants any exemptions.


Marketing of AIFs in Finland requires prior notification to the FSA, depending on the category of investors to whom the AIF will be marketed, and the nationality of the AIF/AIFM. Please see questions 5.1 and 5.2 concerning disclosure obligations and regular reporting obligations.


It is very common that the investors have only a limited liability in AIFs. In limited partnerships, the investors are silent partners whose liability is limited to the invested amount. Possible participation in the management does not usually have an effect on the limited liability. In relation to limited liability companies, the liability is likewise limited to the invested equity of a particular investor.


AIFMs applying for authorisation in Finland are required to be structured as private or public limited liability companies. Companies retained for advisory services are also often limited liability companies.


Generally, redemptions are included as a part of the contractual provisions incorporating or regulating the AIF. Redemption rights determine the nature of the fund (closed or open), the categorisation of which is based on EU Commission Delegated Regulation 694/2014. According to the Regulation, an AIFM of an open-ended AIF is considered to be an AIFM managing an AIF the units of which are, at the request of any of its shareholders or unitholders, repurchased or redeemed prior to the commencement of its liquidation phase or wind-down, directly or indirectly, out of the assets of the AIF and in accordance with the procedures and frequency set out in its rules or instruments of incorporation, prospectus or offering documents. Therefore, there are no explicit redemption time-periods, but the procedures agreed determine the nature of the fund. However, if the period is over five years, the AIF is a closed-ended fund. Transfer restrictions generally depend on the rules or instruments of incorporation of the fund.


Generally no. However, if units of the particular fund may only be offered to professional investors, transfer of units to retail investors is not allowed. Also, the articles and rules of the fund may naturally contain transfer restrictions and are very common.


The AIFM cannot generally carry out any other business than fund management and certain ancillary investment services. The diversification requirements of a fund/AIF are usually set out in the fund documentation. The own funds of the AIFM must be maintained in cash or liquid assets, not containing speculative elements. Importantly, an AIFM must separate its risk management function from its other functions both operatively and hierarchically. Furthermore, provisions concerning the use and disclosure of used leverage in the AIFs is strictly regulated as is investing in securitised assets – requiring the fulfilment of additional conditions.


Finl

and


EEA licence, or the company will need to have been notified under the EU financial services legislation in Finland.


No. Financial institutions naturally are subject to risk regulatory investment restrictions and limits on risk concentrations.

4 Investments


AIFMs may carry out portfolio management and risk management functions. In addition, if a part of its licence is externally managed, a licenced AIFM may offer asset management services and investment advisory and deposit functions for financial instruments, broker and dealer functions. Generally, no other activities are allowed.


Generally no. There is a specific type of domestic AIF (special investment fund), whose structure is governed by the UCITS rules but whose management falls under the AIFMA. The special investment fund is subject to certain investment restrictions.


The AIFM must disclose and approve the limits for the leverage it employs. In addition, the level of FSA supervision and regulatory actions depends on the level and perceived leverage risk of the fund. Furthermore, the AIFM has to prove upon request to the FSA that the leverage thresholds are appropriate and have not been exceeded at any time.



The AIFM must disclose periodically the following information to the investors in each AIF it manages:■ the percentage of the AIF’s assets which are subject to special

arrangements arising from their illiquid nature;■ any new arrangements for managing the liquidity of the AIF;■ the current risk profile of the AIF and the risk management

systems employed by the AIFM to manage those risks; and■ if the AIF is employing leverage, the AIFM must on a regular

basis disclose changes to the maximum level of leverage, any right of reuse of collateral or any guarantee granted under the financing arrangement, and the total amount of leverage.

Furthermore, the AIFM must inform AIF investors and other relevant parties, of potential conflicts of interest in its investment operations.


Marketing to retail investors is restricted. The obligation to act in accordance with good securities markets practice, and prohibition from giving misleading or false information, cannot be waived in marketing even when the reverse solicitation (professional investors) rules apply.We describe below the general rules used in determining whether the marketing thresholds are being triggered in Finland (i.e. Finnish law applies). Generally, “marketing” in Finland triggers the registration and authorisation requirements set out in question 1.2.Marketing covers, e.g., advertising in mass media, direct marketing channels and specific investor presentations, distribution of advertising material or brochures, and the oral presentation of information and at meetings specifically organised for investors. Offering of AIFs is also included if the institution solicits orders from Finnish customers by means of remote sales techniques, advertising or visits of relationship managers soliciting “services” or “orders”. Already, generally targeted marketing measures in Finland relating to the offering of the AIF may trigger the licensing requirements. The use of websites is not likely to be considered cross-border provision of AIFs if the AIFM does not otherwise market or offer AIFs and if it does not intend to acquire customers resident in Finland.Finnish investors may still be in contact with the fund manager based on previous contacts or otherwise at their own initiative without triggering the licensing requirements. If the customer initiates the initial contact itself, the licensing obligation is not likely to be triggered. The so-called reverse solicitation exception is fairly extensive in Finland. In such case, the investors are able to waive most statutory requirements that would otherwise apply.


AIFs may be marketed to retail (non-professional) investors in Finland subject to approval from the FSA. Marketing is restricted to AIFs being managed by Finnish and EEA AIFMs. In addition, Finnish and EEA AIFMs subject to the registration obligation may offer AIFs to retail investors subject to FSA approval.


The AIFMA distinguishes between marketing to professional and retail investors. Professional investors are those who qualify as professional investors under MiFID I and MiFID II. Retail investors are investors who do not qualify as professional investors under MiFID I and MiFID II rules.


No, there are no such additional restrictions.


The intermediaries will need to have an investment services company authorisation or a banking licence in Finland, or have an


Finl

and



An AIFM which is established as a limited liability company will generally be subject to tax treatment as described in question 6.1 (limited liability companies). It should be noted that various forms of AIFM compensation (carried interest, management fees and other such items) need to be considered separately.


Generally no. However, transfer of shares in a limited liability company (unlisted) triggers a 1.6% transfer tax liability (2% for share purchases in real estate holding companies).


The tax treatment for investors depends, e.g., on the legal structure of the AIF, the assets of the AIF and whether the investment is made by a corporation or a private person. Resident investors that are limited liability companies are generally taxed as described in question 6.1 to the extent the AIF is also a limited liability company. If the AIF share (limited liability company) is held by a private person, the income may be taxed, depending on the situation either as income, capital income or dividend income. The classification of income (e.g. personal, corporate or capital gains income) on the investor level may also depend e.g. on the net assets of the AIF, both if the AIF is a limited liability company or a limited partnership.Non-resident investors are usually subject to withholding tax (corporate entity 20%, private person 30%) on dividends and other profit distributions in Finland, unless otherwise provided for in an applicable tax treaty with Finland and the country of residence. If the recipient is resident within the EEA, the exemption method will be applicable e.g. on the dividends, subject to certain provisions. Capital gains are generally not taxable in Finland if received by non-resident investors. This requires careful analysis. The overall tax treatment depends largely on the type of income, recipient’s domicile, EU law and the relevant tax treaty. Real estate-based income is not usually exempted from Finnish tax even in relation to tax treaty persons.


It is advisable to assess the tax consequences prior to establishing an AIF in Finland (or investing in it), both in relation to the form of the AIF and the types of investment assets.It should be noted that the description under this section 6 with respect to taxation is limited and of very general nature and contains only a limited number of relevant tax issues that might arise for an AIF or AIFM in Finland. It is in some cases advisable to seek an advance tax ruling for the establishment of an AIF from the Finnish tax authorities.


The AIFM must publish an annual report for each AIF it manages no later than six months following the end of the financial year. The annual report must be audited and prepared in accordance with the accounting rules and standards of the AIF’s home state.An AIFM is also obliged to report to the FSA (as a minimum) the following information for each AIF it manages:■ the main markets and instruments the AIFM trades on behalf

of the AIF;■ information the AIFM is required to disclose to its investors

(see question 5.1);■ the main categories of assets the AIF has invested in; and■ the results of stress tests which the AIFM is required to carry

out.There are also additional reporting requirements in relation to situations where an AIF acquires control over a non-listed company.


No, the use of side letters is not restricted and they are used often, especially by institutional investors.

6 Taxation


Finnish AIFs are normally structured either as limited liability companies or limited partnerships.Limited liability companies are taxed according to general tax rules applying to companies. Limited liability companies may, subject to exceptions, be exempted from corporate tax on dividends received from other (portfolio) domestic limited liability companies or from capital gains received from the sale of shareholding or portfolio companies (subject to specific requirements) in Finnish limited liability companies or similar entities established within the EEA. The same exemption may also apply in relation to share investments outside the EEA area, usually provided that the company holds at least 10% of the shares and votes in the company. This usually also requires careful analysis and review of the relevant tax treaties. Limited liability companies are subject, for other types of income, to corporate tax, usually at the general rate of 20% (May 2018) (net taxable income).An AIF formed as a limited partnership is treated as a flow-through entity in Finnish taxation but is treated as a single unit for tax and accounting purposes. The AIF is, as such, not subject to taxation. The profits of the AIF are taxed directly as the partners’ income and any subsequent actual distributions are not taxed again in Finland. The level of taxation of the partners may not be the same and will depend on other income of the relevant partner, its corporate form, domicile and other factors of the partner (investor).Accrued losses (preceding 10 years) may be deducted from the profit before the allocation to partners. Losses are calculated on the partnership level and are generally not deductible by the partners themselves.


Finl

and


the LPs, and to some extent the asset class (e.g. real estate-related profits may be treated differently) and whether the AIF distributes the income or profits annually or at the final phases of the fund.


According to our analysis, there are not meaningful tax changes anticipated in the coming 12 months that would affect Alternative Investment Funds.

7 Reforms


There are no pending reforms having a direct effect on AIFMs. However, the planned debt-for-equity swaps legislation may be of significance for operational aspects of AIFs.


Finland and the US signed an agreement relating to the implementation of FATCA in 2014 and reporting has commenced as of 2015. In 2015, the Finnish tax authorities issued guidelines on how the FATCA treaty will be applied.


Finland signed the agreement 7 June 2017, but has not yet ratified it. Certain double tax treaties such as the Nordic income tax treaty are excluded from its scope. Also, the BEPS does not alter the existing provisions of, e.g., permanent establishments, because Finland has made a reservation concerning the matter.


A large proportion of AIFs are structured as limited partnerships, because, unlike limited liability companies, they are treated as flow-through entities in Finnish taxation (a single unit for tax and accounting purposes). In some cases, it is advisable to use a two-tier fund structure (with a holding entity), but these situations may relate to, in addition to tax, the investor base and the funding instruments utilised by the AIF and AIFM.


The nature of tax issues that arise depends on, e.g., on the structure of the fund, the advisory and management agreements and the nature of the AIF’s business. We feel that the parties should pay special care to the fees under management and advisory contracts and transaction fees, the location and permanent establishment of

TRUST is a niche law firm that focuses on M&A, Banking & Finance and Tech/IT. We advise institutional investors, funds, corporate boards and management both in domestic and cross-border transactions and ‘bet-the-company’ assignments.

Mika is one of the leading Banking and M&A lawyers in Finland.

He has extensive experience on Finnish and cross-border M&A and banking and financial transactions in the Nordic area and Russia. Mika has graduated from the University of Helsinki in addition to which he holds two post-graduate law degrees from the University of Oxford, where he also acts as a researcher in the Law Faculty (international financial law).

Mika has, throughout his career, served especially the interests of foreign clients in complex financing and M&A transactions taking place in Finland.

Mika J. LehtimäkiAttorneys-at-Law Trust Mikonkatu 1700100 Helsinki FInland

Tel: +358 40 534 2273Email: [email protected]:www.thetrust.fi


Chapter 18

Lacourte Raquin Tatar

Damien Luqué

Martin Jarrige de la Sizeranne

France

■ if it is located in a third country, apply for a specific approval from the AMF in order to manage French AIFs, subject to meeting the conditions as set out in French Monetary and Financial Code, the AMF General Regulation and the relevant AMF instruction.

AIF advisers: In order to be able to provide French AIFs with investment advice, any French entity must either: ■ be authorised and regulated in France by the French banking

authority (the “ACPR”) as an investment services provider (either a credit institution or an investment firm), authorised to provide financial investment advice in France;

■ be authorised and regulated in France by the AMF as a portfolio management company authorised to provide financial investment advice in France, provided that such activity is carried out on an ancillary basis;

■ be registered in the ORIAS register as a French financial investment adviser (conseiller en investissements financiers – “CIF”) and be affiliated with one of the professional associations authorised by the AMF; or

■ if it is located outside France but in another Member State of the EU, be authorised by its local authority as an investment services provider and comply with the passporting notification procedure in accordance with the EU Directive 2014/65/UE (the “MiFID”).


The French Monetary and Financial Code distinguishes between three (3) categories of AIFs: ■ French AIF de jure (open to both retail and professional

investors) which must be authorised and are regulated by the AMF;

■ French AIF de jure (eligible to professional investors only) which are regulated by the AMF and whose creation, amendment or termination must be notified to the AMF pursuant to a specific notification procedure; and

■ French AIF de facto, i.e. any entity which qualifies as an AIF pursuant to the definition of AIFs in the AIFMD, which are not authorised by the AMF or subject to a notification procedure with the AMF. Such AIFs are submitted to general rules applicable to any AIF, in particular information requirements with the AMF.



The following legislation and regulations govern the establishment and operation of French Alternative Investment Funds (“AIF”):■ The French Monetary and Financial Code (including the

French ordinance No. 2013-676 of 25 July 2013 which implemented the EU Directive 2011/61/UE on alternative investment funds managers (the “AIFMD”) into French law);

■ Delegated Regulation (EU) No. 231/2013 of the European Commission of 19 December 2012;

■ relevant legal or regulatory provisions in the French Commercial Code and the French Insurance Code;

■ the General Regulation of the Autorité des marchés financiers (the “AMF” – the French financial markets regulator);

■ the following AMF Instructions and positions: 2002-01, 2003-03, 2004-07, 2006-18, 2007-19, 2008-04, 2008-14, 2010-05, 2011-01 and 2011-02, 2011-05, 2011-10, 2011-15, 2011-19 to -23, 2011-24, 2011-25, 2012-06, 2012-11, 2012-12, 2013-16, 2013-22, 2014-02, 2014-03, 2014-04 and 2014-09;

■ relevant ESMA’s doctrine (Guidelines, Q&A, Opinion, Recommendations, etc.); and

■ French Tax Code (Code général des impôts – “CGI”) and administrative regulations (Official Tax Bulletin, BOFip).


AIF managers: In order to be able to manage French AIFs, any manager must either: ■ if it is located in France, be authorised and regulated by the

AMF as a French portfolio management company authorised to manage AIFs; or

■ if it is located outside France but in another Member State of the European Union (“EU”), be authorised by its local regulator as an AIF manager and comply with the passport notification procedure pursuant to the AIFMD; or


Fran

ce

FranceLacourte Raquin Tatar

■ OPCI; and■ FFA.

■ French AIFs opened to professional investors: ■ FPVG; and ■ OPPCI.

■ Employee savings funds (FCPE and SICAVAS). The AMF issues an authorisation for the creation of these products after checking in particular (i) the compliance of the product with the regulations, and (ii) that unitholders or shareholders are properly informed through the information indicated in the regulatory documents, as well as in the letters sent to clients when there is a material change to the strategy of the product they hold.French AIFs are authorised and monitored by the AMF which checks the information supplied in (i) the regulatory documents: the key investor information document (“KIID”) (relevant for AIFs distributed to retail investors) and prospectus, to which are attached the rules for an FCP or the articles of association for a SICAV, and in (ii) the marketing materials.In practice, an authorisation file (whose content is described in relevant AMF instructions) must be sent to the AMF through the online platform “GECO” (if the management company is regulated by the AMF). Once a complete file is received by the AMF, the latter issues an acknowledgment of receipt which mentions the authorisation deadline (one month (i.e. 23 business days) from the issuance of the acknowledgment of receipt). Notification process with the AMF: Certain French AIFs de jure reserved to professional investors are not subject to the AMF prior approval but their creation, modification or termination are subject to a notification process with the AMF. Such process covers the following categories of AIFs: ■ FPCI; ■ FPS; and■ SLP.Constitution of such AIFs must be notified to the AMF within one month following the date of their constitution, through a notification file (whose content is described in the relevant AMF instruction). Once a complete file has been received by the AMF, the latter issues an acknowledgment of receipt within eight business days. Authorisation process for AIF managers: French portfolio management companies shall receive the approval of the AMF in order to be able to manage AIFs. The AMF can decline its approval for several reasons, such as:■ the management company does not fulfil the required

conditions; and■ when the monitoring mission may be hindered by “the existence

of a capital relationship or a direct/indirect control, between the requesting company and other company or individual”.

As a matter of principle, any French portfolio management company must have two executives with a good reputation and sufficient experience, one of whom is present on a full-time basis at the management company’s office. A person responsible for compliance and internal control functions must be appointed.The minimum initial capital is EUR 125,000, which must be fully paid up. Any French portfolio management company must also comply with own fund requirements. The AMF grants its authorisation within three month from the receipt of a complete authorisation file. In practice, the authorisation process may be longer depending on the internal organisation of the future management company or the additional requirements from the AMF.


As a matter of principle, most French AIFs de jure are open-ended vehicles. The sole closed-ended AIF is the SICAV (as defined below). Nevertheless, most of the French AIFs may provide for redemption restrictions provisions depending on the eligible investors or invested assets, e.g. liquid or illiquid assets (such as real estate assets, securities of unlisted companies, etc.). The French Monetary and Financial Code distinguishes between the following categories of AIFs de jure:■ French AIFs open to retail investors:

■ generic investment funds (fonds d’investissement à vocation générale – “FIVG”);

■ private equity investment funds (fonds de capital investissement – “FCPR”, “FCPI” or “FIP”);

■ real estate investment funds (organismes de placement collectif immobilier – “OPCI”);

■ closed-ended investment companies with fixed share capital (sociétés d’investissement à capital fixe – “SICAF”); and

■ alternative funds of funds (fonds de fonds alternatifs – “FFA”).

■ French AIFs opened to professional investors: ■ generic professional investment funds (fonds

professionnels à vocation générale – “FPVG”); ■ professional real estate investment funds (organismes

professionnels de placement collectif immobilier – “OPPCI”);

■ professional private equity investment funds (fonds professionnels de capital investissement – “FPCI”);

■ professional specialised investment funds (fonds professionnels spécialisés – “FPS”); and

■ special limited partnerships (sociétés de libre partenariat – “SLP”).

■ French employee savings funds (fonds d’épargne salariale – “FCPE” and “SICAVAS”).

■ French financing vehicles:■ securitisation vehicles (which may qualify as AIFs if they

meet certain criteria); and■ specialised financing vehicles (organismes de financement

spécialisé – “OFS”). In practice, real estate investment funds (OPCI, OPPCI); private equity investment funds (FCPR, FCPI, FIP, FPCI); FPS and SLP (if redemptions of their shares or units are limited) may include gates or other limitation of redemption requests.


Authorisation granted by the AMF: Creation or material amendments of certain French AIFs de jure are subject to the prior authorisation of the AMF. The authorisation process covers the following categories of AIFs: ■ French AIFs opened to retail investors:

■ FIVG;■ FCPR, FCPI and FIP;


Fran

ce

Lacourte Raquin Tatar France

2 Fund Structures


Any French AIF de jure may use the following legal structures: ■ a mutual fund (fonds communs de placement – “FCP”); ■ an investment company with a variable capital (sociétés

d’investissement à capital variable – “SICAV”) either in the form of a public limited company (société anonyme – “SA”) or a simplified limited company (société par actions simplifiée – “SAS”); or

■ a special limited partnerships (“SLP”) only if the French AIF is a professional specialised investment fund (see below).

By definition, any AIF de facto may take the form of any type of legal structure (civil or commercial company, trust, other contractual forms, etc.).


For unitholders in a mutual fund (“FCP”):Liability of unitholders in FCPs is limited up to the amount of their commitment. For unitholders in an investment company with a variable capital (“SICAV”) and limited partners in a special limited partnership (“SLP”):Liability of shareholders or limited partners is limited up to the amount of their contribution.For general partners in a special limited partnership (“SLP”):Liability of general partners is unlimited.


Managers and advisers of AIFs generally use the following legal structures: ■ a simplified limited company (“SAS”); or■ a public limited company (“SA”).


Yes. For French open-ended funds, redemptions may be restricted by the AIF manager only on a temporary basis, in exceptional circumstances and in the unitholders’ or shareholders’ interests. Some French AIFs can include gate provisions or lock-up periods expressly stated in their documentation.In addition, transfers of shares of open-ended funds in the form of an investment company (“SICAV”) must not be subject to any restrictions.For SICAF (closed-ended AIF) or AIF eligible to professional investors only, there are no limits on the AIF manager’s ability to restrict transfers or redemptions. Rules regarding the transfer or redemption of units or shares are provided for in their by-laws.


The official headquarters of the portfolio management company and its effective management shall be located in France.


In addition to the portfolio management company, any AIF is required to appoint, at least, the following service providers:■ a depositary, responsible for (i) safeguarding the assets of the

AIF, and (ii) ensuring the compliance of management decisions; ■ a statutory auditor, responsible for certifying the accounts of

the AIF; and■ for real estate investment funds (OPCI and OPPCI): two

external valuers of real estate assets (or only one external valuer for professional real estate investment funds (OPPCI)), in addition to the abovementioned service providers.


For European managers or advisers which benefit from the European passport “in” pursuant to the AIFMD or the MiFID: When foreign managers or advisers manage or advise French AIFs on a cross-border basis pursuant to the passporting regime, they are submitted to the supervision of the competent authority of their home Member State. However, they have to comply with some good conduct rules applicable in France (namely: rules applicable to marketing and information to investors or potential investors; rules on marketing materials; good conduct rules on financial solicitation (“démarchage”) if relevant, etc.). For foreign managers located in a third country which may not benefit from the AIFMD passport regime:Foreign managers managing French AIFs must meet stringent requirements in the absence of AIFMD passporting regime, including the following requirements: ■ compliance with all provisions applicable to French portfolio

management companies which derived from the AIFMD;■ the AMF’s prior approval;■ appointment of one or more third-party service providers to act

as depositary(ies) and notify the AMF of such appointment;■ there must be appropriate cooperation arrangements in

compliance with the AIFMD between the AIF manager’s home country regulator and the AMF for systemic risk oversight in line with international standards; and

■ the home country must not be listed as a risk country pursuant to the FATF.


The AMF has entered into many co-operation or information sharing agreements with foreign regulators or governments. The list of such agreements (in English) are available at the following address: http://www.amf-france.org/en_US/L-AMF/Relations-institutionelles/Accords-et-actions-de-cooperation/Conventions-bilaterales?langSwitch=true.


Fran

ce


If the AIF benefits from the passporting regime pursuant to the AIFMD, the AMF must also be provided with the legal documents of such AIF in the context of the notification process. Regarding marketing materials, the AMF is entitled to ask to be provided with any marketing materials related to any AIF marketed in France, prior to their publication or dissemination.


Marketing AIFs in France is subject to the notification process with the AMF (if the relevant AIF is marketed to professional investors) or a prior approval by the AMF. The concept of marketing adopted by the AMF is wider than the definition of marketing provided for in the AIFMD. The AMF defines the marketing as an “offering” or “placement” of units or shares of an AIF, i.e. their presentation by different means (advertising, direct marketing, advice) with a view to encouraging investors to subscribe to or purchase them. The AMF specifies in its position No. 2014-04 that certain activities shall not be considered as acts of marketing in France. Amongst them, the AMF includes the concept of “pre-marketing”, which is not considered as marketing shares or units of AIF in France, and then is not subject to any authorisation or notification process with the AMF.The pre-marketing consists of, inter alia, contacting 50 investors at most in order to estimate their level of interest before launching an AIF, provided that: (i) such practice is conducted among professional investors or retail investors whose initial subscription is greater than or equal to EUR 100,000; and (ii) such practice does not involve the delivery of a subscription form and/or document presenting definitive information on the characteristics of the AIF.The concept of pre-marketing will soon be harmonised within the EU, as a project of Directive amending the AIFMD includes a new definition of pre-marketing.


Yes, if the AIF is duly authorised in France to be marketed to retail investors. Nevertheless, please note that at this stage, the AIFMD passporting route does not apply for retail investors.


There is no qualification requirements applicable to prospective investors in AIFs de jure opened to retail investors (unless the documentation of the relevant AIF provides for specific qualification requirements).For AIFs de jure opened to professional investors, investor must be either:■ a professional investor within the meaning of MiFID; ■ any investor provided that the amount of its initial investment

is at least equal to EUR 100,000; ■ any investor provided that the subscription or acquisition of

shares or units is performed in its name and on its behalf by an investment services provider acting in the context of the service of portfolio management;

■ as the case may be, any retail investors if the AIF is ELTIF pursuant to the EU Regulation No. 2015/760; or


There is no legislative or regulatory restriction applicable to transfer of shares or units of AIFs opened to retail investors. For AIFs opened to professional investors, any transferee must qualify as a professional investor or meet the conditions as set out in law or applicable regulations in order to be able to acquire shares or units of the relevant AIF (e.g. acquire shares or units for an amount at least equal to EUR 100,000).


Yes. AIF managers must comply with specific diversification constraints (risk-spreading ratios, control ratios, etc.) applicable to certain French AIFs. Such requirements differ depending on the category of AIFs. In particular, generic investment funds (“FIVG”), private equity funds opened to retail investors (FCPR, FCPI and FIP) or real estate investment funds (“OPCI”) are subject to strict rules regarding diversification ratios and asset stripping. Certain diversification rules do not apply to certain AIFs opened to professional investors. In particular, specialised professional investment funds (“FPS”) and special limited partnerships (“SLP”) are not submitted to any restriction in terms of diversification, asset stripping or control.

3 Marketing


Rules regarding the production and offering of marketing materials for AIFs marketed in France are provided for in:■ the French Monetary and Financial Code; ■ the General Regulation of the AMF; and■ the relevant AMF instructions and guidelines applicable to

the content requirements of marketing materials.


As a matter of principle, marketing materials must be accurate, clear and not misleading, irrespective of the communication medium used (including social network media). Marketing materials must be clearly identifiable as such. AMF Position No. 2011-24 provides for details regarding the AMF requirements on the content of marketing materials.For instance, the AMF requires a strict balance between risks and benefits of any AIF marketed in France. Thus, risks must be as visible as benefits in any marketing documentation. In addition, marketing materials must mention the existence of the prospectus and the KIID (if relevant) of the relevant AIF.


Legal documents of French AIFs de jure must be approved or notified (depending on the type of AIF) by the AMF.


Fran

ce


For private equity investment funds (FCPR, FCPI, FIP and FPCI): Such AIFs may borrow cash up to 10% of their assets. For real estate investment funds (OPCI and OPPCI): OPCIs may borrow cash up to 10% of the value of their non-real estate assets. For FIVG, FPVG, FFA: These AIFs may not borrow cash on an ongoing basis. They are only allowed to borrow cash on a temporary basis and either:■ for an amount which does not exceed 10% of their assets; or■ with the objective of acquiring real estate properties which

are necessary to their business and for an amount which does not exceed 10% of their assets.

The total amount of cash borrowing used pursuant to the above indents does not exceed 15% of its assets. For FPS and SLP: There is no legal or regulatory restrictions on borrowing by a FPS or a SLP. Rules on cash borrowing are specified in their prospectus or by-laws.



Before any investment made by a potential investor, the AIF manager must make available all information listed in Article 23 of the AIFMD, namely: ■ a description of the investment strategy and objectives; ■ the identity of the AIFM, the AIF’s depositary, auditor and

any other service providers and a description of their duties and the investors’ rights;

■ a description of any delegated management function;■ a description of the AIF’s valuation procedure and of the

pricing methodology for valuing assets; ■ a description of the AIF’s liquidity risk management,

including the redemption rights both in normal and in exceptional circumstances, and the existing redemption arrangements with investors;

■ a description of all fees, charges and expenses and of the maximum amounts thereof which are directly or indirectly borne by investors;

■ the latest annual report;■ the procedure and conditions for the issue and sale of units or

shares;■ the latest net asset value of the AIF or the latest market price

of the unit or share of the AIF;■ where available, the historical performance of the AIF;■ the AIF or its portfolio management company shall provide

the unitholders or the shareholders with an annual report including several elements:■ the annual accountings;■ the annual activity report;■ the main changes which occurred during the year; and■ remunerations paid (all the employees or just those

concerned by the AIF referred).In addition, the AIF or its portfolio management company shall provide the unitholders or the shareholders with the following documents: ■ semi-annual report or quarterly report; and ■ semi-annual or quarterly asset composition.

■ for private equity professional AIFs (FPCI, FPS or SLP), any member of the management team or the management company or any person who assists the management company and whose initial investment is at least equal to EUR 30,000.


No. However, some French pension funds or retirement schemes may be subject to specific investment constraints/policies.


No. However, activities carried out by the intermediaries in the context of the fundraising process may qualify as investment services within the meaning of the MIFID. Consequently, such intermediaries may have to be authorised as investment services providers or duly authorised to provide such regulated services in France (e.g. CIF).


No, there are no restrictions.

4 Investments


Yes. By definition, an AIF cannot carry out any industrial or commercial activities. For AIF de jure in the form of an investment company (SICAV), the company purpose of such vehicles is limited to the management of a portfolio of securities and deposits. There is a similar restriction for real estate funds (OPCI, OPPCI, SCPI), which are not authorised to conduct any commercial activities other than those specifically provided for by law.


Yes. There are many limitations on any investments made by an AIF. For instance, cash borrowings, investment in certain types of securities or financial derivatives, use of guarantees, short selling, etc. are subject to strict limitations provided for in the French Monetary and Financial Code. Most AIFs de jure are also subject to diversification constraints (risk spreading ratios), control ratios and counterparty risk ratio. Only specialised professional investment funds (FPS and SLP) are not submitted to such restrictions.


Cash borrowing is limited for certain French AIFs.


Fran

ce


Alternative investment funds taking the form of partnerships or co-ownerships of assets:Investment funds existing as SLPs (sociétés de libre partenariat) or FCPs (fonds communs de placement) are tax transparent. As a result, profits and gains they realise are not taxed at the level of the fund but at the level of partners/unitholders (see question 6.4). This mainly concerns the following forms of funds:■ FCPs;■ FCPRs (FCPRs are specific types of FPCIs) and SLPs (SLPs

envoy the exact same tax regime as FCPRs);■ FCPIs and FIPs (FCPIs and FIPs also are specific types of

FCPRs);■ FCTs (securitisation vehicles); and■ OFS (if incorporated as mutual funds).


Fees invoiced by management companies are generally fully subject to CIT under standard rules. Subject to certain exceptions, such fees are generally exempt from VAT.French law provides for a favourable tax regime with respect to distributions paid and gains realised on sales of carried interest shares by carried interest shareholders, under certain conditions. This tax regime applies to:■ carried interest units issued by FCPR or FPCIs as from 30

June 2009 or by equivalent European venture capital funds; and

■ carried interest shares issued by SCRs as of 30 June 2009 or by equivalent European venture capital.

Under this regime, gains on carried interest shares or units are first deemed to be a tax exempt reimbursement of equity subscriptions (to the extent of such equity subscription) and are thereafter treated as a capital gains on securities for individual tax purposes (subject to a flat taxation at the rate of 30%, see question 6.4).When the above regime is not applicable, distributions to which carried interest shares or units entitle and net capital gains on the sale or redemption of carried interest shares are subject to individual income tax as salaries, and are also are subject to social contributions.


Subject to the exceptions referred to below, no transfer taxes are generally due in relation to the sale or the redemption of units/shares in mutual funds or SLPs.However, a 5% transfer tax applies to sales or redemptions of shares/units in SPPICAVs and FPIs where the purchaser (i) if an individual, owns or will own more than 10% of the shares/units after the transfer, and (ii) if a legal person or a fund, owns or will own more than 20% of the shares/units after the transfer.Also, standard transfer tax rules apply to sales or redemptions of shares in funds existing as corporations (i.e. SICAVs and SCRs). As a result, (i) a 0.1% transfer tax applies to sales of shares in SICAVs or SCRs (existing as stock corporations) provided that they do not qualify as property companies for French transfer tax purposes and (ii) a 5% transfer tax applies to sales of their shares if they do.

Any French portfolio management company must also publish and/or make available to the investors in the AIFs it manages information on: ■ its policy on complaints handling;■ its voting policy; ■ the way it takes into account environmental, social and

governance criteria in its management policies (on its website and/or in its annual report);

■ its internal remuneration policy (for instance through an independent remuneration policy statement, a periodic disclosure in the annual report or any other form); and

■ its policy on execution of orders.


In addition to the reporting obligation or the public disclosure as referred to in question 5.1, any French AIF manager must regularly report to the AMF, for each AIF it manages, the following information: ■ the percentage of the AIF’s assets which are subject to special

arrangements arising from their illiquid nature;■ any new arrangements for managing the liquidity of the AIF;■ the current risk profile of the AIF and the risk management

systems employed by the AIF manager to manage the market risk, liquidity risk, counterparty risk and other risks including operational risk;

■ information on the main categories of assets in which the AIF is invested; and

■ the results of the stress tests. AMF instruction 2014-09 describes the process to file such reports.


No. However, entering into side letters with one or more investors would qualify as granting preferential treatment with such investors, within the meaning of the AIFMD. Preferential treatments granted to investors are not restricted, provided that they do not result in an overall disadvantage to other investors. Information on preferential treatment must be disclosed within the prospectus of the relevant AIF and the investors in the relevant AIF must be informed that preferential treatments have been granted to one or more other investors.

6 Taxation


Alternative investment funds taking the form of corporations:As a rule, corporations are subject to corporate income tax (“CIT”) in respect of all the profits and capital gains they realise. However, specific provisions of the French Tax Code provide for a CIT exemption on the profits realised by certain forms of investment funds with respect to the profits and capital gains derived from the operations they realise in accordance with their corporate purposes. This concerns SICAVs, SCRs and SPPICAVs.Other funds existing as corporations are generally subject to CIT under standards rules.


Fran

ce


However, most of the international tax treaties concluded by France provide for withholding tax rates that vary from 0% to 15%, depending on the tax jurisdiction of the investor (being however specified that investment funds do not enjoy the benefits of all double tax treaties entered into by France).

No taxation generally applies in France on distribution reflecting the interest income received by the fund from French companies.

Except when they are distributed by FPIs (for which they are subject) or SPPICAVs (for which they are fully subject to dividend withholding tax), no taxation generally applies in France on distributions reflecting capital gains realised by the fund from the disposal of shares in a French company unless the unit holder, his/her spouse and their relatives in the ascending and descending line, hold, directly or indirectly, more than 25% of the rights in such underlying company.

ii) Taxation of capital gains made upon disposal of the fund units or shares

Subject to the exceptions below regarding SPPICAVs/FPIs and to specific exceptions, no taxation generally applies in France in respect of capital gains derived from the disposal of a fund’s units, unless the unitholder, his/her spouse and their relatives in the ascending and descending line, hold, directly or indirectly, more than 25% of the rights in one of the French companies of its portfolio (or in the fund). French regulations do not make a distinction between pension fund investors and other investors.

Notwithstanding the above, capital gains derived by non-residents from sales of shares in (i) SPPICAVs in which they hold 10% or more of the shares and (ii) FPIs are generally taxable in France:■ at a rate of 34.43% for legal persons; or■ at a rate of 19% for individuals (and social contributions).


No, it is not.


FATCA has been implemented in France insofar as France and the United States entered into an intergovernmental agreement regarding FATCA on 14 November 2013.Regarding Common Reporting Standard (CRS), France has issued a complete set of guidance for French reporting financial institutions. On 8 September 2017, France transmitted the CRS returns for the reporting year 2016.Implementation of FATCA and CRS is still ongoing in France. For instance, Article 56 of France’s Amending Finance Bill for 2017 includes provisions related to the obligations of financial institutions in relation to the FATCA, CRS and the European Directive on Administration Cooperation in Taxation provisions related to financial accounts, notably regarding carrying and archiving the audit trail of their client due diligences, as well as their supervision by the French financial regulator (in addition to the tax authority). The draft mentions also new penalties for financial institutions and clients in case of failure to meet some requirements.


A distinction should be made between domestic and foreign investors:1) French tax residents

i) Individuals When they invest in funds existing as corporations (e.g. a

SICAV), individuals are generally subject to income tax on the distributions paid by such funds. In respect of such distributions, individuals are treated as if they had directly derived the underlying profits (distributed capital gains are treated as capital gains and redistributed dividends are treated as dividends for tax purposes). At the level of the investors, dividends and capital gains are then treated in the same manner for individual tax purposes. Both are subject to a flat tax at the rate of 30% (12.9% income tax + 17.8% of social levies). Capital gains derived from the disposal of units are subject to the same taxation regime.

When they invest in funds existing as mutual funds (FCPs), individual are technically deemed to directly derive the income realised by such funds on the year in which they are effectively distributed (tax transparency regime).

But it is important to note that notwithstanding the above, provided that they commit to retain their shares/units for at least five years and subject to (i) the concerned funds respecting certain investment ratios (notably to invest 50% of their assets in securities issued by certain non-listed European companies, see question 6.8), and (ii) the concerned individuals not holding more than 25% of the share capital of the companies in which the concerned funds have invested, individuals may enjoy an individual income tax exemption on the dividends and gains derived from units or shares they hold in FCPRs, SCRs and SLPs.

ii) Companies subject to corporate income tax According to a so-called “mark-to-market” rule,

companies that are subject to French CIT and that hold units in a fund are generally subject to CIT in respect of any change in the liquidation value of the units they hold in a French fund. This holds true whatever the legal form of the fund (mutual fund or corporation) and whatever its location. Also, any distributions or capital gains realised upon disposal of the fund units and that has not been already subject to CIT under the mark-to-market rule are subject to corporate tax at the ordinary rate.

However, it is important to note that FCPRs, SCRs, SLPs, SPPICAVs, FPIs and certain FCPs (investing at least 90% of their assets in shares) are not subject to this mark-to-market rule. Corporate investors are rather taxed according to a tax transparency regime upon any redistribution of profits and gains by these funds. Corporate investors may notably benefit from the French participation-exemption regime in respect of capital gains distributed by FCPRs, SCRs and SLPs i.e. 88% CIT exemption on capital gains, subject to the underlying shares being eligible to such participation-exemption regime (which is not the case for shares in property companies).

2) Non-French tax residentsi) Taxation of income received by the fund and

distributed to the investors Distributions paid to European individuals or corporate

investors generally are subject to a withholding tax at the rate of 12.8% for individual investors who are EEA tax residents or 30% for any other investor (i.e. 28% from 2020, 26.5% from 2021 and 25% from 2022) if the distribution reflects dividends received by the fund from French companies.



FCPIs and FIPs must invest up to a certain percentage of their assets within a period of twelve months following their last closing date and are allowed to invest on a limited basis in listed companies and/or holding companies.


Not to our knowledge.


The Directive of the Council of the European Union dated 20 June 2016 (ATAD Directive) should be transposed into French tax law as of 1 January 2019. It mainly addresses interest limitations and hybrid mismatches. Most of its provisions are more or less covered by existing French interest limitations. However, Article 4 provides for a new limitation on deduction of exceeding borrowing costs (i.e. net financial income) to 30% of the taxpayer’s earnings before interest tax, depreciation and amortisation (“EBITDA”), subject to a possibility for Member States to adopt a group safe harbour rule. Member States may also allow a full deduction of exceeding borrowing costs of up to EUR 3 million. We do not know yet how this rule will be transposed into French legislation and whether in doing so, French parliament will soften existing interest limitation rules.

7 Reforms


■ Following the transposition of MIFID II into French law and the separation between investment firms and portfolio management companies, many AMF instructions and guidelines have yet to be updated and adapted to the new regime.

■ A regime applicable to the new securitisation vehicles and the OFS (the French decree describing the new regime applicable to these vehicles to be published).

■ At the EU level, a directive and a regulation on facilitating the cross-border distribution of collective investment funds.


Action 6 (to prevent treaty abuse): France already has anti-abuse clauses in some tax treaties. It is expected that more will be added either through bilateral treaties or the multilateral instrument (“MLI”). France has announced its intention to implement a purpose principal test, which means that the provisions of a tax treaty would not be granted automatically. In this respect, justification of the presence of the Alternative Investment Fund in a jurisdiction, as well as arguments that the structure does not mainly intend to minimise French taxes, may be required.Action 7 (permanent establishment status) is likely to be implemented as part of the MLI.


Investors in SCRs, FCPRs (as well as FPCIs, and FIPs) and SLPs may benefit from a favourable tax regime, which depends notably on the composition of the fund’s asset (see question 6.4).In order to benefit from this regime, SCRs and FCPRs must invest 50% of their assets in eligible investments issued by commercial companies organised in France and/or the EU (limited exemptions are available for investments made in holding companies and/or investment funds organised in the European Economic Area (“EEA”) where appropriate tax treaties are in place). FPCIs must invest at least 50% of their assets in equity, equity related securities or securities giving access to capital issued by non-listed companies (eligible investments). However:■ FCPIs must, in addition, invest up to 70% of their assets

in eligible investments issued by innovative companies organised in France, the EU or (where appropriate tax treaties exist) the EEA.

■ FIPs must, in addition, invest up to 70% of their assets in eligible investments issued by SMEs organised in a specific geographic areas of France, the EU or (where appropriate tax treaties exist) the EEA, and up to 20% of this quota must be invested in newly formed companies.

Fran

ce


Fran

ce


With more than 50 qualified lawyers and legal practitioners, of which 16 are partners, the firm is organised around three major areas of expertise: mergers & acquisitions; real property transactions; and tax, assisted by recognised experts in the field of financing, regulatory, public business law and litigation.

The firm has developed a strong expertise in property finance, banking and financial regulation. We act on behalf of arrangers, lenders, debt funds, insurers and mezzanine funds in setting up a full range of loans and financial products.

We also assist industrial groups, institutional investors and investment funds in structuring and setting up financing arrangements.

In addition, we are involved in asset management (in particular, in structuring and marketing collective investment schemes) and in financial regulatory matters (banking regulation, investment services, crowd-funding, insurance) on behalf of credit institutions, investment firms, crowd-funding platforms, management companies and French and international institutional investors.

The partners’ strong involvement, in-depth knowledge of the clients and their business sector, as well as the ability to address the most complex issues are the guarantees of high added-value support.

Year after year, the firm’s success has been reckoned throughout the loyalty and development of its client base, which primarily consists of major groups and professionals with the highest of expectations.

Lacourte Raquin Tatar advise on domestic and international deals for French and foreign clients.

Damien Luqué is an experienced financial and regulatory lawyer, focusing his practice on Investment Funds & Asset Management.

He works closely with credit institutions, management companies and institutional investors in the structuring of investment vehicles in the form of AIF, other AIFs, UCITS and other collective investment products.

Damien Luqué joined Lacourte Raquin Tatar as a partner in January 2018. He was previously part of the Banking and Finance team at CMS-Francis Lefebvre. From 2008 to December 2014, Damien developed his practice in the Financial Market department at the Allen & Overy LLP Paris Office. On this occasion, he was seconded as an associate in the AXA REIM SGP legal team (2012), as well as in the equity division team at the Paris Office of Goldman Sachs (2010).

He speaks French and English.

Damien LuquéLacourte Raquin Tatar36 rue Beaujon 75008 Paris France

Tel: +33 1 58 54 40 70Email: [email protected]: www.lacourte.com

Martin Jarrige has been an associate in Lacourte Raquin Tatar since March 2018. He specialises in financial law and he regularly assists investment services providers, French or foreign MiFID firms and asset management companies on asset management matters, investment fund formation, various financial and banking regulatory aspects and compliance matters.

Previously, Martin Jarrige was an associate within the Financial Services team of CMS Francis Lefebvre from January 2016.

He speaks French and English.

Martin Jarrige de la SizeranneLacourte Raquin Tatar36 rue Beaujon 75008 Paris France

Tel: +33 1 58 54 40 00Email: [email protected] URL: www.lacourte.com


Chapter 19

Flick Gocke Schaumburg Christian Schatz

Germany

sophisticated investors with a minimum commitment of EUR 200,000 (different threshold of EUR 100,000 under European Venture Capital Fund Regulation).


The KAGB contains substantial distinctions. The definitions open-/closed-ended follow European regulations. Before the KAGB, the distinction open-ended/closed-ended was decisive on the regulation, as the management of open-ended fund was subject to regulation, whereas closed-ended funds could be managed without regulation.Nowadays, the distinction matters as it decides:(1) which regulatory regime the AIFM can be subject to. The

small AIFM regime is only available to managers of closed-ended funds. All other funds trigger a AIFM licence under the KAGB; and

(2) the KAGB provides for fund-related product regulation on open-ended funds generally, but only for closed-ended funds addressing also retail investors, whereas closed-ended funds addressing semi-professional and professional investors are minimally regulated if not providing debt.


The authorisation process on AIFM follows the AIFMD. Although the AIFMD deadline of three months applies, prospective fund managers should consider a duration of the BaFin process of more than three months.The approval times on AIFs vary as well. The KAGB provides for various deadlines; due to additional demands by and discussions with BaFin, often these deadlines are not met.


The local residency requirements under German follow the AIFMD.


German law does not provide for additional service providers to the AIFMD. A depositary and an external valuer may be required



The establishment and operation of alternative investment funds is governed by the Kapitalanlagegesetzbuch – KAGB, which is the Alternative Investment Fund Manager Directive – AIFMD transposition legislation in Germany introduced in 2013.Certain activities in connection with a fund, like solicitation services, are regulated in the MiFID transposition legislation (Kreditwesengesetz, Wertpapierhandelsgesetz) or additional domestic law like the Gewerbeordnung.In addition, the European legislation like the European Venture Capital Fund Regulation and the European Long-Term Investment Fund (ELTIF) regulation apply.Before the introduction of the KAGB, it was possible to establish and operate closed-ended AIFs without triggering regulation in Germany.


Following the AIFMD, it is required to register or license an alternative investment fund manager. Germany provides for a small-AIFM regime with stricter requirements than the AIFMD.Advisors do not per se fall under the KAGB as long as no outsourcing occurs, but investment advisory services may fall under the Kreditwesengesetz transposing the MiFID rule on such advice into German law.The supervisory body is in both cases Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin.


AIFs which address also retail investors need several approvals from BaFin to be marketable in Germany.If the AIFs only address so-called semi-professional and professional investors to qualify as a Spezial-AIF, technically no further steps are required, but BaFin requests a(n) (informal) notification on their raising. Professional investors are defined under the AIFMD. Semi-professional investors are defined under domestic law as


Ger

man

y

Flick Gocke Schaumburg Germany

beside an auditor, dependent on the regulatory regime to be applied (exemptions for small AIFMs).


Funds domiciled in Germany can be managed from abroad following the AIFMD cross-border rules. Germany has transposed these generally following the AIFMD. The regulatory requirements are therefore on a level playing field with domestic fund managers. Please note that in practice these structures are rare due to deficiencies of the German tax system (mainly management fee may be subject to VAT).The advice to funds domiciled in Germany can be subject to regulation as investment advice (see above).


Germany has historically a widespread network of regulatory co-operation or information sharing agreements with most of the relevant jurisdictions. In the course of the AIFMD transposition, also AIFMD agreements were entered into. With some jurisdiction like Mauritius no agreements exist. For further information see https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Merkblatt/WA/mb_130722_internat_koopvereinbarungen_kagb_en.html.

2 Fund Structures


The fund structures vary on open-/closed-ended funds:(1) Open-ended funds are traditionally arranged as

Sondervermögen (contractual funds), but can also arranged as investment stock corporations.

(2) Closed-ended funds are due to tax reasons most often structured as limited partnerships. Since 2018, corporate forms are also tax efficient and may be used in future more often.


The limited liability is generally ensured by the legal form of the AIFs.


Traditionally, most firms are established as corporations. Regulatory law also allows the use of limited partnerships which are used sometimes also for tax planning reasons.


The closed-ended fund concept also allows a restriction on transfers (redemptions are typically not foreseen).

Open-ended funds generally provide for a regular redemption right which can only be suspended in limited cases defined in the fund agreement and provided applicable minimal capital requirements are met. Interests in open-ended funds are generally transferable, but certain restrictions can be implemented.


Yes, the two main restrictions are:■ If a fund qualifies as a Spezial-AIF, the fund agreement needs

to contain a transfer restriction to semi-professional and professional investors.

■ If a fund qualifies for tax purposes as a Spezialinvestmentfonds, a restriction on transfers to individuals needs to be implemented and the number of investors needs to be limited to 100.


The KAGB provides for various requirements on assets to be invested is dependent on the type of the funds which can be categorised as follows:■ Funds addressing also retail investors are subject to detailed

asset rules excluding also certain investments.■ The asset allocation rules on open-ended funds focus on

ensuring the liquidity of the fund assets and therefore focus on fungible assets and limit other assets. Dependent on the investor and fund status (Spezial-AIF) releases can be agreed.

■ Closed-ended Spezial-AIFs are generally flexible on assets beside rules on debt investments.

■ Germany introduced detail rules on loan origination which distinguish between open-and closed ended funds and whether shareholder loans, loan notes or plain loans are issued. Reliefs are granted on secondary loan acquisitions.

■ Closed-ended one-asset funds are generally possible, but open-ended funds need to comply with diversification rules.

The KAGB transposed the AIFMD asset stripping rules with the intention of a 1:1 transposition.

3 Marketing


The production and offering of marketing materials by the AIFM is governed by the KAGB which transposes the AIFMD concept on AIFs focused on semi-professional and professional investors. Detailed domestic rules apply on funds which also address retail investors.


On funds addressing retail investors also, detailed rules on fund terms, as well as on the disclosure of the investment strategy and assets, exist. BaFin has issued certain guidance which needs to be adhered to in order to receive approval.


Ger

man

y


Banks are subject to the European banking supervisory rules. Germany provides for additional separation rules which in most cases do not apply.Insurance companies are to asset-related requirements under German insurance regulations and Solvency II.Many pensions schemes are subject to asset-related requirements under German domestic law (Anlageverordnung).

4 Investments


Generally, AIFs need to restrict their activities to investing. Other AIFs than Spezial-AIF are subject to detailed product regulation. Debt fund activity is subject to regulation.


Open-ended funds are subject to diversification rules and also limitations on eligible investments. Closed-ended funds can generally be operated as single asset funds. Retail closed-ended funds are subject to restrictions on eligible assets. Specific rules apply on loan origination.


The KAGB does not provide for a general leverage limit, but special types of funds like retail closed-ended funds are subject to leverage caps. Also the regulatory status of AIFs and loan originating funds varies in case of leverage.



AIFMs and the AIFs are subject to the AIFMD reporting and public disclosure requirements.


German AIFMs and AIFs are subject to the AIFMD reporting and public disclosure requirements. In addition, a reporting to Bundesbank needs to be made on a monthly basis. Foreign AIFMs and AIFs are subject to the AIFMD reporting requirements.

On Spezial-AIF, the rules are more liberal. Regarding open-ended funds, the documentation follows standards agreed with the fund industry, whereas on closed-ended funds, a large variety of offering documents can be found in the market. The focus is on disclosure to reduce liability issues.


Documents on funds addressing retail investors also need to be approved for marketing. On other domestic funds with domestic managers, no such approval is required. Please note that cross-border marketing approvals do not require technically a registration or approval of documents, but the documents are to be provided in the marketing approval application.


The restrictions vary depending on the home jurisdiction and the investors to be addressed. To summarise briefly, the main restrictions are:■ Retail investors: marketing is allowed, but only by licensed

AIFMs and it is subject to compliance with the detail retail fund rules.

■ Semi-professional and professional investors: Marketing is generally allowed, but full AIFMD compliance may be required on funds addressing semi-professional investors.

■ Small AIFMs: No relief for third country AIFMs. EU AIFMs can be approved if their home jurisdiction also allows marketing by small German AIFMs.


Yes, but this is subject to restrictions (see above).


Semi-professional and professional investors need to be identified and documents whereby semi-professional investors also require a constitutive confirmation by the AIFM.


No. Please note that public bodies may not qualify as professional investors and therefore trigger additional requirements.


Besides outsourcing cases, intermediaries should consider whether there services are subject to financial market regulation. Solicitation is generally regulated in Germany.



Ger

man

y



The German authorities are issuing rulings, but are restrictive on certain questions.


Germany has concluded a model 1 intergovernmental agreement with the US. CRS was implemented in Germany in 2017.


Germany is currently revising its tax rules in this respect further, but has already introduced domestic and treaty bases additional tests (BEPS Action 6) and limitations on avoiding permanent establishment and profit attributions (BEPS Action 7).


Investors should consider a higher likelihood of becoming taxable with real estate-related income, in particular, as plans exist to tax also gains realised by a disposal of foreign property holding companies.


The main advantage for managers is that management services are not per se VAT-exempt. Investors are liable to pay withholding taxes.


The German government may tighten the rules for the taxation of investment income and may also limit the German participation exemption further.

7 Reforms


No significant reforms are expected. The Investment Tax Act was reformed with effect from 2018.


Within the limits of the AIFMD, the use of side letters is not restricted.

6 Taxation


The treatment depends on the legal form of the AIF:■ Partnerships are taxed under the ordinary partnership taxation

rules; the fund is generally transparent, but can be subject to trade tax if the fund is seen as being trading.

■ All other AIFs fall under the Investment Tax Act assuming an opaque treatment of the AIF. The AIF is taxable, but only with a limited number of income items (e.g. German dividends, German real estate-related income). The income is subject to corporate income tax of 15% and under certain conditions also to trade tax.


A corporation as management or advisory entity is subject to German corporate and trade tax (tax burden up to 33%).


No, there are not.


Funds falling under the Investment Tax Act:■ Resident investors: private individuals are subject to the flat

tax on investment income (25% plus solidarity surcharge plus church taxes, all other investors are fully taxable); investors need to figure in minimum tax base (Vorabpauschale) and taxation on gross amount of distribution.

■ Non-resident investors: not subject to taxation.■ Pension funds: mostly tax exempt.Partnerships: ■ Resident investors: subject to taxation with income realised

from the fund, but tax exemption on capital gains and dividends potentially achievable.

■ Non-resident investors: in case of a trading activity taxed like German investors; in case on non-trading, German taxation only in limited cases, also subject to treaty protection.

■ Pension funds: in case of a trading activity taxed like German investors; in case on non-trading, German taxation only in limited cases, also subject to treaty protection.


Ger

man

y

Flick Gocke Schaumburg stands for tax-focused legal advice. We combine outstanding expertise in German and international tax law with specialist know-how in other areas of business law particularly relevant to our clients. By concentrating on tax and tax-related fields and thus working in a selection of specialist areas of business law for over 40 years, we have gained a degree of expertise which enables us to provide our clients with expert and comprehensive advice. Our interdisciplinary teams of corporate lawyers and tax lawyers advise both initiators and investors on all legal, tax and regulatory aspects of private equity, venture capital, infrastructure, real estate and debt funds.

Christian Schatz has advised for more than 17 years (before Flick Gocke Schaumburg at SJ Berwin LLP/King & Wood Mallesons LLP) initiators and investors on tax and regulatory aspects of private equity, venture capital, infrastructure, real estate and debt funds. For many years, Christian acted as board member of the German Venture Capital Association – Bundesverband deutscher Kapitalbeteiligungsgesellschaften e. V. lobbying the AIFMD and Solvency II transposition, as well as many tax projects. He is a member of the tax and regulatory board of Invest Europe.

Christian SchatzFlick Gocke Schaumburg Brienner Straße 29 80333 MünchenGermany

Tel: +49 89 80 00 16 0Email: [email protected]: www.fgs.de



Chapter 20

Vivien Teu & Co LLP

Vivien Teu

Sarah He

Hong Kong

AIFs offered by way of private placements only (and hence not authorised by the SFC) are not directly subject to specific legislation that governs their establishment and operation, but as mentioned above, intermediaries that offer AIFs or the managers or advisers of such AIFs are subject to licensing and regulation. The Securities and Futures (Amendment) Ordinance gazetted in 2016 provides the framework for open-ended investment funds structured in corporate form, and it would soon be possible to establish Hong Kong domiciled open-ended AIFs in the form of an open-ended fund company structure with variable capital. The detailed rules and code for open-ended fund companies promulgated by the SFC (OFC Rules and Code) are undergoing legislative process, and are expected to be effective soon so that the structure can become available before the end of 2018. Once effective, the establishment of retail or non-retail AIFs in the form of a Hong Kong domiciled open-ended fund company structure would be subject to the OFC Rules and Code.


As noted in question 1.1, Hong Kong managers of AIFs are required to be licensed by the SFC to conduct Type 9 regulated activity of asset management, and are thereby subject to regulation by the SFC in conducting its business of managing AIFs. AIFs that are not managed in Hong Kong are not subject to specific requirements by the SFC, other than the securities offering restrictions and the requirements for persons engaged in the marketing of the AIFs to hold a licence by the SFC to conduct Type 1 regulated activity of dealing in securities.Hong Kong advisers to AIFs are required to be licensed by the SFC to carry on business in the Type 4 regulated activity of advising on securities unless any relevant exemption applies, subject to applicable conditions. A Hong Kong adviser may provide the relevant advisory services solely to its group company under a group company exemption. Besides, a company that advises on or manages a portfolio of “private equity” or “venture capital” which does not involve securities (the definition of which excludes shares or debentures of a company that is a private company within the meaning of section 11 of the Companies Ordinance (Cap.622)) may not by itself attract a licensing requirement.


AIFs are not themselves required to be licensed or authorised unless they are marketed or offered to the public in Hong Kong. AIFs



Investment Funds that are offered in Hong Kong are primarily subject to the Securities and Futures Ordinance (SFO) regarding offers of securities (including forms of collective investment schemes as widely defined), including requirements for funds to be offered to the public to be authorised by the Securities and Futures Commission (SFC), and also applicable provisions relating to private placement offers including to “Professional Investors” as defined in the SFO. The conduct of business in regulated activities relating to securities and the futures market is subject to potential licensing requirements under the SFO. Persons engaged in the business of offering Alternative Investment Funds (AIFs) are required to be licensed by the SFC to carry on the Type 1 regulated activity of dealing in securities, unless any relevant exemption applies. Hong Kong managers of AIFs are required to be licensed by the SFC to conduct Type 9 regulated activity of asset management, and are thereby subject to regulation by the SFC in conducting its business of managing the AIFs, including applicable requirements under the SFC Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) and the SFC Fund Manager Code of Conduct (FMCC).AIFs that are marketed or offered to the public in Hong Kong must be authorised by and are subject to the applicable requirements of the SFC, including under the SFC Code on Unit Trusts and Mutual Funds (UT Code). AIFs may be authorised for public offer under the UT Code as “specialised schemes”, expressed to cover any scheme whose primary objective is not investment in equities and/or bonds, or any scheme falling within one of the specified categories or which does not meet the general core requirements of the UT Code on investment limitations and prohibitions. The specified categories that may be authorised as specialised schemes under the UT Code are such as futures and options funds, hedge funds, fund of hedge funds, structured funds or funds that invest in financial derivative instruments, and also index funds (applicable to exchange-traded funds). Retail AIFs are prohibited under the UT Code from investing in any type of real estate (including buildings) or interests in real estate (including options or rights, but excluding shares in real estate companies or real estate investment trusts (REITs)). On the other hand, the establishment and operation of REITs in Hong Kong are subject to authorisation by the SFC pursuant and subject to the requirements under the SFC Code on REITs.


Hon

g K

ong

Vivien Teu & Co LLP Hong Kong

to form or establish local investment funds, and the SFO does not differentiate between local funds or offshore funds in the conduct of regulated activities of licensed persons or offers of securities (which may hence cover collective investment schemes or AIFs of any jurisdiction). Non-retail AIFs may be formed as a Hong Kong domiciled unit trust and it will soon be possible to establish a Hong Kong domiciled open-ended fund company. However, AIFs are not restricted to Hong Kong domiciled funds and may be domiciled in other jurisdictions by adopting legal vehicles available in the relevant jurisdiction. Hong Kong managers of AIFs quite commonly adopt fund vehicles in the form of an open-ended or closed-ended fund company or limited partnership structure in an offshore tax neutral jurisdiction. This is also the case for retail AIFs where the regulations do not prescribe whether the funds are Hong Kong domiciled or foreign funds to be authorised by the SFC for offers to the public in Hong Kong. For example, Cayman domiciled funds may and have been established and authorised by the SFC as retail funds offered to the public in Hong Kong, subject to the SFC authorisation process and complying with the requirements of the UT Code. Foreign funds may also be authorised in Hong Kong, broadly speaking under two available schemes: (1) schemes established in recognised jurisdictions (the “Recognised Jurisdiction Schemes” (RJS) (the majority of which are UCITS funds domiciled in Luxembourg, Ireland and the United Kingdom)); and (2) schemes to be authorised under the mutual recognition of funds (MRF) arrangements currently with jurisdictions including Mainland China, France and Switzerland.AIFs to be offered to the public in Hong Kong (subject to SFC authorisation) or AIFs that may be offered on a private placement basis by intermediaries in Hong Kong are similarly not subject to any local domicile or local qualification requirements. Under the UT Code, the management company of a retail AIF can be based outside Hong Kong in one of the acceptable inspection regimes published by the SFC. However, a non-Hong Kong based retail AIF is required to appoint a Hong Kong representative.Upon the OFC Rules and Code becoming effective, an AIF that adopts the structure of a Hong Kong domiciled open-ended fund company must appoint at least one Hong Kong licensed manager (see question 1.7).


The service providers that are typically required for AIFs would include the fund manager, the investment manager or investment advisor (if distinct from the fund manager), the trustee (if established as a unit trust structure)/custodian (in the case of mutual fund corporations), fund administrator, valuation agent (if distinct from the fund administrator), auditor, prime broker (in the case of hedge funds) and marketing agent/distributor. Having said that, Hong Kong law and regulations do not specifically prescribe requirements for having specific service providers or the qualifications of service providers of AIFs, unless the AIFs are to be offered to the public in Hong Kong which would then be subject to the requirements under the UT Code applicable to the service providers, including on the fund manager, investment manager, trustee/custodian and auditor. Besides this, under the proposed OFC Rules and Code, there shall be specific requirements on the board of directors of open-ended fund companies, on the investment manager (at least one investment manager licensed or registered to conduct Type 9 regulated activity of asset management must be appointed), and also on the custodian and auditor of open-ended fund companies.

that are marketed or offered to the public in Hong Kong must be authorised by the SFC, such as falling within one of the categories of specialised schemes to be authorised in accordance with and subject to the applicable requirements of the UT Code, as mentioned in question 1.1. Upon the issue of the final OFC Rules and Code as mentioned in question 1.1, AIFs established in the form of Hong Kong open-ended fund companies would be subject to registration with and regulation by the SFC thereunder.


The regulatory regime in Hong Kong does not distinguish between open-ended and closed-ended AIFs or otherwise differentiate between different types of funds or strategies, except that AIFs that are to be offered to the public in Hong Kong would need to be authorised by the SFC and comply with relevant requirements of the SFC which may be specific to the type of funds or strategies. As mentioned in question 1.1, the Securities and Futures (Amendment) Ordinance gazetted in 2016 specifically provides the framework for open-ended investment funds structured in corporate form, and AIFs to be established in the form of Hong Kong domiciled open-ended fund company structure shall be subject to prescribed requirements under the OFC Rules and Code.


As noted in question 1.3, AIFs that are not marketed or offered to the public in Hong Kong are not required to be licensed or authorised by the SFC. The authorisation process for AIFs (e.g. hedge funds) that are offered to the public in Hong Kong involves the review by the SFC of the funds themselves and the offering documents in respect of the funds, as well as the key operators of the funds pursuant to the requirements set out in the UT Code.A new fund application for the authorisation of SFCs is generally expected to take one to three months from the date the application is taken up by the SFC, depending on factors such as whether the fund under application is a sub-fund under an existing SFC-authorised umbrella fund, whether the fund is managed by existing approved managers managing other existing SFC-authorised funds with good regulatory records, the extent of the fund’s use of derivatives and any material issues or policy implications relating to the application. The application will be subject to a six-month period from the SFC take-up date, at the expiry of which the application will in general lapse.For establishing non-retail AIFs in the form of Hong Kong domiciled open-ended fund companies when the framework becomes effective, an application for registration would first need to be made to the SFC with a specified form and provide prescribed information (including the instrument of incorporation and the profile of key operators) to be submitted to the SFC, and upon the SFC approval on the registration, the incorporation can then be made with the Companies Registry. The offering document of the fund shall be filed as soon as practicable with the SFC upon issuance.


Hong Kong managers are not restricted under any local requirements


Hon

g K

ong


Co-operation or information sharing agreements for tax purposes including with respect to the Common Reporting Standard are discussed in Section 6 on taxation.

2 Fund Structures


AIFs in Hong Kong may be formed as a Hong Kong domiciled unit trust constituted under a trust deed governed by Hong Kong law. The Securities and Futures (Amendment) Ordinance gazetted in 2016 provides the framework for open-ended investment funds structured in corporate form, and it would soon be possible to establish Hong Kong domiciled open-ended AIFs in the form of an open-ended fund company structure. The detailed OFC Rules and Code promulgated by the SFC are undergoing legislative process and are expected to be effective soon so that the structure can become available before the end of 2018.However, AIFs are not restricted to Hong Kong domiciled funds or specific forms and may be, and quite commonly are, established by adopting legal vehicles domiciled in other jurisdictions, subject to considering ease and costs of establishing and operating, applicable legal and regulatory requirements in the jurisdiction of the fund domicile, familiarity to investors and other factors such as tax implications.


The limitation of liability of investors or any exception thereto must be clearly provided for in the constitutive document of the AIFs and disclosed to investors in the offering document. An investor generally shall not be liable to make any further payment after the investor has paid the monies agreed to be paid by such investor in respect of the units, shares or interests held by such investor and no further liability can be imposed on the investor in respect of the units, shares or interests held by such investor.


Hong Kong fund managers and advisers tend to be companies incorporated in Hong Kong with limited liability and are subject to be licensed by the SFC to conduct the relevant regulated activities (usually at a minimum Type 9 regulated activity in asset management and/or Type 4 regulated activity in advising on securities).As it is quite common for Hong Kong fund managers or fund promoters to establish AIFs that are domiciled in an offshore jurisdiction, when doing so, such as when establishing an offshore (e.g. Cayman) limited partnership fund, a Hong Kong manager or adviser (or its parent company) may establish an offshore company as the general partner of the limited partnership fund. Depending on the management and operational arrangement of the particular fund management group, as well as the investment strategies or investment process, the parent company or subsidiary of the Hong Kong managers or advisers may also form or be formed as an offshore manager or as an investment adviser in the particular jurisdiction(s) where a fund shall invest. Such manager or investment adviser would need to comply with any requirements including registration or licensing that may apply in the relevant jurisdiction where it is established or operates.


The SFO governs funds offered in Hong Kong or targeted to the Hong Kong public, or the conduct of businesses relating to regulated activities in securities or futures that are carried out in Hong Kong or the active marketing to the public in Hong Kong (whether in Hong Kong or from a place outside Hong Kong), of any services which would constitute a regulated activity if provided in Hong Kong. Foreign managers or advisers that engage in any activity falling within the aforesaid may be subject to licensing requirements and would need to be properly licensed by the SFC if required for the conduct of relevant regulated activities.Foreign managers or advisers wishing to manage, advise or otherwise operate AIFs for public offer in Hong Kong would be subject to the applicable requirements of the SFC, such as under the UT Code regarding the management company (or its delegates) of SFC authorised funds. Foreign managers or advisers that may consider to manage, advise or otherwise operate retail or non-retail AIFs to be established in the form of a Hong Kong domiciled open-ended fund company should note that the proposed OFC Rules and Code require that there must be at least one investment manager licensed or registered for Type 9 regulated activity.


Over the years, the SFC has signed a number of bilateral or multilateral agreements with local, Mainland China and overseas regulatory bodies.To ensure a consistent regulatory approach, the SFC has entered into memoranda of understanding (MOU) with local regulatory bodies such as the Hong Kong Monetary Authority, Insurance Authority, Mandatory Provident Fund Schemes Authority, Hong Kong Exchanges and Clearing Limited, the Stock Exchange of Hong Kong Limited, etc.The SFC has signed agreements with the regulators of Mainland China including the China Securities Regulatory Commission (CSRC), Administration and Supervision Department of the State Administration of Foreign Exchange, China Banking Regulatory Commission, China Insurance Regulatory Commission (now part of the China Banking & Insurance Regulatory Commission), People’s Bank of China, Shanghai Stock Exchange, Shenzhen Stock Exchange, setting out co-operative frameworks, including investigatory assistance, exchange of information, and market or product-related arrangements.The SFC has also entered into cooperative arrangements for investigatory assistance, exchange of information, and market or product-related arrangements in the form of memoranda of understanding, confidentiality undertakings, memoranda regarding administrative arrangements and memoranda of regulatory cooperation, and the IOSCO Multilateral Memorandum of Understanding (MMOU) (which was the first global information-sharing arrangement among securities regulators) with overseas regulators such as the UK Financial Conduct Authority.In the context of authorised funds, the SFC has also entered into mutual recognition of funds arrangements with jurisdictions such as Mainland China, France and Switzerland, which have established framework for retail funds in one jurisdiction to seek authorisation to be offered as retail funds in the other jurisdiction.


Hon

g K

ong


the investment and borrowing parameters. Non-retail AIFs are not subject to specific investment limits or restrictions.

3 Marketing


The SFO governs the offers of securities (including collective investment schemes as widely defined) in Hong Kong including the production and issue of marketing materials relating to offers of funds. The Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO) governs the offer of shares in the Hong Kong corporate structure.For retail AIFs, the SFC Advertising Guidelines Applicable to Collective Investment Schemes Authorised under the Product Codes (Advertising Guidelines) are applicable to all forms of product advertisements for SFC-authorised collective investment schemes.


The key content requirements for marketing materials for SFC-authorised funds are set out in the Advertising Guidelines. The general principles that govern the content of advertisements for SFC-authorised funds are that the advertisements should (1) not be false, biased, misleading or deceptive, (2) be clear, fair and present a balanced picture of the fund with adequate risk disclosures, (3) contain information that is timely and consistent with its offering document, and that the advertisements may not refer to unauthorised funds except as otherwise permitted. Detailed requirements are set out in the Advertising Guidelines on the content of advertisements including language and graphics, performance information, warning statements, etc.The Advertising Guidelines do not apply to marketing materials for non-retail funds. However, the FMCC provides that where the advertisements and marketing materials are not required to be authorised by the SFC (which is the case for non-retail funds), a fund manager should nonetheless ensure that marketing materials are accurate and not misleading and that any performance claims can be verified.


The marketing or legal documents relating to offers of SFC-authorised retail funds are subject to the prior approval or authorisation of the SFC before they can be issued; although advertisements or marketing materials issued by intermediaries licensed by the SFC to conduct Type 1 regulated activity of dealing in securities, Type 4 regulated activity of advising on securities, and Type 6 regulated activity of advising on corporate finance are exempted from prior authorisation by the SFC. However, if the marketing documents relate to certain funds, such as mandatory provident fund schemes and their constituent funds, occupational retirement schemes and insurance contracts, then the prior vetting of SFCs is still required.The marketing or legal documents relating to the offer of non-retail funds that are offered in Hong Kong on a private placement basis will not need to be approved by or registered with the SFC, such as AIFs that are primarily offered to “Professional Investors” as defined under the SFO.


For hedge funds (or funds of hedge funds) or other AIFs that are authorised by the SFC for offer to the public in Hong Kong, according to the UT Code, there must be at least one regular dealing day per month. The maximum interval between the lodgement of a properly documented redemption request for redemption of units/shares (whether a notice period is required or not) and the payment of redemption money to the holder may not exceed 90 calendar days. The manager may restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds only in certain circumstances, such as during massive redemption, and there should be full disclosure in the offering documents on permitted circumstances.For non-retail AIFs, there are no specific limits or restrictions on redemptions under Hong Kong law or regulations. However, under new requirements of the revised FMCC to be effective from November 2018, Hong Kong managers who are responsible for the overall operation of a fund would need to adopt appropriate liquidity management measures including the redemption policy of the fund; the liquidity risks of the fund, the liquidity management policies and an explanation of any tools or exceptional measure that could affect redemption rights would also need to be disclosed to fund investors. These requirements are relevant to open-ended funds as well as closed-ended funds.Under the revised FMCC to be effective from November 2018, there are also specific provisions relating to the use of any side pocket by a Hong Kong fund manager who is responsible for the overall operation of a fund, and to provide clear disclosure to fund investors on the creation, features and implications of a side pocket including the impact or lock-up on redemption for a side pocket.


Transfers of investors’ interests in AIFs are not specifically regulated under Hong Kong law or regulations. Therefore, transfers of investors’ interests in AIFs would be subject to the specific provisions in the constitutive document, and would be subject to such process as prescribed in the constitutive document (typically transferable by the appropriate instrument of transfer signed by the transferor and the transferee and registered in the register of members of the fund), subject to the applicable anti-money laundering laws and policies, and may be subject to consent or approval requirement (if any) of the relevant fund governance body.


There are certain investment restrictions that apply under the UT Code on retail AIFs, covering spread of investments and diversification limits, restrictions on certain types of instruments or assets, and limits on short selling and borrowing. The fund should have a set of clearly defined investment and borrowing parameters in its constitutive and offering documents. The offering document should clearly explain the types of investments or financial instruments in which the fund will invest; the extent of diversification or concentration of investments or strategies; the extent and basis of leverage (including the maximum level of leverage); and the related risk implications of


Hon

g K

ong


A licensed person may be exempted from certain requirements of the Code of Conduct including the suitability requirements, when dealing with (1) “Corporate Professional Investors” as defined in the Code of Conduct who have satisfied the relevant assessment criteria as set out in the Code of Conduct in relation to relevant products and/or markets, and (2) “Institutional Professional Investors”.


As noted in question 3.3, if the marketing documents relate to certain funds, such as mandatory provident fund schemes and their constituent funds, occupational retirement schemes and insurance contracts, then SFC’s prior vetting is still required even where the marketing documents are issued by intermediaries licensed by the SFC to conduct Type 1 regulated activity of dealing in securities, Type 4 regulated activity of advising on securities, and Type 6 regulated activity of advising on corporate finance. These apply in the context of the marketing of retail provident fund schemes or pension fund schemes to individual members who are participants in such schemes. On the other hand, among the categories of financial institutions and intermediaries that are specified in the definition of “Professional Investor” in the SFO, any registered mandatory provident fund scheme or its constituent fund (or an approved trustee, service provider or investment manager of such scheme or constituent fund), any occupational retirement schemes, as well as any government or institution which performs the functions of a central bank all fall to be categorised as “Institutional Professional Investors”. Accordingly, funds may be marketed to such bodies on a private placement basis, and in respect of which a licensed person is exempted from the suitability requirement and certain other investor protection requirements under the Code of Conduct.


There are no specific restrictions on the use of intermediaries to assist in the fundraising as long as the intermediary is properly licensed by the SFC (unless any relevant exemption applies). Under the revised FMCC which shall be effective from November 2018, Hong Kong licensed managers will be subject to additional specific requirements where the Hong Kong manager is responsible for the overall operation of the fund. In respect of marketing/fundraising activities, a fund manager should ensure that any representations made by it or its representatives to a client are accurate and not misleading, and that all advertisements and marketing materials are accurate and not misleading where such materials are not required to be authorised by the SFC. This should apply even where the fund manager has appointed intermediaries to assist in the fundraising.


There are no specific restrictions on the participation in AIFs by particular types of investors such as financial institutions (whether as sponsors or investors). The fund manager or operator and other service providers are not restricted from participating in the funds, however any conflict of interests should be properly disclosed in the offering document.


Non-retail AIFs do not need to be authorised in order to be marketed in Hong Kong. However, persons engaged in the business of offering investment funds whether retail funds or non-retail funds are required to be licensed by the SFC to conduct Type 1 regulated activity of dealing in securities, unless any relevant exemption applies.Retail AIFs must be authorised by the SFC pursuant to the requirements under the UT Code before they can be marketed to the public in Hong Kong. Non-retail funds should not be offered to the public in Hong Kong, and under Hong Kong securities offering laws, an offer to a section of the public may constitute an offer to the public; but an offer is not a public offer where the offer is made to “Professional Investors” as defined in the SFO only (unlimited in number) and/or no more than 50 people by way of private placement, among other circumstances that may be relevant to be exempted or excluded as a public offer. For non-retail funds in Hong Kong corporate form, another exemption is where an offer involves a minimum investment of at least HK$500,000 per investor or not exceeding a specific overall size of HK$5 million.When a licensed person is engaged in the offer of any investment funds whether retail funds or non-retail funds, the licensed person needs to satisfy applicable suitability requirements and other know-your-customer requirements as set out in the Code of Conduct in the offering of funds. In particular, the offering of funds that may be considered a derivatives product would require specific assessment of suitability including derivatives knowledge of the investor.


An AIF (e.g. a hedge fund) can be marketed to retail investors in Hong Kong provided that they are authorised by the SFC in accordance with the UT Code, although AIFs are usually offered in Hong Kong on a private placement basis, primarily to “Professional Investors” as defined in the SFO.


As noted in question 3.4, a licensed person engaged in the offering of funds to prospective investors should satisfy applicable suitability requirements and other know-your-customer requirements in relation to prospective investors, pursuant to the Code of Conduct.When offering to “Professional Investors” as defined in the SFO, the licensed person would need to put in place procedures to limit offers to “Professional Investors” only and to verify the qualification of “Professional Investors”. The licensed person should also comply with the relevant know-your-customer and suitability requirements under the Code of Conduct, to the extent such requirements apply, depending on the category of the “Professional Investors”. Broadly speaking, “Individual Professional Investors” or “Corporate Professional Investors” mean individuals or corporates, respectively, that meet the relevant minimum-net-worth or net assets requirements (broadly speaking, individuals with a portfolio of at least HK$8 million, or a trust corporation, corporation or partnership with a portfolio of at least HK$8 million or net assets of HK$40 million), while “Institutional Professional Investors” refer to financial institutions and specific bodies as prescribed in the SFO.


Hon

g K

ong


document containing the required information as listed in the UT Code and a product key facts statement (KFS) which shall be deemed to form part of the offering document and serve as a summary of key fund features and risks. The offering document must be accompanied by the retail fund’s most recent audited annual report and accounts together with its semi-annual report if published after the annual report.There are no specific legal or regulatory requirements on the disclosure to be made by non-retail funds that are offered in Hong Kong on a private placement basis.


SFC-authorised retail funds must publish at least two financial reports each financial year, being the annual reports and accounts published and distributed to holders within four months of the end of the fund’s financial year, and the interim reports within two months of the period they cover. These reports will need to be filed with the SFC. For retail hedge funds, the SFC has published the Guidelines on Hedge Funds Reporting Requirements (Appendix H to the UT Code) setting out the minimum amount of information that is required to be disclosed in regular reporting to investors. Retail hedge funds are required to publish quarterly reports in addition to the annual reports and semi-annual reports.There are no specific legal or regulatory requirements on the reporting to be made by non-retail funds that are offered in Hong Kong on a private placement basis. However, under the revised FMCC which shall be effective from November 2018, Hong Kong licensed managers of non-retail funds will be subject to additional specific requirements where the Hong Kong manager is responsible for the overall operation of the fund. Requirements include having appropriate policies and procedures for the valuation of fund assets and calculation of net asset value, independent review of the valuation policies, procedures and process, and also a requirement to ensure an independent auditor is engaged to perform an audit of the financial statements of the fund in order to prepare an audited report at least annually, which should be made available to fund investors upon request. Where the fund engages in securities lending, repo or reverse repo transactions, the Hong Kong fund manager who is responsible for the overall operation of the fund is also required to provide to the fund investors, at least on an annual basis, certain prescribed minimum information on the fund’s securities lending, repo and reverse repo transactions. A Hong Kong fund manager is required to appoint an independent auditor to perform an audit of the financial statements of the fund manager, and the audited accounts should be filed in accordance with applicable statutory requirements and be made available to the fund upon request. There are also reporting obligations to the SFC, and specifically, from November 2018 when the revised FMCC becomes effective, a Hong Kong fund manager would be subject to requirements to provide appropriate information to the SFC upon request such as on fund assets, leverage, liquidity, securities lending, repo and reverse repo transactions, and to respond to requests and enquiries from the SFC promptly and in an open and co-operative manner.


There is no restriction on the use of side letters by non-retail funds or their fund managers/operators. Therefore, Hong Kong managers are able to use side letters to supplement or modify the terms of a fund’s offering document, subscription agreement or constitutive

4 Investments


The UT Code contains the core requirements and restrictions applicable to SFC-authorised retail funds covering areas such as limits on short selling, borrowing, making loans, and acquiring assets that involve the assumption of unlimited liability.There are no specific restrictions on the types of activities that can be performed by non-retail funds. However, under the revised FMCC which shall be effective from November 2018, Hong Kong licensed managers of non-retail funds will be subject to additional specific requirements where the Hong Kong manager is responsible for the overall operation of the fund, specifically covering several areas that are considered risk areas and for managing systemic risks, such as in relation to securities lending and repurchase agreements, use and disclosure of leverage, liquidity management, risk management, use of side pockets, and managing conflicts of interest.


The UT Code sets out certain investment restrictions that apply to SFC-authorised retail funds depending on the type of retail funds. Certain core requirements primarily apply to plain vanilla (equity or bond) funds, covering spread of investments and diversification limits, while certain requirements and restrictions on certain types of instruments or assets apply to specialised schemes such as hedge funds, funds of hedge funds and structured funds as provided in the UT Code. For retail hedge funds, the UT Code requires that the fund must have a set of clearly defined investment parameters in its constitutive and offering documents.There are no specific limits on the types of investments that can be included in a non-retail fund’s portfolio whether for diversification reasons or otherwise. However, under the revised FMCC which shall be effective from November 2018, Hong Kong licensed managers of non-retail funds will be subject to additional specific requirements where the Hong Kong manager is responsible for the overall operation of the fund, specifically covering several areas that are considered risk areas and for managing systemic risks.


The UT Code contains certain borrowing restrictions that apply to SFC-authorised retail funds. The maximum borrowing of an SFC-authorised retail fund generally may not exceed 25% of its total net asset value (back-to-back loans do not count as borrowing), although this restriction does not apply to retail hedge funds.There are no specific restrictions on borrowing by non-retail funds.



SFC-authorised retail funds must issue an up-to-date offering


Hon

g K

ong



There is no Hong Kong withholding tax on any dividends or distributions to be made to fund investors, regardless of the category of investors. Where the dividends or distributions or other gains from the AIFs fall within income or profits derived by an investor in any business, trade or profession carried out in Hong Kong, the investor may be subject to profits tax on such income or profits.


As the Hong Kong tax framework is relatively straightforward, it is usually not necessary to obtain a tax ruling from the tax authority in Hong Kong prior to establishing an AIF. For AIFs investing in private equity, venture capital, real estate or in unusual structure or instruments, it is advisable to obtain specific tax advice on the potential tax implications. Where considered necessary such as in circumstances involving transfer pricing between associated companies, it is possible to seek advanced pricing arrangement with the Hong Kong Inland Revenue Department.


Hong Kong has signed Model II IGA for FATCA, which is supplemented by an agreement with the United States for exchange of information relating to taxes; this forms the necessary basis for Hong Kong to provide for the exchange of information upon requests made in relation to the information reported by financial institutions in Hong Kong to the US under FATCA. Hong Kong has implemented the Common Reporting Standard (CRS) and the automatic exchange of financial account information in tax matters (AEOI) on a reciprocal basis with appropriate partners, with the first exchanges expected by the end of 2018. The legal framework has been put in place for CRS reporting in respect of a list of 75 reportable jurisdictions; however, Hong Kong would only exchange information with a reportable jurisdiction where there is an arrangement in place with such jurisdiction that forms the basis for exchange. Currently, Hong Kong has signed comprehensive avoidance of double taxation agreements with 39 jurisdictions and tax information exchange agreements with seven countries.


In June 2016, Hong Kong accepted the invitation of the OECD to join the inclusive framework for global implementation of the Base Erosion and Profit Shifting (BEPS) measures, and in June 2017, China signed the “Multi-lateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing” (MLI) on behalf of Hong Kong, although with rights reserved with respect to most articles of the MLI.

document for the purpose of granting strategic investors certain preferential treatment; however, a relevant disclosure should be made in the fund’s offering document that side letters may be entered into and that certain investors may be given preferential terms. In a circular previously issued by the SFC and addressed to managers of hedge funds, the SFC indicated that to ensure fair treatment of investors, it is good practice to disclose material terms to all existing and potential investors, and highlight where applicable that side letters have been entered into only with investors with significant shareholding or interest. (Further, the revised FMCC which shall be effective from November 2018 contains a general requirement that where a fund manager is responsible for the overall operation of a fund, it should make adequate disclosure of information (as well as any material changes to the information) on the fund which is necessary for fund investors to be able to make an informed judgment about their investment into it).

6 Taxation


Under Hong Kong’s tax framework, profits derived from the carrying on of business, trade or profession in Hong Kong would be subject to Hong Kong profits tax at the rate of 16.5%. Profits sourced outside Hong Kong are not chargeable to tax in Hong Kong, and Hong Kong does not levy tax on the basis of remittance or receipt in Hong Kong or apply worldwide taxation on foreign-sourced profits or income of Hong Kong tax residents. A non-resident or overseas company is potentially liable to Hong Kong profits tax if it carries on a trade, profession or business in Hong Kong and has profits derived from Hong Kong from such trade, profession or business. Accordingly, where an AIF derives Hong Kong sourced profits from carrying on a business in Hong Kong (in its investment activities), it may be subject to Hong Kong profits tax.Certain types of AIFs may be exempted from Hong Kong profits tax, as outlined in question 6.8.


A Hong Kong investment manager or adviser would be subject to Hong Kong profits tax at the rate of 16.5% on its profits derived from carrying on its business, trade or profession in Hong Kong.


The transfer of interests in an AIF domiciled in Hong Kong is subject to Hong Kong stamp duty, unless exempted. Stamp duty is chargeable at the rate of 0.1% of the consideration or value of the instrument of transfer of Hong Kong stock (the definition of which covers shares of Hong Kong companies, also units in unit trusts) or in certain circumstances at a nominal fixed duty.


Hon

g K

ong


or adviser would be subject to Hong Kong profits tax on its profits derived from carrying on its business, trade or profession in Hong Kong. There may be a transfer pricing issue between associated companies within the group of companies of the fund promoter, fund manager or adviser, for the management or advisory fees receivable by the Hong Kong manager or adviser to be charged on an arm’s length basis. Another key issue is the manner or form in which managers of AIFs may receive a performance fee or carried interest from the fund, and whether subject to profits tax, and also as regards the remuneration of fund executives, this may be subject to salaries tax. The Hong Kong Inland Revenue Department has indicated that general anti-avoidance provisions may be applied on distributions of a management fee or carried interest to fund executives from a general partner limited partnership, or carried interest limited partnership if the distributions are not genuine investment returns.


As mentioned in question 6.7, China has signed the “Multi-lateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing” (MLI) on behalf of Hong Kong, although with rights reserved with respect to most articles of the MLI. On 29 December 2017, the Inland Revenue (Amendment) (No.6) Bill 2017 was published in the Gazette to implement OECD BEPS Actions. The Amendment Bill contains substantial amendments with broad implications, and would be a significant tax development in Hong Kong. The Amendment Bill covers proposed changes including a statutory codification of OECD transfer pricing rules, introduce statutory provisions for unilateral, bilateral and multilateral advanced pricing arrangement, the definitions of permanent establishment and provisions between associated persons, provisions on double taxation relief and also a dispute resolution mechanism, among others. It is now undergoing the Hong Kong legislative process.

7 Reforms


As mentioned above, the FMCC will be modified and enhanced, effective from November 2018. Key areas include additional requirements in respect of securities lending and repurchase agreements, custody of fund assets, liquidity risk management, and disclosure of leverage. There are also enhancements to the Code of Conduct aimed to address conflicts of interest in the sale of investment products and enhance disclosure at the point of sale by: (i) restricting an intermediary from representing itself as ‘independent’ or using any terms with a similar inference, when distributing an investment product if the intermediary receives commission or other monetary benefits in relation to distributing such investment product, or it receives any non-monetary benefits from any party or has close links or other legal or economic relationships with product issuers which are likely to impair its independence; and (ii) requiring an intermediary to disclose the maximum percentage of any monetary benefits received or receivable that are not quantifiable prior to or at the point of sale. The enhancements to the Code of Conduct will take effect in mid-August 2018. In considering these requirements, the SFC stopped short of restricting intermediaries from receiving commission payments on fund sales, with Hong Kong regarded as not yet ready to adopt a strictly pay-for-advice model.

Hong Kong has expressed its commitment to the implementation of the four minimum standards of the OECD’s BEPS Action Plan, namely: (i) countering harmful tax practices (Action 5); (ii) preventing treaty abuse (Action 6); (iii) imposing country-by-country reporting (Action 13); and (iv) improving the cross-border dispute resolution regime (Action 14). On 29 December 2017, the Inland Revenue (Amendment) (No.6) Bill 2017 was published in the Gazette to implement aforesaid BEPS Actions. The Amendment Bill is seen as probably the largest tax amendment bill of Hong Kong with broad implications, and is a significant tax development in Hong Kong. It is now undergoing the Hong Kong legislative process. Proposed codification of OECD transfer pricing rules, and in this connection, the proposed changes such as the definitions of permanent establishment and provisions between associated persons, would have potential implications for AIFs and operators of AIFs.Hong Kong has also taken into account considerations of ring-fencing and potential harmful tax practices when adopting the OFC profits tax exemption, and is in the process of reviewing the offshore funds profits tax exemption and other concerns of any ring-fencing features in the present Hong Kong tax regimes for funds.


SFC-authorised retail funds are exempted from Hong Kong profits tax. Profits tax exemption may also apply to a mutual fund, unit trust or investment scheme which is a bona fide widely held investment scheme, and which complies with the requirements of a supervisory authority within an acceptable regulatory regime. For non-retail funds, under the relevant provisions of the Inland Revenue Ordinance (IRO), where a fund is not tax resident in Hong Kong (i.e. its central management and control are exercised outside Hong Kong), subject to satisfying the prescribed conditions, the fund can be exempted from profits tax (referred to as the “offshore funds profits tax exemption”). Profits tax exemption may also apply to open-ended fund companies that meet relevant conditions (referred to as the “OFC profits tax exemption”). In order to avail the tax exemption, the open-ended fund company must be tax resident in Hong Kong (i.e. its central management and control exercised in Hong Kong) and meet other conditions including that it must be “non-closely held”, as specifically defined. The offshore funds profits tax exemption and the OFC profits tax exemption each require that the qualifying transactions for the tax exemption are carried out through or arranged by a “specified person”, meaning a corporation licensed or registered for carrying out specified regulated activity under the SFO and which would include Hong Kong licensed managers. Qualifying transactions are transactions in specified asset classes including securities, future contracts, foreign exchange contracts, bank deposits, foreign currencies, certificates of deposits and OTC derivative products. For the purposes of the said profits tax exemptions, the definition of “securities” has been expanded to cover investments in private companies (including through offshore or Hong Kong special purpose vehicles or interposed special purpose vehicles). Hence subject to meeting relevant conditions and falling within the prescribed scope, private equity funds may also avail the exemption.


As mentioned in question 6.2, a Hong Kong investment manager


Hon

g K

ong


also include new fund types such as active ETFs and closed-ended listed funds. The consultation period ended in March 2018. The changes that would be put in place would be subject to the final form of the amended UT Code to be issued by the SFC in due course with the consultation conclusions. In any case, it is anticipated to be a welcomed modernisation with updates that would further broaden and deepen the range of fund products available in Hong Kong, while aligning with international standards as recommended by the Financial Stability Board, the IOSCO and also existing practices in other international funds jurisdictions.

The availability of the new Hong Kong open-ended fund company structure from 2018 would also be an important development in the Hong Kong funds market.Besides these, the SFC has issued consultation drafts of proposed amendments to the UT Code. Key proposals include strengthening requirements for the key operators (management companies, trustees and custodians), providing greater flexibility and enhanced safeguards for funds’ investment activities (particularly in relation to allowing a broader use, and introduce specific provisions on securities lending, repo and reverse repo transactions). The proposals


Hon

g K

ong


Vivien Teu & Co LLP is a Hong Kong law practice established with the philosophy of a boutique law firm focusing on the areas of corporate, securities, asset management and financial services. The lawyers at Vivien Teu & Co LLP carry in-depth Hong Kong and international legal practice experience, combined with deep and broad knowledge of China and regional markets.

The legal practice areas at Vivien Teu & Co LLP encompass corporate and commercial law advice, as well as securities law and financial regulatory advice in local and international transactions, and a go-to firm for corporate transactions, funds formation and clients seeking legal and regulatory advice involving Mainland China and Hong Kong elements. With an association with the reputable China law firm, Llinks Law Offices, Vivien Teu & Co LLP is successful in offering seamless support on Mainland China and Hong Kong matters relating to asset management, investment funds, cross-border securities and investments, in-bound and out-bound mergers & acquisitions, China market entry strategies, as well as corporate finance and Hong Kong listings.

The asset management practice of Vivien Teu & Co LLP serves local and international clients who are establishing or operating asset management platforms in Hong Kong, or otherwise accessing investors or investment opportunities in the Greater China region and beyond. Our lawyers are experienced in advising clients in understanding and navigating the business, legal and regulatory environment in Hong Kong for asset management, assisting with incorporation and structuring of investment management or advisory services entities, advising and assisting clients in obtaining necessary licenses or registrations with financial regulatory authorities and compliance requirements, and on establishing varied forms of investment funds and investment arrangements. The firm also boasts dedicated trusts, succession and estate planning expertise, increasingly serving private clients and high-net worth entrepreneurs, in its wider financial services and wealth management practice.

Vivien Teu is the founding and managing partner of Vivien Teu & Co LLP. She has extensive and in-depth experience as a corporate and commercial lawyer specialising in the financial services sector, funds and wealth management. Vivien carries diverse legal practice background with top-tier and Magic Circle firms in the areas of tax, trusts, banking and financial services, investment funds, securities, regulatory and financial institutions set-up as well as mergers & acquisitions. Along with a significant in-house counsel experience at a global investment firm, Vivien brings unique insights and practical commercial approaches in her practice, and with a particular China focus.

Vivien’s experience in the areas of asset management covers diverse forms of investment funds include Hong Kong SFC authorisation of retail funds (including UCITS funds and domestic HK fund series), Mainland-Hong Kong Mutual Recognition of Funds, China-theme investment funds including QFII and RQFII China A Share Funds, RMB Fixed Income Funds, Stock Connect, accessing the China-Interbank Bond Market, and advising in relation to ETFs and REITs. Vivien also regularly advises on China QDII matters and outbound investments; structured finance and securitisation; SFC licensing and regulatory matters; Hong Kong securities compliance advice; and assisting clients of diverse background with establishing private investment funds including hedge funds, private equity funds, real estate funds, institutional segregated account mandates and other investment arrangements; advising on fund distribution matters, custody structure, investment and trading matters. Vivien’s experience also includes joint ventures or mergers & acquisitions of financial institutions or asset management firms, advising on shareholders’ agreements, corporate governance, general corporate and commercial advice, private and corporate trusts, tax issues and tax structuring.

Vivien Teu Vivien Teu & Co LLP27/F Henley Building5 Queen’s Road Central, CentralHong Kong

Tel: +852 2969 5316Email: [email protected]: www.vteu.co

Sarah He is an associate at Vivien Teu & Co LLP in the asset management and financial services practice group. She has diversified experience in the areas of investment funds, financial regulatory, structured finance, corporate trusts, wealth management and corporate and commercial matters.

Sarah currently specialises in asset management and financial services, focusing on the structuring, formation and operation of private investment funds, including hedge funds, private equity funds and real estate funds, and regulatory matters relating to funds and fund managers.

Sarah’s experience also covers the SFC’s authorisation of retail funds in Hong Kong, in particular, the SFC’s authorisation of Mainland retail funds under the Mainland-Hong Kong Mutual Recognition of Funds (MRF) arrangement and the post-authorisation compliance issues of SFC-authorised retail funds. Sarah has also advised on acquisitions of SFC-licensed corporations including applications for the approval of SFCs to become a substantial shareholder of licensed corporations.

Sarah also advises on the structuring and issuance of debt securities under securitisation transactions, and represents China QDII investors in making cross-border investments through such transactions.

Sarah He Vivien Teu & Co LLP27/F Henley Building5 Queen’s Road Central, CentralHong Kong

Tel: +852 2969 5332Email: [email protected]: www.vteu.co


Chapter 21

Dillon Eustace

Brian Kelliher

Sean Murray

Ireland

Although non-EU AIFMs currently have no passporting rights under the AIFM Directive and will not have such rights until such time as they are extended to non-EU AIFMs by the European Commission, non-EU AIFMs may avail of transition benefits allowed by the Central Bank for such entities and consequently may manage an Irish QIAIF provided they are designated by the QIAIF as the AIFM and certain rules as set out in question 1.8 are complied with. However, in such circumstances, the non-EU AIFM must be approved by the Central Bank to act as an investment manager of Irish authorised collective investment schemes (see below).An Irish AIF constituting a collective investment scheme authorised and supervised by the Central Bank under Irish Funds Legislation and marketed to retail investors (a “RIAIF”) must have an authorised AIFM. Consequently, a non-EU AIFM cannot avail itself of the transition benefits allowed by the Central Bank as referred to above and manage a RIAIF on the basis that it is designated by the RIAIF as the non-EU AIFM.Non-AIFM Irish Management Companies/General PartnersRIAIFs and QIAIFs, depending on their legal form, may be required to appoint a management company/general partner to carry out the management of those AIFs. Where such a management company/general partner is not the AIFM, it must be approved by the Central Bank and meet the requirements relating to such entities as set out in the Central Bank’s AIF Rulebook (the “AIF Rulebook”), e.g.:■ a minimum capital requirement of at least EUR 125,000 or

one quarter of its total expenditure taken from the most recent audited accounts (whichever is higher);

■ organisational requirements such as the appointment of a compliance officer who must be located in the State, policies and systems to identify, control and monitor risk, accounting policies and procedures, maintenance of records, etc.; and

■ adequate management resources.Investment ManagersInvestment managers or sub-investment managers which are one of the following entities will not usually be subject to an additional regulatory review process by the Central Bank:■ UCITS management companies;■ MiFID investment firms;■ EU credit institutions; and■ externally appointed AIFMs.Investment managers which are not one of the entities listed above may only be appointed where (i) a Memorandum of Understanding (“MoU”) is in place between the Central Bank and the competent authority in the home jurisdiction of the investment manager, and (ii) the Central Bank has approved the investment manager following receipt of a completed Investment Manager Clearance Form.



Irish Funds Legislation that governs the establishment and operation of Irish AIFs authorised by the Central Bank of Ireland (the “Central Bank”) is set out in question 1.3. Additionally, Irish AIFs structured as European long-term investment funds (“ELTIFs”) are impacted operationally by Regulation (EU) No 2015/760 (the “European Long-term Investment Funds Regulation”).The governing legislation of Irish AIFs not subject to authorisation by the Central Bank depends on the legal form of those AIFs, e.g. the Companies Act, 2014 will apply to corporate AIFs not established as investment companies with variable capital. All Irish AIFs are impacted operationally by:■ the European Communities (Alternative Investment Fund

Managers) Regulations 2013 (S.I. 257 of 2013) (the “Irish AIFM Regulations”), which transposed Directive 2011/61/EU (the “AIFM Directive”) into Irish law; and

■ Commission Delegated Regulations and Commission Implementing Regulations adopted by the EU Commission in specified areas in order to ensure that the AIFM Directive is implemented consistently across the EU, the principal one of which is the Commission Delegated Regulation (EU) No 231/2013 supplementing the AIFM Directive with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (the “Commission Delegated Regulation”).


AIFMsIrish AIFMs managing Irish AIFs established under Irish Funds Legislation are required to be authorised under the Irish AIFM Regulations. However, an Irish registered AIFM may manage an Irish AIF marketed to qualifying investors (a “QIAIF”) for a two-year start-up period during which the Central Bank will not require that it have an authorised AIFM. After the start-up period, an authorised AIFM must be appointed. Non-Irish EU AIFMs managing Irish AIFs are required to be authorised in their home jurisdiction and to have availed of the passporting provisions pursuant to Article 33 of the AIFM Directive.


Irel

and

which does not facilitate the redemption of units at the request of the unitholders during the life of the AIF.


RIAIFs/QIAIFsThe application for authorisation of a RIAIF/QIAIF must be made by (i) the AIFM, together with (ii) the corporate AIF or management company/general partner in the case of a non-corporate AIF, and (iii) the depositary, in the case of a unit trust or CCF.All parties to a RIAIF/QIAIF must have been authorised or otherwise deemed acceptable to the Central Bank prior to the application for authorisation (e.g. the management company, general partner, AIFM, directors in the case of a corporate AIF, depositary, other service providers such as the fund administrator, investment manager, etc.).The directors of any entity authorised by the Central Bank (including, inter alia, the directors of a corporate RIAIF/QIAIF) are required to meet certain standards of fitness and probity. As part of the Central Bank’s fitness and probity requirements, any director proposed to be appointed must be pre-approved by the Central Bank. In this regard, an individual online questionnaire must be completed by the proposed director and validated and submitted on behalf of the appointing entity by a certain time period in advance of the proposed authorisation date for the RIAIF/QIAIF (i.e. at least 20 working days in the case of a RIAIF and at least five working days in the case of a QIAIF).A RIAIF/QIAIF is not subject to any minimum capital requirements unless it is internally managed and constitutes the AIFM.In relation to the authorisation of QIAIFs, there is no prior filing of QIAIF documentation for review by the Central Bank. Instead, there is a self-certification regime (i.e. certification has to be given that the Central Bank’s disclosure requirements relating to the QIAIF documentation are met). Because there is no prior review by the Central Bank, the timeframe for authorisation of a QIAIF is within the control of the relevant parties based on the length of time it takes to negotiate and agree the QIAIF documents (subject to the pre-clearance of any persons or parties required by the Central Bank). Once the documentation is filed online by 5pm on the business day prior to the date for which authorisation is sought, a QIAIF will be authorised on the requested date without a prior review. The Central Bank may carry out a “spot check” post-authorisation review.This contrasts with the authorisation process for RIAIFs, as the Central Bank requires certain documents (e.g. the prospectus, risk management process, and agreement/deed appointing the depositary) to be submitted for review and cleared of comment by the Central Bank in advance of the formal application for authorisation being submitted. As a result, a RIAIF with an externally appointed AIFM can take approximately eight weeks to be authorised by the Central Bank from the date of submission of applicable documents for review.Internally Managed RIAIF/QIAIF Constituting the AIFMWhere it is proposed that a RIAIF or QIAIF will be internally managed and constitute the AIFM, a separate application for authorisation of an AIFM must be submitted to the Central Bank (together with other supporting documentation, including, inter alia, a programme of activity) and such authorisation must be obtained before formal application for authorisation of the RIAIF/QIAIF may be submitted to the Central Bank.Any such RIAIF/QIAIF is required to meet the minimum capital requirements of an AIFM as set out in Regulation 10 of the Irish AIFM Regulations (equivalent to Article 9 of the AIFM Directive).

Investment AdvisorsThe Central Bank does not apply an approval process to investment advisors in order for such entities to provide investment advice in relation to a RIAIF/QIAIF, provided that the managers/directors of the RIAIF/QIAIF confirm that the advisors in question will act in an advisory capacity only and will have no discretionary powers over any of the assets of the RIAIF/QIAIF.


Irish AIFs authorised under “Irish Funds Legislation” as detailed below are required to be authorised by the Central Bank which has the power to impose conditions on them. The current conditions which the Central Bank imposes are contained in an AIF Rulebook:■ unit trusts under the Unit Trusts Act 1990;■ investment companies under Part 24 of the Companies Act

2014;■ investment limited partnerships (“ILPs”) under the

Investment Limited Partnerships Act 1994;■ common contractual funds (“CCFs”) under the Investment

Funds, Companies and Miscellaneous Provisions Act 2005; and

■ Irish collective asset-management vehicles (“ICAVs”) under the Irish Collective Asset-management Vehicles Act 2015,

(collectively referred to as the “Irish Funds Legislation”).In addition, Irish AIFs structured as ELTIFs must be authorised by the Central Bank pursuant to the European Long-term Investment Funds Regulation.


The Central Bank allows RIAIFs/QIAIFs to be structured as follows:Open-EndedAn AIF is considered open-ended by the Central Bank where it:■ provides redemption facilities on at least a (i) monthly basis

in the case of a RIAIF, and (ii) quarterly basis in the case of a QIAIF;

■ redeems, when requested, at least (i) 10% of net assets in the case of a RIAIF/QIAIF that redeems on a monthly basis or more frequently, or (ii) 25% in the case of a QIAIF that redeems on a quarterly basis; and

■ does not impose a redemption fee in excess of (i) 3% of the net asset value per unit in the case of a RIAIF, or (ii) 5% in the case of a QIAIF.

An AIF, which provides for a period of greater than 30 days in the case of a RIAIF and 90 days in the case of a QIAIF between the dealing deadline and the payment of redemption proceeds, will not be subject to the above requirements provided it classifies itself as open-ended with limited liquidity.Open-Ended with Limited LiquidityA RIAIF/QIAIF is classified as open-ended with limited liquidity if it does not meet one or more of the requirements for an open-ended AIF but does permit the redemption of units throughout the life of the AIF.Closed-EndedThe Central Bank considers a closed-ended RIAIF/QIAIF to be one

Dillon Eustace Ireland


Irel

and


The service providers involved in a RIAIF/QIAIF will depend on:■ the legal structure of the AIF as detailed in question 1.3 (e.g. a

management company/general partner will be required to be appointed in the case of a non-corporate AIF);

■ whether an external valuer, distributor and/or prime broker will be appointed; and

■ whether a fund administrator authorised by the Central Bank will be appointed (as is customary) to calculate the net asset value of the AIF and to provide fund accounting and transfer agency services.

The appointment of a depositary is required under the Irish AIFM Regulations.A RIAIF/QIAIF must appoint auditors and a money laundering reporting officer and, if a corporate AIF, will need to appoint a secretary. In addition, if it is intended to list the units of the AIF on the Irish Stock Exchange, it will be necessary to appoint an Irish listing sponsor. It is also customary for Irish legal advisers to be appointed.


AIFMsThe rules applying to non-Irish AIFMs depend primarily on whether they are EU or non-EU (third country) based.Non-Irish EU AIFMs managing Irish RIAIFs/QIAIFs are not subject to any additional rules imposed by the Central Bank. As stated in question 1.2, non-EU AIFMs may currently avail of the transition benefits allowed by the Central Bank for such entities and act as AIFM of QIAIFs. However, the non-EU AIFM and the QIAIF it manages must comply with the provisions of the Central Bank’s AIF Rulebook that apply in the case of QIAIFs with registered AIFMs, e.g. certain provisions of the AIFM Directive relating to delegation, liquidity management, valuation and transparency obligations.Investment Managers Non-Irish investment managers approved by the Central Bank to act as an investment manager of RIAIFs/QIAIFs, the process for which is detailed in question 1.2, are not subject to any rules imposed by the Central Bank. However any proposed change in the legal/regulatory status or name of the investment manager must be advised to the Central Bank. Investment AdvisersNon-Irish investment advisers providing advice in relation to a RIAIF/QIAIF are not subject to any rules imposed by the Central Bank.


The Central Bank has entered into numerous national, bilateral and international memoranda of understanding. In particular, the Central Bank has entered into 40 memoranda of understanding as part of the implementation of the AIFM Directive. Separately, Ireland has signed comprehensive Double Taxation Agreements with 74 countries, 73 of which are in effect. Ireland has

The Central Bank is obliged to inform the AIFM in writing as to whether or not authorisation has been granted, within three months of a complete application. However, the Central Bank may extend this period for another three months where it considers it necessary because of the specific circumstances of the case.


DirectorsA minimum of two directors in a corporate RIAIF/QIAIF, or in any entity which is authorised by the Central Bank and provides non-AIFM fund services to such an AIF (e.g. non-AIFM management company, general partner, fund administrator or depositary), must be Irish-resident. In the case of a RIAIF/QIAIF, an Irish resident is a person present in Ireland for the whole of 110 business days per year. In the case of an Irish AIFM authorised by the Central Bank which has a Central Bank PRISM impact rating of Medium Low or above, the AIFM must have at least:■ three directors resident in Ireland or, at least, two directors

resident in Ireland and one designated person (i.e. a person designated by the board to carry out one or more managerial functions) resident in Ireland;

■ half of its directors resident in the European Economic Area (“EEA”); and

■ half of its managerial functions performed by at least two designated persons resident in the EEA.

In the case of an Irish AIFM authorised by the Central Bank which has a PRISM impact rating of Low, the AIFM must have at least:■ two directors resident in Ireland;■ half of its directors resident in the EEA; and ■ half of its managerial functions performed by at least two

designated persons resident in the EEA.As part of the Central Bank’s fitness and probity requirements, a proposed director/designated person is required to confirm (via the individual questionnaire as referred to in question 1.5) his/her time commitment in days that will be provided per year in respect of that directorship or role as designated person. In addition, the appointing entity, in validating the questionnaire, is required to confirm its expectation regarding the proposed director’s/designated person’s time commitment per year.Fund Governance CodeCorporate RIAIFs/QIAIFs or the management companies/general partners of non-corporate RIAIFs/QIAIFs are recommended to adhere to a voluntary corporate governance code for funds put in place by the Irish Funds Industry Association at the request of the Central Bank. Such code provides, inter alia, for a majority of non-executive directors and at least one independent non-executive director.Fund Service Providers’ Governance CodeIrish fund service providers such as fund administrators and depositaries are recommended to adhere to a voluntary corporate governance code put in place by the Irish Funds Industry Association at the request of the Central Bank. Such code provides, inter alia, for at least one independent non-executive director.Non-Irish PartiesLocal requirements regarding the appointment of a non-Irish AIFM, investment manager or investment advisor are detailed in question 1.2 above.



Irel

and


The principal legal structure used for managers and advisers of RIAIFs/QIAIFs is a private company incorporated with limited liability.


Although RIAIFs/QIAIFs may apply redemption gates if provided for in the applicable fund documentation, the Central Bank currently imposes limits on an AIF’s ability to restrict redemptions on any one dealing day in the context of open-ended funds. These limits are detailed in question 1.4.


There are no legislative restrictions on transfers of investors’ interests in RIAIFs/QIAIFs other than in ILPs. A limited partner may only assign his partnership interest subject to the consent of all general partners to the assignee being admitted to the partnership as a limited partner.


Other than the investment restrictions and limitations imposed by the Central Bank on RIAFs/ QIAIFs as referred to in question 4 and the limitations imposed under the AIFM Directive (e.g. relating to asset striping), there are no limitations on an AIFM’s ability to manage RIAIFs/QIAIFs.

3 Marketing


The Irish Funds Legislation and AIF Rulebook govern the production and offering of a prospectus by a RIAIF/QIAIF. Regulation (EU) No. 1286/2014 (the “PRIIPS Regulation”) governs the production and offering of the key information document (“KID”) by a RIAIF/QIAIF where units are to be offered to retail investors in the EU.


There are prescriptive requirements relating to the content of a prospectus and where applicable KID issued by or on behalf of a RIAIF/QIAIF. These are set out in the AIF Rulebook and PRIPS Regulation, respectively.The prospectus of a closed-ended AIF must comply with the content requirements in the Irish Prospectus Directive Regulations (where applicable).The European Communities (Markets in Financial Instruments) Regulations 2017 (the “Irish MiFID Regulations”), which

also concluded a total of 26 tax information exchange agreements with non-EU countries, 25 of which are in effect.

2 Fund Structures


The principal legal structures of RIAIFs/QIAIFs are set out in question 1.3, the main features of which are set out below:■ unit trusts are contractual arrangements created under a

trust deed made between a management company and a depositary. Unit trusts do not have their own legal personality and contracts are entered into by the management company and, in certain cases, by the trustee. A unit represents an undivided beneficial interest in the assets of the unit trust;

■ investment companies are public limited liability companies incorporated with variable capital, i.e. the actual value of the paid-up share capital is equal at all times to the value of the net asset value of the company. Shares issued do not represent a legal or beneficial interest in the company’s assets;

■ ILPs are partnerships between one or more general partners and one or more limited partners, constituted by written agreements between the parties known as partnership agreements. A general partner is personally liable for the debts and obligations of the partnership and a limited partner contributes or undertakes to contribute a stated amount to the capital of the partnership;

■ CCFs are funds constituted under contract law by means of a deed of constitution executed under seal by a management company. The CCF is an unincorporated body and does not have a legal personality and therefore may act only through the management company. Participants in the CCF hold their participation as co-owners and each participant holds an undivided co-ownership interest as a “tenant in common” with other participants; and

■ ICAVs are corporate bodies with limited liability where the actual value of the paid-up share capital is at all times equal to the net asset value of the ICAV and the share capital is divided into a specified number of shares without assigning any nominal value to them. The assets of the ICAV belong exclusively to the ICAV and no shareholder has any interest in the assets of the ICAV.

Each of the above-referenced AIFs may be established as an umbrella fund with separate sub-funds.It is also possible to have unauthorised AIFs (i.e. AIFs that are not authorised by the Central Bank under Irish Funds Legislation), the principal legal structures of which are companies, trusts and limited partnerships.


In investment companies and ICAVs, the liability of the shareholders is limited to the amount, if any, unpaid on the shares held by them.In unit trusts, the limited liability of the unitholders under the trust deed will depend on the contractual provisions in the trust deed.In ILPs, the liability of the limited partners is limited to the stated amount of capital they have contributed or undertaken to contribute and, except in limited circumstances set down in the Investment Limited Partnerships Act 1994, does not extend to the debts of the partnership beyond the amount contributed.In CCFs, the liability of a unitholder is limited to the amount agreed to be contributed for the subscription of units.



Irel

and

Non-Irish-registered EU AIFMs (as opposed to non-Irish-authorised EU AIFMs that can avail of the passport pursuant to Article 33 of the AIFM Directive) cannot market AIFs that they manage to professional investors in Ireland.


RIAIFs/QIAIFsQIAIFs may be only be marketed to qualifying investors as detailed in question 3.6. However, RIAIFs may be marketed to retail investors.Non-Irish AIFsNon-Irish AIFs which propose to market their units in Ireland to retail investors must be authorised by a supervisory authority set up in order to ensure the protection of unitholders and which, in the opinion of the Central Bank, provides an equivalent level of investor protection to that provided under Irish laws, regulations and conditions governing RIAIFs.A non-Irish AIF which proposes to market its units in Ireland to retail investors must make an application to the Central Bank in writing, enclosing certain prescribed information.AIFs established in:■ Guernsey and authorised as Class A schemes;■ Jersey and authorised as recognised funds; and■ the Isle of Man as authorised schemes,will receive approval to market their units in Ireland to retail investors on completion of the information and documentation requirements. Other AIFs must demonstrate an equivalent level of investor protection to that provided under Irish laws, regulations and conditions governing RIAIFs.The marketing of units in Ireland to retail investors is subject to the requirements set out in question 3.4 above and may not take place until the AIF has received a letter of approval from the Central Bank.The fact that Central Bank pre-approval is required and that consumer protection regulation is applicable renders marketing to retail investors more cumbersome than in the case of marketing to professional investors.


RIAIFsA RIAIF has no regulatory minimum subscription requirement and no investor qualification requirements.QIAIFsA QIAIF may only be sold to qualifying investors and a minimum subscription of EUR 100,000 applies. A qualifying investor is:■ an investor who is a professional client within the meaning of

MiFID;■ an investor who receives an appraisal from an EU credit

institution, a MiFID firm or a UCITS management company to the effect that the investor has the appropriate expertise, experience and knowledge to adequately understand the investment in the QIAIF; or

■ an investor who certifies that they are an informed investor by providing the following:■ confirmation (in writing) that the investor has such

knowledge of, and experience in, financial and business matters as would enable the investor to properly evaluate the merits and risks of the prospective investment; or

transposed the MiFID II Directive into Irish law, require authorised “investment firms” providing “investment services” (including, inter alia, investment advice and certain distribution services) to ensure that information provided to potential clients about, inter alia, “financial instruments” (such as units in an AIF) meets certain prescribed requirements.


In relation to a QIAIF, a dated prospectus, constitutional document and material contracts must be submitted to the Central Bank for noting in advance of the date of authorisation. In relation to a RIAIF, the prospectus and certain other documents must be submitted for review and clearance by the Central Bank in advance of seeking the authorisation of the RIAIF from the Central Bank.The prospectus of a closed-ended AIF must be submitted to the Central Bank for approval in accordance with the Irish Prospectus Directive Regulations (where applicable).The Central Bank does not currently require a KID to be filed with it.


Marketing in Ireland to Retail InvestorsA non-Irish AIF which has been approved by the Central Bank to market in Ireland to retail investors (see question 3.5 below) must comply with the Consumer Protection Code of the Central Bank. In addition, certain wording prescribed by the Central Bank must be included in the AIF’s prospectus and in any marketing material distributed in Ireland for the purposes of promoting the AIF to retail investors.Marketing in Ireland to Professional InvestorsNotification to the Central Bank pursuant to the Irish AIFM Regulations is required in advance of any marketing in Ireland to professional investors of:■ EU AIFs by Irish AIFMs;■ non-EU AIFs by EU AIFMs; and■ AIFs by non-EU AIFMs.Marketing may only commence once the Central Bank has informed the AIFM that it may commence marketing and is conditional on the applicable requirements set out in the AIFM Directive having been complied with. For example, a non-EU AIFM must comply with the substantive transparency and other requirements set out under Articles 22, 23, 24 and, for private equity funds, 26–30, of the AIFM Directive:■ Article 22: each AIF must be audited in accordance with the

prescribed standards.■ Article 23: sets out disclosure requirements such as disclosing

to investors the current risk profile of the AIF.■ Article 24: provides requirements to “regularly” report to

each Member State in which the AIF is marketed. Member States may require more information on a periodic as well as an ad hoc basis.

■ Articles 26–30: set out detailed rules applicable to private equity funds only on the acquisition of control, including rules regarding asset stripping.

Non-Irish EU AIFMs marketing EU AIFs to professional investors in Ireland must only comply with their local rules.



Irel

and

not undertake (a) short selling of assets; (b) taking direct or indirect exposure to commodities; (c) entering into securities lending, securities borrowing, repurchase transactions, etc. if more than 10% of the assets of the ELTIF are affected; and (d) using financial derivative instruments, except where the use of such instruments solely serves the purpose of hedging the risks inherent to other investments of the ELTIF.A RIAIF/QIAIF may not acquire any shares carrying voting rights which would enable it to exercise significant influence over the management of an issuing body. This requirement does not apply to investments in other investment funds or where the AIF is a venture capital, development capital or private equity AIF, provided its prospectus indicates its intention regarding the exercise of legal and management control over underlying investments.


Although the RIAIF is a higher-risk option than an Irish UCITS fund authorised by the Central Bank, and although concentration limits are imposed by the Central Bank on RIAIFs (e.g. 20% of the net asset value (“NAV”) issuer limit, 30% of the NAV limit on deposits with an acceptable credit institution, 30% of the NAV limit in any one open-ended fund, etc.), such limits are generally more flexible than those applicable to UCITS funds.In relation to QIAIFs, the Central Bank does not impose any limits on the investment objectives, the investment policies or the degree of leverage which may be employed. However, for money market QIAIFs and QIAIFs that invest more than 50% of NAV in another fund, the Central Bank does impose certain requirements in relation to the underlying assets. A loan originating QIAIF must ensure the adequate diversification of its credit positions with regard to its target market and overall strategy. A risk diversification strategy must be included in its prospectus which must limit exposure over a specific timeframe to any one issuer or group to 25% of net assets. If the risk diversification strategy is not met within the disclosed timeframe, unitholders must give approval to continue to operate otherwise the QIAIF must be terminated.An Irish AIF structured as an ELTIF may only invest in certain eligible investments as prescribed in the European Long-term Investment Funds Regulation. Furthermore it is subject to portfolio composition and diversification limits as set out in the European Long-term Investment Funds Regulation.Finally, in relation to investment companies authorised as QIAIFs, there is a statutory requirement to spread investment risk.


A RIAIF may not borrow in excess of 25% of its net assets at any time. QIAIFs are not subject to any regulatory borrowing limits.



Except as set out below, RIAIFs/QIAIFs are not required to make public their annual reports or the identity of their investors:

■ confirmation (in writing) that the investor’s business involves, whether for its own account or the account of others, the management, acquisition or disposal of property of the same kind as the property of the QIAIF.

Qualifying investors must self-certify in writing to the QIAIF that they: (i) meet the minimum initial investment per investor and appropriate expertise/understanding tests; and (ii) are aware of the risk involved in the proposed investment and of the fact that inherent in such investments is the potential to lose all of the sum invested.




No, there are no such restrictions. However, any intermediaries used to fundraise in Ireland must be regulated where required pursuant to Irish laws. This will depend on the specific activity been carried out by the intermediary in Ireland.


There are none in the context of RIAIFs/QIAIFs.

4 Investments


Pursuant to the AIF Rulebook, RIAIFs/QIAIFs may not raise capital from the public through the issue of debt securities. However, this restriction does not operate to prevent the issue of notes by QIAIFs, on a private basis, to a lending institution to facilitate financing arrangements. RIAIFs/QIAIFs may not grant loans (except for loan originating QIAIFs) or act as a guarantor on behalf of third parties. This is without prejudice to the right of the AIF to acquire debt securities and it does not prevent AIFs from acquiring securities which are not fully paid. It will also not prevent a QIAIF in certain circumstances from entering into bridge financing arrangements.The operations of a loan originating QIAIF (other than instruments which are held for treasury, cash management and hedging) are limited to the business of issuing loans, participating in loans, investment in debt/credit instruments, participations in lending and to operations relating thereto, including investing in equity securities of entities or groups to which the loan originating QIAIF lends. Such QIAIFs may not originate loans to natural persons, other collective investment schemes, the AIFM or depositary of the QIAIF or delegates or group companies of these, financial institutions or related companies except in the case where there is a bone fide treasury management purpose which is ancillary to the primary objective of the loan originating QIAIF, and persons intending to invest in equities or other traded investments or commodities.Pursuant to the European Long-term Investment Funds Regulation, an ELTIF (which may be structured as a RIAIF or a QIAIF) may



Irel

and

(b) AIFMs/Non-AIFM Management Companies/Administrators/Depositaries

Where an AIFM, a non-AIFM management company, administrator or depositary is authorised by the Central Bank, such entity must file with the Central Bank a minimum capital requirement report when filing its half-yearly and annual reports.

Other Reports(a) RIAIFs/QIAIFs A RIAIF/QIAIF may be obliged to file reports on a periodic

basis with the Central Bank depending on the composition of its portfolio, e.g. where the AIF has side pocket assets, an annual report is required confirming whether or not the Central Bank’s parameters continue to be respected and the prospects and/or plans for the side pocket assets must be outlined.

(b) Depositary A depositary of a RIAIF/QIAIF must enquire into the conduct

of the AIFM and the management company, investment company, ICAV or general partner in each annual accounting period and report thereon to the unitholders via a depositary report included in the annual report of the AIF.

(c) Irish AIFMs/Non-EU AIFMs Marketing in Ireland A non-EU AIFM marketing an AIF in Ireland without a

passport and an Irish-authorised AIFM are required to file reports with the Central Bank in accordance with Regulation 25 of the Irish AIFM Regulations, e.g. reports on the principal markets and instruments in which they trade on behalf of the AIFs they manage, etc.


There is no express statutory or regulatory restriction on the use of side letters. However, a RIAIF/QIAIF is required, subject to certain exceptions as set out in the AIF Rulebook, to treat all unitholders in the same class equally and all unitholders in different classes fairly.Furthermore, an AIFM is subject to certain operating conditions, including, inter alia, an obligation to treat all AIF unitholders fairly and to ensure that no unitholder in an AIF obtains preferential treatment unless such preferential treatment is disclosed in the relevant AIF’s constitutional document.

6 Taxation


RIAIFs/QIAIFs are not subject to any taxes on their income (profits) or gains arising on their underlying investments. While dividends, interest and capital gains that an AIF receives with respect to its investments may be subject to taxes, including withholding taxes, in the countries in which the issuers of investments are located, these foreign withholding taxes may, nevertheless, be reduced or eliminated under Ireland’s network of tax treaties to the extent applicable.


Compensation paid to Irish managers and advisors (such as management/advisory fees, as well as performance fees) of RIAIFs/QIAIFs is generally subject to corporation tax at the trading rate (i.e. 12.5%).

■ certain documents in relation to ILPs required to be filed and maintained with the Central Bank are a matter of public record (e.g. the partnership agreement and annual report);

■ where the securities of a closed-ended RIAIF or QIAIF are admitted to listing on a regulated market, the AIF is required to make its annual and half-yearly reports public in accordance with the EU Transparency Directive. Such an AIF must also make public other information, including, inter alia, any change in the rights attaching to the various classes of shares; and

■ corporate RIAFs/ QIAIFs incorporated under the Companies Act 2014 are required to file their annual financial statements, directors’ report and auditors’ report with the Companies Registration Office in Ireland within 11 months of their year-end and as a result such documents will be a matter of public record.


Annual and Half-Yearly Reports(a) RIAIFs/QIAIFs

■ A newly established RIAIF/QIAIF must submit to the Central Bank a set of accounts (whether an interim report or an annual report) within a certain period of the launch date (i.e. within nine months for a RIAIF and 12 months for a QIAIF) and publish it within two months if it is an interim report or six months if it is an annual report. The first annual reports must be made up to a date within 18 months of incorporation/establishment and published within six months.

■ On an ongoing basis, a RIAIF/QIAIF must publish an annual report within six months of the end of the financial year. In addition, a QIAIF (established as a unit trust or CCF) and a RIAIF must publish, within two months of the reporting period, a half-yearly report covering the first six months of the financial year.

(b) AIFMs/Non-AIFM Management Companies/Administrators/Depositaries■ Where an AIFM, a non-AIFM management company,

administrator or depositary is authorised by the Central Bank, such entity must publish and file with the Central Bank (i) an annual report within four months of the end of the financial year, and (ii) a half-yearly report, covering the first six months of the financial year, within two months of the reporting period.

■ However, where an AIFM is an internally managed RIAIF/QIAIF, the annual audited accounts must be published within six months (as opposed to four months) of the year end. Furthermore, internally managed corporate QIAIFs are not required to produce half-yearly financial accounts.

Prudential Reports(a) RIAIFs/QIAIFs A RIAIF/QIAIF is obliged to file the following prudential

reports with the Central Bank:■ a monthly return setting out prescriptive information

relating to the AIF;■ a quarterly Survey of Collective Investment Undertakings

return within 10 working days of the end-quarter to which it refers; and

■ a Funds Annual Survey of Liabilities return filed with the latter return.

A RIAIF or a QIAIF structured as a money market fund that meets the definition of a “monetary financial institution” in the Regulation of the European Central Bank (EU) No 883/2011 is also obliged to file statistical information on a monthly and quarterly basis with the European Central Bank.



Irel

and

the income and gains arising or accruing to the AIF are treated as arising or accruing to its unitholders in proportion to the value of the units beneficially owned by them as if such income and gains did not pass through the hands of the CCF or ILP. Consequently, for tax purposes, the profits that arise to this type of AIF are treated as being profits that arise to the unitholders themselves. Currently, natural persons cannot invest in a CCF without negatively affecting its Irish tax transparent status. This may change in the future.Irish Real Estate FundsIn 2017, Ireland introduced a new withholding tax regime in respect of certain Irish property-related distributions and redemptions made by Irish real estate funds (“IREFs”) to certain unit holders. An IREF is a non-UCITS authorised fund where (i) 25% or more of the market value of its assets is derived from certain types of Irish real estate related assets (“IREF Assets”), or (ii) it would be reasonable to consider that the fund’s main purpose (or one of its main purposes) was to acquire IREF Assets or carry on an IREF business (that is, activities involving IREF assets the profit or gains of which would, but for the general tax exemptions applied to funds, be within the scope of Irish taxation). Where a fund is an umbrella fund, the new rules will be applied at the sub-fund level. In summary, subject to certain exceptions, a 20% withholding tax will be imposed on distributions and redemptions made out of IREF profits, which are essentially the accounting profits of the IREF with certain exclusions (e.g. distributions/dividends made by unquoted companies which derive the greater part of their value from Irish relevant assets).


No. Once a RIAIF/QIAIF has received its authorisation from the Central Bank and for so long as such authorisation remains in place, the taxation treatment detailed above applies.


Foreign Account Tax Compliance Act (“FATCA”) – The Irish and US Governments signed a Model 1 intergovernmental agreement (“Irish IGA”) on 21 December 2012 and provisions were included in the Irish Finance Act 2013 for the implementation of the Irish IGA and also to permit regulations to be made by the Irish Revenue Commissioners with regard to registration and reporting requirements arising from the Irish IGA. Subsequently, the Irish Revenue Commissioners (in conjunction with the Department of Finance) issued Regulations S.I. No 292 of 2014 which were effective from 1 July 2014. Supporting Guidance Notes (which will be updated on an ad hoc basis) were first issued by the Irish Revenue Commissioners on 1 October 2014 with the most recent version being issued in May 2016. RIAIFs/QIAIFs established in Ireland will have to carry out due diligence to identify US investors and non-FATCA-compliant investors, and will then have to report information about such investors to the Irish Revenue Commissioners. Compliant RIAIFs/QIAIFs will not be subject to, nor will they have to operate, FATCA withholding taxes.Intergovernmental Agreements – Aside from the Irish IGA, Ireland has not entered into any other IGAs.Common Reporting Standards (“CRS”) – As Ireland was one of the early adopter countries, the legislation to implement the CRS in Ireland was introduced in the Finance Act 2014 by

With regard to carried interest, aside from a regime introduced in 2009 for certain venture fund managers in respect of qualifying venture capital funds (which must be structured as partnerships and which are quite limited in their activities), Ireland does not have specific legislation dealing with carried interest. Nevertheless, generally speaking it should be possible to structure funds such that carried interest could be treated for Irish tax purposes as a capital gains tax receipt subject to tax at the standard rate (currently 33%) in the hands of an individual manager. The recently introduced venture fund managers regime (where applicable) reduces the capital gains tax rates even further to 15% (as opposed to 33%) for an individual and 12.5% (as opposed to an effective 33% rate) for a company.


There are no such establishment taxes. Furthermore, there are no transfer taxes payable in Ireland on the issue, transfer, repurchase or redemption of units in a RIAIF/QIAIF (aside for possibly units in an IREF, see question 6.4 below). Where any subscription for or redemption of units is satisfied by the in specie transfer of securities, property or other types of assets, Irish stamp duty may arise on the transfer of such assets.


RIAIFs/QIAIFs are not subject to any taxes on their income (profits) or gains arising on their underlying investments.RIAIFs/QIAIFs (other than CCFs & ILPs)Non-ResidentsThere are no Irish withholding taxes in respect of a distribution of payments by such AIFs to investors or in relation to any encashment, redemption, cancellation or transfer of units in respect of investors who are neither Irish-resident nor ordinarily resident in Ireland, provided the AIF has satisfied and availed of certain equivalent measures or the investors have provided the AIF with the appropriate relevant declaration of non-Irish residence.Irish ResidentsExempt Investors (which includes pension funds) – Again, no Irish withholding taxes apply in respect of a distribution of payments by the AIF to such investors (which would include approved pension schemes, charities, other investment funds, etc.) or any encashment, redemption, cancellation or transfer of units in respect of investors that have provided the AIF with the appropriate relevant declaration.Non-Exempt Investors – If an investor is an Irish resident and not an exempt Irish investor, tax at the rate of 41% (25% where the unitholder is a company and an appropriate declaration is in place) is required to be deducted by the AIF on distributions (where payments are made annually or at more frequent intervals). Similarly, tax at the rate of 41% (25% where the unitholder is a company and an appropriate declaration is in place) will have to be deducted by the AIF on any other distribution or gain arising to the investor on an encashment, redemption, etc. of units by an investor who is Irish-resident or an ordinary resident in Ireland. While this tax will be a tax liability of the AIF, it is effectively incurred by investors out of their investment proceeds.RIAIFs/QIAIFs (established as CCFs or ILPs)For Irish tax purposes, a CCF and an ILP (authorised on or after 13 February 2013) are treated as “tax transparent”, which means that



Irel

and


Management fees are generally subject to VAT at the current rate of 23%. However, under the harmonised VAT legislation, an exemption applies to the management of investment funds as defined by the EU Member States which, in Ireland, includes all authorised investment funds. Therefore, the VAT exemptions are wide-ranging with regard to the provision of services to funds (for example, fund administration, transfer agency, investment management, etc.).RIAIFs/QIAIFs must adhere to the relevant rules on due diligence and information reporting under the CRS and FATCA, for instance. Furthermore, RIAIFs/QIAIFs will also need to monitor the OECD BEPS project and its possible effects on their investment structures (see question 6.7 above).A tax concern which may arise is whether Irish AIFs managed by a non-Irish AIFMs lose their Irish tax residency due to the AIFM being established abroad and are thus taxed according to the laws of the seat of the AIFM. This, however, depends on the content of the laws of the jurisdiction of the AIFM. On the other hand, Irish tax law has provided that a non-Irish AIFM will not be liable to tax in Ireland by reason only of having an Irish AIFM.


No, but continual monitoring of BEPS and BEPS-related legislation is a necessity.

7 Reforms


In July 2017, the Irish Government approved the drafting of the Investment Limited Partnership (Amendment) Bill 2017.The ILP has become a favoured legal vehicle to international asset managers for the establishment of private equity funds. The regulated ILP structure has been available in Ireland since the Investment Limited Partnerships Act 1994; however, the current legislation is not considered to be up to date with the standards of global investment managers. The Amendment Bill is aimed at enhancing the existing regime to bring it into line with international standards and promote Ireland as a favoured jurisdiction for the establishment of ILPs and private equity funds. It will also bring the legislation up to date with the requirements of the AIFM Directive.

inserting Section 891F of the Taxes Consolidation Act 1997, and Regulations (Statutory Instrument 583 of 2015) came into effect on 31 December 2015. The legislation to implement the Revised EU Directive on Administrative Cooperation in the Field of Taxation (DAC2 – which essentially imports the CRS into EU legislation) in Ireland was introduced in the Finance Act 2015 by inserting Section 891G of the Taxes Consolidation Act 1997. Section 891F will not apply where Section 891G applies. RIAIFs/QIAIFs established in Ireland will have to carry out due diligence to identify various non-Irish investors and will then have to report information about such investors to the Irish Revenue Commissioners.Organisation for Economic Co-operation and Development (“OECD”) – Base Erosion and Profit-Shifting (“BEPS”) project – see question 6.7 below.


The Irish Government has been very active in the area of BEPS, having launched a consultation in May 2014 and published a detailed paper in 2014 (“OECD BASE EROSION AND PROFIT SHIFTING PROJECT IN AN IRISH CONTEXT – Part of the Economic Impact Assessment of Ireland’s Corporation Tax Policy”), where they explored the potential impacts of this project that is currently being undertaken by the OECD.Following the publication of the OECD’s final BEPS reports on 5 October 2015, Ireland introduced Country-by-Country Reporting legislation in the Finance Act 2015, followed by accompanying regulations published on 23 December 2015. The legislation applies for accounting periods commencing on or after 1 January 2016.The Irish Government is in ongoing discussions with various interested parties (including the Irish Funds Industry) in relation to the various “Actions” provided for under BEPS (to include Actions 6 and 7). Although it is unclear how Ireland will react to BEPS, asset managers and RIAIFs/QIAIFs should bear in mind the potential impact of these suggested Actions on their structures.


Whether a tax advantage exists for a particular asset class or structure depends on numerous factors, some of which will be non-Irish factors and so in order to obtain the optimum structure for a particular asset type, counsel advices should be sought on a case-by-case basis. That said, there are a few strategies/structures available in Ireland that may assist in obtaining an optimum result.



Irel

and

Dillon Eustace is one of Ireland’s leading law firms, focusing on financial services, banking and capital markets, corporate and M&A, litigation and dispute resolution, real estate and taxation.

Headquartered in Dublin, Ireland, the firm’s international practice has seen it establish offices in Tokyo (2000), New York (2009) and Cayman Islands (2012) where the firm advises on Cayman law matters.

In tandem with Ireland’s development as a leading international financial services centre, Dillon Eustace has developed a dynamic team of lawyers representing international and domestic asset managers, investment fund promoters, insurers, banks, corporates, TPAs and custodians, prime brokers, government and supranational bodies, as well as newspapers, aviation and maritime industry participants and real estate investors and developers. Dillon Eustace has been the leading Irish legal advisor to Irish domiciled funds for over 20 years as confirmed by Monterey.

The Dillon Eustace financial services team is recognised internationally by legal directories IFLR 1000, The Legal 500 and Chambers as a top-tier firm in asset management and investment funds.

Brian is a partner in Dillon Eustace Asset Management and Investment funds practice. He is a highly experienced adviser on Irish financial services law focusing on asset management and investment funds, derivatives, foreign fund registrations, investment services, and regulatory and compliance.

His investment funds practice covers all fund product types – from traditional UCITS, ETFs, money market funds and alternative UCITS to the full spectrum of Alternative Investment Funds (AIFs). He advises on product design, authorisation, contract negotiation, marketing, migration and all applicable regulatory and compliance matters.

Brian advises on Irish-regulated investment services, including establishment and authorisation and ongoing regulatory and compliance matters.

His clients include leading worldwide asset managers and credit institutions, UCITS, UCITS management companies, AIFs, AIFMs, ETFs, administrators, depositories, investment managers, investment advisers, brokers/intermediaries and other financial services firms.

Brian KelliherDillon Eustace33 Sir John Rogerson’s QuayDublin 2Ireland

Tel: +353 1 673 1721Email: [email protected]: www.dilloneustace.ie

Sean is a tax partner in Dillon Eustace and advises on financial services tax matters, including investment management, structured finance, real estate, banking, capital markets and private equity. His clients include many of the world’s leading financial institutions and asset management companies.

Sean is a Fellow of the Institute of Chartered Accountants in Ireland, an Associate of the Irish Tax Institute, a member of the Irish Funds Domestic Tax Committee and a member of the Irish Debt Securities Association Tax Committee.

Sean MurrayDillon Eustace33 Sir John Rogerson’s QuayDublin 2Ireland

Tel: +353 1 673 1764Email: [email protected]: www.dilloneustace.ie



Chapter 22

5Lex

Francesco Di Carlo

Camilla Fornasaro

Italy


As a preliminary remark one must note that Italian AIFs are established as either:■ a contractual fund: which comprises a separate pool of assets

managed by an AIFM;■ a corporate fund vehicle: a legal separate entity that, in

accordance with the Italian regulatory framework, may be established in the form of a:(a) variable capital investment company (“SICAV”): open-

ended UCI constituted in the form of a joint stock company with variable capital with its registered office and general management in Italy, with the exclusive purpose of the collective investment of the assets obtained by the offer of its own shares; or

(b) fixed capital investment company (“SICAF”): closed-ended UCI constituted in the form of a joint stock company with fixed capital with its registered office and general management in Italy, with the exclusive purpose of the collective investment of the assets obtained by the offer of its own shares and other financial instruments of equity held by the same.

Having clarified the above, one must note that:■ contractual funds rules or by-laws are subject to the approval

procedure described hereunder under question 3.3; and■ corporate fund vehicles (SICAVs/SICAFs) are subject, in

addition to the approval procedure under question 3.3, to the authorisation procedure for the establishment of the relevant corporate fund vehicle (please refer to the information provided under question 1.5 hereunder).


In accordance with Ministerial Decree no. 30/2015, the Italian regulatory framework provides for the establishment of open-ended or closed-ended AIFs (such AIFs may be established as either a contractual fund or as a corporate fund vehicle; please refer to question 1.3).Please consider that the incorporation/authorisation procedure described under question 1.5 does not differentiate between closed-ended or open-ended AIFs.



The general rules governing the activity of Alternative Investment Funds (“AIF”) and Alternative Investment Fund Managers (“AIFM”s) are provided by:■ the Italian Consolidated Financial Law (“CFL”), Legislative

Decree of 24 February 1998, no. 58;■ the Decree of the Minister of the Economy and Finance of

5 March 2015, no. 30 (Ministerial Decree no. 30/2015), Regulation implementing Article 39 of the CFL on the determination of the general criteria to be met by Italian collective investment schemes;

■ the Bank of Italy’s Regulation on collective asset management of 19 January 2015, as amended by the Bank of Italy’s Measure of 23 December 2016 (Collective Asset Management Regulation);

■ Consob’s Regulation no. 11971 of 14 May 1999, implementing the provisions on issuers of Legislative Decree 58 of 24 February 1998 (as lastly amended by Consob resolution no. 20250 of 28 December 2018) (Issuer Regulation); and

■ Bank of Italy and Consob Joint Regulation of 29 October 2007, on the organisation and intermediary procedures providing investment services or collective investment management services (as lastly amended by the joint Bank of Italy/Consob act of 27 April 2017).


The professional practice of collective asset management of AIFs is reserved to Italian Asset Managers (Società di gestione del risparmio (SGR), SICAV and SICAFs) and EU AIFMs. As for the authorisation procedure of asset managers, please consider that a manager must be authorised as an AIFM in compliance with what is provided under the AIFMD (please refer to the information provided under question 1.5 hereunder).As for the position of advisor, to be understood as an entity providing advisory or management services (depending on the scope of the Advisory Mandate), the same has to be licensed as either an entity authorised to perform advisory services or portfolio/collective asset management services (please refer to the information provided under question 1.7 regarding the delegation of AIFM functions).


Ital

y

5Lex Italy

1) Authorisation procedure – Self-managed SICAVs/SICAFs and sub-threshold AIFMs

Under Italian laws, the Bank of Italy, after consulting Consob, authorises self-managed SICAVs/SICAFs and sub-threshold AIFMs to provide collective asset management services, within 90 days from the date of receipt of the complete application, where the following conditions are fulfilled:(a) the legal form adopted is that of an Italian Joint Stock

Company (società per azioni – S.p.A.). Please note that the establishment of the S.p.A. is made by way of execution of a deed of incorporation before an Italian notary public. The deed of incorporation (Atto Costitutivo) also incorporates the by-laws (Statuto) of the company;

(b) the registered office and the head office of the company are in Italy;

(c) the paid-up capital is not less than that established on a general basis by the Bank of Italy:■ for self-managed Italian AIFMS, €1 million (€500,000

for SGRs which intend to manage exclusively close-ended Reserved AIFs or for Reserved SICAFs); and

■ for sub-threshold AIFMs, €50,000;(d) the representatives of the company (board of directors,

general manager, statutory auditors) fulfil the requirements (to be declined in terms of integrity, professionalism and independence) set by applicable laws (i.e. Article 13 of the CFL). Responsibility for verifying the fulfilment of such requirements and the probative completeness of supporting documentation falls within the competence of the company’s Board of Directors. In such case, a certified copy of the minutes of the Board’s meeting during which the integrity requirements have been verified shall be annexed to the application together with all the documentation grounding such evaluation;

(e) the qualified shareholders fulfil the requirements (to be declined in terms of integrity, competence and fairness) and meet the criteria laid down by Article 14 of the CFL;

(f) the structure of the group of which the company is part is not prejudicial to the effective supervision of the entity; and

(g) a programme of initial operations and a description of the organisational structure have been submitted together with the instrument of incorporation and the articles of association.

Please note that the described authorisation procedure is also applicable for the establishment of an Italian SGR (società di gestione del risparmio).

2) Authorisation procedure – Externally managed SICAVs/SICAFs

The Bank of Italy, after consultation with Consob, authorises the establishment of externally managed SICAVs and SICAFs within 90 days. The authorisation shall be granted where the conditions under points (a), (b), (d) and (e) of paragraph 1) are fulfilled and: (a) the paid-up capital is not less than €50,000;(b) the articles of association contemplate:

■ for SICAVs, the exclusive purpose is collective investment of the capital obtained by the offer of its own shares to the public; for SICAFs, the exclusive purpose is the collective investment of the capital obtained by the offer to the public of its own shares and of the financial instruments of its equity holdings indicated in the said articles; and

■ the entire assets are entrusted to an external asset manager and the designated management company is identified;

(c) the stipulation of an agreement between the manager, if other than an SGR, and the custodian, which ensures

In addition, Ministerial Decree no. 30/2015 sets an additional type of fund, Italian Reserved AIFs: an AIF reserved to professional investors which may be set up as closed-ended or open-ended AIFs. In particular, Article 14(2) Ministerial Decree no. 30/2015 provides that Italian Reserved AIF’s rules or by-laws may provide for the participation of non-professional investors (see question 3.6 below for more details). Furthermore, please consider that the category of closed-ended Italian AIFs encompasses real-estate and credit funds. With regards to the latter, it is necessary to specify that in accordance with the Italian legal framework (i.e. Article 4 (1) let. e) of Ministerial Decree no. 30/2015), the following funds fall within the scope of definition of ‘credit funds’ relevant for the provisions under Article 46-ter of the CFL: ■ AIFs that directly provide loans out of the assets of the fund

(‘direct lending funds’); and■ AIFs, operating on the secondary credit market, by

investing in receivables or debt certificates (crediti e titoli di rappresentativi di crediti), already existing and disbursed by third parties.

In addition, and in compliance with EU rules implementing the AIFMD, the Italian framework provides for the establishment of AIFs falling within the scope of:■ Regulation (EU) no. 345/2013 (EuVECA Regulation);■ Regulation (EU) no. 346/2013 (EuSEF Regulation); and■ Regulation (EU) no. 2015/760 (ELTIF Regulation).


As anticipated under question 1.3, and recalling what is stated therein, corporate fund vehicles (SICAVs/SICAFs) are subject to the following authorisation procedure. On this point, one should emphasise that the Italian regulatory framework allows, in addition to traditional self-managed funds (SICAVs/SICAFs):(a) Externally managed SICAVs/SICAFs: The difference

compared to the traditional ‘self-managed’ model, resides in the fact that the management of SICAVs/SICAFs’s portfolio does not constitute a mere delegation of portfolio management services as provided by Article 78 and following of Commission Delegated Regulation (EU) no. 231/2013 (Regulation no. 231/2013), but incorporates a true statutory designation. Indeed, SICAVs/SICAVs’s by-laws must entrust the management of the entire (and not part of) their assets to an external manager. Such manager must be authorised to provide asset management services (i.e. an Italian SGR (società di gestione del risparmio), an EU AIFM) and shall comply with capital, organisational and control requirements ordinarily set for self-managed asset managers;

(b) Sub-threshold SICAVs/SICAFs (subthreshold AIFMs): Provisions on sub-threshold AIFMs apply to asset managers which exclusively carry out collective asset management services with regard to Reserved AIFs having AUM below the following thresholds:■ below €100 million, including any assets acquired through

the use of leverage; and ■ below €500 million where the relevant portfolio of AIFs

are unleveraged and have no redemption rights exercisable during a period of five years following the day of initial investment in each AIF.

Sub-threshold AIFMs may also be established as AIFs falling within the scope of Regulations (EU) no. 345/2013 (EuVECA Regulation) and no. 346/2013 (EuSEF Regulation).Below is a summary of the main peculiarities of the relevant authorisation procedures:


Ital

y

5Lex Italy

■ investment firms authorised under Directive 2014/65/UE (“MIFID II”) to perform portfolio management;

■ credit institutions authorised under Directive 2006/48/EC having the authorisation to perform portfolio management under MiFID II;

■ external AIFMs authorised under AIFMD; and■ third country entities authorised or registered for the purpose

of asset management and effectively supervised by a competent authority in those countries (if certain conditions are met, please refer to Article 78 (2) of Regulation no. 231/2013).

Please consider that the provision under Section 8 of Chapter III of Regulation no. 231/2013 applies to all delegations of AIFM functions (in any case, the AIFM shall supervise the outsourced functions, the relevant outsourcing agreement shall comply with the requirements set by the aforesaid Regulation and outsources shall be subject to the Italian regulatory Authorities supervision).In accordance with Article 47 of the CFL, the custodian mandate may be conferred on authorised banks in Italy, Italian branches of EU banks, investment companies and Italian branches of EU investment companies. The custodian fulfils the obligations of custody of the entrusted financial instruments, verification of ownership, and also the obligation to keep registers of other assets. Unless entrusted to other subjects, it also holds the available liquidity of the AIFs. The custodian may carry out other activities for the asset manager without prejudice to the application of the provisions on outsourcing pursuant to Regulation (EU) no. 231/2013.Italian Asset Managers are subject to the regulatory provisions regarding the statutory auditing of accounts established for ‘entities subject to an interim regime’ (enti sottoposti a regime intermedio) pursuant to Article 19-bis of Legislative Decree no. 39 of 27 January 2010. In particular, pursuant to such rules, statutory auditing of accounts may not be entrusted to the board of statutory auditors and must be assigned to a statutory auditor or auditing firm enrolled in the dedicated register. The statutory audit assignment lasts nine years for audit firms and seven for statutory auditors and may not be renewed or reissued unless at least four years have elapsed since the date of termination of the previous assignment.


Notwithstanding the condition of reciprocity informally requested by Italian Authorities as described under question 1.6, as a general remark please note that in compliance with the principle of home country control, EU AIFMs are subject to the national rules implementing the AIFMD of their home Member State of origin.As for the conditions for managing Italian AIFs, if the EU AIFM intends to manage an Italian AIF the same shall follow the relevant passporting procedure implementing Article 33 of the AIFMD (please refer to Chapter IV, Title VI of the Collective Asset Management Regulation). In addition, the EU AIFM shall enter into an agreement with the depositary of the AIF that it intends to manage in Italy with the content foreseen by the Article 83 of the Delegated Regulation (EU) no. 231/2013.In the management of an Italian AIF, the EU AIFM shall comply with the provisions set by:■ Article 6 (1) (c) of the CFL, relating to the rules applicable to

UCIs and related implementing measures;■ Part II, Title III, Chapter II, of the CFL, concerning the

regulation of investment funds and related implementing measures; and

this latter access to the information necessary for the performance of its duties, as contemplated by Article 41-bis (2-bis) of the CFL.

As for both the authorisation procedures under the previous paragraphs, please note that the 90-day term is not mandatory and that Italian Authorities, during the procedure, may request further information to the applicant company, at any time, thus extending the duration of the procedure. In our experience, the Bank of Italy authorises the applicant company after five/six months from the filing of the application.The authorisation shall be denied where verification of the conditions indicated above shows that sound and prudent management is not ensured.


Considering the applicability of the European passport provided by the AIFMD, EU AIFMs may perform the same collective asset management services in Italy for which they have been authorised in their home member state of origin on a freedom to provide services basis or by way of establishment (see Article 41ter of the CFL).In this regard, EU AIFMs which intend to manage Italian AIFs:■ must be authorised in the home state for the management of

funds with the same characteristics as those they intend to set up and manage in Italy; and

■ must have stipulated an agreement with the custodian which ensures the latter access to the information necessary for the performance of its duties.

In accordance with the AIFMD, EU AIFMs shall follow the relevant passporting procedure, according to which the Bank of Italy must be notified by the competent authority of the EU Member State of the EU AIFM (see Title VI, Chapter IV, of the Collective Asset Management Regulation). As for non-EU asset managers, please consider that Italian legislation substantially forecloses the ability of non-EEA AIFMs to operate in Italy (the regime is pending the entry into force of Commission’s Delegated Act referred to under Article 67 (6) of the AIFMD, which will establish the passport for non-EEA AIFMs, please refer to the information provided under question 3.4 hereunder).As for the management of Italian AIFs offered to retail investors by EU AIFMs, please consider that Italian Authorities may condition such activity to a condition of reciprocity.For the sake of completeness, Italian laws do not set “residence” requirements on the asset manager’s personnel.


Italian AIFs must have: ■ an AIFM;■ a custodian authorised in the country of origin of the UCI to

undertake mandate as custodian; and■ a statutory auditor or auditing firm enrolled in the dedicated

register.As for the position of the AIFM, and notwithstanding the condition of reciprocity informally requested by Italian Authorities, please consider that the same may – in compliance with what is provided under Article 75 and following of Regulation no. 231/2013 – delegate portfolio or risk management to:■ management companies authorised under Directive 2009/65/

EC;


Ital

y

5Lex Italy

units/shares may be suspended in the interest of the investors. In the case of redemptions, these events are generally referred to situations in which the reimbursement requests (for their size) would require disinvestments that, taking into account the market situation, could cause prejudice to the investors’ interests. Conversely, for closed-end funds (which by definition provide for limits on divestments), the fund rules/by-laws may provide, before the term of the fund:(a) partial pro-quota redemptions against disinvestments; and(b) early redemptions against new issuances of units/shares,

specifying the criteria on the basis of which the requests are satisfied in case of redemptions exceeding new subscriptions.

In addition, please consider that the fund rules/by-laws must provide the timeframes in which the rights under a) and b) may be exercised by the investors.A case-by-case assessment must be carried out with regards to soft and hard lock-ups for open-ended funds.


Under Italian laws Reserved Italian AIFs may be marketed to professional investors within the meaning of Annex II of Directive 2014/65/EU (“MiFID II”) and to the categories of non-professional clients identified by Article 14 of Ministerial Decree no. 30/2015 (please refer to the information provided under question 3.6).Consequently, investor’s interest may be transferred only in between the aforementioned subjects (professional investors and non-professional clients identified by Ministerial Decree no. 30/2015.Further limitations could be established in the funds rules or by-laws.


Notwithstanding what is provided under the European framework as for asset composition of AIFs compliant, respectively, with the EuVECA, EuSEF and ELTIF Regulations, please consider that Ministerial Decree no. 30/2015 provides that:■ Open-ended Italian AIFs: may invest their assets, subject to

the prudential provisions for risk containment and fractioning by the Bank of Italy, in:■ financial instruments traded on a regulated market;■ unlisted financial instruments for a maximum of 20% of

their assets (units/shares of unlisted open-ended UCITS are not calculated in the 20% threshold); and

■ bank deposits of money.■ Closed-ended Italian AIFs: may invest their assets (in

addition to the eligible assets for open-ended Italian AIFs) in:■ unlisted financial instruments (the 20% threshold does not

apply);■ real estate property, real estate rights, including those

derived from leasing real estate contracts with translatable nature and from concessionary relationships, and shareholdings in real estate companies, units/shares of other real estate AIFs, including foreign real-estate AIFs;

■ receivables and debt securities, including engaging in direct lending activities towards commercial borrowers; and

■ other goods for which there is a market, having a value which may be determined with a periodicity of at least six months.

■ Part IV, Title II, Sections II and III, of the CFL, relating to the public offering of the EU AIFs and the related implementing measures.

The Bank of Italy and Consob ensure compliance with these provisions. It is left to the supervisory authority of the home Member State of origin the assessment of the adequacy of the organisational measures adopted by the EU AIFM.


There are no co-operation or information sharing agreements specifically related to the AIFMD.As for other legal frameworks (MiFID, CRD IV/CRR), the list of agreements and cooperation actions entered into by Italian Authorities with EU and non-EU Supervisory Authorities is available on:(a) Consob’s website (http://www.consob.it/web/area-pubblica/

cooperazione-internazionale).(b) Bank of Italy’s website (http://www.bancaditalia.it/compiti/

sispaga-mercati/accordi-cooperazione/index.html).

2 Fund Structures


Please refer to the answers provided under question 1.3 and 1.4.


In compliance with what is provided under Article 36 (4) of the CFL, each mutual investment fund or each sub-fund represents an independent capital, separate to all effects from that of the asset management company and from that of each investor, as well as from any other assets managed by the same company; with regard to the obligations undertaken on behalf of the fund, the asset management company answers only with the assets of that fund. Claims on such assets on the part of the creditors of the asset management company or in the interests of the same, or on the part of the creditors of the custodian or sub-custodian or in the interests of the same are not admitted. Claims of creditors of a single investor are admitted only on the units held by said investor. Under no circumstances may the asset management company use the assets of the funds managed in its own interests or those of third parties.


An Italian AIFM must be incorporated in the form of a joint stock company (società per azioni, S.p.A.). Please consider that Italian investment companies (SIMs, which could act as advisors) must be also incorporated as a joint stock company.


As for open-ended funds, the fund rules or by-laws must indicate the cases, of an exceptional nature, in which redemptions or issuance of


Ital

y

5Lex Italy

As for legal documents, please consider the following approval procedure:Fund rules of AIFs (except Italian Reserved AIFs, as defined under question 1.4 herein) are subject to an approval procedure to be carried out before the Bank of Italy. In particular, the establishment of new funds and the approval of their rules/by-laws are within the competence of the administrative body of the Italian Asset Manager. Once internally approved, the fund rules are transmitted to the Bank of Italy for approval. This procedure can follow two main schemes:(1) ‘In general’ approval (approvazione in via generale): A

peculiarity of the domestic market. The following fund rules are not subject to specific approval by the Bank of Italy as they fall within the cases where approval is generally granted:(a) open-ended (un-reserved) AIFs rules drawn up in

accordance with the simplified regulation scheme (see Title V, Chapter I, Section II, paragraph 1 of the Collective Asset Management Regulation); and

(b) fund rules that differ from rules of other existing funds set-up by the same asset manager only for aspects relating to subject, investment policy and expenditure regime, in the understanding that the general criteria and rules established by the Bank of Italy for such matters are observed (see Title V, Chapter I, Section II, paragraphs 3.1 and 3.3 of the Collective Asset Management Regulation).

Asset managers wishing to make use of this simplified procedure shall communicate to the Bank of Italy (in December of each year) the characteristics of the funds they intend to set up in the following year, thereby indicating any impact on the organisational structure. The asset manager may generally approve during the year funds with characteristics other than those indicated in the annual communication. In such case, the same must inform the Bank of Italy in advance, supplementing the annual communication already sent.

(2) Ordinary approval: The Bank of Italy must approve fund rules of AIFs other than those of Italian Reserved AIFs (as well as related amendments) where the fund rules do not meet the requirements set out above. This approval procedure requires 60 days (30 days for Italian AIFs managed by an EU AIFM).

In addition, as for the amendments to the by-laws of SICAVs/SICAFs (except Italian Reserved AIFs, as defined under question 1.4 herein) please consider that, in compliance with what is provided under Article 35-septies of the CFL, the Bank of Italy approves amendments to by-laws of SICAVs/SICAFs (the approval procedure requires 90 days).In addition, and for the sake of completeness, please note that in public offerings, fund prospectus rules apply.


Please consider that the AIFMD disciplines on the marketing of: (i) non-EU AIFs by an EU AIFM/non-EU AIFM, and (ii) EU AIFs by a non-EU AIFM have not been implemented in the Italian regulatory framework. Legislative Decree no. 44/2014 (the Decree), introduced a transitional period with respect to laws regulating the marketing of non-EU AIFs and non-EU AIFMs operativity in Italy, which is pending the entry into force of a delegated act of the European Commission referred to in Article 67(6) of the AIFMD, which will establish the passport for non-EU AIFs and non-EU AIFMs. In this regard, and notwithstanding the possibility of subscription of units/shares under a reverse solicitation scenario, it is worth noting that non-EU AIFs and non-EU AIFMs operativity in Italy is substantially foreclosed, pending the entry into force of the aforesaid Commission’s Delegated Act.

In addition, it should be noted that such rules are further declined by the provisions set by Chapter III of Title V of Collective Asset Management Regulation which provide for criteria and prohibitions on investment activity, risk containment and fractioning/diversification.As for Italian Reserved AIFs, Italian laws place no restriction on Italian Reserved AIF’s investments. The only restrictions are those imposed in the fund rules or by-laws.With regards to asset stripping, please consider that Italian legislation (Article 28-quaterdecies, “Ban on the unbundling of assets” of Consob’s Issuer Regulation) is aligned to the provision under Article 30 of the AIFMD; hence an AIFM that acquires, individually or jointly, control of a non-listed company or of an issuer, in the following 24 months, as regards distribution transactions, including the payment of dividends and interest to shareholders, or transactions for the reduction of capital, the redemption of shares or shareholdings, or the acquisition of own shares by the investee company:■ shall refrain from facilitating, supporting or initiating them;■ shall not express a favourable vote on the same on behalf of

the AIF in the investee company; and■ shall strive to prevent the same.

3 Marketing


Please refer to question 1.1.


As a general remark, please consider that marketing materials must be accurate, clear and not misleading. To this end, we emphasise that Consob’s Communication no. DIN/1031371 of 26 April 2001 provides for guidelines on the drafting of advertisements relating to Italian and foreign UCIs.


As mentioned under question 3.2 above, marketing materials do not require prior approval by Italian Authorities. As for public offerings, please consider that Article 34-decies of Consob’s Issuer Regulation states that before publication of the prospectuses, the bidder, the issuer and the party responsible for the placement may proceed, directly or indirectly, with the divulgation of information, the performance of market surveys and the collation of purchase intentions pertaining to the public offering, provided that: (a) the information divulged is consistent with that contained in

the prospectuses; (b) the related documentation is transmitted to Consob at the

same time as its divulgation; (c) express reference is made to the circumstance that the

prospectuses will be published and to the location where the public can procure a copy of the same; and

(d) it is stated that the purchase intentions collated do not represent purchase proposals.


Ital

y

5Lex Italy

the Italian legal regulatory framework provides for the following categories of clients:(a) professional clients (Annex II, Part I of MiFID II – categories

of client who are considered to be professionals);(b) opted-up professional clients (Annex II, Part II of MiFID II –

clients who may be treated as professionals on request); and(c) retail clients.Notwithstanding the above, Ministerial Decree no. 30/2015 provides that Italian Reserved AIF’s rules or by-laws may provide for the participation of the following non-professional investors (i.e. retail clients):(a) non-professional investors subscribing units/shares of the

relevant AIF for a total amount of not less than €500,000 (Article 14(2) of Ministerial Decree no. 30/2015); and

(b) members of the administrative body and employees of the asset manager subscribing shares/units of Italian Reserved Italian AIFs managed by them, for an amount below the €500,000 threshold (i.e. Article 14(4) Ministerial Decree no. 30/2015).

In addition, in accordance with Article 14(3) of Ministerial Decree no. 30/2015, Italian Reserved Real-Estate AIFs can be marketed to public entities that do not meet the requirements to be classified as public professional clients under Ministerial Decree no. 236 of 11 November 2011, where their participation estate is effected through the direct granting of real-estate property and rights, including concession relationships, for value enhancement of public assets pursuant to Article 33 of Decree Law no. 98 of 6 July 2011, converted into Law no. 111 of 15 July 2011.


Notwithstanding what provided under question 3.6 in relation to Reserved Real Estate AIFs, Italian laws and regulations do not impose further restrictions.


Italian laws and regulations do not impose restriction on the use of intermediaries for marketing the shares/units of AIFs. Please note that such intermediaries require a licence/authorisation to conduct marketing of the shares/units of the funds. In particular, intermediaries must be authorised to perform the investment service of placing financial instruments without a firm commitment basis under Article 1 (5) lett. c-bis of the CFL in order to market the unit/shares of the AIF in the Italian territory.


Notwithstanding sectoral rules with regards to the acquisition and holding of participations in both the financial and non-financial sector, Italian laws do not set specific restrictions on the participation by particular types of investors, such as financial institutions. In any case, investment limits regarding direct and indirect holdings imposed by banking/insurance/financial sectoral rules shall apply (e.g. Directive 2009/138/EC (“Solvency II” applies to investments in funds by insurance companies)).

Finally, one should emphasise that AIFs qualify as complex products and hence the distribution activity is subject to additional rules/measures prescribed by Consob’s Communication no. 0097996 of 22 December 2014 (e.g. informative obligations, remuneration requirements, and specific suitability assessment).Please also consider the answer to question 3.5 below.


EU AIFs can be marketed in Italy to professional investors in accordance with the passporting procedure provided by Article 32 of the AIFMD. Please consider that the passporting procedure provided by the AIFMD may be followed for marketing to:■ professional investors (as defined by Annex II of Directive

2014/65/EU (“MiFID II”); and■ to non-professional investors included among the categories

of investors to which Italian Reserved AIFs can be marketed (see question 3.6).

Notwithstanding what is provided under question 3.4 regarding the complexity of AIFs (and relevant implications), please consider that when an EU AIFM intends to market its AIFs to retail investors, in addition to the passporting procedure implementing Article 32 of the AIFMD, the EU AIFM shall directly apply for authorisation before Consob, thereby indicating the following:(a) the applicant’s company name, registered head office and the

general management; (b) the name of the AIF or the sub-fund, the units of shares of

which are to be sold in Italy; (c) the name of the subject appointed for the payments, the

subject appointed to place the units or shares in Italy and of the subject, if other than the subject appointed for the payments, who deals with the offer in Italy;

(d) the full details and legal qualification of the person who underwrites the units or shares; and

(e) the list of the attached documents.As for the documentation requested under (e) above, please note that the document set slight changes in relation to the nature of the relevant AIF (closed-ended versus open-ended AIF) and that the relevant documentation, if drafted in a foreign language, shall be translated in Italian and shall be filed together with a certification of conformity to the original issued by the AIFM’s legal representative.Consob, in accordance with the Bank of Italy, authorises the marketing if certain conditions are met within:■ 60 days for open-ended AIFs, following the filing of the

authorisation application. ■ 20 days for closed-ended AIFs, following the filing of the

authorisation application. For the sake of completeness, one must additionally emphasise that Consob seems to have assumed a stricter approach with respect to marketing to retail clients. In particular, as a result of the practices undertaken by other EU supervisory authorities, the Authority could subject marketing to retail clients to a condition of reciprocity. In addition, it is worth noting that Article 44 of the CFL (marketing of non-reserved AIFs) states that shares/units of the AIF have to be actually sold to retail investors in the home member state of origin in order to be marketed to retail investors in Italy.


The implementation of the AIFMD did not introduce a specific category of perspective investors AIFs can be marketed to; thereby


Ital

y

5Lex Italy

■ periodically (in a period at least equal to the issuance of units/shares), the manager has to draft a report of the NAV of each fund and its units/shares.

Additional rules are set with regards to real-estate AIFs.


National implementing laws of the AIFMD require AIFMs to comply with a range of detailed regulatory reporting obligations. More specifically, Italian AIFMs shall, inter alia, provide to:■ Consob, the reporting obligations set by Consob’s Resolution

17297 of 28 April 2010, provisions relating to authorised intermediaries’ requirements on the communication of data and information and the transmission of records and documents; and

■ the Bank of Italy, the communications and reporting obligations provided by Section II and III of Chapter III of Title IV of the Collective Asset Management Regulation.


The use of side letters is not expressly dealt with by Italian laws.On this point, please consider that Article 12 (1) (f) of the AIFMD, as implemented by Article 35-decies of the CFL, states the obligation to treat all investors fairly and to not give preferential treatment to any investor. In the case of Italian reserved AIFs, preferential treatment to one or more investors or investor categories is allowed insofar as it is disclosed in the relevant AIF’s rules or by-laws. Please consider that even before the entry into force of the AIFMD, Italian Authorities have adopted a conservative approach aimed at avoiding discrimination between investors.

6 Taxation


Domestic Alternative Investment Funds (other than real estate funds) are subject to the same tax regime set forth for any other type of investment fund, regardless of whether they are established under the legal form of “fund” or under the form of “closed-ended investment joint-stock company” (“SICAF”). Under article 73(5-quinquies) of Presidential Decree 917/1986 and Article 3(2) of Legislative Decree 446/1997, alternative investment funds are neither subject to corporate income tax nor to regional business tax. In addition, most of the profits realised by the fund are not subject to any Italian withholding tax, with certain exceptions, amongst which, for instance: the 26% withholding tax on income from “atypical” securities (i.e. securities that neither qualify as “shares” or “securities similar to shares” nor as “bonds” or “securities similar to bonds” for Italian income tax purposes); the 26% withholding tax on income from foreign bank accounts, deposits and certificates of deposit; and the 26% withholding tax on income from banker acceptances (“accettazioni bancarie”).


In relation to carried interest schemes, Article 60 of Law Decree no. 50 of 24 April 2017 has recently provided a new legislation

4 Investments


Please refer to question 2.6.


In addition to what is provided under question 2.6, please consider that Chapter III of Title V of Collective Asset Management Regulation sets, for non-reserved UCIs, criteria and prohibitions on investment activity, risk containment and fractioning/diversification. Further on, for Italian Reserved AIFs, the Bank of Italy may provide for the application of leverage limits and prudential rules to ensure the stability and integrity of the financial market.


For open-ended AIFs borrowing is restricted to short-term credit (maximum six months) up to 10% of the NAV; the borrowing must be aimed at facing, in relation to the investment or disinvestment needs of the fund’s assets, temporary mismatches in the management of the treasury.Closed-ended AIFs may borrow up to 10% of the NAV (for credit funds the limit is brought up to 30% of the NAV); borrowing is not limited to short-term credit and is not (necessarily) aimed at facing temporary mismatches in treasury management.The borrowing for Italian reserved AIFs is generally not restricted but the fund rules/by-laws will have to set a maximum level of leverage consistent and appropriate with the fund’s characteristics and investment strategies. As anticipated under question 4.2, the Bank of Italy may restrict the level of the fund’s leverage for the stability and integrity of the financial market.



In accordance with Article 3 of Ministerial Decree no. 30/2015, fund accounts are maintained by the Italian AIFMs. For each fund managed (in addition to the ordinary accounting obligations), the AIFM must:■ keep day-to-day accounts for the fund, including details of

portfolio acquisitions and sales, and all issues and redemption of fund units;

■ within six months from the end of each financial year (or in the shortest period in which proceeds are distributed), the manager has to draft the annual investment management report, and the company’s board of directors has to prepare a report on the management of the activity performed;

■ within two months from the end of each semester, the manager has to draft a report on the management activity carried out during the semester; and


Ital

y

5Lex Italy

If the relevant unitholders qualify as individuals carrying out commercial activities for units held as business assets, the above-mentioned 26% withholding tax is applied as an account income tax and the proceeds arising from the investment in the fund must be included in the investor’s relevant annual income tax return and are therefore subject to general Italian income taxation. Otherwise, if the individual does not act in the context of a business activity, the 26% withholding tax applies as a final withholding tax.Distributions of amounts paid from capital contribution are not subject to any income taxation at the level of the investor but reduce the tax basis of the units for a corresponding amount. The relevant management company of the distributing fund should inform the investor (as well as intermediaries with whom the units are deposited) about the tax nature of the amount being distributed. In such respect, the Italian tax administration clarified that as to the tax qualification of the distributed amount, reference shall be made to the qualification given by the management company under a regulatory perspective: accordingly, there is no presumption according to which profits are deemed firstly distributed.With regards to non-resident investors (that do not act through a permanent establishment in Italy to which the units are effectively connected), the proceeds distributed to them by an Italian investment fund (and those included in the positive difference between the redemption, liquidation and transfer value of the fund’s units and their weighted average subscription or acquisition price) are subject to a 26% final withholding tax. However, no withholding tax is applicable provided that the investor:■ is the beneficial owner of the proceeds; and■ is resident, for income tax purposes, in a “white list” state.Finally, distributions of profits to Italian pension fund investors made by Italian Alternative Investment Funds to Italian pension funds are included in the results of the portfolio ordinarily subject to the 20% substitutive tax regime. Distributions are made to UE pension.


In principle a tax ruling is not required prior to establish an Alternative Investment Fund. It might be advisable to request for a tax ruling only in case there are specific elements of uncertainty regarding the application of tax provisions to the relevant case.


Both the FATCA and CRS legislations have been implemented by the Italian law and therefore Alternative Investment Funds operating in Italy are fully subject to the application of such legislations.


In principle, no specific steps have been implemented with particular regard to Alternative Investment Funds’ operations. However, all the international Alternative Investment Funds operating in Italy are required to comply with the Italian tax legislation that has been amended on the base of OECD’s Action Plan on Base Erosion and

according to which, subject to certain conditions, the carried interest embedded into units of undertakings for collective investments (“UCIs”) qualifies by operation of law as financial income rather than income from employment. In particular, the following conditions need to be met:(i) the commitment of all the relevant managers of the Fund must

be at least equal to 1% of the overall investments actually made by the Fund;

(ii) payment of the carried interest shall only be made once the other investors have received sums at least equal to the overall investment plus a pre-determined return (the “hurdle rate”) to be set in the Fund’s regulations; and

(iii) the units, shares or financial instruments must be held by the manager (or, in case of demise, by the heirs) for a minimum period of at least five years or, if earlier, until the change of control or the substitution of the management company.

If the relevant conditions are not met, the tax qualification of the carried interest is subject to interpretation. Based on the clarifications provided by Italian tax authorities the following elements must then be taken into account to determine whether the relevant arrangement is capable of generating financial income rather than income from employment: (i) the magnitude of the investment is significant enough, also in an absolute amount, to align the interest of the managers to those of the other shareholders and to determine for the manager an actual exposure to the risk of a loss; (ii) the absence of any agreement aiming at neutralising the risk of a loss such as put options at cost price; (iii) the absence of any leavership clause; (iv) the compensation of the manager is adequate (without considering the carried interest); and (v) the units or shares entitling to the carried interest return are also offered to third parties.


No establishment or transfer taxes apply in Italy.


As for Resident investors, according to provisions set forth by Article 26-quinquies of Presidential Decree 600/1973, a 26% withholding tax is applied on (i) the proceeds distributed by the fund and (ii) the proceeds included in the positive difference between the redemption, liquidation and transfer value of the fund’s units and their average subscription or acquisition price. The proceeds arising from the investment of the fund in bonds issued by the Republic of Italy or by other states, considered as “white list” states (i.e. states which recognise the Italian tax authorities’ right to an adequate exchange of information as listed in the Ministerial Decree of 4 September 1996, as subsequently amended and supplemented), shall be subject to the above-mentioned 26% withholding tax only for 48.08% of their relevant amount (the actual taxation is equal to 12.5%). The 26% withholding tax is withheld:a) by the management company; orb) in case the units are deposited with a centralised custodian of

financial instruments, authorised in accordance with article 80 of Legislative Decree 58/1998, or with a non-resident entity which has an account with a centralised clearance and settlement system (which has a direct link with the Italian Ministry of Economy and Finance), by the above-mentioned financial intermediaries that will intervene, in any way, in the collection of the proceeds of units.


Ital

y

5Lex Italy

Units of collective investment vehicles (including Alternative Investment Funds) established in Italy or in EU/EEA Member States are also considered as “qualified investments” provided that such vehicles meet the same asset allocation requirements described above.


There are no other material tax issues to be highlighted.


No relevant tax changes regarding Alternative Investment Funds are expected in the coming 12 months.

7 Reforms


No major amendments to domestic laws are expected in the near future with regards to investment funds.Please consider that future amendments are directly attributable to changes in EU legislation. In this respect we emphasise that Italian legislation may be affected by the Commission’s proposals of March 2018, which, inter alia, aim to introduce a specific harmonisation in the EU on pre-marketing:■ the Directive amending Directive 2009/65/EC (“UCITS”)

and AIFMD with regard to cross-border distribution of collective investment funds; and

■ the Regulation on facilitating cross-border distribution of collective investment funds and amending Regulations (EU) no. 345/2013 and (EU) no. 346/2013.

AcknowledgmentThe authors would like to acknowledge the assistance of Ludovici Piccone & Partners in the preparation of this chapter.

Profit-Shifting (“BEPS”). In particular, foreign funds carrying out certain activities in Italy need to pay a particular attention to the application of the dependent agent permanent establishment provisions (“DAPE”) that have been enlarged in their scope by the outcome of the Final Report on BEPS Action 7. A DAPE in Italy could for instance arise in case employees of the foreign fund manager are involved in negotiations and sales activities that lead to the conclusion of contracts in Italy in the name of the foreign fund manager.


The Law no. 232 of 11 December 2016 has introduced a number of tax incentives applicable to investments made by both pension funds and Italian resident individuals and carried out through the special scheme of “Individual Long-Term Saving Plans” (“Piani Individuali di Risparmio a Lungo Termine”, “PIRs”). In particular, under certain circumstances, the new regime exempts from taxes any income from financial investments included in PIRs (in addition, investments in the PIR are also exempt from inheritance tax). Each individual cannot set up more than one PIR and contributions into the PIR cannot exceed €30,000 per year with a total cap of €150,000 during their lifetime.Assets contributed into PIRs must be invested as follows:■ at least 70% of their total value in financial instruments,

irrespective of whether listed or unlisted, issued by companies (other than real estate companies) resident in Italy for tax purposes. Companies resident in EU or EEA Member States are also eligible provided that they maintain a permanent establishment in Italy;

■ 30% of such 70% amount (i.e. 21% of the total) in financial instruments issued by qualified companies that are not listed in the “FTSE MIB” index of the Italian Stock Exchange – the primary benchmark index for the Italian equity markets, measuring the performance of the 40 Italian most capitalised equities – or in similar indices of other regulated stock exchanges; and

■ the remaining 30% on any type of investment with the sole exception of instruments issued by persons established in non-cooperative States (i.e. those States that do not allow an adequate exchange of information).

PIRs cannot be invested for more than 10% of their value in instruments issued by the same company or by companies belonging to the same group of companies or in deposits and current accounts.


Ital

y

5Lex Italy

The Firm has consolidated experience in the structuring and implementation of collective investment management schemes (including in the area of real estate investment funds) and in the setting up and offering of units of Italian and foreign funds, also relying on collaboration with a worldwide network of foreign firms. In addition to comprehensive theoretical and practical knowledge of UCITS legislation, the Partners have considerable and recognised expertise in providing legal advice with respect to alternative collective investment undertakings, since their introduction to the Italian legal system. Our Partners assisted the first mutual funds specialised in mini-bonds as well as collective investment schemes focused on the credit industry. The Firm assists Italian and foreign clients with cross-border transactions.

One of the founding partners of Craca Di Carlo Guffanti Pisapia Tatozzi, Francesco Di Carlo has a longstanding experience in advising financial institutions and Italian and foreign funds on banking, financial, insurance and company law matters. His expertise is mainly focused on the incorporation and authorisation of financial industry players and funds, M&As and Italian and international corporate reorganisations, the provision of cross-border reserved transactions, the structuring of financial products and assistance to intermediaries with the administrative stage of the penalty proceedings initiated by Supervisory Authorities. He has also developed significant experience with the regulatory supervision of listed companies, with particular regard to the protection of minority shareholders, corporate governance, related-party transactions, reporting obligations and market abuse. He has assisted major international institutional investors in the management of their shareholdings in listed companies at the various stages of their investment, including with respect to governance issues and damages claims. He is often involved in innovative projects related to legislative changes in his areas of practice and has been working for years with the major Italian and international Authorities.

In 2016, 2017 and 2018 he has been named by Who’s Who Legal: Private Funds as “one of the leading advisers in the Italian funds industry, assisting asset managers and investment funds”, “well known for his international expertise in investment funds and his dynamism on matters of structuring and management”. In 2016 and 2017, he was included among the 50 Italian advisers who have left their mark in business advisory, according to Legalcommunity.it. In 2018, he received the Professional of the Year award in the Finance Regulatory category from the Legalcommunity Finance Awards.

Francesco Di Carlo5LexVia degli Omenoni 220121Italy

Tel: +39 02 304 1331Email: [email protected]: www.5lex.it

Camilla Fornasaro’s areas of practice mainly include banking, finance, commercial and insurance advice. Mrs. Fornasaro also advises Italian and European asset managers and investment funds on aspects of Italian financial services regulatory issues, including structuring, establishment, management, cross-border marketing (both via authorisation or passporting) and operation of investment funds (UCITS and alternative investment funds). Mrs. Fornasaro also advises on regulatory and general compliance issues affecting clients throughout the financial sector (including MiFID II).

Camilla Fornasaro5LexVia degli Omenoni 220121Italy

Tel: +39 02 304 1331Email: [email protected]: www.5lex.it


Chapter 23

Bonn & Schmitt

Jeannette Vaude-Perrin

Amélie Thévenart

Luxembourg

Securitisation vehicles, which are governed by the Luxembourg law of 22 March 2004 on securitisation vehicles, as amended, should normally be out of the scope of the AIFM Law unless given its features it would fall within its scope.


All Luxembourg entities that manage AIFs (based in Luxembourg, in another EU country or outside the European Union) are subject to the AIFM Law and, must be (i) regulated and supervised by, or (ii) at least registered with, the CSSF. Investment managers managing the portfolio of an AIF may be located abroad. For Regulated Funds, the appointment of a manager is subject to CSSF approval. If unknown to the CSSF but supervised by a recognised financial supervisory authority, the CSSF will proceed to a due diligence on available information. If the manager is unregulated, the CSSF will carry out a due diligence on its expertise, track record, financial standing and reputation.Luxembourg based advisers to AIFs (or their AIFM) are (i) either regulated by the CSSF and must be licensed pursuant to the law of 5 April 1993 on the financial sector, as amended (the “1993 Law”), subject to exemptions, or (ii) may be subject to the law of 2 September 2011 regulating the access to the professions of craftsman, merchant, industrial as well as certain liberal professions, as amended (the “2011 Law”) and submit an application for a business licence as economic advisor (conseiller économique) to the Minister of Economy, subject to exemptions. (Also please refer to question 1.8 for foreign advisors.)


Regulated Funds are subject to prior CSSF authorisation and ongoing supervision.


Luxembourg AIFs subject to a Product Law can be open or closed-ended and such information must be disclosed in the offering document.



In Luxembourg, an Alternative Investment Fund (“AIF”) within the meaning of the law of 12 July 2013 relating to managers of alternative investment funds (the “AIFM Law” and an “AIFM”), will usually take the form of: (i) a fund authorised under Part II of the Luxembourg law of 17 December 2010 on undertakings for collective investment, as amended (“Part II Fund” and “2010 Law”, respectively); (ii) a specialised investment fund (“SIF”) under the law of 13 February 2007 relating to specialised investment funds, as amended (the “SIF Law”); (iii) a “SICAR” (société d’investissement à capital risque), being an investment company in risk capital, subject to the Luxembourg law of 15 June 2004 on companies investing in risk capital, as amended (the “SICAR Law”); or (iv) a reserved alternative investment fund (“RAIF”) under the law of 23 July 2016 on reserved alternative investment funds (the “RAIF Law” and together with the SIF Law, the 2010 Law and the SICAR Law the “Product Laws” and each a “Product Law”, and Part II Funds, SIF and SICAR together “Regulated Funds”). An AIF may also be set up as a non-Product Law structure (typically referred to as SOPARFI (société de participations financières), subject to the law of 10 August 1915 on commercial companies as amended (a “Corporate AIF” and the “1915 Law”, respectively) and may opt between the range of available corporate structures.Part II Funds, SIF and SICAR are regulated by the Luxembourg financial supervisory authority (Commission de Surveillance du Secteur Financier – “CSSF”).The implementation of European Directive 2011/61/EU of the European Parliament in relation to the supervision of managers of alternative investment funds (“AIFMD”) has changed the regulatory environment for managers of AIFs and for AIFs. Luxembourg was one of the first EU Member States to successfully transpose the AIFMD into national law.All AIFs established in Luxembourg must be managed by an AIFM, responsible for ensuring compliance with the AIFM Law. The AIFM will be subject to either the simplified registration regime or the full-scope authorisation regime, depending on (i) the assets under management, and (ii) whether the AIFM will market the shares on a cross-border basis to investors located outside Luxembourg. Moreover, the AIFM can be (a) an externally appointed entity, or (b) where the legal form of the AIF permits internal management, the AIF itself.


Luxe

mbo

urg

■ Auditor: audit of financial statements by Luxembourg independent approved statutory auditor with appropriate professional experience.


For foreign advisors, there is no regulation requirement, provided that the CSSF views it favourably when an advisor opts into regulation where possible. For foreign managers, evidence of supervision is required, or failing due diligence by CSSF (see question 1.2).


The CSSF has signed:the Memorandum of Understanding (“MoU”) on Cooperation between the Financial Supervisory Authorities, Central Banks and Finance Ministries of the EU on Cross-Border Financial Stability, dated 1 June 2008. The text of the MoU, including the list of signatories, is available on the CSSF website, (http://www.cssf.lu/fileadmin/files/Documents_internationaux/MoU_2008_Final_1_June_2008.pdf). MoUs with a number of supervisory authorities of the financial sector, laying down the principles and terms relating to cooperation between authorities on issues relating to prudential supervision. The list of signatories is available on the CSSF website (http://www.cssf.lu/en/eu-international/subnav/col3/memoranda-of-understanding/).Pursuant to the AIFM Law and further to ESMA’s approval of cooperation arrangements between EU securities regulators and their global counterparts, as of February 2015, the cooperation agreements with 44 non-EU authorities. ESMA has published a list of the AIFMD MoUs signed between EU regulators (including the CSSF) (http://www.cssf.lu/fileadmin/files/AIFM/ESMA_34_32_418_AIFMD_MoU.pdf).In addition, the CSSF is a member of the European System of Financial Supervision (“ESFS”), created with effect from 1 January 2011, and participates in each of the following entities comprising the ESFS:■ the European Banking Authority (“EBA”);■ the European Securities and Markets Authority (“ESMA”);

and■ the European Insurance and Occupational Pensions Authority

(“EIOPA”).Their purpose is to contribute to establishing common regulatory and supervisory standards and practices and ensuring that the Member States’ supervisory authorities apply a single set of harmonised rules and consistent supervisory practices.In addition to the above, Luxembourg currently has around 77 double taxation treaties (“DTT”) in force. The 46 DTTs entered into between Luxembourg and a third country include the provisions of Article 26 §5 on exchange of information of the Organisation for Economic Co-operation and Development (“OECD”) Model Tax Convention on Income and on Capital, so that an effective exchange of information in tax matters is ensured.Luxembourg signed the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the “Convention”) on 29 May 2013, ratified in Luxembourg by the Law dated 26 May 2014 and entered into force on 1 November 2014.

Only SICAR are subject to strategy limitation (exclusive investment in risk capital within the meaning of Circular CSSF 06/241 of 05 April 2006 relating to the concept of risk capital under the SICAR Law (“Circular 06/241”)). The 2010 Law, the SIF Law and the RAIF Law provide for two different fund types: (i) contractual vehicles without legal personality (fonds commun de placement – “FCP”); or (ii) investment company, (a) with variable capital (société d’investissement à capital variable – “SICAV”), or (b) with fixed capital (société d’investissement à capital fixe – “SICAF”).There is also a distinction between funds subject to a Product Law or to the 1915 Law only, and between regulated and non-regulated funds.


For Regulated Funds notably, the following draft documents and information must be submitted to the CSSF: articles of incorporation/LPA; offering document; service provider agreements; information on initiator; advisor; CSSF questionnaires; and director documents. On average the procedure takes three to four months.For an authorised AIFM, the application must contain i.a.: CSSF questionnaire (CSSF website); draft articles of incorporation; information concerning shareholders (qualifying holdings); governing bodies; senior managers; drafts of policies and procedures; service provider agreements; and draft constitutional documents of the AIF to be managed.The CSSF has three months from the date of acknowledging receipt of the file to complete its examination process, during which the clock may be stopped where additional information is requested. Once approved, the AIFM is entered on the CSSF’s Official List of AIFMs, tantamount to formal authorisation.


Registered office and central administration of the AIF/AIFM must be located in Luxembourg to qualify as a Luxembourg-based AIF/AIFM. The depositary must be located in Luxembourg, the AIFM must have at least two Luxembourg resident conducting officers. A number of local resident directors is advisable.


If not internally managed, a Luxembourg AIF’s appointed external AIFM is entrusted with portfolio and risk management, and potentially administration and marketing. An AIF established in the form of an FCP must appoint an external AIFM, in the absence of own legal personality.For AIFs set up under a Product Law, the following service providers are required:■ Depositary: Luxembourg credit institution or PSF licensed

under the 1993 Law, responsible for the safekeeping and supervision of the assets of the AIF.

■ Paying Agent: a Paying Agent will be required in Luxembourg and in each country where the AIF is distributed (typically via the depositary (and its network)).

■ Administration/Domiciliation/Registrar and Transfer Agent: either performed by the authorised AIFM (or regulated management company), potential sub-delegation to third party (credit institution or professional of the financial sector (“PSF”)) or direct appointment by AIF.

Bonn & Schmitt Luxembourg


Luxe

mbo

urg


AIFs subject to the 2010, SIF and RAIF Law are subject to risk diversification provisions. SICARs are limited as regards their investments (see questions 2.4 and 4.1). All AIFs managed by authorised AIFMs are subject to asset stripping rules.

3 Marketing


Post-authorisation marketing of AIFs is governed by the Product Laws, the AIFM Law, CSSF circulars and/or CSSF regulations.


The offering document of any AIF must include the information necessary for investors to be able to make an informed judgment of the proposed investment, in particular, of the risks attached thereto. Further content include: NAV computation; costs; expenses; subscription; redemption; conversation mechanisms; and AIFM Law requirements.


Core fund documents of regulated AIFs must be CSSF approved (offering document, articles of incorporation, etc.). Presentations, flyers, similar short-form marketing documentation need not be approved.


SIFs, SICARs and RAIFs are reserved for well-informed investors only (see question 3.6). No restrictions apply to Part II Funds and Corporate AIFs, which may be offered to retail investors, unless there is specific legal prohibition.AIFs subject to the 2010 Law, SIF, SICAR or RAIF Law are automatically authorised for marketing in Luxembourg. The marketing of Luxembourg non-regulated AIFs is limited to professional investors.The AIFM Law contains detailed provisions applicable to marketing/distributing of units/shares of Luxembourg AIFs or non-Luxembourg AIFs by Luxembourg AIFMs and non-Luxembourg AIFMs in Luxembourg and abroad, respectively. Only authorised AIFMs benefit from the marketing passport, in order to market EU AIFs in Luxembourg, the AIFMs established in another Member State must be authorised under the AIFMD.“Marketing”, under Luxembourg regulatory rules, means a direct or indirect offering or placement, at the initiative of the AIFM or on behalf of the AIFM of units/shares of an AIF it manages, to or with investors domiciled or with a registered office in the EU. Hence, any active marketing activities are covered by the term. Reverse solicitation, i.e. placement of AIF units/shares at the initiative of an investor, is not “marketing” and does not trigger AIFMD requirements.

2 Fund Structures


Stand-alone structures and umbrella funds with one or several compartments are feasible under the Product Laws as well as several forms of investment vehicles (notably FCP, SICAV, SICAF) (see question 1.4 above).Investment companies may be set up as: public limited liability company (société anonyme – “SA”); private limited company (société à responsabilité limitée – “SARL”); partnership limited by shares (société en commandite par actions – “SCA”); corporate limited partnership (société en commandite simple – “SCS”); or special limited partnership (société en commandite speciale – “SCSp”). The SCSp has no legal personality and mirrors the Anglo-Saxon limited partnership. It is a very flexible corporate structure and a success story with over 2,000 SCPs launched since 2013. The limited partnership structures are the most used structures.


Liability of the limited partner/ordinary investor is generally limited to the amount committed/paid in to the fund. General partners’ liability is unlimited but manageable if set up as a corporate entity.


The principal legal structures used for investment managers and advisers in Luxembourg are the SA and the SARL, subject to the 1915 Law, the AIFM Law and/or the 2011 Law.


No legal provisions limit a manager’s ability to restrict redemptions. It is, however, market practice to provide for rules for occasional suspension of the net asset value (“NAV”) calculation and hence of the subscription, conversion and redemption, in certain prescribed and disclosed circumstances (e.g. a breakdown of communication devices/political instability/emergency). Suspensions must be communicated to investors by the AIFM in an appropriate manner. There is no distinction between open- and closed-ended AIFs in this regard.Transfer of shares/units by investors to another investor are usually not restricted, except in commitment-based AIFs or in case of investor eligibility requirements (e.g. well-informed investors).In corporate AIFs (other than SCS and SCSp), redemption at the request of investors is not possible.


There are no legislative restrictions on transfers other than those resulting from the well-informed investor requirement (see question 3.6) in the SIF, SICAR and RAIF environment. (Also refer to question 2.4.)



Luxe

mbo

urg

For Part II Funds, SIFs, RAIF (except risk capital RAIF) and corporate AIFs, the eligible assets are unrestricted.


Luxembourg AIFs are not restricted in terms of types of investments (except the SICARs – see above).

Diversification requirements apply to:■ SIFs and RAIFs (maximum 30% of their net assets or

commitments in the same type of security issued by the same issuer); and

■ Part II Funds (maximum exposure 20% of net assets).


Luxembourg laws do not provide for any restrictions. However, AIFs must mention the level of borrowing and leverage in the offering document.



AIFs subject to Product Laws are required to produce and make available to investors an annual report. Part II Funds must publish an unaudited semi-annual report.

If mentioned in the documentation, the AIFM must publish the net asset value (or make it available to investors). Any other publication must be made in compliance with the offering document.

Luxembourg AIFMs are subject to transparency requirements towards investors and the CSSF, pursuant to the AIFM Law (e.g. information on conflicts of interest, liquidity risk, leverage, and remuneration policy).


AIFs must communicate their annual reports to the CSSF and are subject to reporting requirements. AIFMs are subject to requirements towards the CSSF, notably on principal instruments, markets, exposures and concentrations in which they trade on behalf of the AIFs managed, details on the assets of the AIFs, including risk profiles, liquidity arrangements, overall level of leverage per AIF and acquisition by AIF of important holdings in non-listed companies.

The CSSF may require further information on an ad hoc basis if it is considered necessary to ensure the effective monitoring of systemic risk.


The use is not restricted but subject to disclosure to investors via the AIF’s rules or incorporation documents to ensure fair treatment.


Only Part II Funds can be marketed to retail investors in Luxembourg (see above). Marketing of non-regulated EU AIFs is limited to professional investors.EU AIFMs authorised in another EU Member State can market units/shares of EU AIFs they manage to retail investors in Luxembourg, provided (i) the EU AIF is subject to permanent supervision, and (ii) the EU AIF is furthermore subject in its home Member State to regulations offering a level of protection for investors, as well as to a prudential supervision considered by the CSSF as equivalent to that provided for in Luxembourg legislation.The 2010 Law imposes additional conditions on the marketing of non-Luxembourg AIFs, including the appointment of a Luxembourg paying agent and prior authorisation by the CSSF.


Investment in a SIF, SICAR or RAIF is reserved to “well-informed investors”, i.e: (i) institutional; (ii) professional; or (iii) other investors who confirm in writing that they adhere to the status of “well-informed” investors and who either: (a) invest a minimum of EUR 125,000; or (b) have been assessed by a credit institution, an investment firm or a management company which certifies the investors’ ability to understand the risks associated with investing in the product.


Luxembourg laws do not provide any specific restrictions.


Luxembourg or foreign intermediaries may act as distributors, provided the latter are authorised by competent authorities to act as distributors of a Luxembourg AIF.The use of nominees who act as intermediaries between investors and the AIF is possible.


Luxembourg law does not provide for any specific restrictions.

4 Investments


SICARs are restricted to direct and/or indirect investment in securities that represent risk capital, i.e. mainly high-risk investments made in view of their launch, development or listing on the stock exchange in various forms.



Luxe

mbo

urg

b) Registration tax Incorporated SIFs and RAIFs are subject to a non-

recurring registration duty of EUR 75 at the time of their incorporation and at the time of any other corporate event (e.g. amendments of articles).

c) Direct taxes Luxembourg SIFs and RAIFs (other than risk capital

RAIFs – see below) are exempt from Luxembourg direct taxes.

Risk capital RAIFs may opt for a special tax regime similar to the SICARs. Hence RAIFs investing exclusively in risk capital, opting for this special tax regime, are fully subject to corporate income tax and municipal business tax but benefit from an exemption on any income from transferable securities, their transfer, contribution or liquidation, and are exempt from net wealth tax (except for the minimum net wealth tax of in principle EUR 4,815).

d) VAT Regarding VAT, please refer to developments for Part II

Funds.


Investment management companies established in Luxembourg are subject to Luxembourg corporate income tax, municipal business tax and net wealth tax at standard rates. Their taxable base may, however, be reduced by various deductions. Fund management services supplied in Luxembourg are in principle exempt from VAT (see VAT rules in the context of Part II Funds).Private portfolio managers and investment advisers are professionals and fall under the rules of individual taxation for independent activities.A withholding tax of 20% is levied on the gross amount of the director fees, creditable against the director’s Luxembourg tax. Such withholding tax should be final for a non-resident director provided that the director fees do not exceed EUR 100,000 per year and constitute the only Luxembourg professional source income. It should be noted that with application from 1 January 2017, individuals who supply directorship services for consideration have the status of taxable persons for VAT purposes. However, such services might fall under the VAT exemption subject to certain conditions. Hence, a Luxembourg-resident independent director might be obliged to register for Luxembourg VAT and to file VAT returns reporting their supplies of directorship services. The AIFM Law allows, under certain conditions (like the tax residency of the employee or the full return of committed capital to investors prior to payment to employees), the taxation of carried interest realised by certain employees of the AIF or the AIFM as “speculative income”, with an applicable tax rate of 25% of the average tax rate applicable to the adjusted income, i.e. a marginal income tax rate of 11.44% (including the employment fund contribution) as from 2017. The AIFM Law defines “carried interest” as a share in the profits of the AIF accrued to the AIFM as compensation for the management of the AIF and excluding any share in the profits of the AIF accrued to the AIFM as a return on any investment by the AIFM into the AIF.The minimum corporate tax introduced for certain holding companies as of 1 January 2011 (further amended as of 1 January 2013) has been replaced by a minimum net wealth tax as of 1 January 2016, which may apply to management and advisory companies in certain circumstances. Depending on the assets of the management

6 Taxation


1. Part II Fundsa) Subscription tax

■ annual subscription tax of 0.05%, calculated and payable quarterly on aggregate net assets valued on the last day of each quarter. The value of units representing assets held by an undertaking in other Part II Funds, having already paid the subscription tax, is exempt therefrom; and

■ reduced rate of 0.01% applies to undertakings the exclusive object of which is (i) the collective investment in money-market instruments, and (ii) the placing of deposits with credit institutions.

b) Registration tax■ upon their incorporation and upon any further corporate

events (amendment of articles of incorporation or transfer of seat): fixed registration duty of EUR 75 (regardless of the number of compartments); and

■ none for Part II Funds organised as FCPs (since FCPs are contractual agreements without legal personality).

c) Direct taxes Part II Funds are exempt from any Luxembourg income,

withholding, capital gains or net wealth taxes.d) Value-added tax (“VAT”) Pursuant to Circular no 723 of 29 December 2006, the

Luxembourg tax authorities have expressly recognised that all investment funds are VAT-taxable persons (in the case of an FCP the management company is the VAT-taxable person). Consequently, Luxembourg VAT will be applicable under the reverse charge mechanism whereby a Luxembourg-based fund (or, in case of an FCP, the management company) receives services from suppliers located in other EU Member States.

A VAT exemption (article 44 (1) (d) of the Luxembourg VAT law) is available to portfolio management services, investment advisory services and certain administrative services, while mere technical services, supervision and control services supplied by a depositary are not exempt services. The VAT exemption on administrative and management services is also available to outsourced services, provided that these services, strictly recharged, form a distinct whole and are essential functions to the exempt management services, thus leaving isolated technical supplies outside of the VAT exemption scope.

Given the breadth of exemptions available, investment funds and their management companies will, in most cases, derive an almost 100% exempt turnover. For that reason, Circular no 723 denies them the possibility to deduct the input VAT they might have borne on non-exempt services.

2. SIFs and RAIFsa) Subscription tax SIFs and RAIFs (other than RAIFs investing exclusively

in risk capital – see below): annual subscription tax of 0.01%, calculated and payable quarterly on their aggregate net asset value at the end of the relevant quarter. Exemptions available to certain institutional cash funds, pension pooling funds and microfinance funds as well as funds investing in other funds already subject to the subscription tax.



Luxe

mbo

urg


Luxembourg and the USA signed the Intergovernmental Agreement Model 1 on 28 March 2014, amended by an exchange of notes signed on 31 March 2015 and 1 April 2015, ratified by the law of 24 July 2015. The first reporting obligations concerned the 2014 calendar year, which the Foreign Financial Institutions had to meet by 31 August 2015. The reporting for the 2015 calendar year and all following calendar years needs to be realised before 30 June of each following year.As per the Common Reporting Standards (“CRS”), Luxembourg signed the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which provides a legal basis for the automatic exchange of tax information and which was approved by the law of 26 May 2014. Luxembourg is part of the 53 “early adopters” of the OECD’s Common Reporting Standards. The reporting for the 2017 calendar year and all following calendar years needs to be realised before 30 June of each following year.The CRS have been implemented at EU level by Directive 2014/107/EU, transposed by the law of 18 December 2015. The reporting starting from the 2016 calendar year needs to be realised before 30 June of each following year.


Luxembourg is actively implementing all of the OECD’s BEPS Action Plans through various domestic measures.BEPS Action Plan 1 regarding VAT on business-to-consumer digital services was implemented in domestic law on 1 January 2015.Luxembourg implemented BEPS Action Plan 2 on hybrid mismatches by transposing Directive 2014/86/EU on the prevention of double non-taxation deriving from hybrid loan arrangements.BEPS Action Plans 3 and 4 on CFCs and interest deductions are subject to an EU anti-tax avoidance directive adopted in July 2016, to be transposed by 31 December 2018.BEPS Action Plan 5 on harmful tax practices led to the repeal of the previous IP Box regime in Luxembourg on 1 July 2016. A bill of law introducing a new IP Box regime was submitted to the Parliament on 4 August 2017. As of today the bill of law has not been approved.With regard to (i) BEPS Action Plan 6 on treaty abuse, Luxembourg introduced a general anti-abuse rule when it transposed Directive 2015/121 amending the EU Parent-Subsidiary Directive, and (ii) BEPS Action Plan 7 on the prevention of artificial avoidance of permanent establishment status and BEPS Action Plan 14 on dispute resolution, Luxembourg implemented the new standards by signing the OECD’s multilateral instrument, which should enter into force three months after five countries have ratified, accepted and approved it.BEPS Action Plans 8 to 10 on transfer pricing and Action Plan 13 on transfer pricing documentation and country-by-country reporting have been implemented through the amendment of Luxembourg transfer pricing regulation (in particular, by determining clearly the arm’s length remuneration between related parties) as from 1 January 2017 and through the non-public country-by-country reporting obligations applicable as from the financial year 2016.

and advisory company, the minimum net wealth tax is either a fixed rate of in principle EUR 4,815 or a progressive rate ranging from EUR 535 to 32,100.


There are none.


No withholding tax is levied on distributions made by a regulated Luxembourg AIF to resident, non-resident or pension fund investors. Distributions made by an unregulated Luxembourg AIF to resident, non-resident or pension fund investors should be subject to a 15% withholding tax on the gross amount of dividends (unless availability of reduced rate or exemption under a DDT or the participation exemption regime).

Income distributed by the Luxembourg AIF should be taxed in the country of residence of the non-resident or pension fund investor. Capital gains realised by non-residents may only be taxed in Luxembourg (i) in case of unregulated AIFs, (ii) where no DDT is available, and (iii) under certain specific circumstances.

Luxembourg-resident individual or corporate investors have to declare their income in their annual tax return.

Dividends distributed by and capital gains realised on a regulated AIF should be subject to corporate taxation at the level of the Luxembourg corporate investor, whereas such dividends and capital gains from an unregulated AIF may benefit from the participation exemption regime at the level of the Luxembourg corporate investor, under certain conditions.

Dividends distributed by an AIF to a resident individual investor are subject to the progressive tax rates depending on the investor’s annual income and matrimonial situation, the marginal income tax rate being 45.78% (including the employment fund contribution). Capital gains arising from the sale of AIF shares or units, other than speculative gains (realised within six months after acquisition), are exempt from taxation in the hands of a Luxembourg-resident individual investor, except if the investor holds more than 10% of the capital of the SICAV or SICAF, the 10% threshold being determined on the umbrella fund.

AIFs set up as FCPs are tax-transparent for direct tax purposes and investors are treated as directly holding the underlying investments and directly receiving the corresponding income and capital gains.


There is no requirement to obtain a tax ruling in Luxembourg prior to establishing an AIF. However, depending on complexity of the structure (e.g. the use of specific financial instruments or nonstandard structuring), it might be advisable to secure the structure with the Luxembourg tax authorities through a tax ruling. The tax ruling procedure is subject to an administrative fee ranging from EUR 3,000 to 10,000 depending on the complexity of the case.



Luxe

mbo

urg


The Council of the European Union on 13 March 2018 reached political agreement on a Council Directive introducing mandatory disclosure rules for intermediaries such as lawyers, accountants and tax advisers. Intermediaries must report potentially aggressive cross-border tax planning arrangements and arrangements designed to circumvent reporting requirements like CRS and ultimate beneficial ownership reporting. EU Member States’ tax authorities will exchange the information automatically within the EU through a centralised database.The Council Directive must be transposed by 31 December 2019 and apply as from 1 July 2020. However, it will have retroactive effect, which means that starting in summer 2018, intermediaries and their clients should already monitor all tax advice provided with a cross-border dimension and all advice concerning reporting requirements to ensure that a future obligation to report can be properly fulfilled.

7 Reforms


No major reforms are currently proposed to impact directly AIFMs in 2018.

AcknowledgmentThe authors would like to thank Alex Schmitt for his invaluable contribution to this chapter. Me Schmitt is a Founding Partner at Bonn & Schmitt and is specialised in banking and finance and investment funds. Tel: +352 27 855 / Email: [email protected]


Tax advantages related to any asset class or structure depend on a wide variety of factors, such as the underlying investments, holding period as well as investor’s status and residency.It is therefore essential to seek counsel for using the optimal asset class and structure for each individual case.


Under Council Directive 2003/48/EC on the taxation of savings income (the “Savings Directive”), Luxembourg had elected for the withholding tax system instead of the exchange of information system. However, by virtue of the law of 25 November 2014, entered into force on 1 January 2015, Luxembourg abolished this withholding tax system and introduced an automatic exchange of information. The Savings Directive was repealed by Directive 2015/2060/EU on 10 November 2015 and will no longer be applicable once all reporting obligations have been complied with.A tax issue which may arise is whether Luxembourg AIFs managed by a non-Luxembourg AIFM lose their Luxembourg tax residency due to the AIFM being established abroad and are thus taxed according to the laws of the seat of the AIFM. This, however, depends on the content of the laws of the jurisdiction of the AIFM. In the opposite sense, i.e. having a non-Luxembourg AIF and a Luxembourg-based AIFM, the Luxembourg AIFM Law makes clear that the non-Luxembourg AIF will not be subject to Luxembourg taxation.



Luxe

mbo

urg

Bonn & Schmitt is a leading, independent, full-service Luxembourg law firm. The firm assists asset managers, banks, institutional investors and private equity houses in the setting up of Luxembourg investment fund vehicles and their ongoing legal and regulatory administration.

Jeannette Vaude-Perrin is a Partner at Bonn & Schmitt, with almost 20 years of experience in investment funds with a focus on private equity, real estate, debt, infrastructure and UCITS. She specialises in the formation and accompanying of regulated and non-regulated funds (partnerships, RAIF, SIF, SICAR) and on related operational aspects. She is actively involved with the Association of the Luxembourg Fund Industry (“ALFI”) and a regular lecturer on fund-related topics for training institutes.

Prior to joining Bonn & Schmitt in 2018, Jeannette worked with other top-tier law firms in Luxembourg and also practised in-house at a leading depositary bank in Luxembourg as a member of management of the RePe Business Line. She is admitted to the Luxembourg Bar.

Jeannette Vaude-PerrinBonn & Schmitt148, Avenue de la FaïencerieL-1511 LuxembourgLuxembourg

Tel: +352 27855Email: [email protected]: www.bonnschmitt.net

Amélie Thévenart is a Counsel at Bonn & Schmitt, specialised in investment funds. She has 10 years of experience in Luxembourg investment funds law, both in-house at regulated Luxembourg management companies, and at the law firm Bonn & Schmitt. She assists in the setting up, merger and liquidation of different Luxembourg funds (UCITS/SIF/SICAR/Part II/non-regulated AIFs). Amélie has also acquired solid experience in the drafting and reviewing of different types of fund-related agreements (e.g. depositary agreements, investment management agreements, distribution agreements and management company agreements).

Amélie ThévenartBonn & Schmitt148, Avenue de la Faïencerie L-1511 LuxembourgLuxembourg

Tel: +352 27 855Email: [email protected]: www.bonnschmitt.net



Chapter 24

Vieira de Almeida


Carlos Filipe Couto

Mozambique


Yes. In general terms, the UCI Law distinguishes between AIFs investing in (i) securities or financial assets, and (ii) real estate (real estate investment funds). Both AIF types may be open or closed-ended.In general terms, open-ended AIFs target the retail market and closed-ended AIFs target high-net-worth or professional investors; thus in open-ended AIFs, scrutiny by the BoM tends to be tighter.


In a nutshell, the authorisation request for setting up AIFs is filed with the BoM and the relevant AIF’s manager must provide the BoM with the relevant AIF’s documentation, notably the regulation and a copy of the agreement to be executed between the fund manager and the depositary.Furthermore, the BoM may request further information from the fund manager.If applicable, authorisation should be given within 45 days of receipt of either the relevant documentation or any supplementary information or amendments to the documents required by the BoM. If at the end of such period the applicants have not been notified of the authorisation, this means it has been tacitly refused.However, considering that BoM has discretion to request further information, which will halt the term for granting the authorisation and that are few AIF being constituted in Mozambique, the term for completing the process may vary significantly from case to case.The marketing of the AIF’s units shall start within 90 days of the granting of the relevant authorisation.


No, there are not.


In Mozambique, an AIF is legally required to have a fund manager, a depositary, an auditor and, in the case of real estate AIFs, real estate appraisers.



Activity involving the management, investment and marketing of Alternative Investment Funds (AIFs) is mainly regulated by: the Undertakings for Collective Investment Law, enacted by Decree no. 54/99 of 8 September 1999 and amended by Decree no. 36/2005 of 29 August (the UCI Law), which sets out most of the rules relating to AIFs; Law no. 15/2009 of 1 November 1999, amended from time to time, which implemented the Credit and Financial Institutions Regime (Banking Law); Decree no. 56/2004 of 10 December 2004, as amended by Decree no. 31/2006 of 30 August, which implemented the Regulation on Credit and Financial Institutions (Banking Law); Decree-Law no. 4/2009 of 24 July 2009 (Mozambique Securities Market Code); and Ministerial Ordinance no. 10/99 of 24 February 1999 (Financial Intermediation Activities Regulation).The Bank of Mozambique (BoM) is the relevant supervisory authority.


Yes. Fund managers, as financial institutions, are subject to the BoM’s supervision; accordingly, the relevant authorisation procedure shall be filed with the BoM.The UCI Law does not foresee any de minimis exception or fast-track authorisation procedure, therefore all fund managers, regardless of the type of assets under management, will need to comply, in general terms, with the same requirements.


Yes. The setting up of AIFs is subject to authorisation with the BoM, which is the competent regulator to conduct the supervision of AIF management activity and ancillary service providers as well as distribution and compliance with the general rules applying to AIFs, notably in connection with the protection of investors’ interests.


Moz

ambi

que


The UCI Law is silent in respect of the fund manager’s ability to limit redemptions in open-ended funds, but considering that such type of AIFs is, in general, targeted towards retail investors, the BoM will most certainly scrutinise this matter. In fact, such possibility would need to be clearly set out in the AIF’s regulation, which is analysed throughout the authorisation procedure.Moreover, the draft AIF regulation, approved by the UCI Law, includes a field where conditions set out for redemptions must be described, but only refers to applicable fees, settlement dates and the criteria for the determination of which units will be redeemed.The fund manager may suspend the units’ redemption, in the case of an abnormal situation that may impact the usual running of the market or jeopardise the interests of the unitholders, provided the BoM is immediately informed of said suspension.As far as restriction of transfers in open-ended funds is concerned, the same rationale as described above in respect of redemptions is applicable.Conversely, in the case of closed-ended AIFs – mainly those targeting professional investors – it should be considered that it is possible to establish, in the AIF’s regulation, restrictions on the transfer of the units from investors to third parties.


No. However, it is important to bear in mind the limitations established on foreign investment, which place constraints on transfers abroad of profits or dividends obtained in Mozambique. Therefore, prior to an investment in a Mozambique AIF being performed, the thresholds and requirements to be met by such an investment shall be assessed, on a case-by-case basis, as well as the provisions applicable to the transfer abroad of the profits or dividends obtained pursuant to the redemption of the units/shares or liquidation of the AIF.


The ability of the manager to manage its funds will be mainly limited by the investment policy established in the AIF’s prospectus or regulation, as applicable, by the general investment limits by type of AIF, if any, established in the UCI Law and by the obligation to conduct its activity in the best interest of the investors.The UCI Law has a list of acts that a manager cannot carry out, such as granting loans, execute certain transactions on its own account, execute transactions relating to the assets held by the AIF with related parties, e.g., entities of its group, the depositary, etc.

3 Marketing


Please refer to question 1.1 above, as well as to the Consumer Law, approved by Law no. 22/2009 of 28 September 2009, and the Advertising Code, approved by Decree no. 65/2004 of 31 December 2004.

It should be noted that the UCI Law does not expressly foresee the existence of an auditor and, in the case of real estate AIFs, real estate appraisers; however, the existence of such two entities in the case of real estate assets is fundamental in light of the fact that the AIF itself will need to be assessed and is subject to accounting control.Furthermore, the AIF may also have, but is not legally compelled to have, distributors or entities that will market its units, although such entities are more common in open-ended AIFs.


In accordance with the Banking Law, the same rules established for national managers will apply to foreign managers. However, the foreign managers will need to be properly authorised to conduct their activities in Mozambique and will need to have a local establishment.


We are not aware of any specific protocol or sharing agreement having been signed by the BoM with other governments or regulators in respect of the Alternative Investment Fund Managers Directive (AIFMD) or AIFs.

2 Fund Structures


Under the UCI Law and subject to the licensing procedures described in question 1.5 above, an AIF may only adopt the contractual structure with no legal personality. This is the classic structure and requires that the AIF be managed by a separate fund manager. The investors’ or unitholders’ interests in such funds are called units (unidades de participação).


The assets of an AIF are only liable for its debts. Accordingly, the AIF will not bear liability for the debts of investors, fund managers, depositaries, distributors or other AIFs. Likewise, the investors are not personally liable for the debts of the AIF.The statement of the preceding paragraph does not stem expressly from the UCI Law, but rather from general legal principles applicable to investment in AIFs.


An AIF needs to be managed, depending on its scope, by a:■ fund manager (financial institution), which may only manage

AIFs investing in securities and other financial assets;■ real estate fund manager (financial institution), which may

only manage AIFs investing in real estate funds; or■ commercial or investment bank, but only in the case of

closed-ended AIFs.

Vieira de Almeida Mozambique


Moz

ambi

que

Nonetheless, the fund manager shall ensure that the “know your customer” and investment adequacy analyses are properly carried out in relation to the investor, and that the procedures against money laundering and the financing of terrorism are closely respected.


No, there are no additional restrictions.


No. However, the relationship established between the intermediaries and the AIF shall be laid down in a written agreement and disclosed in the AIF’s legal documents.Furthermore, the intermediary, when carrying out the fundraising process, needs to act within the scope of activities that it is authorised to conduct; i.e. if the fundraising process corresponds to AIF marketing, the intermediary will need to be an authorised institution under the applicable legal terms in order to carry out the distribution of securities.


No. However, the holding of AIFs’ units may have an impact on credit institutions’ and financial institutions’ own funds, which needs to be assessed on a case-by-case basis.

4 Investments


Yes. AIFs may only focus on investment activities and their investments must comply with the general rules applicable to financial instruments markets.


Yes. The assets eligible for the portfolio of an AIF will depend on its specific type.In general terms, an AIF cannot hold in its portfolio: (i) units from a UCI managed by the same fund manager; (ii) assets encumbered with in rem security, liens or precautionary proceedings; (iii) securities issued or held by its fund manager; (iv) securities issued or held by entities that hold more than 10% of the fund manager share capital; (v) securities issued or held by entities 20% or more of whose share capital is held by the fund manager; (vi) securities issued or held by entities that are members of the management body of the fund manager; (vii) securities issued or held by entities 20% or more of whose share capital is held by members of the management body of the fund manager; (viii) securities issued or held by entities whose management bodies are comprised of one or more directors of the


There are no drafts available; neither does the UCI Law set out express provisions addressing marketing materials. However, providing information on the investment policy, markets targeted, main features (identification of the relevant entities, terms and conditions of the investment, links to the legal documents) and historic returns of the AIF is perceived as common practice for fund managers and other distribution entities.Lastly, on a general note, the information contained in the marketing materials must comply with the following principles: legality; truthfulness; objectivity; adequacy; opportunity; and clarity.


Yes. AIFs’ prospectuses, as well as their amendments, are subject to prior BoM authorisation.Furthermore, all marketing actions in respect of an AIF shall inform the addressee of the existence of the prospectus and the place where it may be consulted.


The concept of marketing or distribution of AIFs is not defined in the UCI Law. Nevertheless, it should be construed as comprising all activity directed towards investors with a view to promoting or proposing the subscription of the relevant AIF’s units, regardless of the means of communication used.Nonetheless, the general principles laid down in question 3.2 above in respect of marketing will be equally applicable to all marketing activities and materials.Furthermore, attention is drawn to the fact that the reverse solicitation is not officially recognised or defined under Mozambican law and it is thus not an official exemption expressly foreseen in the applicable legal framework, but rather a tolerated practice. Such practice consists of an investor, on its own initiative and without having been engaged for such purpose by the distributor, requesting information on a specific AIF. However, a case-by-case assessment needs to be conducted, considering that the use of the reverse solicitation exemption may come under the BoM’s scrutiny.Lastly, the requirements and principles laid down in the Consumer Law and Advertising Code in respect of investors, which are deemed as consumers, shall also be observed.


Yes, they can.


There is no particular requirement to be fulfilled in relation to investors in AIFs. However, every marketing material must make reference to the existence of the AIF’s prospectus and the place where it may be consulted by the investor.



Moz

ambi

que

The annual and biannual accounts shall be made available to investors, as they become ready, in the premises of the fund manager, the depositary and, if applicable, the distributor.Additionally, with regard to such data, the fund manager shall publish a report containing the activities carried out during the last term, which shall comprise information on the units, transactions, portfolio evaluation and evolution, etc.In the case that the marketing entity of the AIF is also a bank of which the investor is a client, it can provide the above information together with the investor’s bank statement.The fund manager shall publish in the Mozambique Stock Exchange’s official journal, on a monthly basis with reference to the last day of the immediately preceding month, an inventory of the AIF’s asset portfolio, its global net value and the number of units currently in circulation. The fund manager shall remit this information to the BoM within three days after its publication.Lastly, the fund manager shall submit to the BoM its monthly trail balances, by the 15th day of the following month.


The use of side letters that set out particular terms and conditions in respect of governance, investment, etc. of an AIF is not specifically addressed by the UCI Law.However, in the case of open-ended AIFs, considering that they usually target retail investors and/or a broader unrestricted scope of investors, the use of side letters which alter any relevant provision of the legal documents shall be deemed illegal, considering that as a general principle fund managers need to abide by the AIF’s legal documents during the provision of its activity.In closed-ended AIFs, notably in AIFs targeting only professional investors, we trust that there is a wider margin to set out, namely through a side letter, specific provisions in respect of certain matters. However, in general terms, as the provisions of the UCI Law are imperative, any side letter providing for actions in breach of such legal provisions will be deemed illegal and may subject the fund manager to administrative offence proceedings.

6 Taxation


Considering there is no special tax regime applicable to Collective Investment Vehicles, the general tax regime applies, under which Mozambican-resident entities are subject to corporate income tax at the rate of 32% (Imposto sobre o Rendimento das Pessoas Coletivas – IRPC) to be levied on taxable profits obtained on a worldwide basis (including income obtained abroad).


There is no special tax treatment or rules applicable in Mozambique for investment managers or advisers. Therefore, as Mozambican-resident entities, they will also be subject to the general taxation regime referred to above (32% IRPC rate to be levied on taxable profits obtained on a worldwide basis).

fund manager; (ix) securities issued or held by entities, pursuant to a placement agreement, by the fund manager, depositary or entities which hold 10% or more of the share capital of the fund manager, save for public subscription offers targeting securities envisaged to be admitted to trading in a stock exchange; and (x) real estate assets in co-ownership.The prohibitions laid down in points (iv) to (viii) do not apply if the securities at stake are admitted to trading in the Mozambique stock exchange.Moreover, in general terms, an AIF investing in securities or financial assets may have on its portfolio securities as defined in the Mozambique Securities Code, which comprise shares, bonds, participation titles in public funds, units and any other similar instruments, as well as instruments stemming from rights detached from the previous securities, provided that they are exchangeable in a secondary market.An AIF investing in real estate may hold in its portfolio real estate assets registered in the Land Registry Office as pertaining to an investment fund, and holdings of 50% or more in companies listed in a stock exchange and whose scope consists in acquiring, selling, renting and exploring real estate assets.


Fund managers may obtain loans on behalf of AIFs under their management, but the loan period cannot exceed 120 days, consecutive or not, within a period of one year and up to a maximum of 10% of the AIF’s global value.Moreover, the assets of the AIF can only be encumbered, in any way whatsoever, in order to obtain loans within the conditions referred to in the preceding paragraph.



AIFs’ legal documents and their updates shall be made available to investors, in the premises of the fund manager, the depositary and, if applicable, the distributor.Considering that legal documents must describe the identity of the fund manager, depositary, auditor, distributors and other AIF services providers, the majority of data in connection with the AIF will be made available to the public.However, the identity of the investors in the AIF is not mandatorily subject to public disclosure.


Fund managers must prepare annual accounts of the AIFs under management by 31 December of each year. In the following four months, the fund manager shall publish the balance sheets and profit and loss accounts.The fund manager shall also prepare biannual accounts after the end of the relevant semester.



Moz

ambi

que

respect, since there is no specific tax regime for investment funds, we would recommend that they request a tax ruling in order to obtain more regulatory and tax certainty. This results from the fact that, after the ruling is issued, the decision obtained by the taxpayer (which it may request previously to a potential transaction or the setting up of a fund) is binding on the tax authorities and could only be amended or changed by a court decision.


Mozambique has not entered into any treaty or adhered in any way to any mechanism in order to implement either FATCA or the Common Reporting Standard and, to the best of our knowledge, no initiative has been undertaken by the Mozambique authorities regarding this matter.


Mozambique is not an OECD Member State and we are not aware of any initiative by the Mozambican tax authorities regarding this subject.However, the OECD’s Commissioners General and Heads of Delegations of the Revenue Authorities of Botswana, Lesotho, Mozambique, Namibia, South Africa, Swaziland and Zambia gathered in Pretoria, South Africa on 16 July 2015 in order to discuss BEPS, among other matters.


No, there are not.


No, there are not.


No, there are not.

7 Reforms


The Mozambique capital markets framework has been subject to several updates in recent years. However, at the present date, the UCI Law remains in urgent need of a complete revamp in order to address its shortfalls and the increasing market needs, particularly as far as real estate AIFs are concerned.Nonetheless, we are not aware of any legislative initiatives aimed at amending or updating the UCI Law currently in effect.


No establishment or transfer taxes are applicable.


For tax purposes, income deriving from a fund’s units is qualified as investment income, while income deriving from the sale of said units is qualified as capital gains.Resident investorsPersonal Income Tax (Imposto sobre o Rendimento das Pessoas Singulares – IRPS): investment income earned by resident beneficiaries is subject to final withholding tax at a 20% rate.The positive difference between capital gains and capital losses assessed by resident beneficiaries on the sale of fund units is included in the taxable income of the beneficiary and subject to taxation at progressive income rates (currently between 10% and 32%). Such balance may be partially exempt according to the fund units’ holding period.IRPC: investment income payments to a resident entity are subject to withholding tax at a rate of 20% (to be paid on account of the final CIT bill). Such income will subsequently be included in the entity’s final IRPC tax result.Capital gains earned on the sale of fund units are also included in the final IRPC tax result of the resident entity and are subject to IRPC at a 32% rate.Non-resident investorsIRPS: investment income earned by non-resident beneficiaries is subject to a final withholding tax at the rate of 20%.As a rule, capital gains taxation on the sale of fund units is similar to that which is set out above for resident individuals. Nevertheless, capital gains obtained by non-resident investors do not benefit from partial exemption according to the fund units’ holding period and are fully taxed.IRPC: investment income paid to a non-resident entity is subject to a 20% final withholding tax rate.As a rule, capital gains taxation on the sale of fund units is similar to that which is set out above for resident corporate beneficiaries, with the exception that capital gains obtained by non-resident investors do not benefit from partial exemption according to the fund units’ holding period and are fully taxed.Pension funds Pension funds established and operating according to the Mozambique laws are subject to a similar tax treatment to that mentioned above for resident investors under the IRPC.Pension funds established and operating according to the laws of a foreign jurisdiction are subject to a similar tax treatment to that mentioned above for non-resident investors under the IRPC.


Mozambique legislation provides for a tax ruling system in which tax authorities may provide a binding ruling by request. In this



Moz

ambi

que






Pedro Simões CoelhoVieira de AlmeidaRua Dom Luís I, 28Lisbon 1200-151Portugal


Carlos Filipe Couto joined Vieira de Almeida & Associados in 2011. He is a senior associate in the Banking & Finance practice area, where he has worked on several key transactions, notably on securities issues, banking and insurance sectors. He advises several assets managers in regulatory and legal matters, such as the setting up of collective investment schemes, providing ongoing counsel to the respective fund managers, as well as in respect of sale and purchase transactions in connection with assets under management or their shareholdings. Moreover, he also provides advice to common representatives and trustees and has been actively involved in regulatory and contractual matters in connection with banking entities, aviation finance and cross-border factoring transactions. Lastly, he regularly assists insurance companies and intermediaries with regulatory matters, as well as with matters related to pension fund schemes and pension fund managers.

Carlos Filipe CoutoVdA Vieira de AlmeidaRua Dom Luís I, 28Lisbon 1200-151Portugal




Chapter 25

Wikborg Rein Advokatfirma AS

Christoffer Bergene

Jens Fredrik Bøen

Norway


Alternative Investment Funds that meet the IFA’s definition of an investment fund may only be established if a specific authorisation to establish such fund is granted by the Norwegian FSA. Alternative Investment Funds that are not investment funds within the meaning of the IFA may be established by an appropriately licensed/authorised manager of Alternative Investment Funds without obtaining any specific authorisation by the Norwegian FSA. However, a marketing authorisation must be obtained before any such funds are marketed to investors.


Yes. As alluded to above, the Norwegian regulatory regime distinguishes between open-ended and closed-ended funds, albeit not in a particularly clear manner.Investment funds (within the meaning of the IFA) cannot be closed-ended. While investment funds must be open-ended, the requirements as to the frequency of redemptions, etc. vary greatly between the three subsets of investment funds. Other Alternative Investment Funds (non-investment funds) are normally organised as limited liability companies or limited partnerships, and can theoretically be structured to allow for an open-ended structure. However, Norwegian law does not cater well for open-ended structures, as the concept of variable capital for limited companies is not recognised. Accordingly, open-ended structures are usually reserved for funds organised as investment funds. Open-ended structures are predominantly organised as investment funds, whereas closed-ended structures are predominantly organised as limited liability companies or partnerships.


In order to set up a licensed manager of Alternative Investment Funds, an application must be filed with the NFSA. The application must i.a. include a business plan and demonstrate that the applicant satisfies relevant statutory criteria for fund managers under the AIF Act (and potentially also the IFA).



The establishment and operation of Alternative Investment Funds are governed by the Investment Funds Act 2011 (the “IFA”) and the Alternative Investment Funds Act 2014 (the “AIF Act”).The IFA provides for regulation of three subsets of investment funds (i.e. a legally independent/separate asset pool, arisen through capital contributions from an undefined range of persons against the issuance of units in said asset pool, substantially comprised of financial instruments and/or deposits in credit institutions), namely UCITS, domestic funds and special funds. Domestic funds and special funds are types of funds that do not fall within the definition of a UCITS (in accordance with Directive 2009/65/EC). As UCITS are not alternative investment funds (within the meaning of AIFMD and the Norwegian AIF Act), any reference to investment funds in this memo shall be construed as a reference to domestic funds and special funds only. The IFA regulates both the managers of investment funds and the investment funds themselves (product regulation).The AIF Act provides overarching regulation for managers of all non-UCITS funds, including private equity, infrastructure and real estate funds, as well as investment funds as described above.


Generally, yes. Managers of Alternative Investment Funds will have to be licensed or registered as managers under the AIF Act. Additionally, if the Alternative Investment Funds under their management are non-UCITS investment funds, the manager will have to be appropriately licensed under the IFA as well.Advisers to Alternative Investment Funds must be licensed in accordance with the relevant services they intend to offer to an Alternative Investment Fund. We would normally expect such advisers to hold appropriate licences under MiFID II implementing measures.EEA domiciled managers and advisers (duly authorised under AIFMD and/or MiFID II implementing measures (as appropriate)) may manage or advise Norwegian domiciled AIFs by virtue of their home state licence.


Nor

way


Norwegian authorities have entered into various co-operation and information sharing agreements with other governments/regulators in respect of entities operating within the asset management industry. The AIFMD (including its Norwegian implementing measures) provides for co-operation and exchange of information between supervisory authorities in respect of relevant entities within the asset management industry. The AIF Act chapter 10 and the IFA chapter 12 contains detailed provisions on arrangements for co-operation and exchange of information between Norwegian and foreign supervisory authorities.

2 Fund Structures


Alternative Investment Funds in Norway are predominantly structured as either (i) private limited liability companies, (ii) public limited liability companies, and (iii) limited partnerships (usually with a private limited liability company as its general partner).In addition to the above, Alternative Investment Funds that meet the definition of an investment fund (as described above), may take the legal form of a “investment fund”, a special type of legal entity subject to special regulation in the IFA. Investment funds have legal personality, but no corporate bodies (apart from a unit-holder meeting) and are controlled by their management company, who act on their behalf.


Where an Alternative Investment Fund is structured as a limited liability company (whether public or private), the liability of its shareholders is generally limited to the equity contributions they have made in the company.Where an Alternative Investment Fund is structured as a limited partnership, the partners’ liability is determined by the limited partnership agreement. Customarily, the limited partners’ are liable for their committed capital (less any paid in capital) in accordance with the limited partnership agreement. Investors may, however, under general insolvency and bankruptcy law, be required to repay any distributions they have received.


Managers and advisers of Alternative Investment Funds are always structured as limited liability companies (public or private), as the IFA, the AIF Act and the Securities Trading Act 2007 (the “STA”, which i.a. governs the licensing requirements for i.a. MiFID II investment firms in Norway) require managers and advisers (to the extent that the advisers offer MiFID II investment services) to take such legal form.

For applications under the AIF Act, the statutory case handling period is normally three months (which can be extended to six months), whereas the statutory process under the IFA is six months (only relevant if the manager intends to manage investment funds).


For a Norwegian licensed investment fund manager, there are no regulatory requirements in terms of residence. However, as discussed elsewhere in this questionnaire, licensed fund managers must be organised as a limited liability company. The relevant acts on limited liability companies stipulate that a company’s general manager and no less than 50% of the board’s directors must be resident in Norway. The residence requirement does, however, not apply in respect of EEA nationals that are resident in an EEA state. However, a licensed company must meet certain requirements as regards its organisation and risk management. These requirements may require that a company has sufficient employees and that these employees are sufficiently involved in the operations of the company, which may imply that they (or some of them) are resident in Norway.As for qualification requirements, members of a Norwegian fund manager’s board of directors and key members of its management must meet certain requirements concerning their qualification, as well as fitness and propriety.


A Norwegian manager of Alternative Investment Funds (or the Alternative Investment Fund itself) will be required to appoint a depositary and an auditor for its Alternative Investment Funds.


Foreign managers and advisers wishing to manage, advise, or otherwise operate funds domiciled in Norway must generally be licensed to perform such activities.In order for a foreign manager to be able to manage a Norwegian Alternative Investment Fund on a cross-border basis (whether on a freedom of services or freedom of establishment basis), the manager must be an EEA based entity licensed under AIFMD implementing rules in its home state. Such entities can provide fund management services to Norwegian Alternative Investment Funds by virtue of their passporting rights under AIFMD.In order to advise a Norwegian Alternative Investment Fund (whether on a cross-border or branch establishment basis), an adviser may, depending on its regulatory status, provide services on the basis of it (i) being an EEA based adviser duly licensed to provide the relevant advisory services under AIFMD or MiFID II implementing rules and offer its services by virtue of its passporting rights, or (ii) be a non-EEA based adviser (licensed/authorised (or similar) in its home state and subject to appropriate supervision from its home state authorities) having obtained a specific licence in Norway to establish a branch or to provide services on a cross-border basis. While it is theoretically possible to obtain a licence as a non-EEA based entity, obtaining such licence will be very burdensome. Such licence has not been granted to any entities to date.

Wikborg Rein Advokatfirma AS Norway


Nor

way

3 Marketing


The primary legislative acts (including underlying regulations) governing the production and offering of marketing materials for Alternative Investment Funds are the IFA (in respect of investment funds) and the AIF Act (in respect of all Alternative Investment Funds).For Alternative Investment Funds distributed through MiFID II investment firms, additional requirements concerning the production and offering of Alternative Investment Funds will apply.


Managers are, for investment funds under their management, required to prepare a prospectus and a key investor information document. The IFA contains detailed requirements for prospectuses and key investor information documents. Generally speaking, a prospectus must contain the information required in order to make an informed judgment of the investment fund and the risks associated with such investment. Moreover, the prospectus shall contain a clear and easily understandable explanation of the investment fund’s risk profile.


Managers of Alternative Investment Funds must submit their investor documentation to the NFSA when submitting marketing applications under chapter 6 of the AIF Act. Managers of investment funds must register the prospectus with the NFSA prior to the commencement of marketing activities. Investment funds may only be established subject to obtaining the NFSA’s consent. The NFSA expects managers to carry out the fund establishment, marketing applications and filing of investor documentation to take place simultaneously.


Alternative Investment Funds, whether local or foreign, must obtain a marketing permission prior to any marketing initiatives taking place. Investment funds established pursuant to the IFA will normally obtain such permissions in connection with the establishment of the Fund.


Investment funds taking the form of so-called domestic funds may be marketed to retail investors without obtaining any specific permission (other than the specific authorisation to establish the fund). However, the permission to establish a domestic fund may contain conditions limiting marketing of such funds to professional investors only.


The manager is, to some extent, able to restrict redemptions in open-ended funds of the types of investment funds. As a starting point, an investment fund must permit investors to redeem their units twice-monthly.Domestic funds may apply to the NFSA for exemptions from this starting point. Special funds may, in their articles of association, limit investors’ right to redeem their shares (compared to the bi-monthly standard requirement). However, the special fund must permit investors to redeem their shares at least once a year. Subject to obtaining the NFSA’s consent, a special fund may limit investors’ redemption right beyond a yearly redemption. The manager is, at least to some extent, able to restrict transfers in both open-ended funds and closed-ended funds, by including provisions to that effect in, e.g. a fund’s articles of associations, partnership agreement and shareholder agreements (as relevant).


Alternative Investment Funds organised as investment funds: Absent any restrictions in the articles of associations of such entities, investors may freely transfer their interests in such Alternative Investment Funds.Alternative Investment Funds organised as limited liability companies: Limited liability companies may be subject to statutory transfer restrictions. Companies may opt in or opt out (as relevant) of the various transfer restrictions in their articles of association. The statutory starting point is, however, that transfers of shares in private companies are subject to restrictions, whereas transfers of shares in public companies are not subject to such restrictions.Alternative Investment Funds organised as limited partnerships: Absent any provisions to the contrary in the partnership agreement of said partnership, transfer of interests requires the consent of all partners.


Investment funds, whether domestic funds or special funds, are subject to the requirements of the IFA. The manager must observe these requirements, including requirements as to, e.g. subscriptions, redemptions and diversification.Managers of Alternative Investment Funds are subject to asset stripping rules. Non-investment funds will generally not be subject to any statutory limitations on which investments they can include in their portfolios, save for securitisation positions, where managers of Alternative Investment Funds are only allowed to assume such exposure if certain entities retain, on an ongoing basis, a material net economic interest, which in any event shall not be less than 5%.



Nor

way

4 Investments


Investment funds are subject to the requirements of the IFA. The key requirements in terms of the investment funds’ activities are the investment restrictions provided for in chapter 6, including in respect of which instruments may be held by the investment fund, diversification requirements, liquidity requirements, limitations on borrowing/financial leverage and requirements as to which portfolio management techniques may be employed. In addition to the above, managers of Alternative Investment Funds are subject to restrictions on their activities (other activities than fund management and other regulated services covered by their licence).


Alternative Investment Funds that are regulated as investment funds must comply with the investment requirements of the IFA that apply to the respective type of investment fund. Alternative investment Funds not falling within the IFA will generally not be subject to any statutory limitations on which investments they can include in their portfolios, save for securitisation positions, where managers of Alternative Investment Funds are only allowed to assume such exposure if certain entities retain, on an ongoing basis, a material net economic interest, which in any event shall not be less than 5%.


Investment funds are generally banned from borrowing, granting of guarantees and posting of collateral, etc. However, an investment fund is permitted to borrow on a temporary basis, provided that the borrowing may only equal up to 10% of its assets, as well as posting its assets as collateral for its obligations under derivative contracts and contracts entered into to achieve effective portfolio management.Special funds are, however, permitted to borrow funds and post collateral.



The annual accounts and the annual report of a Norwegian limited liability company are open to anyone through the Brønnøysund Register Centre (Norway’s public register for information related to companies and other legal entities). Managers and Alternative Investment Funds organised as limited liability companies will thus have their annual accounts and annual reports made public through the abovementioned public register.

Investment funds taking the form of so-called special funds, as well as all other Alternative Investment Funds (except for domestic funds, see above), may only be marketed to retail investors subject to obtaining a specific permission to do so.


Fund managers (or their intermediaries) must establish the status of each potential investor (e.g. whether retail or professional) prior to marketing and/or offering of interests in Alternative Investment Funds to such prospective investors.Managers or advisors offering MiFID II investment services may be required to carry out suitability and appropriateness testing of prospective investors. In addition to the above, managers of Alternative Investment Funds marketing non-investment funds to retail investors will be required to comply with Norwegian rules implementing MiFID II suitability testing.


There are no particular additional restrictions that must be observed when marketing to public bodies such as a government pension funds.


Yes. Norwegian investment funds may only be marketed/sold by fund management companies (including third-party fund management companies and representation/marketing offices of the fund’s manager), credit institutions, insurance companies and appropriately licensed investment firms that are licensed in or otherwise authorised to operate in Norway.Other Alternative Investment Funds may only be sold by their managers and appropriately licensed or authorised investment firms (including banks and third-party fund management companies/AIFMs holding appropriate MiFID II top-up licences).Intermediaries, particularly intermediaries subject to MiFID II, may be required to prepare and/or produce information that a fund manager is not required to prepare in connection with marketing of Alternative Investment Funds in Norway.


There are no particular restrictions from an Alternative Investment Fund’s point of view. Various investors, in particular regulated entities within the financial services sector and public sector entities, are, however, subject to restrictions to i.a. their asset management and permitted activities. This may i.a. include limitations on borrowing/financial leverage, permitted investments, etc. and, therefore, in turn limitations on investments in Alternative Investment Funds.



Nor

way

The current (2018) corporate income tax (“CIT”) rate is 23% on net taxable income. Dividends and gains on shares earned by the Alternative Investment Fund are taxable at the Norwegian CIT rate, unless they qualify for the Norwegian exemption method, in which case only 3% of the dividends are taxable.


The investment manager/advisor is taxable at the prevailing CIT rate for any income earned, unless the income is classified as dividends or gains that qualify for the Norwegian exemption method, which will only be the case if the investment manager has a return on invested capital and not service income.


There are no establishment taxes, but a transfer of the investor’s interest may result in taxation of a gain realised.


The tax treatment of an investor depends on whether the investor is an individual or a corporate shareholder, resident or non-resident, and whether the Alternative Investment Fund is organised as a private or public limited company, or as a transparent entity like a limited partnership.Alternative Investment Funds organised as a private or public limited company:a) Resident:Individuals are subject to tax at 23% on dividends and gains, but the income is grossed up by a factor of 1.33, resulting in an effective tax rate of 30.59%. A risk-free interest element deduction is allowed. Individuals are subject to net wealth tax in Norway and the interest in an Alternative Investment Fund is included in the basis for net wealth tax. Corporate shareholders are only subject to tax on 3% of dividends when the shares qualify for the Norwegian participation exemption method. b) Non-resident:Non-residents are not subject to tax in Norway on a gain from the sale of the ownership interest.Non-residents may be subject to tax on income with a Norwegian source. This includes non-residents that are carrying out business activities in Norway (through a permanent establishment if resident in a tax treaty country), as well as non-residents that earn dividend income subject to withholding tax in Norway.Non-residents are subject to withholding tax in Norway at a rate of up to 25% on dividends earned. The dividend withhold tax may be reduced both under Norwegian domestic rules and tax treaties, so that qualifying corporate shareholders in the EEA are exempt from withholding tax. For other shareholders, a tax treaty may provide a reduced rate. Non-resident investors are not subject to net wealth tax on the shares in Norway.

Accordingly, managers and Alternative Investment Funds organised as limited liability companies will have accounts and yearly reports that are open to the public.Managers of investment funds are required to disclose the market price of units in the fund at least weekly (subject to any provisions in the articles of associations stipulating more frequent disclosure), as well as yearly accounts, half-yearly reports and the fund’s prospectus in accordance with the IFA.


Regulatory reporting is generally restricted to only the managers of Alternative Investment Funds.Managers of Alternative Investment Funds are subject to the following reporting requirements:■ yearly accounts; ■ half-yearly reports; and■ annex IV-reporting.Managers of investment funds are, in addition to the above, subject to the following reporting requirements:■ Quarterly reports for its investment funds.■ Complaints reporting.Further reporting requirements apply in respect of managers of Alternative Investment Funds holding a top-up licence for the MiFID II investment service portfolio management.


Side letters may be used. It is, however, fundamental that such instruments are utilised in accordance with statutory requirements, in particular as regards requirements related to sound business practice. In accordance with the AIF Act, managers of Alternative Investment Funds must act in the best interests of investors, the AIFs they manage and the integrity of the market. In doing so, they must act honestly, with due skill, care and diligence and fairly in conducting their activities. They must also treat investors fairly. If certain investors are/will be granted preferential treatment, the manager must disclose any such preferential treatment in accordance with the statutory requirements of the AIF Act, in particular the disclosures contemplated by AIFMD art. 23 (as relevant).In a recent NFSA precedent, where preferential treatment in the form of discounted subscriptions is discussed, it is stated that any preferential treatment must be based on objective, justifiable and documented criteria.

6 Taxation


Alternative Investment Funds organised as private or public limited companies are non-transparent and subject to tax under the general Norwegian tax rules. Alternative Investment Funds organised as limited partnerships are tax transparent and not subject to tax themselves – instead it is the investors that are subject to tax.Norway applies a combination of a global income tax principle and a source tax principle. A person tax resident in Norway, both as an individual and a company/legal entity, is subject to tax in Norway on the person’s worldwide income.



Nor

way

residency rules, which may result in more companies incorporated outside Norway being considered tax resident in Norway, as more emphasis is put on day-to-day management functions.Norway has introduced Country-by-Country Reporting (“CbCR”) requirements that mainly follow OECD BEPS Action 13 requirements.


Sea-going vessels qualifying for tonnage tax has tax advantages. Due to the broad scope of the Norwegian exemption method, share income is generally considered favourably taxed at the corporate/partnership level.


Norway has interest limitation rules. Under these rules, interest expenses paid to related parties that exceed 25% of “tax EBITDA”, which is defined as ordinary taxable income with tax depreciation and net interest expenses added back, are non-deductible. Carried interest is normally taxed as business income at the company level.


Withholding tax on royalty and interests paid by a Norwegian tax resident to a foreign recipient have been proposed previously, but it is still uncertain if and when such rules might be introduced an it is in our view unlikely that this will happen over the next 12 months.The key potential change is the likely change to the tax residency rule as mentioned under question 6.7 above.

7 Reforms


No major reforms are on the agenda. However, certain AIFMD relevant regulations EuVECA, ELTIF, EuSEF have been appended to the EEA Agreement. We therefore expect that Norwegian law measures implementing these EU regulations will be adopted as well.

Limited partnershipsa) Residents:Individual and corporate partners are taxable on their pro rata share of the profits of the partnership at a rate of 23%. However, for the purposes of qualifying for the Norwegian exemption method, the relevant criteria are applied at the level of the partnership, meaning that the exemption method could apply also for partnerships and their investors. Losses are deductible within certain limitations. Individual partners are subject to tax at 23% on distributions and gains, but the income is grossed up by a factor of 1.33, resulting in an effective tax rate of 30.59%. A risk-free interest element deduction is allowed. Individuals are subject to net wealth tax in Norway and the interest in an Alternative Investment Fund is included in the basis for net wealth tax. Corporate shareholders are only subject to tax on 3% of distributions when the partnership share qualify for the Norwegian participation exemption method. b) Non-resident:Non-resident’s partners will as a starting point be subject to tax in Norway in the same manner as resident partners, as above.Individuals are subject to net wealth tax in Norway and the interest in an Alternative Investment Fund is included in the basis for net wealth tax.c) Pension fund investors:See above.


No, it is not.


They are implemented in Norway.


Norway has signed the Multilateral Instrument and is working on different measures in line with the BEPS project, including the tax



Nor

way

Wikborg Rein is an international law firm located in Oslo, Bergen, London, Singapore and Shanghai. Our unique and long-standing presence overseas enables us to offer our clients the benefit of our extensive international expertise.

Headquartered in Oslo, Norway, we offer a full range of legal services to our domestic and international clients. Our extensive international experience and expertise is unique, with many of our partners having spent time working abroad or in-house working with their clients.

Wikborg Rein’s broad range of legal services includes the following: corporate; dispute resolution; real estate and construction; banking and finance; shipping and offshore; trade, industry and public sector (including technology, media and telecommunications); energy and natural resources.

Christoffer Bergene is a Specialist Counsel at Wikborg Rein’s Oslo office and is part of the firm’s Capital Markets practice. He works primarily with financial regulatory issues. Bergene assists Norwegian and foreign players in the financial sector, i.e. banks, brokerage houses, insurance companies, fund managers, etc., with establishments, licences, permits and ongoing advice and transactions involving such actors.

Christoffer BergeneWikborg Rein Advokatfirma ASDronning Mauds gt. 11OsloNorway

Tel: +47 22 82 75 04Email: [email protected] URL: www.wr.no

Jens Fredrik Bøen is a Senior Associate at Wikborg Rein’s London office and is part of the firm’s Financial Regulatory practice. Bøen advises Norwegian and international banks, financial institutions, investment firms, fund managers, insurance companies and insurance mediation firms. He is regularly advising on regulatory applications processes regarding, inter alia, establishments and reorganisations, the regulatory aspects of transactions involving regulated financial entities and the day-to-day aspects of regulated financial institutions’ businesses.

Jens Fredrik BøenWikborg Rein Advokatfirma ASCheapside House, 138 CheapsideEC2V 6HSLondonUnited Kingdom

Tel: +44 20 73 67 03 00Email: [email protected] URL: www.wr.no



Chapter 26

Dubiński Jeleński Masiarz i Wspólnicy sp.k.

Tomasz Masiarz

Rafał Lidke

Poland

The Polish provisions of law determine the following requirements as regards advisors:■ in the case of SFIO and FIZ, TFIs are obligated to employ

at least two investment advisors licensed by PFSA, unless TFI manages only FIZ of a special structure (non-public asset fund), then the requirement to employ advisors is not applied; and

■ in the case of ASI, the requirement to employ advisors is applicable only to the manager of ASI whose participation titles may be placed on the market among retail clients.

According to Polish law, external advisory services relating to financial instruments may be provided only by entities holding an authorisation of PFSA.


An authorisation of PFSA is required for the establishment of each SFIO, as well as FIZ and ASI whose participation titles will be subject to public offering. No authorisation of PFSA is required for other types of AIFs (non-public FIZ and ASI). Nevertheless, all types of AIFs operate under the supervision of PFSA and inform the supervisor of their establishment, and also provide their articles of association and information about any amendments thereto to the supervisor. The establishment of each ASI requires registration in the competent registry court.


Distinction between open-ended and closed-ended funds relates in the Polish legal regime only to AIFs operating in the form of investment funds – i.e. SFIO (which is an open-ended fund) and FIZ (which is a closed-ended fund). AIFs, which are investment funds, may freely determine their investment policy and strategy with respect to investment limits laid down by the provisions of the Act. Statutory limits are so wide that on the basis thereof you may structure in principle every type of investment policy – e.g. private equity, hedge, fund of funds. In addition, the Act distinguishes various types within AIFs operating in the form of investment funds, depending on pursued investment policy, and so:SFIO may be established as a money market fund, investing its assets only in money market instruments and deposits.



The establishment and operation of Alternative Investment Funds (“AIFs”) in Poland is governed by the Act on Investment Funds and the Management of Alternative Investment Funds of 27 May 2004 (the “Act”), implementing to the Polish legal regime the principles laid down in Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (“AIFMD”) and directly applicable Community legal provisions.


In Poland, the operations of AIFs may be carried on in various legal forms differing, among others, by the type of managers of AIFs and the principles of their licensing. The Act distinguishes the following types of AIFs:■ AIF operating in the form of an investment fund;■ Specialised Open-Ended Investment Fund (“SFIO”); and■ Closed-Ended Investment Fund (“FIZ”).AIF operating in the form of an alternative investment firm (“ASI”):■ ASI (managed internally or externally) with the value of

portfolio of no more than EUR 100,000,000, and if ASI does not apply financial leverage and allows the redemption of participation titles after at least five years from their purchase – no more than EUR 500,000,000 (this limit is calculated: (i) in the case of ASI managed internally, individually for a given ASI; and (ii) in the case of ASI managed externally, as the sum total of portfolios managed by one manager (“Registered ASI”); and

■ ASI (managed internally or externally) with the value of portfolio higher than set forth under item a) (“Licensed ASI”).

SFIO and FIZ may be established and managed only by an Investment Fund Management Company (“TFI”) – a joint-stock company holding an authorisation of the Polish Financial Supervision Authority (“PFSA”).Licensed ASI may be established and managed only by an entity holding an authorisation issued by PFSA. Registered ASI may be established and managed by an entity registered by PFSA without the need to conduct the licensing procedure.


Pola

nd

of governing bodies of managing entities do not have to be Polish residents; however, in accordance with good practices developed by PFSA, appropriate participation of members who have a good command of Polish, as well as knowledge and experience about the functioning of the Polish capital market, should be assured in the governing bodies of managing entities.


It is a statutory requirement for each AIF to have a depositary and have its financial statements audited by an independent specialised entity. In other areas, AIF may use the external entities on the terms and conditions set forth in the provisions of law.


TFI may entrust the management of SFIO or FIZ to a manager from EU, i.e. a legal person established in the territory of a Member State which has obtained an authorisation of the competent authority in that Member State to perform the activity involving the management of AIFs in accordance with the Community law governing the operations of AIF managers. The manager from EU may also take over the management of an externally managed ASI. The manager from EU may start carrying on the activities on the Polish territory after having effectively notified such activities via the supervision authority in its home state. While in order to take over the management of SFIO, FIZ or an externally managed ASI, it is necessary to obtain an authorisation from PFSA and consent of the AIF’s investors as well as to make respective amendments to the AIF’s constitution documents.


A list of agreements on international co-operation is available on the PFSA’s website at the following address: https://www.knf.gov.pl/en/ABOUT_US/International_cooperation/EU/Memoranda_of_understanding.

2 Fund Structures


AIFs in the Polish legal regime may operate in the form of investment funds (SFIO and FIZ) and in the form of ASI. Each investment fund, regardless of its type, is a legal person established pursuant to the Act. By virtue of law, an investment fund may be established and represented in relations with third parties only by TFI. Depending on their form, investment funds issue:■ in the case of SFIO – participation units, in principle

transferred and redeemed at the participant’s request, which are a divisible financial instrument without status of a security. Participation units may not be transferred in favour of a third party, but they may be pledged and inherited; or

■ in the case of FIZ – investment certificates which are an indivisible security. The principles of issue, redemption and trading in investment certificates are set forth in the Act and in the articles of association of FIZ.

FIZ may be established as a portfolio fund, whose investment portfolio (i) is based on the composition of a portfolio of securities underlying determination of the value of regulated market index (index portfolio), or (ii) constitutes a portfolio the composition of which is specified in the fund’s articles of association not based on the index referred to in item (i) (base portfolio).FIZ may be established as a securitisation fund, investing predominantly in receivables. SFIO and FIZ may be established as a non-public asset fund, investing at least 80% of its assets in assets other than securities covered by public offering or admitted to trading on the regulated market and in money market instruments, unless they were issued by non-public companies whose shares are comprised in the fund’s investment portfolio.The investment policy of ASI is specified by its constitution documents, and otherwise in the case of investment funds, the Act does not set forth in advance any investment limits that ASIs are obligated to observe. With respect to ASI, the Act makes a distinction between entities only as regards the possibility of offering their participation titles to professional and retail clients – this classification is connected not with the type of investment policy but with the way participation titles are offered.


In the licensing procedure for TFI and the manager of ASI, PFSA examines in particular qualifications and good reputation of individuals having an impact on the operation of such entities, the entity’s ownership structure and the credibility and financial standing of its shareholders, the compliance of its organisational structure (especially as regards the management of the AIF’s portfolios, risk management, and management of conflicts of interest) with the national regulatory requirements, a detailed business plan describing the first year of the entity’s operations. With respect to AIFs established with an authorisation, PFSA examines in particular the investment policy, risk profile and general characteristics of operations. The Management Board of TFI and the manager of ASI must be composed of at least two members. All management board members must have full capacity to perform acts in law, no criminal record and enjoy good opinion connected with the functions held. At the same time, at least two management board members must have higher education or the licence to practice as an investment advisor and work for at least three years on an executive or independent position in financial market institutions or hold functions in governing bodies of such institutions over the same period.The initial capital of TFI and the external manager of ASI amounts to EUR 125,000, in the case of the internal manager of ASI such capital amounts to EUR 300,000. In the event that the total value of portfolios managed by ASI has exceeded EUR 250,000,000, the manager’s initial capital must be increased by 0.02% of such excess. After the manager’s initial capital has reached EUR 10,000,000, no further increases are necessary.The provisions of Polish law do not specify any binding time limit for PFSA in which the licencing procedure must be finished. Depending on how complicated the licensing structure is, the procedure can take between six and 12 months.


TFIs and managers of ASI must be commercial companies established in the territory of the Republic of Poland. Members

Dubiński Jeleński Masiarz i Wspólnicy sp.k. Poland


Pola

nd

detailed investment limits and allowed categories of investments which should be taken into account when structuring the investment policy of AIF operating in the form of an investment fund (SFIO and FIZ) and when managing such AIF. With respect to ASI, the provisions of law do not specify any investment limits or diversification rules. The investment policy and strategy of ASIs is determined by their constitution documents at the manager’s discretion.

3 Marketing


The production and offering of marketing materials on AIFs is governed in detail by the Act and implementing instruments of law thereto. In addition, in the case of marketing materials on FIZ and ASI offered to the public, the provisions of the Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies are applicable.


The scope of marketing materials on AIFs offered in Poland is in compliance with the scope defined in Article 23 AIFMD. The national regulations may additionally extend that catalogue.


The marketing documents on SFIO and FIZ and ASI offered to the public must be always approved by PFSA. In other cases, although there is no requirement of PFSA approval, documents are provided to PFSA.


The basic restriction on offering AIFs is the circle of recipients to which the offer may be addressed. In the case of ASI and FIZ not offered to the public (so without approval of the marketing materials by PFSA), the offer may not be addressed to more than 149 investors or to an unspecified addressee.SFIO and ASI and FIZ offered to the public may be addressed to a wide (indefinite) circle of recipients; however, their marketing materials must be approved by PFSA.Any additional restrictions on offering AIFs may be envisaged in their constitution documents.


The possibility to offer AIFs to individual investors depends on the type of AIF. General division is as follows:■ Open-ended AIF (SFIO) may be offered to individual

investors without any restrictions. If the articles of association of SFIO provide for that the fund will apply investment restrictions typical for FIZ, the Act implements an additional

In accordance with the Act, ASI may be established as a capital company, including European company or limited partnership or limited joint-stock partnership. A participation title in ASI, depending on its legal from, will be a security or a share. The rights connected with securities or shares and the manner of their exercise are set forth in the articles of association of a given ASI and in the provisions of the Polish Commercial Companies Code of 15 September 2000.


Investors are not liable for actions and liabilities of AIFs operating in the form of investment funds. In case of ASI, liability of investors is ruled by the provisions of the Polish Commercial Companies Code of 15 September 2000.


TFI may operate only in the form of a joint-stock company. The manager of ASI may operate only in the form of a joint-stock company, a limited liability company or a European company.


In the case of SFIO, redemption of participation units may be suspended for two weeks, if: 1) over the last two weeks the sum total of the value of

participation units redeemed by the fund and units requested to be redeemed makes the amount in excess of 10% of the value of the fund’s assets; or

2) a material part of the fund’s assets may not be reliably valued because of reasons not attributable to the fund.

With consent of and subject to terms and conditions specified by PFSA:1) redemption of participation units may be suspended for a

period longer than two weeks, but not exceeding two months; or

2) the fund may redeem participation units in instalments within a period of maximum six months, applying proportional reduction.

In the case of FIZ and ASI, the principles of redemption of participation titles are governed only by their articles of association.Because in accordance with Polish law, the transfer always requires a prior redemption of participation titles, the above principles are applied accordingly depending on the type of AIF.


In the Polish legal regime, there are no legal restrictions for the possibility to exchange participation titles in AIFs. Detailed principles and restrictions in this regard may be envisaged in the articles of association of a given AIF.


The Act and implementing instruments of law thereto specify



Pola

nd

In the case of ASIs, their sole activity is to collect assets from many investors for the purpose of their investment in the interest of those investors in accordance with the investment policy specified in their constitution documents. The Act does not implement any investment limits or restrictions for ASIs.


The provisions of the Act specify a number of investment limitations for AIFs operating in the form of investment funds. Statutory investment limitations concern both the type of permissible financial instruments, investment objectives, investment limits, as well as investment techniques which may be applied. In accordance with a general rule, limitations for the investment policy of open-ended funds are more restrictive than those relating to the policy of closed-ended funds. FIZ, in principle, may invest its assets in transferrable: securities; receivables; shares in limited liability companies; foreign currencies; derivatives; property rights the price of which depends; directly or indirectly; on things specified as to their kind; specific types of energy; pollution emissions or production volume measures and limits, admitted to trading on commodity exchanges; money market instruments; participation titles in other AIFs and collective investment undertakings, including foreign ones; real properties; and sea vessels. The Act specifies maximum and minimum limits of FIZ’s exposure to individual categories of investments. SFIO may invest its assets in the following instruments set forth in the Act: securities (equity and debt), deposits, money market instruments, participation titles in other AIFs and collective investment undertakings, including foreign ones, derivatives, property rights the price of which depends, directly or indirectly, on things specified as to their kind, specific types of energy, pollution emissions or production volume measures and limits, admitted to trading on commodity exchanges. The Act sets forth precise conditions to be met by the above instruments and their issuers. Similarly as in the case of FIZ, the Act specifies maximum and minimum limits of SIFO’s exposure to individual categories of investments. If the articles of association of SIFO provide for so, the fund may apply investment limitations typical for FIZ, which are less restrictive. In such case, the additional restriction regarding the circle of potential investors in SIFO, as described in question 3.5, is in place.In the case of ASI, the Act does not define any framework of its policy. The investment policy and strategy of ASI is specified in its constitution documents.


FIZ may take, only in domestic banks, credit institutions or foreign banks, loans and credit facilities with their total value not exceeding 75% of the fund’s net asset value at the time of execution of a loan or credit facility agreement. A similar limit is applied in the case of issue of bonds by the fund. SFIO may take, only in domestic banks or credit institutions, loans and credit facilities with maturity up to one year, in the total amount not exceeding 10% of the fund’s net asset value at the time of execution of a loan or credit facility agreement.With respect to ASI, the Act does not establish any restrictions for taking loans.

restriction that individuals may invest in such SFIO provided that they make a one-off payment to the fund in the amount equivalent to EUR 40,000. The offering is made pursuant to the provisions of the Act.

■ FIZ not subject to public offering (operating without PFSA’s authorisation) may be offered to individual investors; however, if these are individuals, the investment is possible if they make a one-off payment to the fund in the amount equivalent to EUR 40,000. The offering is made pursuant to the provisions of the Act.

■ FIZ offered to the public (operating with PFSA’s authorisation) may be offered to individual investors without any restrictions pursuant to the provisions of the Act on Public Offering.

ASI is offered in principle to professional clients. ASI may be offered to individual investors if the participation rights in ASI are securities and the information about them and the terms of their acquisition, making a sufficient basis for decision-making on the acquisition of such securities, is provided, in any form and by any means, to at least 150 persons within the territory of one Member State or to an unspecified addressee. The offering of ASI to individual investors requires an authorisation of PFSA and is made pursuant to the provisions of the Act on Public Offering.


The Act makes a distinction between professional and retail clients. The obligation to have the status of a professional client exists only in relation to the investment in ASI which is not offered to the public.


The provisions of Polish law do not implement any additional restrictions.


Intermediation in the sale of participation titles in ASI may be carried out only by entities operating with an authorisation and under supervision of PFSA.


There are no restrictions other than specified in question 3.5 for participants of AIF.

4 Investments


When defining AIFs operating in the form of investment funds, the Act implements a restriction for the activities carried on by stating that the sole operations of the fund consist in investing funds raised by offering the acquisition of participation titles to the public or by way of private placement, in securities, money market instruments and other property rights set forth in the Act.



Pola

nd

AIFs depends not only on their legal form but also on the pursued investment policy and the way of earning and distribution of income. The form of this study does not allow detailed discussion of this topic. Consultation with a tax advisor is necessary on a case-by-case basis.


The Polish tax system does not envisage any special forms of taxation for entities managing AIFs or providing investment advisory services. Such entities are liable to tax in accordance with general principles applicable to legal persons.


Taxation of capital gains is charged to AIF participants, by way of levying tax at the rate of 19% on income derived from the transfer of securities or financial derivatives and the exercise of rights thereunder.


If AIF participants are legal persons and unincorporated organisational units, income derived by such persons from participation in AIF is chargeable with tax in accordance with principles laid down in the Act on Corporate Income Tax of 15 February 1992. Income of legal persons is chargeable with corporate income tax amounting to 19% of the taxable income.The above principles of taxation of AIF participants relate also to taxation of participants who are foreign investors, provided that they may be not applicable if AIF participants are persons covered by the agreements on the avoidance of double taxation concluded with Poland.If AIF participants are individuals, income from participation in an investment fund is chargeable with a lump-sum tax of 19%.


If a standard investment fund is established, it is not usual to apply for a tax ruling as the applicable principles of taxation and current practices on the Polish capital market are not ambiguous. There are, however, cases in which the establishment of an alternative investment fund assumes a priori the achievement of specific taxation objectives. In such situation, the issue of a final ruling may have an impact on the assessment whether the establishment of an entity of specific structure is reasonable.


In order to implement the US Foreign Account and Tax Compliance Act 2010 (FACTA) in Poland, the Act on Performance of the



SFIO must publish information prospectus and key investor information, as well as annual and semi-annual financial statements on the websites indicated in the articles of association of SFIO. FIZ offered to the public makes available to the public or to the interested investors an issue prospectus or information memorandum by means set forth in the provisions of the Act on Public Offering. Such FIZ is also required, pursuant to separate regulations, to publish its annual financial statements.FIZ which is not offered to the public makes available, at the request of a fund participant, its annual and semi-annual financial statements.If the articles of association of SFIO or FIZ provide for so, the fund publishes on a periodic basis information about particular components of the fund’s investments, to the extent, in the form and on dates specified in the articles of association.In addition, all AIFs make available the following:1) on a periodic basis – with respect to each fund, each alternative

investment firm or each Community AIF, information about:a) percentage share of assets which are subject to special

arrangements in connection with their non-liquidity;b) changes in internal regulations regarding liquidity

management; andc) current risk profile and risk management systems applied

by the entity managing AIF; and2) on a regular basis – with respect to AIF applying financial

leverage, information about:a) changes in the maximum level of AIF’s financial leverage

which may be applied on its behalf, and the right to re-use security instruments or guarantee provided on the basis of the agreement for AIF’s financial leverage; and

b) the total amount of applied AIF’s financial leverage.


AIFs and their managing entities are obligated to ongoing and periodic reports to PFSA on the basis of implementing instruments of law to the Act. Reports express concern in particular over the financial standing of AIF and its manager, the composition of their governing bodies, the pursued investment policy (including the observance of investment limits under the law and the articles of association), and important events relating to AIF, such as issues, liquidation, suspension of sale or redemption of participation titles.


The use of side letters is not restricted or prohibited. But it must be noted that the Act implements a general obligation of equal treatment of AIF’s participants.

6 Taxation


Because of specifics of the Polish tax regulations, taxation of



Pola

nd


According to our knowledge, no material changes are planned in this area.

7 Reforms


The most important reform relating to AIFs concerns implementation to the Polish legal regime of the principles laid down in Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EE (MIFID II). Therefore, many domestic regulations governing the principles for the functioning of capital market in Poland were amended this year. At the time of preparation of this study, AIFs and AIF managers are in the adjustment period. The market also expects the adoption of respective implementing instruments of law corresponding to the above changes.

Agreement between the Government of the United States of America and the Government of the Republic of Poland to Improve International Tax Compliance and to Implement FATCA and Implementing Regulations of 9 October 2015 entered into force.


The execution of Action Plan on Base Erosion and Profit-Shifting (BEPS) was reflected in Poland by making amendments to the Act on Corporate Income Tax, the aim of which was to seal the tax system and to prevent the use of hybrid structures, and especially to eliminate investment vehicles using limited joint-stock partnerships and investment funds.


Some of AIF structures especially in the form of investment funds may be more advantageous from a tax perspective. In each case, the analysis taking into account specific expectations and planned policy of AIF is necessary.


According to our knowledge, there are no material tax issues applicable to management companies, investors or managers.



Pola

nd

Dubiński Jeleński Masiarz i Wspólnicy sp. k. is a law firm which combines legal jurisprudence with practical knowledge about business projects that DJM is involved in. Thanks to many years of practice and experience gained on various levels, we may actively participate in various types of undertakings of our clients. The effectiveness of our solutions is based both on legal jurisprudence and the knowledge of how to carry on a business.

DJM offers comprehensive legal services in all areas of business operations, with the exception of tax advice.

DJM has unique, and the most extensive on the Polish market, experience in creating investment funds and management companies of investment funds. We managed proceedings before the Polish Financial Supervision Authority (and/or previously before the Polish Securities and Exchange Commission) for authorisations to conduct activities by management companies of investment funds and authorisations to create investment funds (in total DJM was involved in creating over 500 funds and sub-funds operating on the Polish market).

DJM’s lawyers involved in the issues of investment funds make one of the largest teams of that type in Polish law firms. They have unique experience on the Polish market in providing services to investment funds and management companies of investment funds, as well as foreign funds connected with the Polish market. The team members have developed specialisation in various legal issues related to investment funds. DJM’s lawyers have been involved in creating many pioneer structures and models of operation on the Polish market.

Special achievements of DJM in the area of investment funds include the execution of the following pioneer projects on the Polish market:

■ creation of the first closed-end investment fund in Poland organised in accordance with the Act on Investment Funds;

■ creation of the first dedicated closed-end investment fund in Poland;

■ creation of the first guaranteed closed-end investment fund in Poland;

■ creation of the first specialised closed-end investment fund in Poland that may invest in real estate;

■ creation of the first specialised closed-end investment fund in Poland;

■ creation of the first specialised open-end investment fund in Poland;

■ creation of the first umbrella fund with separate sub-funds in Poland;

■ creation of the first hedging fund in Poland;

■ the first merger of open-end investment funds on the Polish market;

■ the first take-over of the management of an investment fund on the Polish market;

■ creation of the first master-feeder fund in Poland;

■ creation of the first closed-end investment fund in Poland with its structure implementing as much as possible the common global standard for private equity funds in the form of limited partnerships; and

■ the first and only transformation of a non-public closed-end investment fund into a public closed-end investment fund in Poland.

A number of solutions based on the practice of DJM’s lawyers is currently functioning on the Polish market in all management companies of investment funds. Some of such solutions have been also reflected in legal regulations implemented in Poland.

DJM’s lawyers often were, and continue to be, actively involved in the legislation process for investment funds. Recently, pursuant to the provisions of the Act on lobbying activities in the law making process of 7 July 2005, we have participated in legislation works regarding the implementation of UCITS V Directive and AIFMD Directive in Poland.

Tomasz Masiarz graduated from the Law and Administration Faculty at the University of Warsaw and is a Managing Partner at DJM. He specialises in capital market law. He has conducted numerous licencing proceedings for various types of financial institutions before the Office of the Polish Financial Supervision Authority and the Polish Securities and Exchange Commission, including he participated in the establishment of several dozens of investment funds. Mr. Masiarz provides legal assistance to banks, investment firms carrying on brokerage activities in Poland, investment fund management companies and other financial institutions. He has conducted projects involving implementation of the provisions of European law in international capital groups. He lectures at universities, specialised courses and conferences devoted to capital market law. Tomasz Masiarz has a fluent command of English.

Tomasz MasiarzDubiński Jeleński Masiarz i Wspólnicy sp.k.ul. Marszałkowska 142 00-061 WarszawaPoland

Tel: +48 22 436 06 01Email: [email protected]: www.djm.pl

Rafał Lidke graduated from the Faculty of Law at the Kozminski University. He has been associated with DJM since 2007. He specialises in capital market law. Mr. Lidke participated in works connected with the establishment and registration of a dozen or so investment fund management companies and several dozens of funds. He is involved in providing ongoing services to capital market entities. He advises on issues connected with personal data protection and anti-money laundering and prevention of terrorist financing. Mr. Lidke supports clients in contacts with the Polish Financial Supervision Authority and state authorities, including also in the course of inspections. He has held the function of supervision inspector in the investment fund management company and in the brokerage house. Rafał Lidke has a fluent command of English.

Rafał LidkeDubiński Jeleński Masiarz i Wspólnicy sp.k.ul. Marszałkowska 142 00-061 WarszawaPoland

Tel: +48 22 436 06 01Email: [email protected]: www.djm.pl



Chapter 27

Vieira de Almeida


Inês Moreira dos Santos

Portugal

The UCI Law did not implement in Portugal the de minimis exemption foreseen in the AIFMD. As a result, all fund managers, regardless of the asset under management, will need to comply, in general terms, with the same requirements. Nonetheless, considering the type of AIFs the fund manager intends to manage, i.e. AIFs investing in securities or financial assets, non-financial assets or real estate, there will be some specific requirements to be met, notably as regards investment policies and contracts with service providers.


Yes. The setting up of AIFs is subject to authorisation with the CMVM, which is the competent regulator to undertake the supervision of AIF managers, ancillary service providers, AIFs’ distributors and compliance with the general rules applying to AIFs, notably those relating to the protection of investors’ interests.


Yes. In general terms, the UCI Law distinguishes between AIFs investing (i) in securities or financial assets, such as undertakings for collective investment in transferable securities that do not comply with the UCITS Directive limits and are thus classified as AIFs which invest in securities, (ii) in real estate (real estate investment funds), and (iii) in long-term non-financial assets with a determinable value.Furthermore, Regulation No. 2/2015 allows AIFs investing in securities to adopt the branding of AIF investing in bonds, shares, index tracker, money-market fund, etc., provided that its investment policy complies with certain criteria. The AIFs described in points (i) and (ii) above may be open- or closed-ended, but the type referred to in point (iii) shall be closed-ended.The UCI law does not contain any specific provision regarding private equity or hedge funds, thus in principle they will be encompassed by the regime of the AIFs investing in securities. In general terms, the open-ended AIFs are addressed to the retail market and the closed-ended AIFs target affluent or professional investors. As a result, the CMVM’s scrutiny over open-ended AIFs tends to be tighter.



The activity involving the management, investment and marketing of Alternative Investment Funds (AIFs) is mainly regulated by the Undertakings for Collective Investment Law (Regime Geral dos Organismos de Investimento Coletivo), enacted by Law no. 16/2015 of 24 February 2015 (UCI Law), which implemented in Portugal Directive 2009/65/EC on undertakings for collective investment in transferable securities (UCITS) (UCITS Directive), as amended from time to time, as well as Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD), which sets out most of the rules relating to AIFs, the CMVM Regulation no. 2/2015 on Undertakings for Collective Investment (Regulation no. 2/2015), which sets forth more specific rules regarding certain aspects of the UCI Law and the Portuguese Securities Code (Código dos Valores Mobiliários or PSC), enacted by Decree-Law no. 486/99 of 13 November 1999, as amended from time to time, that entered into force on 1 March 2000.The Portuguese Securities Exchange Commission (Comissão do Mercado de Valores Mobiliários or CMVM) is the main regulatory body in relation to the aforementioned matters.Furthermore, AIFs’ managers, as financial institutions, are also subject to the Bank of Portugal (Banco de Portugal or BoP) prudential supervision, notably in what concerns the applicable provisions of the Portuguese Banking Law, enacted by Decree-Law no. 298/92 of 31 December, as amended from time to time, and all complementary legal documents in connection therewith.


Yes. Fund managers, as financial institutions, are subject to the Bank of Portugal’s supervision, notably in respect of prudential matters. Moreover, fund managers, as financial intermediaries, are also subject to the CMVM’s supervision in what concerns most of the rules governing their management of AIFs’ activity.Therefore, the fund managers’ authorisation procedure will be conducted before the BoP and the CMVM at the same time, but the final authorisation will only be granted if both regulators agree that the candidate fulfils all legal requirements to manage AIFs.


Port

ugal

(the majority of which need to be considered independent) plus a sole auditor.The members of the board of directors and audit board of the fund manager need to be previously authorised by the BoP, being subject to a thorough suitability assessment during such a procedure.Furthermore, the fund manager shall have in place several internal policies aiming to address the risk of its activity, remuneration issues, outsourcing, internal control, evaluation of the assets pertaining to the AIFs under management, anti-money laundering, selection of the members of the boards of directors and audit board, all subject to the control of the CMVM, the BoP and to a certain extent the depository, and entailing permanent record-keeping by the fund manager.


An AIF is legally required in Portugal to have a fund manager (if it is not endowed with legal personality), a depository, an auditor and, in the case of real estate AIFs, real estate appraisal experts.Furthermore, the AIF may also have, but is not legally compelled to have, distributors or entities that will market the AIF, which is standard practice in the case of open-ended AIFs.


The same rules established for national managers will apply, in addition to the harmonised rules for requesting a passport to carry out management of AIFs activity in Portugal.


In accordance with the information currently available on the CMVM’s website, the CMVM has signed memorandums of understanding with the competent regulators of other non-EU Member States, namely Albania, Australia, the Bahamas, Bermuda, Brazil, the British Virgin Islands, Canada, Canada OSFI, the Cayman Islands, Dubai, Guernsey, Hong Kong MA, Hong Kong SFC, India, the Isle of Man, Israel, Japan FSA, Japan MAFF, Japan METI, Jersey, Labuan, the Former Yugoslav Republic of Macedonia, Malaysia, the Maldives, Mauritius, Mexico, Montenegro, Morocco, Pakistan, Singapore, South Africa, South Korea (FSC & FSS), Republika Srpska, Switzerland, Tanzania, Thailand, the United Arab Emirates, the US CFTC, the US SEC and Vietnam.

2 Fund Structures


An AIF may take one of two forms or structures, both subject to the licensing procedures described in question 1.5 above:■ Contractual structure with no legal personality. This is the

classic structure and requires that the AIF be managed by a separate fund manager. The investors’ or participants’ interests in these funds are called units (unidades de participação).

■ Collective investment company endowed with legal personality (sociedade de investimento). Collective investment companies

Furthermore, depending on the type of AIF at stake and whether it is open or closed-ended, different investing limits will apply, notably in respect of leverage and asset allocation.


In a nutshell, the authorisation for the setting up of an AIF must be filed with the CMVM. In requesting such authorisation, the relevant AIF’s manager must provide the CMVM with the AIF’s documentation, notably the Key Investor Information Document (KIID) and the full prospectus of the AIF (if applicable), which must also include the AIF’s regulation.In addition, the CMVM must also be given copies of the agreements to be executed between the management company and (i) the depositary, (ii) the distributors or entities that will market the AIF, and (iii) any other entities that will render services to the AIF or to the AIF manager.Documents evidencing the acceptance of the rendering of the relevant services by all entities involved in the AIF’s activities must also be provided to the CMVM.An authorisation is given within 20 days (or 30 days in the case of self-managed collective investment companies) of the receipt of either the fully documented application or of any supplementary information or amendments to the documents required by the CMVM. If at the end of such period the applicants have not yet been notified of the deferral of their application, the authorisation is considered to have been tacitly refused. However, considering that CMVM tends to request further information from the applicant, the legal term for granting the authorisation is halted and the authorisation process takes generally around two months and in the case of self-managed collective investment companies several months in light of the stricter legal requirements. The CMVM may refuse the authorisation if the applicant does not submit the required documentation or if the AIF manager at stake engages in irregular management of other investment funds.After the authorisation has been granted, an AIF will be fully set up from the moment the first subscription is settled.


Considering that the vast majority of the AIFs in Portugal have been set up under the contractual form with no legal personality, they ought to be managed by a separate fund manager.The fund manager may be a Portuguese incorporated financial institution or an entity providing services on a cross-border basis under the AIFMD passport legal framework, either through the free provision of services or the freedom of establishment.However, it is important to bear in mind that the UCI Law only allows for an EU fund manager, passported under AIFMD, to manage a Portuguese AIF if such an AIF exclusively targets professional investors, in accordance with the MiFID definition.As regards Portuguese incorporated fund managers, they shall have a board of directors comprising at least three members, one of them necessarily being an independent director (or non-executive director).Moreover, pursuant to the recently enacted Law no. 148/2015 of 9 September (Auditing Supervision Framework) the fund manager shall also have an audit board comprising at least three members

Vieira de Almeida Portugal


Port

ugal

■ credit institution, provided that it has own funds in an amount no less than €7,500,000, the AIF is closed-ended, and that the overall asset of the AIFs under its management falls below (i) €100,000,000, if the portfolio includes assets acquired with resort to the leveraging effect, or (ii) €500,000,000, if the AIFs do not resort to leveraging.

Considering that it is unusual for an AIF to be self-managed in Portugal and due to the limitations falling upon credit institutions, almost every AIF is managed by fund managers (financial institutions) as described in the first two paragraphs above.


The UCI Law is silent in respect of the ability of the fund manager to restrict redemptions in open-ended funds, but considering that such types of AIFs in general target retail investors, the CMVM will most certainly closely scrutinise this matter. In fact, such possibility would need to be clearly set out in the AIF’s regulation, which is analysed during the authorisation procedure. Moreover, the minute of the AIF regulation, approved by Regulation no. 2/2015, contains a field where the conditions set out for redemptions must be described, but only as regards the applicable fees, settlement dates and the criteria for the determination of which units/shares will be redeemed. Likewise, Regulation no. 2/2015 only seems to foresee conditions under which redemptions may be suspended, but not restricted. As regards the restriction of transfers in open-ended funds, the same rationale described above in respect of the redemption applies.Conversely, regarding closed-ended AIFs, mainly those targeting professional investors, we trust that it is possible to establish in the AIF’s regulation restrictions on the transfer of units from investors to third parties.


There are no legislative restrictions.


The ability of the manager to manage its funds will be mainly limited by the investment policy established in the AIF’s prospectus or regulation, as applicable, by the general investment limits by type of AIF, if any, established in the UCI Law and by the obligation to conduct its activity in the best interest of the investors.The UCI Law has a list of acts that a manager cannot carry out, such as granting loans, execute certain transactions on its own account, execute transactions relating to the assets held by the AIF with related parties, e.g., entities of its group, the depositary, etc.

3 Marketing


Please refer to question 1.1 above.

which mainly invest in securities are classified as SIMs (sociedades de investimento mobiliários), while those which mainly invest in real estate are classified as SIIs (sociedades de investimento imobiliário). Both SIMs and SIIs may be self-managed or have appointed a third party as their manager, which must be a duly authorised investment fund manager. Participants in these collective investment companies will hold shares (ações).

Lastly, please note that the AIFMD has been partially implemented in Portugal by Law no. 18/2015 of 4 March, relating to Venture Capital, Social Entrepreneurship and Specialised Investment (Venture Capital Law).The Venture Capital Law contains a specific regime applicable to AIFs investing in equity instruments for a limited period of time as well as other structures, which in spite of sharing similar features with the UCI’s framework, is perceived under Portuguese law as being an autonomous subject in relation to the UCIs. That being said, the present questionnaire does not take into account the Venture Capital Law as it falls outside the relevant scope. In Portugal, besides one collective investment company endowed with legal personality that has been set up until the present date, all AIFs are usually set up under the contractual structure with no legal personality.In an overall assessment of pros and cons of both structures, it should be taken into account that the contractual structure has a long track record in Portugal, being the preferred choice for setting up AIFs, as it offers an affordable, simple and well-known model for AIFs.Conversely, the collective investment company endowed with legal personality is clearly a more complex model that allows, however, greater control for the investors over the management of the AIF. Nonetheless, the lack of a decisive incentive to change the current status quo in respect of the way AIFs are usually set up in Portugal may be deemed as holding back a better use of the opportunities offered by this structure.


Legally, the asset of an AIF is only liable for its debts, thus it will not be liable for investors, the fund manager, depository, distributors or other AIFs’ debts. Likewise, investors are not personally liable for the AIF’s debts and will under no circumstances be burdened by any debt of the AIF.Notwithstanding, in the case of closed-ended real estate AIFs, the UCI Law allows for the AIF’s regulation to establish that, following a resolution of the investors’ assembly, the investors in a privately subscribed real estate AIF will take over the debts of the AIF, provided that the creditors agree so and that it is ensured that the debts arising after the extinction of the AIF will be taken over by the fund manager.


The AIF, which is not self-managed, will need to be managed by a:■ fund manager (financial institution) authorised to manage

UCITS, AIFs investing in securities or financial assets and in non-financial assets, or real estate investment funds (sociedade gestora de fundos de investimento mobiliário);

■ real estate fund manager (financial institution), which may only manage real estate funds (sociedade gestora de fundos de investimento imobiliário); or



Port

ugal

or authorised by the CMVM to perform the relevant activities, namely those of placement and reception and transmission of orders on behalf of third parties, and (iv) other entities as foreseen in Regulation no. 2/2015 and subject to its authorisation.Furthermore, the concept of reverse solicitation is not an official exemption from the UCI Law requirements, but rather a tolerated practice, which consists of an investor, on its own initiative and without any previous engagement on the part of the distributor, requesting information on the AIF at stake. However, a case-by-case assessment needs to be conducted, considering that the new AIFMD framework has induced a greater use of the reverse solicitation expedient, which may come under the CMVM’s scrutiny.Virtually every type of marketing falls into the category of distribution (comercialização), thus if such is not carried out by a duly licensed entity or under the reverse solicitation exemption, it will be in breach of the UCI Law.A clear distinction must be drawn regarding pre-marketing. If such marketing is conducted in relation to a specific AIF with the intention of triggering a future solicitation by the addressee to receive more information and subscribe the AIF, it is rather likely that the CMVM will consider it to fall within the concept of actual marketing. Conversely, if the pre-marketing has only a general nature, i.e. seeks to present to the investor the existence and activity carried out by the fund manager or an overall look at the market, without recommending or referring to any investment opportunity in particular, there are grounds to sustain that we will not be facing a marketing activity subject to the UCI Law requirements.An AIF may only be marketed in Portugal after its constitution has been authorised by CMVM and in any case the marketing material may contradict or diminish the importance of the AIF’s prospectus or regulation and KIID.


Yes. However, AIFs passported under the AIFMD can only be marketed in Portugal to professional investors. In order for the AIF to be marketed with retail investors in Portugal, the fund manager will need to obtain an authorisation of the CMVM, to be granted after the conclusion of a full registration procedure in Portugal of the AIF.


There is no particular requirement to be fulfilled in relation to investors in AIFs. Nonetheless, the fund manager shall ensure that the “know your customer and investment suitability analysis” is properly carried out in relation to the potential investor, as well as ensure that the anti-money laundering and terrorism financing procedures are respected.We stress that in the case of AIFs exclusively targeting professional investors, the fund manager shall guarantee that the investors that do not meet such eligibility criteria cannot invest in the AIF.




Regulation no. 2/2015 provides minutes for the AIF’s legal documents (KIID, prospectus and regulation).On the contrary, there are no minutes available in respect of marketing materials. Nonetheless, it is common practice for the fund manager and other distribution entities to provide information on the investment policy, markets targeted, main features (identification of the relevant entities, ISIN Code, terms and conditions of the investment, links to the legal documents) and historic returns of the AIF.Pursuant to Regulation no. 2/2015, if the marketing materials disclose return figures, they shall also contain, at least:■ The identification of the AIF and fund manager.■ The reference “the disclosed returns represent past data and

do not guarantee future returns”.■ The identification of the reference period for return figures

indicated.■ Confirmation on whether or not the return figures disclosed

already include the applicable taxation.■ Information on where and how the KIID and other legal

documents may be obtained.■ In cases where the AIF’s units/shares are admitted to trading

on a regulated market, identification of the market at stake and if the values disclosed are calculated on the basis of the asset value or on the market value of the units/shares.

■ The warning that investment in the AIF may lead to the loss of principal invested, in cases where the AIF does not guarantee payment of the principal invested.

■ If the figures disclosed are annualised, but have a reference period greater than one year, the information disclosed shall also contain the reference according to which the reference return could only be obtained if the investment was performed during the entire period of reference.

■ The risk level, with identical emphasis of the return figure, for an identical period of reference.

Lastly, as a general note, in accordance with the PSC, the information contained in the marketing materials shall be prepared in Portuguese or followed with a duly legalised translation, and must be complete, true, updated, clear, objective and licit.


Marketing materials in respect of AIFs do not need to be registered or authorised by the CMVM.However, an AIF’s legal documents, namely the KIID, the full prospectus of the AIF and/or the AIF’s regulation, as well as any further amendment to them, need to be registered with the CMVM and publicly disclosed through the CMVM’s website.


The marketing or distribution (comercialização) of AIFs is very broad, being defined as the activity directed towards investors with a view to promoting or proposing the subscription of units/shares, regardless of the means of communication used.The entities which are legally permitted to market AIFs are (i) AIF managers, (ii) depositaries, (iii) financial intermediaries registered



Port

ugal

encumbered, with liens or charges that may render its future disposal more difficult, such as in rem security.AIFs which invest in long-term non-financial assets with a determinable value need to hold at least 30% of their NAV in long-term non-financial assets with a determinable value and may invest up to 25% of their NAV in real estate, units/shares in real estate investment funds and shares in real estate investment companies.Lastly, we stress that loan originating from AIFs is not allowed in general terms under Portuguese law.


Yes. In respect of real estate AIFs, the borrowing limits are 25% of the asset for open-ended AIFs and 33% of the asset for closed-ended publicly and privately (by more than five investors, which are exclusively qualified as professional investors) subscribed AIFs. Closed-ended AIFs which are privately subscribed by five or fewer investors or whose investors are exclusively qualified as professional investors are not subject to any borrowing limit.As regards AIFs investing in securities or financial assets and AIFs investing in long-term non-financial assets with a determinable value, their regulations shall set out the limits for borrowing, but the UCI Law is silent in respect of borrowing limits.



Besides the reporting obligations referred to in question 5.2 below, the elements which are made available to the public on the CMVM’s website and the identity of the persons/companies holding qualifying shareholdings (10% or more) in the fund manager shall also be publicly disclosed.Furthermore, the legal documents of the AIFs and their updates shall also be made available on the CMVM’s website. Considering that the legal documents shall describe the identity of the fund manager, depository, auditor, distributors and other services providers to the AIF, the majority of the data in connection with the AIF will be made available to the public.However, the identity of the investors in the AIF is not mandatorily subject to public disclosure.


The fund manager must prepare and publish annual and biennial accounts. These must be made available free of charge at the investors’ request.The marketing entity must send or make available to the investors a statement informing them of: ■ the number of units such investor holds; and■ their value and the aggregate value of the investment. In addition to this information, the marketing entity may provide any additional information regarding the investor’s financial situation. For example, if the marketing entity is a bank of which the investor is a client, it could provide the above information together with the investor’s bank statement.


No. However, the relationship established between the intermediaries and the AIF shall be put in a written agreement and disclosed in the AIF’s legal documents. Furthermore, the intermediary, when carrying out the fundraising process, needs to act within the scope of activities that it is authorised to conduct, i.e. if the fundraising process corresponds to marketing of the AIF under the UCI Law, the analysis carried out in respect of question 3.4 above will be entirely applicable herein.


No. However, the holding of units/shares in AIFs may have an impact, that needs to be assessed on a case-by-case basis, on the own funds and reserves of the credit and financial institutions. Regarding the Portuguese insurance and pension funds sectors, there are limits relating to the representation of technical provisions with interests in AIFs, as well as to the asset allocation of pension funds, which restricts the exposure to a single AIF or the investment in AIFs in excess of a certain percentage of the portfolio, which will vary in accordance with the entity at stake.

4 Investments


Yes. AIFs can only focus on investment activities and their management and investment shall comply with the general rules applicable to the financial instruments markets, notably the ones resulting from the implementation carried out in Portugal of the MiFID II by the PSC.


Yes. The assets eligible for the portfolio of the AIF will depend on its specific type.Therefore, AIFs investing in securities or financial assets, such as undertakings for collective investment in transferable securities that do not comply with the UCITS Directive limits, may also invest up to 10% of their NAV in units/shares of real estate AIFs. Moreover, the AIF’s regulation shall set out the other relevant limits, otherwise the limits established in the UCITS Directive, as implemented by the UCI Law, shall apply.Real estate investment funds shall invest the majority of their assets in real estate, but may also invest in shares of real estate investment companies (sociedades imobiliárias), derivatives, mainly for hedging purposes, units/shares of other real estate investment funds and liquidity instruments. The extent to which the investment in the referred assets is limited will depend on the fact of the AIF being closed-ended or open-ended, and privately or publicly subscribed. Either way, the real estate investment fund cannot invest in assets



Port

ugal

AIFs that are exclusively investing in money market instruments and bank deposits will also be subject to stamp duty calculated on their global net asset value at a rate of 0.0025% (per quarter). Other AIFs will be subject to stamp duty to be levied on their global net asset value at a rate of 0.0125% (per quarter).


In the case of AIFs endowed with legal personality which are self-managed, the tax regime referred to in question 6.1 above applies. On the contrary, in the case of AIFs managed by a third party, the income obtained by such an AIF manager (including capital gains earned on the transfer of fund units) is subject to CIT at a rate of 21% to which a municipal surcharge of up to 1.5% may be applicable on taxable profits, depending on the municipality of where the AIF manager is established (the municipalities have the right to decide if the municipal surcharge is levied and at which rate). Taxable profits are also subject to a progressive state surcharge which has the following applicable rates: (i) 3% on the part of the taxable profits exceeding €1.5 million up to €7.5 million; (ii) 5% on the part of the taxable profits exceeding €7.5 million up to €35 million; and (iii) 9% on the part of the taxable profits exceeding €35 million.


Establishment taxes are not applicable in Portugal to the mere holding of a participation in an AIF. Please note in this regard that the acquisition of an AIF’s units of a privately subscribed closed-ended real estate AIF, as well as operations of redemption, capital increase or reduction, which results in a single investor or two spouses holding more than 75% of the units representing the assets of such AIF, property transfer tax should apply proportionally at the applicable rate (up to 6.5%) to the taxable value or the total value of the assets, as the case may be, but in each case with preference to the evaluation report of the investment fund manager, if higher.


(a) Resident investors. The taxation of resident investors is as follows:

Personal income tax (PIT): Income distributed or derived from redemptions to Portuguese individuals (outside their commercial activity) is subject to a 28% final withholding tax. If the investor opts to aggregate the income received, it will be subject to progressive income tax rates of up to 48%. In the latter circumstance, an additional income tax will be due on the part of the taxable income exceeding €80,000 as follows: (i) 2.5% on the part of the taxable income exceeding €80,000 up to €250,000; and (ii) 5% on any taxable income exceeding €250,000.

Income payments to omnibus accounts are subject to a final withholding tax rate of 35%, unless the relevant beneficial owner of the income is identified, in which case the tax rates applicable to the beneficial owner apply. Capital gains arising from the transfer of units are taxed at a special tax rate of 28% on the positive difference between capital gains and losses or the above progressive income tax rates and additional income tax rates, if the investor opts to aggregate the income received.

Any information published pursuant to the requirements set out below is available to investors, usually through the CMVM’s information diffusion system (website).Moreover, the fund manager must publish and send to the CMVM:■ The annual accounts within three months after the end of the

financial year. ■ The biennial accounts within two months after the end of the

relevant semester.■ An inventory of the fund’s asset portfolio, its global net value,

any responsibilities not found in the balance sheet and the number of units currently in circulation, on a monthly basis.

The fund manager as a regulated entity shall also in respect of its activities prepare and submit its accounts and financial statements and internal control report to the BoP and CMVM. In addition, the fund manager shall keep the BoP updated with the beneficial owners of its qualifying shareholdings.


The use of side letters that set out particular terms and conditions in respect of governance, investment, etc. of the AIF is not specifically addressed by the UCI Law. However, in the case of open-ended AIFs, considering that they tend to target retail investors and/or a broader unrestricted scope of investors, the use of side letters which alter any relevant provision of the legal documents, shall be deemed illegal, considering that as a general principle the fund manager needs to abide by the AIF’s legal documents during the provision of its activity.In closed-ended AIFs, notably those which are privately subscribed or targeting only professional investors, we trust that there is a wider margin to set out, namely through a side letter, giving specific provisions in respect of certain matters. However, in general terms, the provisions of the UCI Law are imperative, therefore any side letter providing for actions in breach of such legal provisions will be deemed illegal and may subject the fund manager to administrative offence proceedings.

6 Taxation


Decree-Law no. 7/2015 of 13 January 2015 (DL 7/2015) introduced a new UCI specific tax legal framework, which has been in force since 1 July 2015.AIFs are subject to corporate income tax (CIT) at the general rate (currently set at 21%), but are exempt from municipal and state surcharges. Taxable income corresponds to the net profit assessed in accordance with an AIF’s accounting standards.However, passive income, such as investment income, rental income and capital gains (except when sourced in a tax haven) are disregarded for taxable profit assessment purposes. Costs incurred in connection with such income (including funding costs) are also disregarded for profit assessment purposes. The following are also disregarded for taxable profit assessment purposes: (i) non-deductible expenses under the CIT code; and (ii) income and expenses relative to management fees and other commissions earned by AIFs. An AIF’s income is not subject to withholding tax. However, autonomous tax rates established in the CIT Code will apply.



Port

ugal

of the non-resident entity is held, directly or indirectly, by resident legal entities except when such entities are resident in a Member State of the EU other than Portugal or in a Member State of the European Economic Area provided, in this case, that such a State is bound to cooperate with Portugal under an administrative cooperation arrangement in tax matters similar to the exchange of tax information existing within the EU Member States or in a State with which Portugal has a double tax treaty in force or a tax information exchange agreement in force; or (iii) non-resident investors have not timely provided non-residence evidence in Portugal.

If the exemptions or reduced withholding tax rates do not apply, the general rules and tax rates (25%, 28% or 35%, as the case may be) will apply.

(c) Pension fund investors. Pension fund investors are taxed as follows:1. Pension funds which are established and operate in

accordance with Portuguese law are taxed as follows:i. In the event of income deriving from AIFs distributions,

pension funds are exempt from CIT and are exempt from withholding tax.

ii. In the event of income deriving from the redemption of the units or liquidation of the AIF, pension funds are subject to withholding CIT at a 25% rate, which will be refunded upon submission of the annual income tax return, since pension funds are exempt from CIT.

2. Pension funds which are established and operate in accordance with the law of a Member State of the EU other than Portugal or in a Member State of the European Economic Area are taxed as follows:i. In the event of income distributed by real estate AIFs

or through the redemption of the units or liquidation of such a real estate AIF, the pension funds are subject to withholding tax at the final rate of 10%.

ii. In the event of income deriving from securities AIFs, including income deriving from distributions and from the redemption of the units or liquidation of the AIF, pension funds should be exempt from CIT. In order to benefit from such exemptions, adequate evidence of non-resident status must be timely provided.

iii. However, non-resident pension funds cannot benefit from the exemptions or the reduced withholding tax rates, as the case may be, pursuant to the characteristics of the AIF if: (i) the non-resident pension fund is domiciled in a blacklisted jurisdiction listed in Ministerial Order 150/2004 of 13 February, as amended from time to time; (ii) more than 25% of the capital of the non-resident pension fund is held, directly or indirectly, by resident legal entities except when such entities are resident in a Member State of the EU other than Portugal or in a Member State of the European Economic Area provided, in this case, that such a State is bound to cooperate with Portugal under an administrative cooperation arrangement in tax matters similar to the exchange of tax information existing within the EU Member States or in a State with which Portugal has a double tax treaty in force or a tax information exchange agreement in force; or (iii) non-resident pension funds have not timely provided non-residence evidence in Portugal.

iv. If the exemptions or reduced withholding tax rates do not apply, the general rules and tax rates (25%, 28% or 35%, as the case may be) will apply.

3. In addition, pension funds which are established and operate in accordance with the law of a Member State of the EU other than Portugal or in a Member State of the European Economic Area are exempt from CIT, provided, in this case, that such Member State is bound to cooperate

Corporate income tax (CIT): Income payments to a resident entity are subject to withholding tax at a rate of 25% (to be paid on account of the final CIT due) and are qualified as income or gains for CIT purposes. Income payments to omnibus accounts are subject to a final withholding tax rate of 35%, unless the relevant beneficial owner of the income is identified, in which case the standard tax rates applicable to the beneficial owner apply.

A resident entity is subject to CIT at a rate of 21% (if the taxpayer is a small or medium-sized enterprise as established in Decree-Law no. 372/2007 of 6 November 2007, the rate is 17% for taxable profits up to €15,000 and 21% for taxable profits in excess thereof). A resident entity may also be subject to a municipal surcharge (derrama municipal) of up to 1.5% on taxable profits, depending on the municipality where it is established (the municipalities have the right to decide if the municipal surcharge is levied and at what rate). Taxable profits are also subject to a progressive state surcharge (derrama estadual) which has the following applicable rates: (i) 3% on the part of the taxable profits exceeding €1.5 million up to €7.5 million; (ii) 5% on the part of the taxable profits exceeding €7.5 million up to €35 million; and (iii) 9% on the part of the taxable profits exceeding €35 million.

Capital gains earned on the transfer of fund units are fully included in the taxable income of the resident entity and are subject to the same rates and surcharges as above.

(b) Non-resident investors. Non-resident investors are taxed as follows:

PIT: Income payments and capital gains derived from units in a securities AIF are exempt from PIT provided that the evidence of non-resident status required by the tax law is timely delivered by the beneficiary of the income to the AIF. A refund procedure is available within a two-year period in cases where a 28% withholding tax was applied for failure to timely deliver the documentation. The refund procedure requires the certification of a special form by the competent authorities of the state of residence. Non-resident investors domiciled in a resident country are not able to benefit from income tax exemptions and, in addition, will be subject to an aggravated 35% withholding tax. Income payments to accounts opened in the name of one or more account holders acting on behalf of one or more unidentified third parties are subject to a final withholding tax rate of 35%, unless the relevant beneficial owner of the income is identified, in which case the tax rates applicable to the beneficial owner apply.

Non-resident individuals who obtain income distributed by a real estate AIF or through the redemption of such AIF units shall become subject to withholding tax at the final rate of 10% provided the non-residence evidence in Portugal has been obtained in due time. Capital gains deriving from the sale of said units are taxed autonomously at a 10% rate.

CIT: A CIT exemption applies where income arising from the units of a securities AIF is distributed or made available to a non-resident entity without a permanent establishment in Portugal. Capital gains arising from the transfer of the said units are also exempt from CIT.

In order to benefit from such exemptions, adequate evidence of non-resident status must be timely provided.

Non-resident corporate investors who obtain income distributed by a real estate AIF or through the redemption of units on such AIF are subject to withholding tax at the final rate of 10%. Capital gains deriving from the sale of units in a real estate AIF are taxed autonomously at a rate of 10%.

However, non-resident investors cannot benefit from the exemptions or the reduced withholding tax rates, as the case may be, pursuant to the characteristics of the AIF if: (i) the non-resident entity is domiciled in a blacklisted jurisdiction listed in Ministerial Order 150/2004 of 13 February, as amended from time to time; (ii) more than 25% of the capital



Port

ugal

to comply with FATCA. Portugal signed an Intergovernmental Agreement with the US on 6 August 2015, which has been in force since 10 August 2016 and, as such, Portuguese financial institutions (funds and fund managers) are implementing procedures which will enable them to fully comply with the legal reporting and compliance rules.In addition, the Common Reporting Standard (CRS) has also been enacted, through Decree-Law no. 64/2016, of 11 October 2016, which implemented the legal framework based on reciprocal exchange of information on financial accounts subject to disclosure in order to comply with CRS and, as such, Portuguese financial institutions (funds and fund managers) are implementing procedures which will enable them to fully comply with the legal reporting and compliance rules.


There have been amendments to the Portuguese legislation in connection with the recommendations of the Base Erosion and Profit-Shifting (BEPS) action plan, issued by OECD, such as on the definition of interest deduction limits and on substance assessment requirements in order to be able to benefit from the Parent-Subsidiary Directive. However, to the best of our knowledge, we are not aware at this stage of any additional proceedings or actions taken or proposed to be taken by the Portuguese Authorities regarding Actions 6 and 7 of BEPS, insofar as they affect AIFs’ operations.


There are some types of investment funds that benefit from a tax-advantaged treatment, namely: (a) Real Estate Investment Funds on Forest Resources; (b) Residential Letting Real Estate Investment Funds; (c) Real Estate Investment Funds on Urban Rehabilitation; and (d) Venture Capital Funds.(a) Real Estate Investment Funds in Forest Resources Real Estate Investment Funds in Forest Resources (REIFFR) incorporated under the Portuguese law are exempt from CIT when at least 75% of its assets are allocated to exploitation of forest resources according to approved forest management plans, provided they are carried out accordingly to the applicable regulations and are subject to the legal forest certification proceedings. Investors who obtain income distributed by a REIFFR are subject to withholding tax at the rate of 10% unless: (i) the investors are entities exempt from CIT on capital income; or (ii) the investors are non-resident entities with no permanent establishment in Portugal to which the income can be attributed and that do not reside in a blacklisted jurisdiction or that are not held in more than 25% by resident entities. Individual investors subject to PIT who opt to aggregate the income received may deduct 50% of the distributed income which concerns to dividends, as a means of eliminating the economic double taxation.Capital gains deriving from the transfer of units are taxed at a 10% tax rate if the investors do not benefit from the specific exemption applicable to capital gains realised by non-residents (foreseen in Article 27 of the Portuguese Tax Benefits Code) or if they are individual investors who do not obtain this income under their professional activity and that do not opt to aggregate the income received.

with Portugal under an administrative cooperation arrangement in tax matters similar to the exchange of tax information existing within EU Member States which are also exempt from CIT, provided the following cumulative requirements are met:i. the pension fund covers exclusively the payment of

retirement benefits for old age or disability, for survival, for early retirement, post-employment healthcare benefits and, where they are supplementary to those benefits and are provided on an ancillary basis to the previously mentioned benefits, the attribution and death grants;

ii. the pension fund is managed by institutions for occupational retirement, as provided by Directive no. 2003/41/EC, of the European Parliament and of the Council, of 3 June;

iii. the pension fund is the ultimate beneficial owner of the income; and

iv. with respect to income distributions made by AIFs, the corresponding participation in the share capital is held, continuously, for at least one year.

In this case, however, it is not clear if the applicable exemption for CIT purposes at the level of the pension funds enables either (i) the operation of a withholding tax exemption upon payment of income from the AIF to the pension fund or, alternatively, (ii) the attribution to the pension funds to the right to claim a refund of the CIT withheld. To the best of our knowledge, the tax authorities have not provided any public guidance in this respect up to this moment.


Portuguese taxpayers may request advance rulings regarding specific tax situations. When advance rulings are issued, the tax authorities may not derogate from such rulings in relation to the taxpayers that requested it, except pursuant to court decisions.Subject to the payment of a fee (it may range from €2,550 up to €25,500), an advance ruling may be provided urgently, provided that such request by the applicant is accompanied by a tax framework proposal, reasons raised for urgency and the amount to be determined by the tax authorities according to the complexity of the topic is paid.If the tax authorities accept the urgency of the matter, the binding ruling will be issued within 75 days from the date of presentation of the request, and in the event that the tax authorities do not issue the ruling in such a time frame, it is considered that the tax treatment presented by the taxpayer is agreed to by the tax authorities. Non-urgent rulings are delivered within 150 days, although this deadline is merely indicative. Unless the new law does not provide a clear answer on any particular topic that might be raised by an investor, it is not necessary to obtain a tax ruling from the tax or regulatory authorities prior to establishing an AIF.


Portugal has implemented, through Law no. 82-B/2014 of 31 December, the legal framework based on reciprocal exchange of information on financial accounts subject to disclosure in order



Port

ugal

(d) Venture Capital FundsVenture Capital Funds constituted under the Portuguese law are exempt from CIT on any type of income.Investors who obtain income deriving from the distribution of income by a venture capital investment fund or from the redemption of units on such funds are subject to withholding tax at the rate of 10% unless: (i) the investors are entities exempt from CIT on capital income; or (ii) the investors are non-resident entities with no permanent establishment in Portugal to which the income can be attributed. This exception does not comprise investors that reside in a blacklisted jurisdiction or that are held in more than 25% by resident entities. This withholding tax becomes final when the investors are non-resident and have no permanent establishment in Portugal or when they are individual investors who earn this capital gains irrespective of their professional activity and that do not opt to aggregate the income received.Capital gains deriving from the transfer of units are taxed at a 10% tax rate if the investors do not benefit from the specific exemption applicable to capital gains obtained by non-residents (foreseen in Article 27 of the Portuguese Tax Benefits Code) or if they are individual investors who do not obtain this income under their professional activity and that do not opt to aggregate the income received.


If an exemption is not applicable, the acquisition of real estate by an AIF is subject to Property Transfer Tax (up to 6.5%) and stamp tax (0.8%) and each applicable tax rate will be levied either on the purchase price or the tax value of the property if higher.


To the best of our knowledge, we are not aware at this stage of any proceedings or actions taken or proposed to be taken by the Portuguese Authorities that consist of meaningful tax changes in the coming 12 months.

7 Reforms


Soon, the UCI Law will be subject to amendments by way of the law that will implement in Portugal MiFID II framework, mainly by republishing the PSC. Although, the amendments to the UCI Law will not be in principle substantial, the reference made by the UCI Law to several provisions of the PSC will entail that many of the changes introduced by MiFID II will indirectly impact the fund manager activity and the AIFs.

Whenever the conditions above described regarding the composition of the fund’s assets cease to be met, the investment fund and its investors shall be taxed according to the regime described in questions 6.1 and 6.4.(b) Residential Letting Real Estate Investment FundsResidential Letting Real Estate Investment Funds (RLREIF) incorporated between 1 January 2008 and 31 December 2015 are exempt from CIT, from Property Transfer Tax and Stamp Duty levied on the transfer of the immovable property to the RLREIF when the previous owners become the tenants or when they opt to purchase the immovable property, in accordance to the lease contract.Investors who obtain income deriving from these funds are exempt from CIT and PIT, except with regards to capital gains earned on the transfer of fund units.These benefits shall apply if certain conditions are met, such as the RLREIF’s portfolio being composed of a minimum of 75% of real estate located in Portugal and used for residential letting purposes.Whenever the legally required conditions cease to be met, the investment fund and its investors shall be taxed according to the regime described in questions 6.1 and 6.4.(c) Real Estate Investment Funds for Urban RehabilitationReal Estate Investment Funds for Urban Rehabilitation (REIFUR) incorporated between 1 January 2008 and 31 December 2013 which 75% of their assets are immovable property subject to urban renewal and located in urban renewal areas are exempt from CIT on income of any type. This exemption is only applicable if urban renewal interventions were initiated after 1 January 2008 and concluded until 31 December 2020. Income distributed by the REIFUR is subject to withholding tax at the rate of 10% unless: (i) the investors are entities exempt from CIT on capital income; or (ii) the investors are non-resident entities with no permanent establishment in Portugal to which the income can be attributed and that do not reside in a blacklisted jurisdiction or that are not held in more than 25% by resident entities. This withholding tax becomes final when the investors are non-resident and have no permanent establishment in Portugal or when they are individual investors who earn this capital gains irrespective of their professional activity and that do not opt to aggregate the income received.Individual investors subject to PIT who opt to aggregate income received may deduct 50% of the distributed income corresponding to dividends, as means of eliminating the economic double taxation. Capital gains deriving from the transfer of units are taxed at a 10% tax rate if the investors do not benefit from the specific exemption applicable to capital gains realised by non-residents (foreseen in Article 27 of the Portuguese Tax Benefits Code) or if they are individual investors who do not obtain this income under their professional activity and that do not opt to aggregate the income received.Whenever the conditions above described regarding the composition of the fund’s assets cease to be met, the investment fund and its investors shall be taxed according to the regime described in questions 6.1 and 6.4.



Port

ugal






Pedro Simões CoelhoVieira de AlmeidaRua Dom Luís I, 28 Lisbon, 1200-151Portugal

Tel: +351 31 311 3677Email: [email protected] URL: www.vda.pt

Inês Moreira dos Santos joined Vieira de Almeida & Associados in 2010 and rejoined the firm in 2015. She is a senior associate of the tax team. Inês graduated in 2007 from the Portuguese Catholic University and is a member of the Portuguese Bar Association since 2010. She has an Executive Master in Tax Management (INDEG/ISCTE), an advanced post-graduation in Taxation (IDEFF) and a post-graduation in Securities Law (IVM). Before joining the firm, she worked at the law firms Garrigues Portugal and Miranda Correia Amendoeira & Associados and at the Legal & Tax Department of Banif – Banco Internacional do Funchal. Inês has broad experience in tax consulting and international tax planning, namely in Portugal, Angola, Mozambique, Cabo Verde and São Tomé and Principe, having mainly been focused on multijurisdictional tax structuring investments, elimination of double taxation and structuring expatriates remuneration packages. Inês has also been providing tax assistance in private wealth transactions, private client planning and compliance with tax reporting obligations.

Inês Moreira dos SantosVieira de AlmeidaRua Dom Luís I, 28 Lisbon, 1200-151Portugal

Tel: +351 21 311 3400Email: [email protected] URL: www.vda.pt



Chapter 28

Ferraiuoli LLC

Yarot T. Lafontaine-Torres

Alexis R. González-Pagani

Puerto Rico

rely on certain exemptions in order to be exempt from the provisions of the ICA.

■ Investment Advisers Act of 1940 (the “Advisers Act”): The Advisers Act regulates the business of persons engaged in providing advice to other persons, for compensation, with regard to investment in securities. A person advising a Fund generally meets the definition of an “investment adviser” under the Advisers Act.

■ Securities Act of 1933 (the “Securities Act”): The offering and sale of ownership interest or securities in Alternative Investment Funds are subject to the provisions of the Securities Act.

■ Securities Exchange Act of 1934 (the “Exchange Act”): The sale and transfer of the ownership interest in Alternative Investment Funds are subject to the provisions of the Exchange Act.

■ Internal Revenue Code of 1984 (the “IRC”): Alternative Investment Funds are generally structured as partnerships. As further explained below, the investors in an Alternative Investment Fund could be subject to different tax treatments (e.g. individuals vs. business entities; domestic persons vs. foreign persons).

■ Others: Alternative Investment Funds and their Investment Advisers could be subject to regulation by the Commodity Futures Trading Commission (the “CFTC”) if the investment strategies of the Fund involve certain types of derivative securities (e.g. futures, options, and certain swaps, among others). Other regulators include the Financial Industry Regulatory Authority (“FINRA”) and the Federal Reserve Board with respect to Alternative Investment Funds affiliated with or sponsored by banks.

Select Puerto Rico Legislation■ Puerto Rico Uniform Securities Act (“PRUSA”): PRUSA

is modelled after the NASAA’s Model Uniform Securities Act. Among other matters, PRUSA regulates the registration of Investment Advisers and the offer and sale of securities (unless federal pre-emption applies).

■ Puerto Rico General Corporations Act (the “PR Corporations Act”): The PR Corporations Act establishes the framework on the constitution and governance of corporations and limited liability companies in Puerto Rico. It is modelled after the Delaware General Corporations Act (the “Delaware Corporations Act”) and the Delaware Limited Liability Companies Act (the “DLLC Act”). The Puerto Rico Supreme Court has stated that judicial decisions from Delaware courts in connection with the interpretation of the Delaware Corporations Act are highly persuasive and illustrative before Puerto Rico courts.

■ Puerto Rico Investment Companies Act of 2013: (the “PR ICA”): The PR ICA established the framework for the



Overview of the Commonwealth of Puerto Rico’s Laws and RegulationsThe Commonwealth of Puerto Rico (“Puerto Rico”) is an unincorporated territory of the United States of America (“United States”). Puerto Rico has a republican government system and has its own Constitution, laws and regulations. In addition, Puerto Rico enjoys United States constitutional, legal, financial and regulatory protection. Furthermore, besides the local court system, Puerto Rico has its own United States District Court and its decisions are subject to appeal to the First Circuit Court of Appeals in Boston, Massachusetts and then to the United States Supreme Court.The official currency of Puerto Rico is the United States dollar. Puerto Rico’s banking system and its financial institutions (including investment advisers, investment companies and broker/dealers) are subject to United States laws and regulations. Bank deposits are insured by the Federal Deposit Insurance Company and Puerto Rico’s geographic access points are protected by the United States Customs and Border Patrol. Legislation Applicable to Alternative Investment FundsIn general, alternative investment funds (an “Alternative Investment Fund” or a “Fund”) are regulated in a similar manner to Alternative Investment Funds organised in the continental United States in the sense that they are subject to both federal laws and regulations and the laws and regulations of the state in which they are formed and/or doing business. It is important to note that Puerto Rico’s securities and investment adviser laws and regulations are modelled after the model laws and regulations published by the North American Securities Administrators Association, Inc. (“NASAA”), and that the local regulator, the Office of the Commissioner of Financial Institutions of Puerto Rico (“OCFI”), is a member of NASAA. Select United States LegislationAs mentioned above, Alternative Investment Funds and their Investment Advisers organised under the laws of Puerto Rico and/or doing business in Puerto Rico are subject to the laws of the United States and all applicable rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”). ■ Investment Companies Act of 1940 (the “ICA”): The ICA

regulates “investment companies” that issue securities and are primarily in the business of investing in securities. As further discussed below, Alternative Investment Funds


Puer

to R

ico

Federal LevelPrivate Fund Adviser Exemption (SEC Rule 203(m)-1):■ SEC Rule 203(m)-1 provides an exemption from registration

to Investment Advisers with their principal office and place of business in the United States who (i) only advise “qualifying private funds”, and (ii) have less than USD 150 million in AUM in the United States (which is defined to include Puerto Rico).

■ The term “qualifying private fund” is defined to mean any (i) private fund that is not registered under Section 8 of the ICA, (ii) private fund that has not elected to be treated as a business development company under Section 54 of the ICA, and (iii) issuer that qualifies for an exclusion from the definition of an “investment company” under Section 3 of the ICA in addition to those provided by Section 3(c)(1) or 3(c)(7) of the ICA where the Investment Advisers treat the issuer as a private fund.

■ Non-United States Investment Advisers (no principal office or place of business in the United States) are exempt from registration under Section 203 of the Advisers Act if (i) the Investment Adviser has no clients that are United States persons except for one or more qualifying private funds, and (ii) has less than USD 150 million in AUM in the United States attributable to private fund assets.

■ Investment Advisers relying on the Private Fund Adviser Exemption are subject to record-keeping and reporting requirements and are classified by the SEC as “Exempt Reporting Advisers”. They are required to prepare and file a “short-form” version of Form ADV.

Venture Capital Fund Adviser Exemption (Section 203 of the Advisers Act and SEC Rule 203(l)-1):■ Section 203(l) of the Advisers Act exempts Investment

Advisers from registration when they solely advise one or more “venture capital funds” as defined by the SEC.

■ Under SEC Rule 203(l)-1, a “venture capital fund” is a private fund that: (i) represents to investors and potential investors that it pursues a venture capital strategy; (ii) immediately after the acquisition of any asset, other than qualifying investments or short-term holdings, holds no more than 20% of the amount of the fund’s aggregate capital contributions and uncalled committed capital in assets (other than short-term holdings) that are not qualifying investments, valued at cost or fair value, consistently applied by the fund; (iii) does not borrow, issue debt obligations, provide guarantees or otherwise incur leverage in excess of 15% of the private fund’s aggregate capital contributions and uncalled committed capital, and any such borrowing, indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar days, except that any guarantee by the private fund of a qualifying portfolio company’s obligations up to the amount of the value of the private fund’s investment in the qualifying portfolio company is not subject to the 120-calendar-day limit; (iv) only issues securities the terms of which do not provide a holder with any right, except in extraordinary circumstances, to withdraw, redeem or require the repurchase of such securities but may entitle holders to receive distributions made to all holders pro rata; and (v) is not registered under Section 8 of the ICA, and has not elected to be treated as a business development company pursuant to Section 54 of the ICA.

■ The main difference between the Venture Capital Fund Adviser Exemption and the Private Fund Adviser Exemption is that Investment Advisers relying on the Venture Capital Fund Adviser Exemption can have AUM in excess of USD 150 million without having to register with the SEC.

■ Investment Advisers relying on the Venture Capital Fund Adviser Exemption are subject to the same record-keeping and reporting requirements as Investment Advisers relying on the Private Fund Adviser Exemption.

organisation and operation of local investment companies and it is modelled after the ICA. Please note that the PR ICA expressly states that it shall not apply to any investment company that is excluded from the definition as an “investment company” under Section 3(b), 3(c)(1) and 3(c)(7) of the ICA. This chapter will not discuss the provisions of the PR ICA and regulations promulgated thereunder, given that Alternative Investment Funds are structured in order to be exempt under ICA.

■ Puerto Rico Internal Revenue Code (“PR IRC”): Puerto Rico has a unique tax system, which is intertwined with the United States tax system. It enjoys fiscal autonomy with respect to local tax matters. Notwithstanding, given that Puerto Rico born individuals are also United States citizens, they are subject to worldwide taxation. However, pursuant to Section 933 of the IRC, bona fide residents of Puerto Rico are not subject to federal income tax on their Puerto Rico sourced income, providing for unique tax structures. With regard to entities, the IRC excludes Puerto Rican entities from the definition of “United States Person” and treats them as foreign. Therefore, as with individuals, Puerto Rican entities and entities organised outside the United States doing business in Puerto Rico are not subject to United States income tax, except to the extent that they (a) engage in trade or business within the United States, or (b) derive certain categories of investment income from United States sources.


Yes, managers or advisers to Alternative Investment Funds are required to be licensed, unless an exception from registration applies. Pursuant to the Advisers Act and PRUSA, Investment Advisers are required to be registered with the SEC or with OCFI, unless an exception from registration applies. Under both statutes, a person who, for compensation, engages in the business of advising others as to the value of securities or as to the advisability of investing in, purchasing, or selling securities must register with the SEC or with OCFI, as applicable.Generally, and subject to certain exceptions, the level of assets under management (“AUM”) of an Investment Adviser determines whether it should register with the SEC or with a state regulatory body, such as OCFI with regard to Puerto Rico-based Investment Advisers. ■ Small Advisers: Investment Advisers with less than USD 25

million in AUM are regulated by the states unless the state in which the adviser has its principal office and place of business has not enacted a statute regulating advisers.

■ Medium Advisers: Investment Advisers with more than USD 25 million and less than USD 100 million in AUM are regulated by the states if (i) the Investment Adviser is registered with the local regulator in the state in which it has its principal office, and (ii) it is subject to examination by the local regulator.

■ Large Advisers: Investment Advisers with more than USD 100 million but less than USD 110 million in AUM may, but are not required to, register with the SEC. Once AUM exceed USD 110 million, the Investment Adviser must register with the SEC. Once an Investment Adviser registers with the SEC, state laws and regulations pertaining to investment advisers are pre-empted.

Notwithstanding the foregoing, there are various exemptions from registration at the federal and Puerto Rico level that Investment Advisers to Alternative Investment Funds may rely on:

Ferraiuoli LLC Puerto Rico


Puer

to R

ico


No. Neither United States nor Puerto Rico laws and regulations distinguish between open-ended and closed-ended Alternative Investment Funds. Such distinctions are generally seen with regulated investment companies (i.e. mutual funds registered under the ICA or the PR ICA).


Alternative Investment Fund EntityAssuming that the Alternative Investment Fund is an on-shore entity, it could be organised as a Delaware limited partnership or limited liability company or as a Puerto Rico limited liability company. As such, it would need to file the corresponding organisational documents in Delaware or Puerto Rico, as applicable, and would also be required to make other business filings and permits which are outside the scope of this chapter. Please note that in order to rely on the private offering exemption under Regulation D, the Alternative Investment Fund would need to prepare and file Form D upon the first sale of its securities.Investment Adviser and General Partner/Managing Member EntityThe entity or entities that will be organised to serve as the Investment Adviser and as the General Partner/Managing Member of the Alternative Investment Fund will also be required to file a Certificate of Organization with the Delaware State Department or the Puerto Rico State Department, depending on the structure chosen by the sponsors. If any of these entities were organised in Delaware and want to engage in business in Puerto Rico, then they will have to file an Authorization to do Business Certificate with the Puerto Rico State Department. In addition, they will be required to file other customary business filings and permits which are outside the scope of this chapter. The Investment Adviser, whether registering with the SEC, with OCFI or as an Exempt Reporting Adviser, will be required to file Form ADV. If the Investment Adviser registers with the SEC or with OCFI, it will be required to complete in full Form ADV, as opposed to the “short-form” version that is required from Exempt Reporting Advisers.


If an Investment Adviser decides to register with OCFI as a “state-registered” Investment Adviser, it will be required to have a surety bond in the amount of USD 10,000 or USD 25,000 (if the entity’s net capital is less than USD 25,000). In addition, the Investment Adviser will be required to appoint the Commissioner of OCFI as its agent to receive service of process in Puerto Rico.


Generally, Alternative Investment Funds and Investment Advisers engage: (i) accountants; (ii) independent accountants to serve as auditors; (iii) legal counsel; (iv) fund administrators; (v) custodians; (vi) banks; and (vii) broker/dealers.

Puerto Rico LevelOn October 20, 2014, OCFI adopted Regulation 8526, which is modelled after NASAA’s Registration Exemption for Investment Advisers to Private Funds Model Rule and provides an exemption from registration to advisers of private funds and of venture capital funds that comply with certain requirements. Under Regulation 8526, an Investment Adviser shall be exempt from registration with OCFI if it satisfies the following conditions: ■ neither the Investment Adviser nor any of its advisory affiliates

are subject to an event that would disqualify an issuer under Rule 506(d)(1) of SEC Regulation D;

■ the Investment Adviser files with OCFI each report and amendment thereto that an Exempt Reporting Adviser is required to file with the SEC, pursuant to SEC Rule 204-4;

■ if the Investment Adviser provides advice to at least one Fund that relies on Section 3(c)(1) of the ICA, that is not a venture capital fund, it must also comply with the following requirements:

■ the Investment Adviser shall advise only Funds (other than venture capital funds) where the outstanding securities (other than short-term paper) are beneficially owned entirely by persons who, after deducting the value of the primary residence from the person’s net worth, would each meet the definition of a “Qualified Client” under SEC Rule 205-3 at the time the securities are purchased from the issuer:

■ as of March 2017, a person needs a net worth of at least USD 2.1 million in order to be classified as a Qualified Client under SEC Rule 205-3;

■ at the time of purchase, the Investment Adviser must disclose to each investor: (i) all services, if any, to be provided to individual investors; (ii) all duties, if any, which the investment adviser owes to the investors; and (iii) any other material information affecting the rights or responsibilities of the investors; and

■ the Investment Adviser must obtain, on an annual basis, audited financial statements of the Fund, and shall deliver a copy of such audited financial statements to each beneficial owner of the Fund.


The ICA regulates all entities that fall under the definition of an investment company. Pursuant to the ICA, an “investment company” is: any issuer that is or holds itself out as being engaged, or proposes to engage, primarily in the business of investing, reinvesting, or trading in securities. However, there are two main exemptions from registration on which Alternative Investment Funds rely:■ Section 3(c)(1): An issuer will not be considered an

“investment company” if said issuer securities are owned by not more than 100 persons and the issuer has not made nor proposes to make a public offering of its securities.

■ Section 3(c)(7): An issuer will not be considered an “investment company” if said issuer securities are exclusively owned by person who, at the time of acquisition of such securities, are “Qualified Purchasers” as defined in question 3.6 below and the issuer has not and does not propose to make a public offering of its securities.

Pursuant to the PR ICA, an entity that would be an “investment company” but for Sections 3(b), Section 3(c)(1) or Section 3(c)(7), is exempt from the requirements of the PR ICA. As such, Alternative Investment Funds organised and/or operating in Puerto Rico are structured in order to meet the requirements of Sections 3(c)(1) or 3(c)(7).



Puer

to R

ico

all of their investors. As such, the investors are not liable for the obligations of the Alternative Investment Fund, whether incurred in contract, tort or otherwise. Alternative Investment Funds organised as Delaware LPs offer limited liability to the limited partners unless they actively engage and participate in the business of the LP.


Generally, the managers and advisers of an Alternative Investment Fund are organised as Puerto Rico LLCs. Furthermore, for tax and liability considerations, the manager and adviser roles are divided in two entities: (i) an entity to serve as the General Partner (with respect to Delaware LPs) or Managing Member (with respect to Delaware or Puerto Rico LLCs); and (ii) an entity to serve as the Investment Adviser which could be either a Corporation or an LLC. Although infrequent, if the Alternative Investment Fund is structured as a Delaware or Puerto Rico LLC, the sponsors may choose a simpler structure in which one entity serves as both the Managing Member and as the Investment Adviser of the Alternative Investment Fund. This structure could provide certain savings from a regulatory and compliance perspective (e.g. less tax filings, state filing fees, and other regulatory disclosures). The choice of the structure will depend on multiple factors, the most important of which are those related to (i) the type of investment that will be made by the Fund, (ii) tax considerations, and (iii) the type of investors in the Fund.


The concept of open-ended and closed-ended funds does not apply to Alternative Investment Funds that are exempt from the ICA and the PR ICA. As such, under local legislation there are no limits regarding the restriction of redemptions and/or transfers in Alternative Investment Funds. It is a common and even necessary characteristic for Alternative Investment Funds to restrict and/or limit redemptions, withdrawals and transfers. Generally, hedge funds provide certain limited redemption and/or withdrawal rights to investors (e.g. quarterly windows to withdraw money). On the other hand, private equity funds do not provide withdrawal rights. Similarly, transfers of the ownership of an Alternative Investment Fund interest are generally prohibited unless otherwise approved by the General Partner/Managing Member in its sole and absolute discretion.All these conditions are negotiated in the Alternative Investment Fund governance documents (i.e. LP Partnership Agreement or LLC Operating Agreement).


Alternative Investment Funds restrict the transfer of investors’ interest in order to limit the risks of losing the exemption from registration under the ICA, the Securities Act, the Exchange Act and PRUSA. In addition, securities offered pursuant to Rule 506 of Regulation D are classified as “restricted securities”, which means that the securities cannot be sold for at least a year without registering them under the Securities Act.

Please note that if an Investment Adviser is considered to have custody of an Alternative Investment Fund’s assets, said Investment Adviser must take certain precautions or safeguards to protect the client’s assets. For example, an Investment Adviser should engage a “Qualified Custodian” (which includes banks, broker/dealers, and other entities) to hold and maintain the Alternative Investment Fund’s assets and have an independent public accountant audit the Fund’s financial statements and/or be subject to examination by an independent public accountant.


Answer not available at time of printing.


The United States and Puerto Rico have entered into information sharing agreements and memorandums of understanding with multiple governments and regulators.

2 Fund Structures


The principal legal structure to organise Alternative Investment Funds in Puerto Rico is the Limited Liability Company (“LLC”). However, it is also common for Alternative Fund sponsors to organise the Alternative Investment Fund entity as a Delaware Limited Partnership (“LP”) or as a Delaware LLC. In addition, the sponsors, for regulatory and tax reasons, may organise fund entities in other tax-neutral jurisdictions, such as the Cayman Islands. Both LLCs and LPs grant ample flexibility to the parties regarding the terms and conditions that will govern the activities and functionality of the Alternative Investment Fund.Due to the applicability of federal laws and regulations and the similarity of Puerto Rico securities laws and regulations to those of most states in the United States, Alternative Investment Funds organised in Puerto Rico generally follow the same structures developed by US-based Alternative Investment Funds. In the most basic Alternative Investment Fund structure, there will be (i) the Alternative Investment Fund entity (either an LLC or LP), (ii) a Managing Member or General Partner entity (organised as an LLC or as a Corporation), and (iii) an Investment Adviser entity (organised as an LLC or as a Corporation). From the foregoing basic structure, an Alternative Investment Fund may expand and include multiple other entities. It is also common to see other Alternative Investment Fund that are structured to include: (i) parallel funds organised in other jurisdictions (such as the Cayman Islands or the British Virgin Islands) to accommodate investors that might be subject to particular tax, regulatory regimes or other investment limitations; and (ii) so-called “blocker” entities that permit tax-exempt entities or foreign investors to “block” United States sourced income generated by the Fund investments that could trigger certain income tax obligations.


Alternative Investment Funds organised as either (i) Puerto Rico LLCs, or (ii) Delaware LLCs provide statutory limited liability to



Puer

to R

ico

with respect to any investor or prospective investor in the pooled investment vehicle. Investment Advisers should also take into consideration the provisions of Rule 206(4)-1 and related SEC No-Action Letters with regard to advertisements by Investment Advisers.


Alternative Investment Funds generally offer and sell their securities to “Accredited Investors” pursuant to the exemption from registration available under Rule 506(b) of Regulation D of the Securities Act to private offerings that do not engage in general solicitation or advertising. As such, neither the SEC nor OCFI impose any requirements regarding the registration or approval of the marketing and legal documentation provided by the Alternative Investment Fund to potential investors. It is common practice to include in the Fund’s legal and marketing documents certain disclosure language that expressly states that the offering materials and the legal documents have not been registered, reviewed or approved with any regulatory agency.


Under the Securities Act and PRUSA, securities offered and sold in the United States must be registered with the SEC and/or PRUSA, as may be applicable, unless an exemption from registration applies. Given the extensive disclosure and regulatory requirements under the Securities Act, Alternative Investment Funds rely on the private offering exemption available under Section 4(a)(2) of the Securities Act. Particularly, Alternative Investment Funds rely on the safe harbour provided under Regulation D (for example, Rule 506(b)), which requires, among others, that the sale of securities under said Rule be made only to “Accredited Investors” with an allowance of a maximum of 35 “Non-Accredited Investors” and that no public offering or solicitation be made.


Prior to the enactment of Rule 506(c) under Regulation D, no issuer that was relying on the private offering exemption under the Securities Act could publicly market, offer or solicit its securities. Furthermore, in order to comply with the safe-harbour provisions under Regulation D, the offer and sale of securities had to be made to “Accredited Investors” as defined in question 3.6 below. As such, the marketing of Alternative Investment Funds was strictly limited. Compliance with the private offering exemption is a matter of high importance because it is one of the factors to be eligible for exemption from registration under Sections 3(c)(1) and 3(c)(7) of the ICA.Now, pursuant to Rule 506(c), issuers can solicit and generally advertise an offering while still being deemed to be undertaking a private offering pursuant to Section 4(a)(2) of the Securities Act if: (i) all the investors in the offering are “Accredited Investors”; and (ii) the issuer has taken reasonable steps to verify that the investors are accredited investors. Under Rule 506(c), the mere representation of an investor that it is an “Accredited Investor” is not enough and among the reasonable steps that can be taken are: (i) verifying the income via the receipt and review of IRS W-2 Forms; and (ii) receiving a certification from a certified public accountant,



3 Marketing


The legislation that governs the production and offering of marketing materials is the Exchange Act. Under Section 10(b) of the Exchange Act, it is unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or mail, or of any facility of any national securities exchange, to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the SEC may prescribe as necessary or appropriate in the public interest or for the protection of investors. Pursuant to said power, the SEC promulgated Rule 10(b)-5 which states that it is unlawful for any person, directly or indirectly, to employ any device, scheme or artifice to defraud, to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading or to engage in any act, practice or course of business which operates as a fraud or deceit upon any person in connection with the purchase or sale of any security.


Besides the provisions of Section 10(b) of the Exchange Act and of Rule 10(b)-5 promulgated thereunder, the Investment Advisers of Alternative Investment Funds must be aware of the provisions of Section 206 of the Advisers Act, which make it unlawful for any Investment Adviser: (i) to directly or indirectly employ any device, scheme, or artifice to defraud any client or prospective client; (ii) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; (iii) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction; or (iv) to engage in any act, practice or course of business which is fraudulent, deceptive or manipulative. Please note that under Rule 206(4)-8 of the Advisers Act, it shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of Section 206(4) of the Advisers Act for any Investment Adviser to a pooled investment vehicle to: (i) make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; or (ii) otherwise engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative



Puer

to R

ico

■ Any trust that is not covered by the point above and that was not formed for the specific purpose of acquiring the securities offered, as to which the trustee or other person authorised to make decisions with respect to the trust, and each settlor or other person who has contributed assets to the trust, is a person described in the preceding paragraphs or the paragraph below.

■ Any person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than USD 25,000,000 in investments.

Qualifications Related to Performance Fees/Carried Interest Charged to InvestorsUnder the Advisers Act and PRUSA, Investment Advisers are prohibited to enter into an agreement that provides for compensation to the Investment Adviser on the basis of a share of capital gains upon, or capital appreciation of, the funds or any portion of the funds of the client. However, under Rule 205-3, an Investment Adviser is not prohibited from entering into performing, renewing or extending an investment advisory contract that provides for compensation to the Investment Adviser on the basis of a share of the capital gains upon, or the capital appreciation of, the funds, or any portion of the funds, of a client if, and only if, the client meets the requirements to be classified as a “Qualified Client” under Rule 205-3.The term “Qualified Client” means: ■ a natural person who, or a company that, immediately after

entering into the contract has at least USD 1,000,000 under the management of the Investment Adviser;

■ a natural person who, or a company that, the Investment Adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, either:■ has a net worth (together, in the case of a natural person,

with assets held jointly with a spouse) of more than USD 2,000,000 (excluding the person’s primary residence and any indebtedness secured by the primary residence); or

■ is a qualified purchaser as defined in Section 2(a)(51)(A) of the ICA at the time the contract is entered into; or

■ a natural person who immediately prior to entering into the contract is an executive officer, director, trustee, general partner, or person serving in a similar capacity, of the investment adviser; or an employee of the investment adviser (other than an employee performing solely clerical, secretarial or administrative functions with regard to the investment adviser) who, in connection with his or her regular functions or duties, participates in the investment activities of such investment adviser and has engaged in those functions for at least 12 months.


Federal RestrictionsUnder Rule 206(4)-5 of the Advisers Act (the “Pay-to-Play Rule”), it is unlawful: (1) for any Investment Adviser to provide investment advisory services for compensation to a government entity within two years after a contribution to an official of the government entity is made by the Investment Adviser or any covered associate of the Investment Adviser (including a person who becomes a covered associate within two years after the contribution is made); and (2) for any Investment Adviser or a covered associate (a) to provide or agree to provide, directly or indirectly, payment to any person to solicit a government entity for investment advisory services on behalf of such Investment Adviser unless such person is a regulated person or an executive officer, general partner, managing member (or, in each

a lawyer, a registered broker/dealer, among others, stating that the investor, in fact, complies with the requirements to be classified as an “Accredited Investor” under Rule 501 of Regulation D.


Qualifications Related to Regulation D Offerings and the ICAAs discussed in other parts of this chapter, Alternative Investment Funds offer and sell their securities to “Accredited Investors” pursuant to private offerings in order to be exempt from registration under the Securities Act and in order for the Alternative Investment Fund to be eligible for exemption from registration under Section 3(c)(1) of the ICA (which allows a maximum of 100 investors). Pursuant to Rule 501 of Regulation D, an “Accredited Investor” includes, among others, the following persons:■ Certain institutional investors such as banks, broker/dealers,

insurance companies; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of USD 5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of USD 5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors.

■ Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer.

■ Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds USD 1,000,000 (excluding that person’s primary residence and any indebtedness secured by the primary residence up to a certain limit).

■ Any natural person who had an individual income in excess of USD 200,000 in each of the two most recent years, or joint income with that person’s spouse in excess of USD 300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year.

■ Any trust, with total assets in excess of USD 5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person.

■ Any entity in which all of the equity owners are accredited investors.

If the Alternative Investment Fund intends to rely on the exemption from registration available under Section 3(c)(7) of the ICA (which allows more than 100 investors in the Fund), all investors must be “Qualified Purchasers” or knowledgeable employees. Under the ICA, a “Qualified Purchaser” includes, among others, the following persons:■ Any natural person (including any person who holds a joint,

community property, or other similar shared ownership interest in an issuer that is excepted under Section 3(c)(7) of the ICA with that person’s qualified purchaser spouse) who owns not less than USD 5,000,000 in investments.

■ Any company that owns not less than USD 5,000,000 in investments and that are owned directly or indirectly by or for two or more natural persons who are related as siblings or spouse (including former spouses), or direct lineal descendants by birth or adoption, spouses of such persons, the estates of such persons, or foundations, charitable organisations, or trusts established by or for the benefit of such persons.



Puer

to R

ico

parties, aspirants, candidates, and campaign committees and authorised committees, as well as to political action committees making contributions to any of them. Please note that the donations that the committee makes are subject to the limits applicable to natural persons. Currently, said amount equals to USD 2,600 per calendar year (which shall rise alongside Puerto Rico’s inflation rate, as adjusted by the Electoral Comptroller).


There are certain restrictions as to the type of intermediaries that an Alternative Investment Fund may use in the sale of its securities to raise funds. Under Section 15 of the Exchange Act, it is unlawful for any broker or dealer to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security unless such broker or dealer is registered with the SEC. Similarly, it is unlawful for a broker or dealer to engage in business in Puerto Rico unless said broker or dealer is registered under PRUSA. The term “broker” is defined to mean “any person engaged in the business of effecting transaction in securities for the accounts of others”. As such, an intermediary engaged in the offering or sale of securities of an Alternative Investment Fund must be a registered broker/dealer or be exempt from registration as such.Now, the safe harbour provided by Rule 3a4-1 of the Exchange Act allows certain associated persons of an Alternative Investment Fund (i.e. the issuer of the securities) to engage in the sale of securities without being deemed to be a broker or dealer if such person is not:■ subject to a statutory disqualification, as that term is defined

in Section 3(a)(39) of the Exchange Act, at the time of his participation;

■ compensated in connection with his participation by the payment of commissions or other remuneration based either directly or indirectly on transactions in securities; and

■ an associated person of a broker or dealer at the time of his participation.

The term “associated person” includes any natural person who is a partner, officer, director or employee of the issuer, a corporate general partner of a limited partnership that is the issuer, a company or partnership that controls, is controlled by, or is under common control with, the issuer or an investment adviser registered under the Advisers Act to an investment company registered under the ICA which is the issuer.Alternative Investment Funds must be aware that the use of persons that engage in activities that would classify them as brokers or dealers, such as persons engaged as “finders”, entails substantial risks and sanctions. For example, the Alternative Investment Fund could be forced to rescind the subscription agreements entered into with investors and be ordered to return in its entirety all of the capital that was raised from said investors.


Under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (which added a new Section 13 to the Bank Holding Company Act), banking entities are generally prohibited from “engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a Hedge Fund or Private Equity Fund, subject to certain exemptions”.

case, a person with a similar status or function), or employee of the Investment Adviser, and (b) to coordinate, or to solicit any person or political action committee to make, any contribution to an official of a government entity to which the investment adviser is providing or seeking to provide investment advisory services or any payment to a political party of a state or locality where the investment adviser is providing or seeking to provide investment advisory services to a government entity.The prohibitions set forth above do not apply to contributions made by a covered associate (if a natural person) to officials for whom the covered associate was entitled to vote at the time of the contributions and which in aggregate do not exceed USD 350 to any one official, per election, or to officials for whom the covered associate was not entitled to vote at the time of the contributions and which in aggregate do not exceed USD 150 to any one official, per election. In addition, the prohibitions shall not apply to an Investment Adviser as a result of a contribution made by a natural person more than six months prior to becoming a covered associate of the Investment Adviser unless such person, after becoming a covered associate, solicits clients on behalf of the Investment Adviser. Further, an Investment Adviser may be exempted from the prohibitions discussed above if it complies with the following: (1) the Investment Adviser must have discovered the contribution which resulted in the prohibition within four months of the date of such contribution; (2) such contribution must not have exceeded USD 350; and (3) the contributor must obtain a return of the contribution within 60 calendar days of the date of discovery of such contribution by the investment adviser. Puerto Rico RestrictionsThe Puerto Rico Code of Ethics for Contractors and Suppliers of Goods and Services (Act 84 of 2002, as amended) generally prohibits any person from offering or delivering to a public servant of the executive agencies – with whom the person wishes to establish or has established a contractual or commercial or financial relationship – any contributions or donations, among other things. A related provision of the Code of Ethics prohibits a person who has “actively participated in political campaigns”, from establishing negotiations with secretaries, heads of agencies, municipal executives or executive directors of public corporations, that may lead to the improper granting of advantages or favours for their benefit. In addition, pursuant to the Puerto Rico Political Campaign Financing Oversight Act (Act 222 of 2011, as amended), there is a clear prohibition that business entities shall not make contributions out of their own resources in or outside Puerto Rico to any political party, aspirant, candidate, campaign committee, or to any authorised agent, representative, or committee thereof, or to political action committees that make contributions to or coordinate expenditure among such entities. However, a business entity may establish, organise, and administer a committee, to be known as a segregated committee or fund that, for the purposes of contributions and expenditures, shall be treated as a political action committee that must be registered in the Office of the Election Comptroller of Puerto Rico, render reports, and comply with all requirements imposed under the Political Campaign Financing Oversight Act. Thus, the business entity members, employees, and their immediate family or related persons may make contributions that shall be deposited in the account established and registered in the Office of the Election Comptroller. In order for a business entity to be able to establish a segregated committee or fund for these purposes, it must comply with the limitations and requirements set forth in Section 625j of the Political Campaign Financing Oversight Act. The committee, organisation or citizen group may make donations from said account to political



Puer

to R

ico

be performed by an Alternative Investment Fund, as long as those activities are lawful and permitted under federal and Puerto Rico laws and regulations. Please note that the governing documents of an Alternative Investment Fund may limit the types of activities that it can perform.Notwithstanding the foregoing, under the Exchange Act, all Alternative Investment Funds are prohibited from employing, in connection with the purchase or sale of any security registered or unregistered on a national securities exchange, any manipulative or deceptive device or contrivance in contravention of the rules and regulations that the SEC may prescribe as necessary or appropriate in the public interest or for the protection of investors. In furtherance of the foregoing, the SEC enacted Rule 10b-5 which states that it is unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or the mails or any facility of any national securities exchange, (i) to employ any device, scheme or artifice to defraud, (ii) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or (iii) to engage in any act, practice or course of business which operates or would operate as fraud or deceit upon any person.


Generally, any limitations regarding the types of investments that an Alternative Investment Fund may include in its portfolio are included in the governance documents and are disclosed in the offering documents. The limitations, if any, will depend on the particular investment strategy of the Alternative Investment Fund.However, there are a variety of federal and state laws that limit ownership in companies involved in highly regulated or sensitive industries or require extensive filings and other regulatory requirements in order to acquire an ownership stake. For example, there are certain regulatory burdens related to the acquisition of ownership stakes beyond certain thresholds in the banking, financial services and insurance industries, in public utilities and transportation industries (such as airlines and railroads), and in the defence industry. In addition, the ICA places certain limits on the investments that an Alternative Investment Fund may make in registered investment companies. Particularly, under Section 12(d)(1)(A)(i) of the ICA, it is unlawful for an Alternative Investment Fund to acquire any security issued by a registered investment company if after the acquisition the Alternative Investment Fund owns more than 3% of the total outstanding voting stock of the registered investment company. Although there are other investment limitations under Section 12(d) related to registered investment companies, they are not currently applicable to Alternative Investment Funds that are exempt from the provisions of the ICA under Sections 3(c)(1) and 3(c)(7) of the ICA.Furthermore, Alternative Investment Funds should take into consideration antitrust concerns if a transaction in which they are engaging is subject to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and/or the Puerto Rico Monopoly Act and certain restrictions related to short-selling of securities under the rules and regulations promulgated under the Exchange Act, such as Regulation SHO and Regulation M.

Under Section 13(d)(1)(G), a banking institution is permitted to organise and offer a private equity or hedge fund, including serving as a general partner, managing member, or trustee of the fund and in any manner selecting or controlling (or having employees, officers, directors, or agents who constitute) a majority of the directors, trustees, or management of the fund, including any necessary expenses for the foregoing, only if:■ the banking entity provides bona fide trust, fiduciary, or

investment advisory services;■ the Fund is organised and offered only in connection with

the provision of bona fide trust, fiduciary, or investment advisory services and only to persons that are customers of such services of the banking entity;

■ the banking entity does not acquire or retain an equity interest, partnership interest, or other ownership interest in the Funds except for a de minimis investment (which, no later than one year after the date of the establishment of the Fund, cannot amount to more than 3% of the total ownership interests in the Fund and the aggregate investment of the banking entity in Funds cannot amount to more than 3% of the Tier 1 Capital of the banking entity);

■ the banking entity complies with the restrictions under paragraphs (1) and (2) of subparagraph (f) of Section 13 regarding certain relationships with Alternative Investment Funds;

■ the banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the Hedge Fund or Private Equity Fund or of any Hedge Fund or Private Equity Fund in which such Hedge Fund or Private Equity Fund invests;

■ the banking entity does not share with the Hedge Fund or Private Equity Fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name;

■ no director or employee of the banking entity takes or retains an equity interest, partnership interest, or other ownership interest in the Hedge Fund or Private Equity Fund, except for any director or employee of the banking entity who is directly engaged in providing investment advisory or other services to the Hedge Fund or Private Equity Fund; and

■ the banking entity discloses to prospective and actual investors in the Fund, in writing, that any losses in such Hedge Fund or Private Equity Fund are borne solely by investors in the Fund and not by the banking entity, and otherwise complies with any additional rules of the appropriate federal banking agencies, the SEC, or the CFTC, as provided in Section 13, designed to ensure that losses in such Hedge Fund or Private Equity Fund are borne solely by investors in the Fund and not by the banking entity.

Besides the restrictions imposed by the Dodd-Frank Act, the only rules and regulations that could be considered as restrictions on the type of investor that can invest in an Alternative Investment Fund are those regarding the net worth and sophistication requirements under Rule 506. As discussed in other parts of this chapter, Alternative Investment Funds limit the sale of securities to investors that meet the requirements to be classified as “Accredited Investors” under Regulation D of the Securities Act and as “Qualified Clients” under Rule 205-3 of the Advisers Act in order to protect the Fund’s reliance on the safe harbour provisions and reduce the risks of running afoul of the ICA.

4 Investments


Generally, there are no restrictions on the types of activities that can



Puer

to R

ico


Please refer to our response in question 5.1 above.


No. The use of side letters is not restricted. An Alternative Investment Fund should disclose in its offering documents that it may enter into side letters with investors that might have different terms and conditions to those disclosed in the offering documents. Furthermore, Investment Advisers should always take into consideration their fiduciary obligations under the Alternative Investment Fund and its beneficial owners when negotiating side letters with other investors.

6 Taxation


As a general rule, LLCs organised in Puerto Rico are taxed as corporations. However, the PR IRC allows LLCs to elect to be treated as partnerships for income tax purposes, even if the LLC has only one member. The PR IRC currently does not provide for entities to be taxed as disregarded entities. As with tax elections made pursuant to the IRC, the election to be taxed as a partnership under the PR IRC allows Funds to be transparent for Puerto Rico tax purposes, making the members the parties responsible for the tax liability instead of the Fund. Furthermore, the PR IRC provides that every LLC that by reason of its election or provision of law or regulation under the IRC, or similar provision of a foreign country, is treated as a partnership, or whose income and expenses are attributed to its members for federal income tax purposes or that of the foreign country, shall be treated as a partnership for purposes of the PR IRC, and shall not be eligible to be taxed as a corporation.


As a general rule, a Puerto Rico Investment Adviser elects to be taxed as a partnership under the PR IRC. As mentioned above, entities organised in Puerto Rico or that are authorised to do business in Puerto Rico do not have available the option of being treated as a disregarded entity. Notwithstanding the above, certain investment managers elect to keep the default corporation tax treatment in order to utilise certain income tax deferrals, simplify tax compliance requirements and possibly maximise benefits under certain tax incentives acts (discussed below).With the enactment of Act No. 20 of January 17, 2012, as amended (“Act 20”), certain Investment Advisers organised in Puerto Rico or who establish operations in Puerto Rico that provide advice to Funds located outside of Puerto Rico or to other Investment Advisers located outside of Puerto Rico (i.e. export their services) are electing to be to be taxed as corporations to benefit from the interplay of Section 933 of the IRC and Act 20, which provides a preferential tax rate of 4% for services rendered from Puerto Rico to persons located outside of Puerto Rico, such as Funds, other Investment Advisers or investors. In addition, Act 20 provides a 0% rate on dividends distributed by the entity to its owners from income derived from


No. There are no statutory restrictions with respect to borrowings or leverage by Alternative Investment Funds. However, it is common to see in Alternative Investment Funds’ governing documents clauses that limit the amount of leverage that the Alternative Investment Fund may use. If the Alternative Investment Fund is authorised to use leverage and expects to use it in its investment strategy, it should clearly disclose said fact and explain to potential investors the risks involved in the use of leverage.



Federal Public DisclosuresUnder the Advisers Act, Investment Advisers registering with the SEC must complete Form ADV, or certain parts of Form ADV, if the Investment Adviser is an Exempt Reporting Adviser. Form ADV is available to the public via the Investment Adviser Public Disclosure website administered by the SEC. Also, Investment Advisers with assets in excess of USD 150 million must file Form PF with the SEC. Form PF requires the Investment Adviser to disclose certain information related to the Funds that they advise, including, without limitation, information regarding size, leverage, investor types, geographical concentration of investments, fund strategy, fund performance, and liquidity. The types and extent of the information that needs to be disclosed will depend on the amount of AUM and the type of Funds that the Investment Adviser manages. For example, Form PF requires the disclosure of different information if the Fund is a Hedge Fund, as opposed to a Private Equity Fund. All issuers that rely on Regulation D of the Securities Act to offer their securities must file Form D with the SEC, which is publicly available via the SEC’s EDGAR system. Form D must be filed within 15 days of the first sale of the Alternative Investment Fund securities and must be amended annually for as long as the Alternative Investment Fund offers securities. Puerto Rico Public DisclosuresAll Investment Advisers doing business in Puerto Rico are required to complete and file Form ADV and notify OCFI of its filing. This requirement applies whether the Investment Adviser is registering with the SEC, registering with OCFI as a “state-registered” adviser or if it is filing as an “Exempt Reporting Adviser”. Although Investment Advisers registering as “state-registered” advisers with OCFI must complete and file a series of additional forms, only Form ADV is generally available to the public.Under PRUSA, an issuer that relies on Regulation D to offer and sell securities in Puerto Rico must send a notification to OCFI with a copy of the Form D filed with the SEC, a notification payment fee and their consent to the service of process. Under the PR Corporations Act, each entity organised in Puerto Rico or authorised to do business in Puerto Rico must make certain filings with the Puerto Rico Department of State that are available to the public. Similarly to Delaware, only entities organised as Corporations are required to file annual reports. Further, LLCs and LPs are not required to file annual reports as they are only required to make an annual fee payment.



Puer

to R

ico

said income from federal and state taxation. Bona fide individuals are subject to the taxes imposed by the PR IRC. The tax rates that apply vary depending on the type of income and amount of income received. Tax rates vary from 0% to 33% for individuals, and from 20% to 39% for corporations. Non-residents that derive Puerto Rico sourced income are subject to the PR IRC. As with residents, the tax rates that apply to non-residents vary depending on the amount and type of income received by the non-resident. In the case of non-residents that are not engaged in a trade or business in Puerto Rico and derive Puerto Rico sourced income, as a general rule, they are subject to a 29% withholding at source. Entities organised in Puerto Rico are considered foreign entities for purposes of the IRC and can also use the exclusion of income provided by Section 933 of the IRC. As with individuals that are residents of Puerto Rico and engaged in a trade or business, entities are subject to the PR IRC and the tax rates vary depending on the type of income. The PR IRC tax rates for entities range from 20% up to 39%. In the case of entities that are not engaged in a trade or business that derive Puerto Rico sourced income, they are subject to a 39% withholding tax.


It is not required to request a tax ruling from the Puerto Rico Treasury Department prior to the establishment of an Alternative Investment Fund.


Puerto Rico is subject to the Foreign Account and Tax Compliance Act 2010.


As of this date, Puerto Rico has not adopted the OECD’s Action Plan on Base Erosion and Profit-Shifting (BEPS).




There are none.



export activities. Please note that Act 20 requires grantees to have at least three full-time (or full-time equivalent) employees within the first six months from the commencement of operations and five employees within two years after commencement of operations.The terms of the exemption provided to the entity under Act 20 are gathered in a Tax Grant, which is considered a contract between the government of Puerto Rico and the entity that requested the benefits. The initial term of an Act 20 Tax Grant is 20 years and can be extended for an additional 10 years.


The PR IRC does not provide a specific transfer tax on the transfer of an investor’s ownership interest in the Alternative Investment Fund. As with the IRC, the PR IRC imposes a capital gains tax on the sale of appreciated ownership interest in the Fund. If the Fund elects to be taxed as a partnership, as with the IRC, the PR IRC provides that the tax liability on the income received by the Fund will flow through to the members and they will be responsible for any tax liability determined under the PR IRC.Notwithstanding, the Puerto Rico government enacted Act No. 22 of January 17, 2012, as amended (“Act 22”), which provides an exemption from Puerto Rico sourced passive income. This includes capital gains, interest and dividends. Act 22 ties into both the IRC exemption for a bona fide resident to not be subject to federal taxation on Puerto Rico sourced income and the sourcing rules of the IRC. Therefore, for example, an individual that receives interest income from an investment in a Fund located in Puerto Rico would be exempt from Puerto Rico and federal taxes. By the same token, given that capital gains are sourced to the residence of the seller and, in the case of partnership, are determined at the level of the partners, investors can greatly benefit from the interplay of the above rules. Furthermore, an individual who owns an Investment Adviser which has an Act 20 Tax Grant (as discussed above), and which provides services to an Alternative Investment Fund or to another Investment Adviser located outside of Puerto Rico, can receive dividend distributions subject to a 0% tax rate.To benefit from Act 22, individuals must become bona fide residents of Puerto Rico and they must not have been residents of Puerto Rico between 2006 and 2012.


Puerto Rico born individuals are also United States citizens. As such, they are subject to taxation on their worldwide income, under both the IRC and the PR IRC. To determine the tax treatment that may apply to (a) residents, (b) non-residents, and (c) pension fund investors, it is required to examine their treatment under both the IRC and the PR IRC. In addition, as mentioned above, bona fide residents of Puerto Rico can exclude from federal and state taxation any income that is treated as Puerto Rico sourced, pursuant to the exclusion of Section 933 of the IRC. To be considered a bona fide resident of Puerto Rico, the individual must comply with three (3) residency tests during the tax year in which they received the income. The three (3) tests are: (i) physical presence; (ii) tax home; and (iii) closer connection. If the individual complies with all three (3) tests and receives Puerto Rico sourced income, they can exclude



Puer

to R

ico

Please note that at the federal level, the Trump Administration has stated its intentions to scale back the financial regulations enacted under the Obama Administration, particularly those enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). It is also worth noting that President Trump has expressed that the preferential tax treatment applicable to “carried interest” could be changed so that it is classified as “ordinary income” or subject to a higher tax rate than the current rate of 15%. As of April 2017, we are not able to provide further guidance regarding the scope of deregulation initiatives or what will be the ultimate treatment of “carried interest” under the tax legislation overhaul being considered by the Trump Administration.

7 Reforms


On the local front, the Puerto Rico Legislature will propose to the United States Congress an amendment to the Foreign Assistance Act of 1961 in order to authorise the Overseas Private Investment Corporation to facilitate financing, risk insurance and support Private Equity Funds to invest in Puerto Rico. If the aforementioned amendment becomes law, it could provide a boost to local Private Equity Funds and to the business sector. As of March 31, 2017, there are no other local proposed reforms that may have a material impact on the regime governing Alternative Investment Funds.


Ferraiuoli LLC is one of the leading full-service law firms in Puerto Rico. The firm provides value-added, comprehensive legal advice to industry-leading private and publicly owned companies on mergers & acquisitions, intellectual property, general corporate law, labour and employment, energy and land use, litigation, tax, among many others.

Ferraiuoli has received international recognition in the legal field by Chambers & Partners, a London-based firm that publishes, on an annual basis, leading directories of the legal profession identifying the world’s top lawyers and law firms. Since 2010, Chambers & Partners has ranked Ferraiuoli as a leader in both Corporate and Intellectual Property and several firm attorneys were named “Leaders in their fields” by the publication. Ferraiuoli has further been honoured as one of Puerto Rico’s outstanding firms by Chambers & Partners as it was shortlisted as one of the candidates for Puerto Rico’s Law Firm of the Year since 2011.

Yarot T. Lafontaine-Torres is a Senior Associate Attorney with our Corporate Practice Group. His main practice areas are: alternative investment funds and investment adviser regulation, mergers & acquisitions; corporate governance; banking and financial services regulation; and securities regulation. He counsels clients in commercial and corporate matters including, among others: structuring of private funds (private equity, real estate and hedge funds); registration of investment advisers with the SEC and Puerto Rico regulatory agencies; private securities offerings (including the preparation of private placement memorandums, subscription documents and filings with regulators); mergers & acquisitions; establishment of international financial entities; and other corporate governance matters.

Yarot T. Lafontaine-TorresFerraiuoli LLC221 Ponce de León Ave., 5th Floor San Juan 00917Puerto Rico

Tel: +1 787 766 7000Email: [email protected]: www.ferraiuoli.com

Alexis R. González-Pagani is a Senior Associate Attorney with our Tax Practice Group. His main practice areas include: local taxation of individual and entities; addressing international taxation issues of individuals and entities; assisting the relocation process of individuals under Act 22-2012; establishment of export companies under Act 20-2012; structuring of new businesses; and advising on the restructuring of existing businesses in order to maximise tax savings and opportunities under other incentives acts such as Act 73-2008. He counsels clients in: devising sophisticated tax and corporate structures for clients who are expanding operations locally and making outbound investments from Puerto Rico; structuring the inbound Puerto Rico investments and operations of multinational entities; and regarding the tax aspects of contracts, mergers, acquisitions and reorganisations.

Alexis R. González-PaganiFerraiuoli LLC221 Ponce de León Ave., 5th Floor San Juan 00917Puerto Rico

Tel: +1 787 766 7000Email: [email protected]: www.ferraiuoli.com


Chapter 29

Brodies LLP

Andrew Akintewe

Karen Fountain

Scotland

In cases where the manager and operator do not have the required FCA authorisations, it is usually possible to structure the AIF so as to outsource these activities to authorised service providers.


AIFs that are structured as SLPs under the LPA 1907 are generally classed as unregulated collective investment schemes (UCIS) and are not themselves required to be authorised or regulated by the FCA or any other regulatory body. Registration with the Registrar of Limited Partnerships in Edinburgh is required.The vast majority of AIFs registered in Scotland utilise the SLP structure. However, in terms of market practice, other AIF structures have been used in Scotland and two examples are considered below.AIFs can be structured in Scotland (as they can in England) using certain forms of authorised fund structures, for example, qualified investor schemes (QISs) which take the form of an open-ended authorised unit trust (AUT) or open-ended investment company (OEIC). In general, the same regulatory regime applies to these funds irrespective of whether they are domiciled in England or Scotland. QIS structures are required to be authorised by the FCA, but can only be marketed to certain categories of eligible investor. AIFs that are structured as QISs benefit from investment and borrowing powers that are very flexible, for example, compared with UCITS and other authorised funds designed for retail investors. QISs are required to achieve a basic spread of risk consistent with the investment objective and policy. QIS structures can also be used for non-retail fund of funds structures, facilitating indirect investment exposure to, for example, private equity, hedge funds, and real estate funds. These are referred to as ‘Funds of Alternative Investment Funds’ (FAIFs) and are subject to specific rules in relation to matters such as concentration, liquidity and due diligence, valuation and audit of the underlying funds. FAIFs may also be structured as ‘non-UCITS retail schemes’ (NURS) to facilitate marketing to a wider range of investors.In addition, there has been a trend for certain retail funds using authorised UCITS structures to adopt investment strategies similar to those used by some hedge funds. As with QIS structures, the same regulatory regime applies to these funds irrespective of whether they are domiciled in England or Scotland.Listed AIFs have also been created using Scottish companies with securities admitted to trading on a securities market such as the Main Market or the Alternative Investment Market (AIM) or the Specialist Fund Market (SFM) of the London Stock Exchange. Historically there have been examples of Scottish investment companies of this



The primary legislation that governs the establishment and operation of Alternative Investment Funds (AIFs) in Scotland is:■ the Financial Services and Markets Act 2000 (FSMA) and

related orders;■ the Limited Partnerships Act 1907 (LPA 1907); and■ the Companies Act 2006.In general, the relevant provisions of the above legislation apply on a UK-wide basis; however, many AIFs are structured as Scottish Limited Partnerships (SLPs), which benefit from particular provisions of the LPA 1907 that do not apply to limited partnerships governed by English law. This is discussed further in section 2 below.The rules which implement the EU Alternative Investment Fund Managers Directive (AIFMD) apply in Scotland. These rules affect the AIFs managed by managers within the scope of the Directive.The European Venture Capital Funds Regulation also applies in Scotland.SLPs are the main focus of this chapter. However, some consideration is also given to other AIF structures which have been used in Scotland.


The management and operation of an AIF in Scotland will normally involve regulated activities that are required to be carried out by persons authorised by the UK Financial Conduct Authority (FCA). The exact scope of regulated activities will depend on factors such as (i) the assets under management, and (ii) the structure of the fund; however, regulated activities that are typically considered during the fund structuring process are:■ establishing and operating a collective investment scheme

(CIS);■ managing investments;■ managing an AIF;■ arranging transactions in investments; and■ advising on investments.


Scot

land


The table below sets out the key features of the three main examples of AIF described above:

type, designed to facilitate indirect investment into alternative asset classes such as forestry assets. In these cases, the company becomes subject to regulation by the FCA and the London Stock Exchange, in respect of compliance with applicable provisions of FSMA, the Disclosure and Transparency Rules, the Admission & Disclosure Standards of the London Stock Exchange and, as applicable, the Prospectus Rules and/or AIM Rules for Companies.

Brodies LLP Scotland

Key Feature Scottish Limited PartnershipAuthorised Unit Trust or OEIC (for example: Qualified Investor Schemes)

Investment Company Admitted to Trading on a Securities Market (for example, AIM or SFM)

Legal structure Partnership Trust or Company CompanySeparate legal personality Yes Yes YesOpen-/closed-ended Either Open-ended Closed-ended

Is the Fund/Manager/Trustee/Depositary regulated? Manager and/or operator (FCA)

Manager or Authorised Corporate Director, Trustee/Depositary and Fund (FCA)

Manager and Custodian (FCA), Fund (Companies Act, FCA listing rules or AIM rules)

Admitted to trading on a securities market? No

Not in practice, with the exception of those Exchange Traded Funds (ETFs) that use these fund structures

Admitted to trading on a securities market, for example, the Alternative Investment Market or Specialist Funds Market of the London Stock Exchange

Collective Investment Scheme? Yes Yes No

Pricing Bespoke valuation provisions in fund documentation NAV of fund Determined by market


AIFs structured as SLPsNo authorisation is required at fund level. As indicated in question 1.3 above, the manager and/or operator will typically be required to be authorised by the FCA. Where not already authorised prior to the launch of the fund, the manager or operator will be required to apply to the FCA for authorisation to conduct the expected range of regulated activities. This will require the production of a detailed business plan, including proposed internal controls and outsourcing, a staff organisational chart including all those individuals who are seeking approved person status and relevant reporting lines, a compliance monitoring programme, details of IT systems as well as numerous other pieces of information. A typical, straightforward application would normally be processed within three months. More complex applications can take longer. As indicated in question 1.2 above, where the manager and operator do not have the required FCA authorisations, it is usually possible to structure the AIF so as to outsource these activities to authorised service providers.AIFs structured as QISs or NURSsAn application for authorisation of a QIS or NURS must be submitted to the FCA. This involves submission of a structured application form, constitutional documents and prospectuses which comply with the detailed requirements of the FCA Collective Investment Schemes sourcebook (COLL), and a solicitor’s certificate. A typical application would normally be processed within two months.AIFs structured as public companies admitted to trading on AIM or SFMThe company must be registered as a public limited company and obtain a trading certificate. A prior requirement is that the nominal value of the company’s share capital is not less than £50,000. At least one quarter of the nominal capital and the whole of any premium must be paid-up.The process of applying for admission to AIM includes (i) the production of a detailed AIM admission document (which complies

with the AIM Rules for Companies and the AIM Rules for Investing Companies), and (ii) the appointment of a nominated adviser (nomad) and broker. A nomad is usually a corporate finance firm, investment bank or a broker that has been approved by the London Stock Exchange. The nomad is responsible to the London Stock Exchange for assessing the appropriateness of a company for an application to AIM and for advising the company on the admission process and its continuing obligations under the AIM Rules for Companies.The process of applying for admission to the Specialist Fund Market is a two-stage process. The requirements include (i) the approval of a prospectus by the UK Listing Authority, and (ii) following approval of the prospectus, application to the London Stock Exchange for admission to trading on the SFM. Applicants will require specialist advice.


Basic formation requirements for Scottish Limited PartnershipsSome market practice for the formation of SLPs is outlined below. Where the separate legal personality of the SLP is required for the operation of the fund (which is often the case with AIFs, particularly in the case of fund of funds, feeder funds and other vehicles), some of these steps are of particular importance:■ It is fundamental that the partnership agreement be written so

as to be governed by Scots Law, specifically stating that the partners intend the partnership to be a Scottish partnership.

■ The SLP is generally required to have a principal place of business in Scotland. This is often an address provided by the lawyers advising on the SLP formation.

■ It is recommended that the general partner is a Scottish entity. This is most usually a Scottish special purpose private limited company. The general partner will be responsible for any day-to-day management of the SLP; however, this is normally delegated to an authorised manager. The registered office of the general partner is normally the principal place of business of the SLP.


Scot

land

As indicated in question 1.4 above, the focus of this chapter is on SLPs.SLP key features include (i) flexible terms of management and operation, (ii) tax transparency, (iii) separate legal personality, (iv) limited liability for investors, and (v) the possibility of multiple passive investors (limited partners). For these reasons SLPs are frequently used as AIF vehicles, particularly as private equity funds, real estate funds (including their feeder funds and carried interest vehicles), and fund of funds structures.


Investors participate in SLPs as limited partners. Provided it does not involve itself in the management of the SLP, a limited partner’s liability for the debts and obligations of the SLP is limited to the amount of its capital contribution. It is normal for AIF SLPs to be structured so as to ensure that this capital contribution is a nominal amount. For example, ‘capital contribution’ is often defined in the partnership agreement as a fraction (e.g. 0.01 per cent) of a limited partner’s commitment to the SLP. The rest of the limited partner’s commitment to the SLP will comprise a loan.If the partnership is wound up, for example, on an insolvent basis, the limited partner will normally rank as an ordinary creditor for sums advanced above the nominal capital commitment.With effect from 6 April 2017, most AIF SLPs can apply to be treated as Private Fund Limited Partnerships (PFLPs). Limited partners in PFLPs are not required to contribute capital and any capital contributed can be repaid at any time without affecting the limited liability status. The general partner of the SLP, which (subject to any delegation arrangements) is responsible for the management and operation of the SLP, has unlimited liability.


The principal legal structures used for managers and advisers of AIFs in Scotland are limited companies and limited liability partnerships (LLPs).LLPs are tax-transparent, which may assist efficient structuring of the management vehicle.


AIF SLPs can be either open- or closed-ended.Subject to the point below about the restriction on distributions of capital by SLPs, a manager may restrict redemptions or transfers, generally in accordance with the terms of the fund documentation.The LPA 1907 restricts distributions of capital by SLPs during the life of the partnership. This makes the redemption of an investor’s capital commitment difficult. However, as described in question 2.2 above, this capital commitment is usually a nominal amount, with the rest of an investor’s commitment comprising a loan. This means that in practice there is no legal impediment to structuring an SLP as an open-ended vehicle. In addition, with effect from 6 April 2017, most AIF SLPs can apply to be treated as PFLPs. Limited partners in PFLPs are not required to contribute capital and any capital contributed can be repaid at any time without affecting the limited liability status.

■ The partnership agreement is usually signed in Scotland. This is often undertaken by an attorney for the partners, who do not have to be physically present in Scotland to sign documents.

In addition, an occasional meeting, for example, an annual review meeting, is sometimes held at the SLP’s principal place of business address in Scotland.


In the case of SLPs, the service providers required will vary depending on the activities of the fund. As indicated above, the management and operation of a typical AIF SLP will be undertaken by manager and operator, which may be the same entity, authorised by the FCA to carry out the regulated activities involved. However, operator services are often provided by specialist fund administration businesses, which will often also provide ancillary services such as fund accounting.The rules implementing the EU Alternative Investment Fund Managers Directive (AIFMD) in the UK apply in Scotland. These rules introduced requirements for specific service providers, such as depositaries, for AIFs managed by managers within the scope of the AIFMD.


As indicated in question 1.2, the management and operation of an AIF in Scotland will normally involve regulated activities that are required to be carried out by persons authorised by the UK Financial Conduct Authority (FCA). The exact scope of regulated activities will depend on factors such as (i) the assets under management, and (ii) the structure of the fund.In cases where the manager and operator do not have the required FCA authorisations, it is usually possible to structure the AIF so as to outsource these activities to authorised service providers.These rules apply to foreign managers or advisers. Specific advice should be taken on whether the relevant regulated activities are within the UK regulatory perimeter or not.


Co-operation or information sharing agreements are entered into at the UK level and there are currently no separate agreements applicable to Scotland. Please see the England & Wales chapter of this publication for an overview of those agreements entered into at the UK level.

2 Fund Structures


As indicated in question 1.3 above, the vast majority of AIFs registered in Scotland utilise the SLP structure. However, in terms of market practice, some other structures have been used, for example, QIS structures and listed investment companies (described in questions 1.3 and 1.4 above).



Scot

land

This content is required by a combination of market practice and certain provisions of the FSMA and related orders, the common law of Scotland and the securities laws of other jurisdictions in which the fund may be being promoted. The AIFMD-driven rules apply where the manager is within the scope of the Directive. In addition, the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPS Regulation) requires product manufacturers to prepare Key Investor Documents (KIDs) for all Packaged Retail and Insurance-Based Investment Products (PRIIPS) that are offered to sale to retail investors in the EEA. This includes alternative investment funds (AIFs) sold to retail investors.


SLPs are required to be registered with the Registrar of Limited Partnerships in Edinburgh. This requires the filing of a form at registration, containing basic details of the partnership, the partners and capital contributions. There are limited continuing obligations to notify the registrar of various changes relating to the partnership, its business and capital. There is no registration requirement in respect of an SLP’s marketing document.


As indicated in question 3.1 above, most AIF SLPs are classified as unregulated collective investment schemes (UCIS). The marketing and promotion of UCIS is regulated by the FSMA and related orders.In very general terms, these regulations mean that, as is the case with AIFs in many other jurisdictions, AIF SLPs cannot be freely marketed to the public, but only to certain categories of eligible investor (such as ‘investment professionals’, ‘high-net-worth individuals’ and ‘sophisticated investors’).


In general, no – but AIFs can be marketed to some investors classed as retail investors subject to the restrictions described under question 3.4 above and compliance with suitability assessment rules.


A range of qualification requirements for eligible investors are set out primarily in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO), the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (CIS Promotion Order) and specific FCA conduct of business rules. The specific rules that apply will depend on factors such as whether the promoter of the AIF is authorised by the FCA or not. Some commonly used categories of eligible investors are noted below:■ investment professionals;■ certified high-net-worth individuals; and■ certified sophisticated investors.These categories are specifically defined in the applicable legislation.AIFMD also introduced a passport which facilitates marketing to professional investors on a pan-European basis.


In the case of SLPs, transfers of partnership interests are required to be advertised in the Edinburgh Gazette and, for the purposes of the LPA 1907, do not take full effect until publication of the advert. Publication of the advert is a simple administrative procedure.With effect from 6 April 2017, the requirement to advertise in the Edinburgh Gazette has been removed for PFLPs.


The AIFMD rules regulating the acquisition of substantial stakes in EU companies apply in Scotland as in the rest of the UK. These rules impose disclosure obligations on the acquisition of major holdings (starting at 10% of voting rights) in non-listed EU companies as well as restrictions on “asset stripping”. These rules impose certain limitations on distributions, share redemptions or buybacks and capital reorganisations during a period of 24 months following the acquisition of control.

3 Marketing


As indicated in question 1.3 above, for regulatory purposes, AIF SLPs are generally classified as unregulated collective investment schemes (UCIS).The marketing and promotion of UCIS is regulated by the FSMA and related orders and the AIFMD-driven rules, where the manager is within the scope of the Directive.In very general terms, these regulations mean that, as is the case with AIFs in many other jurisdictions, AIF SLPs cannot be freely marketed to the public, but only to certain categories of eligible investor (such as ‘investment professionals’ and ‘sophisticated investors’).


Key content requirements for AIF SLP marketing materials are similar to those used in many other jurisdictions and, typically, details include:■ investment objectives and strategy;■ investment process;■ management personnel;■ summary of key fund terms;■ risk disclosures;■ disclosure of UK tax treatment of the fund and investors

and, if the fund is being distributed on a cross-border basis, disclosure of the tax treatment of the fund and investors in other key jurisdictions; and

■ regulatory statements and disclosures required by the FSMA and other securities laws in the UK and, if the fund is being distributed on a cross-border basis, regulatory statements and disclosures required by securities laws in other key jurisdictions.



Scot

land


No such restrictions apply to AIF SLPs, although it is common for fund documentation to limit borrowing by the fund.The rules implementing the AIFMD in the UK require managers within the scope of the Directive to specify leverage limits.



The registration and disclosure requirements, contained in the LPA 1907, that apply to AIF SLPs are set out in question 3.3 above.In addition, the Partnerships (Accounts) Regulations 2008 (as amended) require the annual accounts of certain SLPs to be filed.


The rules which implement the AIFMD in the UK introduce various reporting requirements. These involve periodic reports to the FCA using an online reporting system.


A requirement to disclose arrangements, such as side letters, was introduced by the AIFMD. Other than this, the use of side letters is not restricted by current legislation. As is common in other jurisdictions, investors will often seek to negotiate ‘most favoured nation’ provisions.

6 Taxation


Although SLPs have separate legal personality (which is why they are often used in fund of funds structures, feeder funds, and similar vehicles), they are tax-transparent for most UK taxes. This means that no income, corporation or capital gains tax is payable by the SLP itself. Instead, the UK tax authorities look through the partnership structure and partners are taxed on their share of partnership income arrived at in accordance with their profit-sharing ratios (which can be different from the ratios in which capital has been contributed). For capital gains tax purposes, partners are treated as owning fractional shares in the underlying assets.


The tax treatment of the principal forms of investment manager/adviser will vary according to the structure used, for example, a company or limited liability partnership (LLP). LLPs are often used as management vehicles, as they are tax-transparent corporate vehicles, offering limited liability, with no restrictions on members


No; public bodies will often fall within one of the categories of eligible investor, such as ‘investment professional’, but this should be specifically checked.


The restrictions on marketing that apply to the manager or promoter will also apply to intermediaries.


Generally, and subject to the points made above (see questions 1.2 and 3.4 in particular) on authorisation and marketing, there are no restrictions on the participation in Alternative Investment Funds by particular types of investors. Some qualifications apply to this. For example, Scottish local government pension schemes (LGPS) are subject to the restrictions set out in the Local Government Pension Scheme (Management and Investment of Funds) (Scotland) Regulations 2010, which contains concentration limits for various classes of investments. LGPS, together with other types of pension funds, will also be subject to the terms of their internal investment policies.Certain types of retail investment funds (for example, UCITS funds) also have to comply with investment restrictions which may limit their exposure to Alternative Investment Funds.In addition, investments by financial institutions in AIFs may impact their regulatory capital requirements.The rules which implement the AIFMD in the UK apply in Scotland. These significantly restrict the range of activities which managers within the scope of the Directive can undertake.

4 Investments


In general, no. However, (as described in question 1.2 above) the management and operation of an AIF in Scotland will normally involve regulated activities that are required to be carried out by persons authorised by the FCA. Such persons will be authorised to conduct a specific scope of activities.The rules that implement the AIFMD in the UK also restrict certain activities, for example, where an AIF acquires control of a non-listed company. These restrictions relate to matters such as distributions, capital reductions and share buybacks.


No such limitations apply to AIF SLPs, although it is common for fund documentation to limit the types of investments held.



Scot

land


This is not generally necessary.


FATCA compliance is currently coordinated at the UK level (primarily by the International Tax Compliance (United States of America) Regulations 2013). The use of AIFs domiciled in Scotland should not ordinarily introduce any additional material factors relevant to FATCA or compliance with similar information reporting regimes.It is to be noted that SLPs often elect to be treated as corporations for US tax purposes. Where that is the case, it may be relevant for FATCA compliance purposes (for example, when considering which entity may become liable for FATCA withholding tax).


Implementation of the OECD’s Action Plan on Base Erosion and Profit-Shifting is being dealt with at UK level.


Other than SLPs, which are described above and are generally tax-transparent, the tax and regulatory regime applicable to tax advantaged fund structures and asset classes generally applies on a UK-wide basis.


Individual investors, managers and advisors who are classed as Scottish tax payers for income tax purposes will be liable to pay the Scottish rates of income tax on any non-savings non-dividend income. For example, management fees or trading income treated as arising from an SLP could be subject to the Scottish rates.


The Scottish Government is consulting on introducing: (a) a seeding relief for PAIFs and COACs, to exempt the introduction of Scottish property to funds from LBTT; and (b) an exemption from LBTT for the transfer of units in a COACs which invest in Scottish land.These changes should bring the LBTT treatment of PAIFs and COACs closer to the current SDLT regime.It should be noted that the LBTT rules will apply to funds investing in Scottish property regardless of which jurisdiction the fund itself is resident in.

participating in management. VAT on management fees is often a key tax consideration, as is the use of the Investment Manager Exemption, which allows a non-UK resident fund that is trading for tax purposes, such as a hedge fund, to appoint a UK-based investment manager without creating a permanent establishment in the UK.


There are no establishment taxes levied in connection with an investor’s participation in an AIF. Stamp duty may be payable on the transfer of an investor’s interest in an SLP if the SLP’s property includes stock or marketable securities. In practice, transfers of interests are often structured so as to mitigate stamp taxes. Stamp duty land tax or land and buildings transaction tax may apply where the SLP’s property includes land.


As indicated above, although SLPs have separate legal personality, they are generally tax-transparent and the UK tax authorities look through the partnership structure. Partners are taxed on their share of partnership income in accordance with their profit-sharing ratios (which can be different from the ratios in which capital has been contributed). For capital gains tax purposes, partners are treated as owning fractional shares in the underlying assets. The tax profile of individual investors determines their tax liability.AIF SLPs are generally operated so that they are not treated for UK tax purposes as carrying on a trade, the result of which is that non-resident investors should not be subject to UK tax on gains from the SLP. Non-resident investors may, however, be subject to UK tax on investment income, although this is likely to be restricted to UK tax that is withheld at source (for example, by a portfolio company in a private equity fund). Withholding tax on UK investment income would be subject to the relevant double taxation treaty between the UK and the investor’s jurisdiction of residence.Non-resident investors who hold their interest in the AIF SLP as part of their trade (for example, financial traders such as banks) are likely to be treated as carrying on part of that trade in the UK through a permanent establishment, branch or agency which is a UK representative (for example, the general partner or manager of the fund). The UK-resident general partner would then be treated as the investor’s UK tax representative, and would share responsibility with the investor for submitting UK tax returns and paying any UK tax due on the investor’s partnership income. In these circumstances, the manager will often be authorised to retain an amount equal to such investor’s liability to UK corporation or income tax and pay such amounts to the UK tax authorities. These tax liabilities can usually be mitigated by the use of special purpose vehicles established for the purpose of participating in the AIF SLP.In addition, non-UK jurisdictions may apply or withhold tax on income or gains receivable by the AIF SLP from investments in those jurisdictions. In these circumstances, investors will normally seek relief under applicable double tax treaties, and the availability of relief may depend on whether the SLP is treated as fiscally transparent in the overseas jurisdiction.



Scot

land

requirement for managers to be authorised to market funds only once they have reviewed final form documentation. If regulators do not take a practical approach to these rules, we could end up in the situation where the regulator rejects fund documents on the basis that they are not in final form, which then prevents the fund manager from negotiating with investors. These rules appear to be better suited to funds where the terms are not negotiated, and investors simply buy into an already established product (such as a UCITS fund). For more bespoke products, the proposal is likely to prove particularly challenging.Other developments include the EU prudential framework for investment firms. At the moment, investment firms that are authorised under MiFID are largely regulated under the Capital Requirements Directive (“CRD IV”) and Capital Requirements Regulation (“CRR”), which also establish the prudential framework for credit institutions. The European Commission is proposing to change this for certain categories of investment firm and introduce a more bespoke set of prudential standards which will fall under the umbrella of an Investment Firms Directive and accompanying Regulation.At the time of writing, the impact of Brexit on the UK investment management industry, including Scotland, is uncertain. Topics such as the availability of marketing passports under AIFMD will be an area of focus. The FCA recently announced that firms and funds will continue to benefit from passporting between the UK and EEA during a transition period, following Brexit. Obligations under EU law will continue to apply, and firms must continue with their implementation plans for EU legislation that is due to come into effect before the end of 2020 (this is likely to include the new prudential regime).The FCA has stated that this transition period is intended to allow for further cooperation between UK and EU regulators, to provide solutions for investment managers firms following Brexit.

7 Reforms


On 12 March 2018, the European Commission published a proposal (comprising a Regulation and a Directive) to harmonise national fund marketing rules across EU Member States. The Regulation seeks to ensure that regulatory fees levied by regulators for authorisation, registration and supervision are proportionate and publicly disclosed The Regulation will also require regulators to maintain databases outlining applicable marketing rules for AIFs and UCITS funds.The proposed Directive is more controversial, and aims to further “facilitate” cross-border marketing. The Directive clarifies the definition of “pre-marketing” compared to “marketing”. The proposed Directive states that “pre-marketing” excludes information that:■ Relates to an established AIF.■ Contains a reference to an established AIF.■ Enables investors to commit to acquiring units or shares of a

particular AIF.■ Amounts to a prospectus, constitutional documents of a

not-yet established AIF, offering documents, subscription documents or similar documents whether in draft or final form, allowing investors to take an investment decision.

The proposals are intended to provide clarity and align marketing rules across the EU Member States but, if implemented, are likely to give rise to a number of serious difficulties for fund products where fund managers expect to negotiate their terms with potential investors. As the rules are currently drafted, a fund manager discussing the terms of a limited partnership agreement would technically be ‘marketing’ to investors. This contradicts the FCA’s



Scot

land


Brodies is a UK law firm, operating across offices in Edinburgh, Glasgow, Aberdeen and Brussels. We are ranked ‘No.1’ in 40 key practice areas by leading independent legal directories. Our core expertise is on Scottish jurisdictional work and we have the local market knowledge combined with the market-leading expertise to deliver tailored advice in all relevant business areas and sectors, with a particular focus on banking, funds and financial services. Our investment funds practice draws on the leading expertise within the firm including corporate, private equity, property, banking, regulation, tax and employee benefits. We have established a strong reputation for advising a diverse client base of investment managers, banks and other market participants on the full range of specialist and retail investment structures, including marketing, distribution, financing, tax and transactional matters. We are a market leader in the use of Scottish entities in global fund structures – and regularly work with fund specialists in other jurisdictions.

Andrew specialises in the formation and operation of investment funds, related corporate transactions and financial regulation. He advises a diverse client base of investment managers, banks and other market participants on investment fund structures, regulatory projects and related corporate finance assignments. In particular, he has advised on Takeover Code transactions, schemes of arrangement and capital reorganisations involving London Stock Exchange quoted investment companies. Andrew has worked for a major financial institution and is an Associate Member of the Chartered Institute for Securities and Investment.

Andrew AkinteweBrodies LLP15 Atholl CrescentEdinburgh, EH3 8HAScotland

Tel: +44 131 656 0210Fax: +44 131 228 3878Email: [email protected]: www.brodies.com

Karen has over 20 years’ experience of advising leading financial institutions, funds and institutional and strategic investors across the globe on a broad range of matters (and covering all major asset classes and sectors including infrastructure, real estate, private equity and venture capital and other investment strategies). Karen has also been instrumental in the formation and development of many complex joint ventures and consortia. Many of these have stood the test of time, having successfully completed contested acquisitions, complex refinancing, broader syndications and total and partial exits.

Karen FountainBrodies LLP15 Atholl CrescentEdinburgh, EH3 8HAScotland

Tel: +44 131 656 0179Fax: +44 131 228 3878Email: [email protected]: www.brodies.com


Chapter 30

Colin Ng & Partners LLP

Amit R. Dhume

Abel Ho

Singapore

to hold immovable assets) may be exempted from holding a CMS licence if all the investors in the AIF are qualified investors. There are also exemptions from these licensing requirements available for certain financial institutions such as banks and finance companies, provision of fund management services to related corporations etc., but these exemptions cannot be used by independent investment managers or advisers who want to manage third-party monies.


While the MAS regulates managers and advisers in Singapore, the AIFs by themselves are not required to be licensed by any specific regulatory body. That being said, if the AIF is incorporated as a Singapore company, it would have to be registered by the Registrar of Companies and comply with the Companies Act and the rules and regulations thereunder. Similarly, if the AIF is structured as a Singapore limited partnership, it would have to be registered by the Registrar of Limited Partnerships and comply with the Limited Partnership Act and the rules and regulations thereunder. In general, an AIF need not be authorised save for situations where: (i) the AIF is offered to accredited investors or certain other persons pursuant to the prospectus exemption under section 305 of the SFA (S305 Exemption) for investment, in which case, a simple notification of the proposed offer of the interest in the AIF has to be filed with the MAS before it is offered to such investors in Singapore; or (ii) the AIF is offered to the retail public for investment, in which case, the AIF needs to be authorised or recognised by the MAS and the prudential rules and procedural requirements pursuant to the SFA will apply accordingly.


The regulatory regime in Singapore currently (since 1 July 2013) does not differentiate between open-ended and closed-ended AIFs.


A person who wishes to apply for a CMS licence for fund management or to register itself as a RFMC is required to submit to the MAS the relevant prescribed forms duly completed along with



The applicable legislation that governs the establishment and operation of an Alternative Investment Fund (AIF) in Singapore depends on how the AIF is structured. Some common structures include private limited companies, limited partnerships, and unit trusts. If the AIF is structured as a private limited company, the applicable governing legislation will be the Companies Act (Cap. 50) of Singapore (Companies Act). If the AIF is structured as a limited partnership, then the Limited Partnership Act (Cap. 163B) of Singapore (Limited Partnership Act) will be applicable. While there is no specific governing legislation applicable to an AIF if it is established as a unit trust, the AIF will need to operate in accordance with the trust deed constituting the AIF, and unless such units are offered to the retail public for investment then the prudential rules and procedural requirements pursuant to the Securities and Futures Act (Cap. 289) of Singapore (SFA) will apply accordingly.


Any person conducting fund management activity in Singapore is required to either hold a Capital Markets Services (CMS) licence for fund management or qualify for an exemption to hold a CMS licence under the SFA. Fund management is defined broadly and includes the management of a portfolio of securities on behalf of a customer (whether on a discretionary authority granted by the customer or otherwise). Therefore, managers and advisers of private equity funds are required to be licensed and regulated by the Monetary Authority of Singapore (MAS) unless they qualify for any of the licensing exemptions. In situations where a manager or adviser to a private equity fund proposes to manage up to S$250 million in assets for up to 30 qualified investors (i.e. institutional and accredited investors) of which no more than 15 may be funds or limited partnership fund structures offered to accredited or institutional investors, the manager or adviser is not required to hold a CMS licence but has to be registered with the MAS as a Registered Fund Management Company (RFMC). Another frequently utilised exemption is the “immovable property exemption”. That is, managers and advisers of AIFs that directly or indirectly (through another entity) invest in immovable assets (or corporations or unincorporated bodies whose sole purpose is


Sing

apor

e

Colin Ng & Partners LLP Singapore


Singapore has concluded several international co-operation and information sharing agreements with other governments or regulators as follows: (a) Exchange of Information Agreements;(b) Convention on Mutual Administrative Assistance in Tax

Matters; and (c) International Tax Compliance Agreements (e.g. Foreign

Account Tax Compliance Act (FATCA), Common Reporting Standard (CRS), Country-by-Country Reporting, Multilateral Competent Authority Agreements on Automatic Exchange of Financial Account Information under the CRS and Exchange of Country-by-Country Reports).

2 Fund Structures


While the structure of the AIF would depend on various factors such as the type of the underlying investments and the nature of the investors etc., the legal structures principally used for AIFs are private limited companies and limited liability partnerships.


If the AIF is structured as a private limited company, the liability of the investors is limited to the extent on any amount unpaid on their shares. The investors do not have to contribute any amount more than the share capital they have paid into the AIF. If the AIF is structured as a limited partnership, the investor as a limited partner has limited liability for the debts and obligations of the limited partnership, unless the limited partner takes part in the management of the limited partnership.


The manager or adviser to the AIF is typically incorporated as a separate private limited company.


There are no statutory limits on the manager’s ability to restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds. That said, for AIFs that have been authorised by the MAS for investment by the public and are not listed on the Singapore Exchange, there are certain prescribed liquidity requirements under the Code on Collective Investment Schemes (CIS Code).


Where the AIF is managed by a manager who is licensed by the MAS to manage funds for qualified investors, all transfers of

all supporting documents. These include a simple business plan, a shareholding chart and an organisation chart of the applicant. The MAS would also need details of the applicant’s audited financial statements, and where applicable, the consolidated financial statements of the group of which the applicant is a part. After the application is submitted to the MAS via its Corporate Electronic Lodgement system, the MAS would generally take around four to six months to review and raise any queries it may have in respect of the application. The Guidelines on Licensing, Registration and Conduct of Business for Fund Management Companies issued by the MAS, which are to be read along with the SFA and related regulations, provide key details of the application process and requirements.


Where the AIF is incorporated as a Singapore company, at least one Singapore resident director must be appointed onto the board of the AIF (i.e. Singapore citizen, Singapore permanent resident or holder or an employment pass issued by the Ministry of Manpower in Singapore). The other directors on the board of the AIF can be residents of foreign countries. Where the AIF is set up as a Singapore limited partnership and the general partner is ordinarily resident outside of Singapore, the Registrar of Limited Partnerships will require an ordinarily resident natural person acting as the local manager to be appointed.


In general, the MAS requires Assets Under Management (AUM) to be held by an independent custodian; i.e. a prime broker, depositories or banks which are properly registered or authorised in their home jurisdictions, although it recognises that private equity and wholesale real estate funds may adopt other methods, subject to appropriate disclosures and other safeguards. The AUM must be subject to an independent valuation carried out by a third-party service provider or by an in-house fund valuation function under certain conditions. Investment managers or advisers are also expected to put in place internal audit procedures and comply with annual external audit requirements. The annual external audit performed by the independent auditor is meant to serve as a periodic check on the valuation of the assets and the MAS has emphasised that taken on its own, the annual audit will not fulfil the requirement for independent valuation. It must also be noted that all arrangements with third-party service providers have to be in accordance with the requirements set out in the MAS Guidelines on Outsourcing, where applicable.


Under the Guidelines on Licensing, Registration and Conduct of Business for Fund Management Companies issued by the MAS, managers or advisers regulated under the MAS should be Singapore incorporated companies and have a permanent physical office in Singapore. Therefore, foreign managers or advisers wishing to manage or advise or otherwise operate funds in Singapore should set up a subsidiary in Singapore and would be subject to the licensing requirements unless it qualifies for an exemption.


Sing

apor

e



Whether the marketing materials for the AIF would need to be registered with the MAS depends on which specific prospectus exemption is being invoked. Where an AIF is offered or marketed to accredited investors under the S305 Exemption, a copy of the information memorandum would need to be submitted to the MAS for its records. The MAS does not approve the said information memorandum.Here, information memorandum refers to any materials given to investors to enable them to decide whether or not they want to invest in the AIF (e.g. private placement memorandum and fund fact sheets).


An offer of interests in AIFs in Singapore would generally have to be made in or accompanied by a prospectus that is registered with the MAS, unless the said offer is made under one of the exemptions or safe-harbours in the SFA.The restrictions on marketing the AIFs depend on which safe-harbour or prospectus exemption is being invoked. In the event that the offer is made under the private placement exemption in the SFA, the AIF may be offered to not more than 50 offerees over a period of 12 months. In the event that the offer is made under the “small offers” exemption, then not more than S$5 million can be raised by a person from “personal offers” of interests in the AIF over a period of 12 months. In both scenarios, no advertisements relating to the offer can be published, and marketing of the AIF can only be done by people who hold a CMS licence for dealing in securities and a Financial Advisors licence for marketing Collective Investment Schemes (CIS), or people who are exempted from holding such licences.


AIFs are usually marketed to institutional investors and accredited investors (as opposed to members of the public), either due to the terms of offer of the AIF (e.g. higher minimum subscription amounts) or because the licence granted by the MAS to the investment manager or adviser restricts its clientele to qualified investors only.


Prospective investors are usually institutional investors and accredited investors. They would usually be required to produce supporting documents such as their latest financial statements or bank statements as evidence of their financial worth.


No, there are no additional restrictions.


Intermediaries that assist in the fundraising process are required to hold a CMS licence for dealing in securities and a Financial

investors’ interests in the AIF shall be made only to qualified investors. Where an AIF is not authorised by the MAS for investment by members of the public, the manager shall not make any offering of such interests in the AIF to members of the public, unless one or more exemptions are invoked (i.e. private placement exemption, the institutional investors’ exemption, the accredited investors’ or certain other relevant persons’ exemption). In addition, the constitutive documents of the AIF should restrict transfers of their investors’ interest so that such interests are not held by any member of the public.


There are no statutory limitations on the manager’s ability to manage its funds. However, the CIS Code prescribes various requirements for retail funds with respect to permissible investments and borrowing. There are restrictions as to the maximum amount of exposure to unlisted securities, listed and unlisted derivatives as well as maximum exposure to transferrable securities and money market instruments issued by a single entity or related entities. The requirements will differ based on whether the fund is a non-specialised fund or a specialised fund such as a currency fund, money market fund, hedge fund, or a property fund, etc.

3 Marketing


The SFA, the Financial Advisers Act (Cap. 110) of Singapore and the rules and regulations made thereunder including the various guidelines issued by the MAS govern the offering of marketing materials.


For offers made under the S305 Exemption, there is a prescribed list of specific matters that have to be disclosed in the information memorandum of such AIFs. Amongst the matters which must be disclosed are: the investment objectives and focus of the AIF; the investment approach of the manager; the risks of subscribing for or purchasing units in the restricted scheme; where applicable, the conditions, limits and gating structures for redemption of the units; where applicable, the past performance of the restricted scheme; details of where the accounts of the restricted scheme may be obtained; and the fees and charges payable by the investors and by the restricted scheme. Further, the Guidelines on Licensing, Regulation and Conduct of Business for Fund Management Companies also set out matters to be disclosed to investors. These include: disclosure of counterparties; brokers and prime brokers used by the AIF; disclosure of custodians, trustee, fund administrators and/or auditors used by the AIF; disclosure of valuation policy and performance measurement standards; disclosure of professional indemnity insurance arrangements or the absence of such arrangements; and disclosure on the use of leverage and the extent to which it is permitted. In practice, even for AIFs that are not offered under the S305 Exemption, it is common or customary to see almost all of the aforementioned matters disclosed in the information memorandum.


Sing

apor

e




AIFs structured as Singapore companies must file their financial statements and information on their shareholders and directors with the Accounting and Corporate Regulatory Authority of Singapore (ACRA). Members of the public can obtain such information from ACRA upon payment of a fee.AIFs structured as limited partnerships do not need to file annual returns with ACRA. If the AIF is managed by a licensed manager or a person exempt from the requirement to be so licensed, the particulars of its limited partners will not be open to inspection by members of the public.AIFs which are registered by the MAS for offers to members of the public have extensive disclosure obligations in the prospectus that they have to lodge with the MAS. As continuing disclosure obligations, such AIFs have to disclose the interests of its substantial investors (i.e. those who hold 5% or more of the equity interests in the AIFs), directors and the chief executive officer of the manager in the AIFs and the financial performance of the AIFs.


AIFs structured as companies would need to make regular filings with ACRA, such as filings relating to issuance of securities, changes in directors and shareholders, creation of charges and annual reports. A general partner of a limited partnership is also required to lodge a statement with the Registrar of Limited Partnerships if there are changes in the registered particulars of the limited partnership.AIFs that are registered by the MAS for offers to the members of the public are required to send semi-annual and annual performance reports to their investors.


There are no restrictions on the use of side letters. However, the MAS has prescribed certain disclosures under the Section 305 Exemption to be made to investors in the private placement memorandum on such side letter arrangements (e.g. the nature and scope of such side letters) for restricted funds marketed only to accredited investors.

6 Taxation


Singapore limited partnerships are not treated by the Inland Revenue Authority of Singapore (IRAS) as a legal person and therefore no tax will be levied at the partnership level. However, the share of income accruing to each partner from the limited partnership will be taxed at the rates applicable to them accordingly.

Advisors licence for marketing CIS under the current legislation. When the Securities and Futures (Amendment) Act 2017 is gazetted to come into force in Singapore, all entities marketing AIFs will only be required to hold a CMS licence for dealing in securities or be exempted from holding such a licence.


Under Section 32 of the Banking Act of Singapore, banks in Singapore are prohibited from acquiring or holding any major stakes (that is, any beneficial interest exceeding 10% of the total number of issued shares or control over more than 10% of the voting power) in a company undertaking non-financial business, unless the prior approval of the MAS has been obtained. However, private equity and venture capital investments are excluded from the scope of Section 32 of the Banking Act of Singapore pursuant to Regulation 7 of the Banking Regulations. The scope of private equity and venture capital investments that can be undertaken by Singapore banks, the duration of investments and the bank’s involvement in the management of such investments can be found in MAS Notice 630 to banks on private equity and venture capital investments. For instance, a bank shall not hold any indirect private equity and venture capital investment if such investee is not managed by the bank or a related party, for a period exceeding 12 years from the date of its first investment in the investee.

4 Investments


There are currently no statutory or regulatory restrictions on the types of activities that can be performed by AIFs that are not registered by the MAS for offers to members of the public. However, it is common for investment restrictions to be provided for contractually.


There are no such limitations for AIFs that are not registered by the MAS for offers to members of the public.


There are currently no statutory or regulatory restrictions on borrowing by AIFs that are not registered by the MAS for offers to members of the public. However, it is common for restrictions on borrowing to be provided for contractually.


Sing

apor

e


Singapore company will attract stamp duty upon a transfer of shares in the AIF at a rate of 0.2% of the consideration for the transfer or the net asset value of the shares transferred, whichever is higher. Stamp duty may be incurred on the transfer of limited partnership interests in an AIF if the assets of the partnership include shares of Singapore companies and immovable properties in Singapore.


If the AIF is not able to invoke any of the available tax exemption schemes such as the basic tier tax incentive scheme or the enhanced tier tax incentive scheme, the tax treatment of investors in an AIF becomes a relevant consideration for investors. Limited partnerships are tax-transparent vehicles. Accordingly, income and gains received by the fund are taxable in the partners’ hands. The particular partner’s tax profile would determine the tax payable by him. Resident individual investors are taxed at progressive tax rates of up to 22% on their taxable income. Corporates are taxed at 17% on their taxable income. Non-resident investors in a private equity fund structured as a Singapore company are not subject to taxation. There is no withholding tax on dividend distributions made to non-resident investors by AIFs structured as Singapore companies. Withholding tax at a rate of 15% is applicable if any interest or royalty is paid by an AIF to a non-resident investor. Pension fund investors are subject to tax on their taxable income in the same way as corporate investors.


Generally, it is not necessary to obtain a tax ruling from the tax or regulatory authorities prior to establishing an AIF. There are tax exemption schemes for AIFs in Singapore called the basic tier tax incentive scheme and the enhanced tier tax incentive scheme as mentioned in the answer to question 6.8. Many investment managers or advisers of AIFs would consider applying for a tax exemption scheme in practice if they were able to meet the qualitative and quantitative conditions.


Singapore and the US signed a FATCA Model 1 intergovernmental agreement (IGA) on 9 December 2014 to ease the FATCA compliance burden of Singapore-based financial institutions (SGFIs). The IGA and Regulations came into force on 18 March 2015.SGFIs now have to register with the FATCA Registration Portal as a “Registered Deemed-Compliant Financial Institution (Including a Reporting Financial Institution under a Model 1 IGA)” pursuant to the IGA and Regulations. SGFIs will obtain a Global Intermediary Identification Number when they register with the US Internal Revenue Service. SGFIs need to perform due diligence procedures relating to new individual accounts and new entity accounts opened on or after 1 July 2014. SGFIs also need to automatically remit information regarding accounts believed to be beneficially owned by US persons (including US entities) to the new US government via the Inland Revenue Authority of Singapore (IRAS). Such

Singapore income tax is imposed on income accruing in or derived from Singapore and on foreign-sourced income received or construed to have been received in Singapore, subject to certain exceptions.Singapore does not impose tax on capital gains; however, gains from the disposal of investments may be construed to be of an income nature and subject to Singapore income tax. Generally, gains on the disposal of investments are considered income in nature and sourced in Singapore if they arise from or are otherwise connected with the activities of a trade or business carried on in Singapore. Therefore, one common issue for AIFs on taxation is whether gains are capital in nature, and thus not taxable in Singapore, or taxable as trading income. AIFs that incorporate as Singapore companies are generally taxed at a fixed rate of 17% on their chargeable income. That said, there is an exemption where an AIF owns 20% or more of the ordinary share capital of another company and has held those shares for at least 24 months prior to their disposal, then the gains will be exempt from tax provided they are disposed of between 1 June 2012 and 31 May 2022.Over the years, Singapore has also developed several tax incentive schemes in order to attract managers and AIFs alike to the city state. The MAS administers certain tax incentive schemes which are available for AIFs that are managed by Singapore-based managers. Such schemes allow AIFs that satisfy the qualifying conditions to enjoy exemption from all incidents of income tax save for income sourced from immovable properties in Singapore.It must be noted that an AIF may not make taxable supplies for Goods and Services Tax (GST) purposes and therefore its ability to recover input tax suffered on supplies made to it is very limited. Management fees payable to the manager or adviser will in principle attract GST. MAS has issued a circular to allow AIFs qualifying for income tax concessions managed or advised by a manager or adviser to recover most of this GST.


Investment managers and advisers are usually structured as private limited companies and the general corporate income tax rate in Singapore is 17%. Under the Financial Sector Incentive-Fund Management (FSI-FM) Scheme, fee income derived by an approved Singapore domiciled investment manager or adviser from the provision of prescribed fund management or investment advisory services would be subject to a concessionary tax rate of 10%. An application needs to be made to the MAS for the grant of this award and the award of the concessionary tax rate is subject to MAS’ discretion. One of the conditions that the investment manager or adviser needs to satisfy for the grant of this award is that the investment manager or advisor should have a minimum of S$250 million of AUM. Accordingly, an investment manager or adviser with AUM above this level will be able to apply for the FSI-FM Scheme, but RFMCs will not be able to avail themselves of this incentive as a RFMC must not have AUM in excess of S$250 million.The FSI-FM Scheme is extended until 31 December 2023 as announced in the Budget Statement for Financial Year 2018 delivered in the Singapore Parliament on 19 February 2018 (Budget 2018).


No establishment taxes are levied in connection with an investor’s participation in an AIF. However, investors in an AIF structured as a


Sing

apor

e


provisions which allow taxpayers to request for mutual agreement procedure cases to be resolved through an arbitration process if the competent authorities are unable to reach an agreement within a specified time period. These changes will only take effect after the MLI has been ratified by both Singapore and the DTA jurisdiction. The specific textual changes to each DTA will be provided through subsidiary legislation made under the Income Tax Act. Action 7 deals with Permanent Establishment (PE) status and mandates the development of changes to the definition of PE in Article 5 of the OECD Model Tax Convention (MTC) to prevent artificial avoidance of PE status. Although Singapore has signed the MLI, Singapore has elected to reserve against this optional amendment, so the specific activity exemptions from PE under all the existing DTAs which correspond to Articles 5(4)(a) to (d) of the MTC will be preserved.


There are no specific tax-advantaged asset classes available in Singapore. However, there are tax exemptions available for the returns generated by the AIF (i.e. tax incentives for the AIF). A foreign AIF managed by a Singapore domiciled manager who holds a CMS licence in Singapore or is exempted will be exempt from tax on specified income from designated investments if the fund is a “prescribed person” (Offshore Fund Scheme). A fund will generally qualify as a prescribed person if it is not resident in Singapore and not 100% owned by Singapore investors. For AIFs that are based in Singapore, they may be exempt from tax on specified income from designated investments if the AIF is an “approved company” (Singapore Resident Fund Scheme). An AIF will generally qualify as an approved company if: (i) the AIF is incorporated in Singapore and the manager is registered with the MAS or holds a CMS licence or is expressly exempted from holding a CMS license; (ii) it is not 100% owned by Singapore investors; (iii) the AIF has a local business spending amounting to S$200,000 per year; (iv) the AIF uses a Singapore-based fund administrator; and (v) the MAS approves of the tax exemption and there is no change in investment strategy or objective after such approval by the MAS. There is also another tax exemption that is available to onshore and offshore AIFs if the size of the AIF is over S$50 million, the AIF is managed by a Singapore manager, the manager or adviser employs at least three investment professionals and incurs at least S$200,000 local business spending per year (Enhanced Tier Fund Scheme). In the recent Budget 2018, it was announced that the Enhanced Tier Fund Scheme will be extended to all fund vehicles constituted in all forms besides companies, trusts and limited partnerships provided they fulfil all qualifying conditions.The aforementioned exemptions are currently available until 31 March 2019. It is possible that these exemptions will be extended to a further date. For Singapore-based AIFs, the Singapore Resident Fund Scheme and the Enhanced Tier Fund Schemes are commonly used, whereas for many offshore AIFs, such as those domiciled in the Cayman Islands, the Offshore Fund Scheme is commonly used. Managers should note that even if the AIF is based offshore, if most of the fund management activities are conducted in Singapore, the IRAS may still regard the AIF as having a permanent establishment in Singapore is thus subject to Singapore income tax unless it is covered by the Offshore Fund Scheme. There are also no specific structuring requirements to avail investors of an AIF in Singapore preference in taxation, though master-feeder structures are commonly used where a manager or adviser is seeking

information would include the holder’s name, US Tax Identification Number, account balance and interest earned on the account. The Income Tax (International Tax Compliance Agreements) (Common Reporting Standard) Regulations 2016 of Singapore (CRS Regulations) were published on 2 December 2016.The CRS Regulations allow Singapore to implement the Standard for Automatic Exchange of Financial Account Information in Tax Matters (AEOI) (also known as the Common Reporting Standard (CRS)) from 1 January 2017 onwards. Pursuant to the CRS Regulations, all SGFIs have to put in place necessary processes and systems to collect CRS information from all non-Singapore tax resident account holders from 1 January 2017. This is necessary to enable the SGFIs to submit the required information to IRAS in 2018 for subsequent exchange under the CRS. This timeline is in line with Singapore’s commitment to commence the first exchange of information under the CRS by September 2018, as envisaged by IRAS.Reporting SGFIs would need to transmit to IRAS the CRS information of their account holders who are tax residents of jurisdictions with whom Singapore has a Competent Authority Agreement for CRS.


On 16 June 2016, Singapore joined the inclusive framework for the global implementation of the BEPS project, which is that profits should be attributable to the jurisdiction where the substantial economic activities giving rise to the profits are conducted. The inclusive framework was proposed by the OECD and endorsed by the G20 in February 2016. By joining this framework, Singapore will work with other participating jurisdictions to ensure the consistent implementation of measures under BEPS, and a level playing field across jurisdictions. Singapore has stated that it is committed to implementing the four minimum standards under BEPS, namely, the standards on countering harmful tax practices, preventing treaty abuse, transfer pricing documentation, and enhancing dispute resolution.Action 6 deals with treaty abuse, namely treaty shopping. IRAS has stated that they do not condone treaty shopping. In this regard, a number of Singapore’s bilateral tax treaties do contain anti-treaty shopping provisions to prevent abuse. In line with Singapore’s commitment to implement the minimum standard on preventing treaty abuse, Singapore has participated actively in the ad hoc group formed under the aegis of the OECD and the G20 to develop a Multilateral Instrument (MLI), and on 7 June 2017, 68 jurisdictions including Singapore signed the MLI. The MLI seeks to facilitate the efficient updating of existing avoidance of Double Taxation Agreements (DTAs) to incorporate treaty-related measures recommended by OECD to counter BEPs, without the need for jurisdictions to bilaterally re-negotiate each DTA. Signatory jurisdictions may choose which of their DTAs they wish to be modified by the MLI, and a DTA is only modified by the MLI if both parties to the DTA choose for the DTA to be modified by the MLI. For DTAs that will be amended by the MLI, some of the key provisions adopted by Singapore that will bring about changes to the existing DTAs include (i) a statement of intent that a DTA is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, (ii) the adoption of a general anti-abuse rule, commonly known as the Principal Purpose Test, and (iii) the inclusion in some DTAs of


Sing

apor

e


7 Reforms


On 23 March 2017, MAS published a consultation paper on a proposed framework for the S-VACC to introduce a new corporate structure for CIS. As it is anticipated that the S-VACC will be used in Singapore by Singapore-domiciled investment managers or advisers, it is apposite to note a few of the interesting features of the proposed S-VACC. The S-VACC is proposed to be regulated under the Singapore Variable Capital Companies Act jointly by ACRA and MAS, and can be used as a CIS vehicle either as a stand-alone entity, or as an umbrella entity with multiple sub-funds with segregated assets and liabilities. The S-VACC’s assets are to be managed by an investment manager or adviser that is duly registered, licensed or exempted by the MAS, and an approved custodian must be appointed to supervise custody of the assets. One of the directors of the S-VACC will be required to be a director of the S-VACC’s investment manager or adviser, and all directors must be “fit and proper persons” for MAS purposes, and there will be regular checks conducted on an S-VACC’s directors. While the register of holders of an S-VACC will not be required to be disclosed to the public, it would have to be disclosed to the MAS, ACRA and other public authorities for regulatory, supervisory and law enforcement purposes. Importantly, an S-VACC will be permitted to freely redeem shares and pay dividends using its net assets/capital, thereby providing flexibility in the distribution and return of capital. This is different from the Companies Act which requires a solvency statement to be made by all directors for the redemption of redeemable preference shares. In addition to solvency statements which must be made by all directors, the Companies Act also requires a creditor objection period of six weeks to lapse before the capital reduction can be affected, and stipulates that dividends may only be paid out of the profits of a company.

to accept subscriptions from different sets of investors with different tax and regulatory regimes. For example, investors based in the US and those based outside of the US, where taxable US investors may have their own structuring requirements.


There are no other material tax issues for investors, managers, advisers or AIFs.


In the 2018 Budget, it was announced that a new tax framework for the Singapore Variable Capital Company (S-VACC) will be introduced to complement the S-VACC regulatory framework (as further described in question 7.1 below). Under this tax framework, an S-VACC will be treated as a company and a single entity for tax purposes and therefore it is clarified that the Singapore-resident S-VACC would be entitled to enjoy and rely on the various tax treaties Singapore has concluded with other countries. The S-VACC would therefore be able to enjoy the same tax benefits as a company incorporated in Singapore with the added corporate and regulatory advantages accorded to the S-VACC. In addition, it was further clarified in the Budget 2018 that the main tax exemptions for Singapore-based AIFs (i.e. the Singapore Resident Fund Scheme and the Enhanced Tier Fund Scheme) will be extended to S-VACCs which are able to meet the qualifying conditions for such schemes. Also, the FSI-FM Scheme will be extended to approved managers managing an incentivised S-VACC. The GST remission for AIFs will also be extended to incentivised S-VACCS. Further details are expected to be released by the MAS in October 2018.


Sing

apor

e


Colin Ng & Partners LLP (“CNP”) is a Singapore based full-service law firm providing a comprehensive range of legal services to our clients. CNP enjoys a distinguished reputation and is annually endorsed and recommended by professional and commercial publications, including Asialaw Profiles, Chambers and Partners, IFLR1000 and The Legal500AsiaPacific, for its expertise in various practice areas.

CNP has a multi-disciplinary service team of lawyers with experiences in different areas of practice. Some of our lawyers are qualified in or originate from different jurisdictions. CNP has a wide-ranging client base covering private and public companies, high-net-worth individuals, the public sector, property developers and financial institutions. We support clients in all major Asian markets.

Since 1988, the firm has been driven by its vision of “Delivering Exceptionally Good Service” to its clients. CNP prides itself in delivering innovative and pragmatic solutions, and adding value in our services to all our clients.

Amit R. Dhume is a Partner at Colin Ng & Partners LLP (“CNP”) and Co-head of the Funds and Financial Services Practice Group of CNP. He works closely with fund managers to assist them to establish investment funds and fund management companies and offer the investment funds in Singapore. These include private equity funds, real estate and infrastructure funds, as well as hedge funds. He also advises family offices on various wealth management issues and legal documentation. He regularly advises clients on regulatory and compliance matters in relation to securities laws and regulations in Singapore.

Amit’s expertise has been recognised in The Legal500AsiaPacific2018 as “Recommended Lawyer for Investment Funds”. He is registered to practise Singapore law in the areas of corporate law, banking and finance and securities laws. He is enrolled as a Solicitor in England and Wales. Amit was designated a Sheridan Fellow by the National University of Singapore in 2004 and was awarded the faculty graduate scholarship. In December 2016, Amit was named by Singapore Business Review as one of the 70 most influential lawyers in Singapore under the age of 40.

Amit R. DhumeColin Ng & Partners LLP 600 North Bridge Road, #13-01Parkview SquareSingapore 188778

Tel: +65 6349 8729Email: [email protected]: www.cnplaw.com

Abel Ho is a Practice Trainee at Colin Ng & Partners LLP (“CNP”) and a member of the Funds and Financial Services Practice Group of CNP. He graduated with First Class Honours in law from the University of Warwick in 2016. Prior to law school, Abel graduated with a Bachelor of Commerce (Hons) and spent three years working as a management liability underwriter in a multi-national general insurance company with operations in Singapore and overseas.

Abel HoColin Ng & Partners LLP600 North Bridge Road, #13-01Parkview SquareSingapore 188778

Tel: +65 6349 8667Email: [email protected]: www.cnplaw.com


Chapter 31

Webber Wentzel Nicole Paige

South Africa


This is dependent on the type of AIF. Generally, partnerships and trusts are regarded as collective investment schemes, but not companies. The promotion of local and foreign collective investment schemes in South Africa is regulated by the CISCA. If the AIF is a CIS, it will be regulated under the CISCA and will be required to be registered with the Financial Services Board (“FSB”). An AIF will only qualify as a CIS if members of the public are invited to invest in the AIF.CICSA currently recognises five categories of CIS, being: (i) a collective investment scheme in securities (listed securities); (ii) a collective investment scheme in property; (iii) a collective scheme in participation bonds; (iv) retail hedge funds; and (v) qualified hedge funds. Currently, private equity funds do not fall within any of the categories of CIS and accordingly may not be registered with the FSB. This means that private equity funds may not be offered to members of the public in South Africa, unless such offer is made by way of private placement. A foreign collective investment scheme that is carried on outside South Africa but which will be promoted in South Africa must be registered under CISCA as an approved foreign collective investment scheme.


The regulatory regime does not distinguish between open-ended and close-ended AIFs, but does distinguish between types of strategies (see above). Currently, private equity funds may not be registered under CISCA and, as such, interests in a private equity fund may not be offered to members of the public, but only through a private placement. There are two types of hedge fund that may be registered under CISCA: qualified investor funds; and retail funds. Qualified investor funds are hedge funds that only permit investment by investors who have demonstrable knowledge and experience in financial and business matters that would enable them to assess the merits and risks of a hedge fund investment (or are advised by a FSP having such knowledge) and who initially invest at least R1 million. A retail fund does not have any such restrictions but retail funds must comply with more onerous regulatory and prudential requirements.



The legislation governing the establishment and operation of an Alternative Investment Fund (“AIF”) will depend on the structure the AIF takes. AIFs are usually formed in South Africa as a company, bewind trust (a form of trust where the assets are owned by the beneficiaries but administered by the trustees) or an en commandite partnership (a form of limited partnership in South Africa). If the AIF is structured as a company, the Companies Act, 2008 will apply. If the AIF is structured as a trust, the trust will be governed by the Trust Property Control Act, 1988, and the trust deed will need to be registered with the Master of the High Court in the jurisdiction where the trust’s assets are situated. If the AIF is structured as an en commandite partnership, there is no specific legislation governing the establishment of a partnership and the AIF will be established and operated in terms of the partnership agreement constituting the AIF.


The Financial Advisory and Intermediary Act 37 of 2002 (“FAIS”) provides that no person may act or offer to act as a financial services provider (“FSP”) unless such person has been issued with a licence under the FAIS Act. A FSP is effectively defined to mean any person other than an employee or agent of a FSP, who as a regular feature of the business of such person, furnishes advice (i.e. investment recommendations but not factual advice) and/or renders any intermediary service (which includes discretionary investment management) to clients in respect of financial products (defined to encompass a broad range of local and foreign securities and financial instruments). Accordingly, any person who manages the assets of an AIF, or who advises an AIF on the management of its assets, will be required to obtain a FSP licence. Advisors will be required to obtain a Category I FSP licence, discretionary managers a Category II licence, and hedge fund managers a Category IIA FSP licence.A manager of a registered CIS is required to be authorised as a CIS Manager under the Collective Investment Schemes Control Act 45 of 2002 (“CISCA”), rather than licensed as a FSP under FAIS (although in practice managers will be authorised under both CISCA and FAIS if they conduct financial services business other than the management of the CIS).


Sout

h A

fric

a

A foreign collective investment scheme that is carried on outside South Africa but which will be promoted in South Africa must be registered under CISCA as an approved foreign collective investment scheme. The requirements for such approval include that the foreign scheme must be carried on in a regulatory environment of at least the same standing as the South African regulatory environment and may not offer investments with a significantly higher risk profile than investments that may be offered by any local CIS. The foreign scheme must either establish a representative office in South Africa or enter into a representative agreement with a local CIS manager.


The Convention on Mutual Administrative Assistance in Tax Matters, various bilateral Tax Information Exchange Agreements and international tax compliance agreements, including the USA FATCA Intergovernmental Agreement, Common Reporting Standards (CRS) and the Organisation for Economic Co-operation and Development – Base Erosion and Profit Shifting.

2 Fund Structures


AIFs that are registered under CISCA are usually formed by a trust agreement entered into between an authorised manager and a registered trustee. The CIS then creates portfolios, subject to approval from the FSB, in which investors purchase participatory interests. While CISCA permits other legal structures, in practice only these forms of unit trusts are used.The most common structure in South Africa for a private equity fund is the en commandite partnership, which is equivalent in all material respects to a limited partnership as understood by international investors. There is no statute in South Africa governing the establishment and management of en commandite partnerships, which are created through written agreement between the partners. In its simplest form, an en commandite partnership comprises two categories of partner, a disclosed or general partner, whose liability is unlimited, and one or more commanditarian partners (limited partners), whose liability is limited. Another type of structure sometimes used for private equity funds is a bewind trust. A bewind trust is a type of trust vehicle governed by the Trust Property Control Act, in terms of which the assets are owned by the beneficiaries of the trust, but the trustee of the trust holds and manages such assets on their behalf. Each investor is a beneficiary of the trust and the investors own the assets of the trust jointly in undivided shares in proportion to their respective contributions. The trust deed must be registered with the Master of the High Court. AIFs may also be structured as companies. However, whilst the legal status of companies is well established and the limited liability position of shareholders is clear, companies are separate taxpayers in their own right. This makes them unattractive vehicles for investors that are otherwise tax exempt. The exception to this is venture capital companies, where investors have been provided tax relief in terms of which, subject to certain conditions being met, investors may deduct 100% of their investment in the venture capital company in that year of assessment.


The prior approval of the FSB is required to establish a CIS under CISCA or to form a new portfolio of the CIS in which investors participate. As part of the authorisation process, CISCA (and the regulations promulgated thereunder) prescribes various requirements in relation to the authorisation of both the CIS manager who administers the scheme and the trustee or custodian who holds the assets and oversees compliance with CISCA, the formation of the CIS itself and the creation of each portfolio. The FSB will generally take up to nine months to approve the application.There are no registration requirements for AIFs that are not offered to members of the public, but the manager or advisor of such AIF must be registered as a FSP under FAIS. An application for a FSP licence by the manager of, or advisor to, an AIF involves filling out the prescribed application forms and submitting the applicant’s financial statements, business plan and organisational chart. The key individuals of the FSP that will be responsible for managing and overseeing the activities of the FSP must also be approved by the FSB. Key individuals must meet the fit and proper requirements of honesty and integrity, demonstrate that they have appropriate management and financial product experience, have a recognised qualification and pass regulatory exams. The FSB will generally take around five months to approve the application and grant the FSP licence.


If the AIF is a registered CIS in South Africa, the CIS manager must be a company registered in terms of the Companies Act, 2008 and the trustee of the CIS must be a South African public company, a South African bank (or South African branch of a foreign bank) or a South African-registered long-term insurer. A foreign collective investment scheme that is carried on outside South Africa but which will be promoted in South Africa must be registered under CISCA as an approved foreign collective investment scheme. There are no local resident or local qualification requirements for any manager or advisor of an AIF that wishes to apply for an FSP licence under FAIS.


A registered CIS must have an approved CIS manager who administers the scheme and an approved trustee or custodian who holds the CIS assets and oversees compliance with CISCA. There are no required service providers for AIFs that are not registered under CISCA, although such AIFs will generally have an investment manager/advisor that will then need to be licensed under FAIS.


Foreign financial services providers may not render financial services in or into South Africa without a FAIS licence. Such licence is obtained in the same manner as a local FSP licence (depending on its level of activity in South Africa, the foreign applicant may have to register as an external company with the Company and Intellectual Properties Commission).

Webber Wentzel South Africa


Sout

h A

fric

a

comprehensive requirements relating to the documentation used to market the AIF. These requirements will also apply to any foreign collective investment scheme that is carried on outside South Africa and which is also registered under CISCA as an approved foreign collective investment scheme for marketing in South Africa. The manager of the local or foreign CIS must lodge copies of all advertisements and marketing material with the FSB (including fund fact sheets and relevant investor application forms) before publication or use of the material. There is no specific legislation governing the marketing of interests in private equity funds in South Africa and other AIFs that are not offered to members of the public.


For AIFs that are authorised under CISCA, CISCA requires the CIS manager to disclose to each investor (prior to any investment) information about the investment objectives of the CIS, the calculation of the net asset value and dealing prices, charges, risk factors and distribution of income accruals. CISCA also prescribes various particulars that must be included in any price list, brochure or similar document published for the purpose of soliciting investment in a CIS. These particulars include details of charges levied by the manager and the basis on which the manager will undertake the repurchase of interests, as well as a clear and unambiguous statement to the effect that the value of participatory interests in a portfolio is subject to fluctuation from time to time. The same requirements will apply to foreign collective investment schemes authorised under CISCA to be promoted in South Africa.


For AIFs that are authorised under CISCA, the manager of the local or foreign CIS must lodge copies of all advertisements and marketing material with the FSB (including fund fact sheets and relevant investor application forms) before publication or use of the material.


An AIF may not be marketed to members of the public in South Africa without first being registered as a CIS under CISCA or, in the case of a foreign AIF, as a foreign collective scheme.


An AIF may not be marketed to retail investors without first being registered as a CIS under CISCA or, in the case of a foreign AIF, as a foreign collective scheme. Hedge funds that are registered as qualifying investor funds may only accept investments from qualifying investors.


There are no qualification requirements except for the case of an AIF registered under CISCA as qualified investor fund (hedge

Long-term insurance companies may also market investment exposure to asset portfolios to investors through the issue of linked investment policies.


For AIFs established as en commandite partnerships, the limited partners occupy the position of partners only insofar as their co-partners are concerned, but not with respect to outsiders. Each limited partner will enjoy limited liability and will not be liable to creditors of the partnership for more than their capital commitments to the partnership, provided that they are and remain limited partners. A limited partner’s limited liability is compromised if it holds itself out publicly as an ordinary partner or participates actively in the management or operation of the partnership. The general partner will have unlimited liability to third parties for the partnership’s debts. From a liability perspective, there is little difference between an en commandite partnership and a bewind trust, both forms of entity afford limited liability for investors. For AIFs incorporated as companies, the limited liability of shareholders is clear and is not dependent on the role that the shareholders may play in the management of the company.


Private limited companies incorporated under the Companies Act, 2008.


For AIFs that are authorised under CISCA, there are certain liquidity requirements for investors prescribed under CISCA. There are no such statutory limits for any other form of AIFs (other than as contractually agreed with investors).


There are no such legislative restrictions, other than for a hedge fund which is registered as a qualified investor fund under CISCA, where all investors must meet the prescribed qualifying criteria.


For AIFs that are authorised under CISCA, CISCA places significant restrictions on the asset classes in which a CIS can invest, as well as concentration limits on CIS portfolio exposure. There are no such statutory limits for any other form of AIFs.

3 Marketing


For AIFs that are authorised under CISCA, CISCA prescribes



Sout

h A

fric

a

with exchange control requirements. An AIF that wishes to invest outside of South Africa but in Africa can obtain an upfront exchange control approval to invest 100% of its commitments in Africa. For investments outside of Africa, exchange control approval will generally need to be obtained for each such investment.


For an AIF that is authorised under CISCA as a CIS in securities, such AIF may not borrow any funds, save where the manager must repurchase participatory interests but insufficient liquidity exists in a portfolio or assets cannot be realised. In such circumstances, the manager may borrow the necessary funds for such repurchase from registered financial institutions at the best commercial terms available, provided that the maximum amount borrowed may not exceed 10% of the market value of such portfolio at the time of borrowing. For an AIF that is authorised under CISCA as a retail hedge fund, a manager may borrow up to 10% of the value of the portfolio for liquidity purposes in respect of the repurchase of participatory purposes.There is no limitation on borrowings by an AIF that is not open for investment by members of the public (other than as contractually agreed with investors).



AIFs that are structured as companies are required, in terms of the Companies Act, 2008, to file a copy of their annual audited returns with the Companies Office.AIFs that are structured as trusts are required to register their trust deed with the Master of the High Court in the jurisdiction where the trust’s assets are situated.


For an AIF that is authorised under CISCA, the manager of the AIF must report to investors at least on a quarterly basis, must submit quarterly reports to the FSB relating to all assets in the portfolios administered by them and must annually submit to the FSB their audited financial statements, together with audited financial statements for each portfolio, certain prescribed information and a compliance report. There are no statutory reporting requirements for AIFs that are not open to investment by members of the public, save that AIFs that are structured as companies are required, in terms of the Companies Act, 2008, to file a copy of their annual audited returns with the Companies Office.


There are no restrictions on the use of side letters by AIFs. However, AIFs that are authorised under CISCA will need to disclose the nature and scope of side letters to investors.

fund), where the manager may only permit investment by investors who have demonstrable knowledge and experience in financial and business matters that would enable them to assess the merits and risks of a hedge fund investment (or are advised by a FSP having such knowledge).


There are no additional marketing restrictions.


AIFs may be marketed by any person having an appropriate FSP licence under FAIS. There are restrictions relating to the fees that intermediaries may charge. Intermediaries may earn fees expressed as a percentage of the net value of a financial product (such as an investment in a CIS) only on condition that if such fees are deducted from the investment, the client must specifically agree to this in writing and must have the power to stop the payment of fees.


South African pension funds and financial institutions can invest in AIFs in accordance with their statutorily prescribed prudential limits. For example, South African pension funds are permitted to invest up to 10% of their assets in private equity funds, with a 2.5% limit per fund and a 5% limit per fund of funds.A registered CIS in securities may not itself invest in a private equity fund or hedge fund (other than a listed fund) as it is restricted form investing in unlisted securities. South African exchange control regulations also determine the extent to which South African residents may invest in AIFs established outside of South Africa.

4 Investments


For AIFs that are authorised under CISCA, CISCA places significant restrictions on the asset classes in which a CIS can invest, as well as concentration limits on CIS portfolio exposure. There are no such statutory restrictions for an AIF that is not open to investment by members of the public (although investment restrictions are commonly provided for contractually).


For AIFs that are authorised under CISCA, CISCA places significant restrictions on the asset classes in which a CIS can invest, as well as concentration limits on CIS portfolio exposure. There are no such statutory restrictions for an AIF that is not open to investment by members of the public, subject to compliance



Sout

h A

fric

a


There are general AIF structures with established laws regulating these structures and as such, it is unnecessary to obtain a tax ruling from the South African Revenue Service (“SARS”), unless an exceptional circumstance exists, such as an entirely new transaction or form of legal entity.


SARS imposes sanctions for the non-compliance with FATCA. In maintaining records and collecting the information, financial institutions must comply with the due diligence requirements as mandated by the Tax Administration Act and set out in the prescribed Business Requirement Specification: Foreign Account Tax Compliance Act Automatic Exchange of Information (BRS: FATCA AEOI) return required under Public Notice 509. SARS will exchange information with the U.S. Treasury through an automatic process.


There is a Davis Tax Committee (“DTC”) Base Erosion and Profit Shifting (“BEPS”) Sub-committee that actively seeks to implement OECD’s Action Plan. The DTC is mandated to inquire into the role of South Africa’s tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability and on an international front, the DTC is required to address concerns about BEPS, especially in the context of corporate income tax, as identified by the OECD and G20. To this end, the DTC set up the BEPS sub-committee which has since then reported on the DTC’s position on BEPS.


Section 12J of the Income Tax Act offers tax relief to investors in venture capital companies by allowing investors to deduct 100% of their investment into such company in that year of assessment, provided that the investor holds their interest in the company for a minimum of three years. The types of assets that a section 12J company can invest in are regulated by statute.


No, there are not.


VAT, which will be charged on management fees payable to a South African manager/advisor, will be increased to 15% on 1 April 2018.

6 Taxation


In general, AIFs that are structured as trust vehicles and authorised under CISCA are treated as conduit vehicles in relation to income amounts and, accordingly, if the income amounts are distributed within 12 months of their accrual, such amounts will retain their nature and are taxed in the hands of the investors in accordance with their tax profile. South African partnerships are fiscally transparent. Partnership income and capital gains are taxed in the partners’ hands. Foreign partners are only taxed on South African-sourced income and capital gains derived in respect of certain “land-rich” assets.Ownership of fund assets of a bewind trust resides in the investors’ hands, with the trustees merely administering such assets on their behalf. Bewind trusts are therefore fiscally transparent and treated on the same basis as partnerships as above.South African companies are taxpayers in their own right and are taxed at the current company rate of 28%. A withholding tax is levied on the declaration of a dividend by a company, which is a tax borne by investors (this may be reduced for foreign investors in terms of applicable double tax treaties).Section 12J of the Income Tax Act offers tax relief to investors in venture capital companies by allowing investors to deduct 100% of their investment into such company in that year of assessment, provided that the investor holds their interest in the company for a minimum of three years. The types of assets that a section 12J company can invest in are regulated by statute.


South African companies are taxed at the current company rate of 28%.


There will only be securities transfer tax if the AIF is structured as a company, which will be levied at a rate of 0.25% of the market value of the shares transferred.


South Africa has a residence-based tax system, which means residents are, subject to certain exclusions, taxed on their worldwide income, irrespective of where their income was earned. By contrast, non-residents are taxed on their income from a South African source. South African pension fund investors do not pay tax on their investment.



Sout

h A

fric

a

Founded in 1868, Webber Wentzel is a leading South African full-service law firm providing clients with innovative solutions to their most complex legal and tax issues across Sub-Saharan Africa. With over 450 lawyers in Johannesburg and Cape Town, our multi-disciplinary expertise is consistently ranked top-tier in leading directories and awards, both in South Africa and on the continent. Our collaborative alliance with Linklaters and our deep relationships with outstanding law firms across Africa provide clients with market-leading support wherever they do business.

Core to the ethos of our firm is the belief that diversity is the key to delivering effective legal services in South Africa. In harnessing the varied experiences and perspectives of our people, we are collectively able to offer our clients a unique and tailored service.

For more information visit www.webberwentzel.com or follow us on twitter: @WebberWentzel.

Nicole Paige, co-head of Webber Wentzel’s Private Equity Sector, specialises in the formation of alternative investment funds. She has advised and acted for local and international private equity and venture capital houses looking to raise funds for deployment in South Africa as well as in Africa generally and also for limited partners looking to invest in those funds. Her experience in fund formation, which has been recognised by various international research organisations including Chambers Global and The Legal 500, includes the full spectrum of generalist and sector funds, including buyout, real estate, debt, housing, healthcare, infrastructure, listed and renewable energy funds. She also advises on all regulatory aspects of investment funds as well as tax structuring of funds.

Nicole PaigeWebber Wentzel90 Rivonia Road Sandton Johannesburg, 2196 South Africa

Tel: +27 11 530 5857 Email: [email protected]: www.webberwentzel.com

7 Reforms


On 21 August 2017, the Financial Sector Regulation Act 2017 (“FSR Act”) was signed into law. The FSR Act establishes two new financial sector regulators, the Financial Sector Conduct Authority and the Prudential Authority with jurisdiction over all financial institutions. It aims to promote the following:■ financial stability;■ the safety and soundness of financial institutions;■ the fair treatment and protection of financial customers;■ the efficiency and integrity of the financial system;■ the prevention of financial crime;■ financial inclusion;■ transformation of the financial sector; and■ confidence in the financial system.The FSR Act also regulates the provision of financial services and financial products, and allows for the Financial Sector Conduct Authority and Prudential Authority to issue regulatory instruments (such as prudential standards and conduct standards) to govern financial institutions.



Chapter 32

Cases & Lacambra

Miguel Cases

Toni Barios

Spain

regulation of UCITS regime) (“Sociedad Gestora de Instituciones de Inversión Colectiva” or “SGIIC”, in Spanish official terminology) are governed by Law 35/2003. For additional information, please review the Spanish chapter of the ICLG to: Public Investment Funds 2018. Management companies of closed AIFs (“Sociedad Gestora de Entidades de Inversión Colectiva de Tipo Cerrado” or “SGEIC” in Spanish official terminology) are governed by Law 22/2014. SGEIC are regulated by the Spanish National Securities Market Commission (“CNMV”) and require its prior authorisation; although it has to be noted that non-Spanish AIFMs already authorised in other EU Member States can be passported with no need of obtaining further authorisation or any other additional requirements.Management companies from non-EU countries providing marketing services in Spain are not required to obtain prior authorisation by the CNMV, although a prior authorisation of the AIF is required prior to its marketing in Spain. This process is governed by the reciprocity principle, and the following conditions shall be evidenced to the CNMV prior to its marketing among Spanish investors:■ The existence of cooperation agreements between the CNMV

and the home country regulator of the management company, with the purpose to ensure proper exchange of information.

■ The home country of the management company shall not be listed as a Non-Cooperative Country and Territory (“NCCT”) by the Financial Action Task Force on anti-money laundering and terrorist financing.

Please note that SGIIC, management companies for UCITS funds, can also carry out activities for close-ended AIFs. When managing AIFs, SGIIC must comply with the provisions of Law 22/2014.The CNMV, as the supervisory authority, has created a special register where AIFMs must register prior to the start of their activities. Although, depending on the type of AIF, the requirements and timeline will vary and Spanish AIFMs must be registered in the Commercial Registry and must have obtained prior authorisation from the CNMV after the approval of their application (demonstrating that they meet the regulatory criteria, including: equity requirements; suitable risk management and investment selection procedures; suitability requirements of the shareholders, managers, directors and other key persons; and, if any, applicable exemptions). Consequently, any AIFM which does not appear to be registered in the special CNMV registry is not able to perform management activities.


Yes. AIFs themselves must obtain authorisation by the CNMV,



For the purpose of this chapter, Alternative Investment Funds (hereinafter, “AIFs”) means a collective investment scheme undertaking, including investment compartments thereof, which: i) raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and ii) do not require authorisation pursuant to article 5 of Directive 2009/65/EC. Spanish legislation distinguishes between closed-ended and opened-ended AIFs. Spanish closed-ended AIFs are governed by Law 22/2014, of 12 November 2014, regulating private equity entities, venture capital entities and other closed-ended collective investment entities and the management companies of closed-ended collective investment entities, and amending the Collective Investment Schemes Act (“Law 22/2014”), which involves the transposition into Spanish law of Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (“AIFMD”) applicable to companies managing AIFs. The main purpose of the Law 22/2014 is the establishment of the applicable rules for the authorisation and supervision process and governance of management companies managing AIFs, rather than the particular requirements of closed-ended AIFs for which the Law 22/2014 is very flexible.Spanish open-ended AIFs are governed by Law 35/2003, of 4 November, on Collective Investment Schemes (“Law 35/2003”), which has been modified by the indicated Directive relating to fund management companies of alternative funds, and Royal Decree 83/2015, of 13 February, amending Royal Decree 1082/2012, of 13 July, approving the Regulation for the Development of Collective Investment Schemes Law (“RD 83/2015”). The current Spanish legal framework transposes the Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009, on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (“UCITS”).


Yes, management companies of open-ended AIFs (under the


Spai

n


Given the difference treatment between open-ended and closed-ended AIFs, the authorisation process will depend on the type of fund and, in addition, on whether it is authorised outside or within the EU.Those AIFs authorised within the EU will not require specific authorisation by the CNMV and are enabled to operate in the country through the EU passport. However, non-EU AIFs shall be required to obtain prior authorisation by the CNMV in order to carry out any activity in Spain. An AIF seeking to set up in Spain shall submit its application and draft constitution documents for approval by the CNMV. The authorisation request must, in all cases, include the following documents: (i) a report; (ii) accreditation of the good reputation and professionalism, in the terms stated in the regulations, of those who hold a position of fund administrator; (iii) in general terms, any data, reports or records deemed appropriate to verify compliance with the conditions and requirements legally established; (iv) the prospectus and the key investor information document; and (v) the rules of management. In the case of both AIFs and investment companies which designate an AIFM already authorised by the CNMV as their management company, they must notify the CNMV of this. AIFs cannot start their activity until they are registered in the special CNMV register.The resolution of the CNMV shall be notified within two months after submitting the authorisation request or having presented all the required documentation. If no management company has been appointed, the resolution will be notified within three months after submitting the authorisation request or having presented all the necessary documentation. The resolution shall be considered denied if it has not been resolved five months after having submitted the application or all the needed documents.Regarding the formal authorisation of a “Sociedad Gestora de Entidades de Inversión Colectiva de Tipo Cerrado” or “SGEIC”, the final resolution of the CNMV must be motivated and shall be notified within the three followings months after the initial submission by the management company of its application. Last February 2017, the CNMV published a welcome programme for investment and management firms, although this dossier is for informational purposes only and does not entail any legal or administrative responsibility for the CNMV, the guide highlights that the CNMV will try to complete its authorisation process within two months, provided that the applicant meets the mandatory requirements and the required documentation has been substantially presented.


Local residence and other local qualification requirements only apply for Spanish-based AIFs or AIFMs registered in Spain and for those foreign AIFs intended to be marketed in Spain. Thus, those AIFs or AIFMs which carry out their activities in Spain will be subject to local residence or qualification requirements, except in those cases where the AIFM is authorised to carry out its activities in Spain on a cross-border basis through the EU passport, as noted in question 1.2 above. Foreign AIFs marketed in Spain shall designate a legal person responsible for complying with the general provisions of disclosure

since it is the authorising, supervisory and control authority. For EU management companies, the cross-border marketing of AIF duly authorised in an EU country is free once the regulator’s home country notifies to the management company that it has sent the notification letter to the CNMV including information required pursuant to the EU Passport Regime. In case an EU management company intends to market an AIF not registered in a EU country, it will be necessary to demonstrate the CNMV that the following conditions are met:■ The existence of cooperation agreement between the CNMV

and the home country regulator of the management company, with the purpose to ensure proper exchange of information.

■ The AIF’s home country shall not be listed as a Non-Cooperative Country and Territory (“NCCT”) by the Financial Action Task Force on anti-money laundering and terrorist financing.

■ The AIF’s home country has signed a tax agreement with Spain according to the principles stated in art. 26 of the Organisation for Economic Co-operation and Development (OECD) regulation for the exchange of tax information.

Non-EU management companies intending to market AIFs are also required to comply with the aforementioned conditions.


Yes, as set out in question 1.1 above, the Spanish legal system distinguishes between open-ended and closed-ended AIFs, regulated, respectively, by Law 35/2003 and Law 22/2014. Each law establishes different types of structures and, among others, the requirements, aspects and procedures of each of these entities. Neither the Spanish regulator (the Spanish Securities Market Commission, “CNMV”) nor Law 22/2014 (AIFs) nor Law 35/2003 (UCITS) have included a specific definition of an Alternative Investment Fund (“AIF”). In our understanding, all collective investment schemes which are not UCITS should be classified as AIFs.The open-ended AIFs are those whose object is the collective investment of the funds raised from the public and whose operation is subject to the principle of risk sharing, and whose units, at the request of the holder, are repurchased or reimbursed, directly or indirectly, out of the assets of these undertakings. Open-ended AIFs may adopt the form of either an investment fund or investment company, and can be financial or non-financial, depending on their purpose and on whether or not they invest in financial instruments or assets. The closed-ended AIFs are those collective investment entities that, lacking a commercial or industrial goal, raise capital from investors, through an advertising activity, to invest in all types of financial and non-financial assets, according to a defined investment policy. Law 22/2014 designates close-ended AIFs as (“Entidades de Inversión de Capital Cerrado” or “EICC”), establishing the following types: (i) closed-ended investment funds (“Fondos de Inversión de Capital Cerrado” or “FICC”); and (ii) closed-ended investment companies (“Sociedades de Inversión de Capital Cerrado” or “SICCC”). In addition, Law 22/2014 establishes two types of closed-ended entities focused on private equity activity: (“Entidades de Capital Riesgo” or “ECR”) and companies (“Sociedades de Capital Riesgo” or “SCR”). These entities are not considered in this chapter, since the focus of this guide are AIFs.

Cases & Lacambra Spain


Spai

n

If the managing company is under the control of the same natural or legal persons as another managing company authorised under Directive 2009/65/EC or Directive 2011/61/EU, of an investment services company, of a credit entity or insurance or reinsurance company authorised in another Member State.


The CNMV, within the EU supervisory framework, has subscribed to many information exchange agreements with other jurisdictions and supervisory bodies from within the EU and abroad; for example, Argentina, Australia, Belgium, Bolivia, Brazil, Canada, Chile, China, Colombia, Costa Rica, the Czech Republic, the Dominican Republic, Ecuador, El Salvador, France, Germany, Hong Kong, Italy, Mexico, Panama, Peru, Portugal, Romania, Taiwan, the United Arab Emirates and the USA.Specifically with regard to information sharing agreements, these include, amongst others: (i) the European Union Agreement on Cooperation Between the Financial Supervisory Authorities, Central Banks and Finance Ministries – On Financial Stability in the European Union; (ii) the International Organization of Securities Commissions (“IOSCO”) Multilateral Agreement; (iii) the European Securities and Markets Authority (“ESMA”) Multilateral Agreement for the Exchange of Information and Supervision of Securities Activities; (iv) the Co-operation Framework Agreement for Mutual Assistance in the Supervision and Monitoring of an AIFM, its Delegates and Depositaries; (v) the Securities and Exchange Commissions (“SEC”) and Committee of European Securities Regulators (“CESR”) (currently ESMA) Work Plan; and (vi) the exchange of confidential information between the SEC and the CNMV, in accordance with International Financial Reporting Standards (“IFRS”), on companies issuing securities in both markets. All information regarding sharing agreements is available in CNMV webpage which is updated when necessary.

2 Fund Structures


Essentially, AIFs can be constituted through either an investment fund or an investment company. However, investment funds can only be managed by a management company since they have no legal personality, whereas an investment company can be managed directly (by its own board of directors), or by delegating management to an authorised institution. The main legal structures for open-ended AIFs are investment funds whose objective is to obtain the highest possible return using all the investment opportunities available to the manager (“hedge fund” or “Instituciones de Inversión Colectiva de Tipo Libre”) and funds of hedge funds (“Fondos de Instituciones de Inversión Colectiva de Tipo Libre”). The main legal structures for closed-ended AIFs are: private equity entities (which can take the form of funds or companies); and other types of entities (i.e. closed-ended collective investment entities, which can be either funds or companies, as noted in question 1.4 above). To sum up, the Law 22/2014 distinguishes between two types of open-ended investment schemes:“Sociedades de Inversión de Capital Cerrado” or “SICCC” (Spanish terminology), closed-ended collective investment scheme with company form.

of information and communication of any change affecting the essential elements in its offering to investors or data registration with CNMV. In addition, all foreign AIFs will be required to submit to the CNMV statistical data on a regular basis.


In addition to the management of an AIF, the “Sociedad Gestora de Entidades de Inversión Colectiva de Tipo Cerrado” or “SGEIC” can perform duties of administrative, distribution or fiduciary nature. Furthermore, different types of ancillary services such as: discretionary management portfolio; investment advice; reception; or transmission of client orders can be handled also by any SGEIC.The applicable law and regulations set out that there shall be a depositary institution in which: (i) securities, cash or any other products; and (ii) management companies (in case of investment funds), need to be deposited. Although SGEIC are allowed to outsource certain functions, they must retain the ultimate responsibility, establishing reasonable controls of any of such outsourced functions. The information related to the outsourcing of functions shall be at the disposal of the CNMV.In addition, please note that AIFs may be marketed by financial intermediaries, which mainly tend to be banks, securities or securities agencies.


Under Law 35/2003 foreign managers or advisers wishing to manage, advise or operate open-ended funds domiciled in Spain can do so if they have been authorised by Directive 2009/65/EC, 13 July 2009, in another Member State. If they have been authorised in another Member State they can operate in Spain either through a subsidiary or under the free provision of services regime. As established in article 55.2 of Law 35/2003 under any circumstances the establishment of subsidiaries or the free provision of services can be conditioned to the acquisition of an additional authorisation or contribute to an endowment fund or any measure of equivalent effect. Under Law 22/2014 foreign managers or advisers wishing to manage, advise or operate close-ended funds domiciled in Spain can do so filing a request for authorisation before the CNMV if they have been authorised in another Member State under Directive 2009/65/EC. According to article 82 Law 22/2014, EU management companies are also allowed to manage close-ended AIFs domiciled in Spain, as well as to provide services in Spain either through a subsidiary or under the free provision of services regime with similar procedures to those mentioned in Law 35/2003 for open-ended AIFs.For foreign management companies to be registered in Spain, article 49 of Law 22/2014 establishes the obligation for the CNMV to, prior to authorisation of the manager, consult with the national authority of the Member State where the manager was authorised if: ■ The manager wishing to operate in Spain is a subsidiary

of another manager company authorised under Directive 2009/65/EC in another Member State.

■ If the manager company is the subsidiary of the mother company of another managing company authorised under Directive 2009/65/EC, of an investment services company, of a credit entity, of an insurance or reinsurance company authorised in another Member State.



Spai

n

3 Marketing


Legislation governing either production and marketing materials of investment funds will depend on whether it is a closed-ended or open-ended fund. Thus, Law 35/2003 and Regulation 1082/2012 on Collective Investment Entities apply to open-ended AIFs; and Law 22/2014 to closed-ended funds. However, there is a common regulation for both types of AIF, which consists of: (i) the revised text of the Securities Market Law 4/2015, which states, in general terms, the basic conditions for marketing materials, as well as Act 34/1998, of 11 November 1998, for advertising; and (ii) Royal Decree 217/2008, of 15 February 2008, on investment firms.


For retail investors, the new legislation of Packaged Retail Investment Products (“PRIPS”) came into force last January 2018. SGIIC providing the former Key Investment Information Document (“KIID”) are exempt to apply the new PRIPS regime until 2020. The fund shall not carry out their activities until the current KIID and information brochure is registered in the relevant CNMV’s administrative register.The KIID shall include information containing the essential characteristics of the fund. The works “key investor information” shall appear prominently at the top of the first page of the document in Spanish or another language that accepts the CNMV. Specifically, information shall include the following data: (i) identification of the AIF; (ii) a brief description of its investment objectives and investment policy; (iii) a presentation of the historical returns or, where appropriate, profitability scenarios; (iv) costs and associated expenses; and (v) risk/reward investment, with appropriate guidance and warnings in relation to the risks associated with investments in the Council of Institutional (“CII”) considered warnings profile.The KIID will be drafted in concise, non-technical language and presented in a common format, allowing for comparison, and must be easily analysable and comprehensible to the average investor in order that he/she is reasonably able to understand the essential characteristics, nature and risks of the investment product that is offered and make investment decisions without recourse to other documents. The document must be continuously updated and any amendments thereto should be sent to the CNMV. Regarding close-ended AIFs, once the PRIPS has come into force in January 2018, a Key Investment Information Document (“KIID”) is required to be delivered to any retail investor.


Yes. The CNMV establishes the standard model applicable to all the documentation to be submitted to investors. In this sense, it keeps a record of brochures, documents with key investor information, and annual and quarterly reports on the AIF, to which the public will have free access.All documents published in the public domain will be forwarded simultaneously to the CNMV in order to keep the above-mentioned records updated. In the case of the dissemination of the prospectus and the document containing key investor information, prior registration by the CNMV is

“Fondos de Inversión de Capital Cerrado” or “FICC” (Spanish terminology) closed-ended collective investment scheme with funds form.


It must be assumed that the participants will be responsible up to the limit of their contributions, which constitutes limited liability.


As mentioned, managing both investment funds, being either UCITS or AIFs, is a regulated activity, limited to licensed institutions. Any legal persons whose regular business is to manage one or more closed-ended AIFs must be registered at the CNMV under the official name of Sociedad Gestora de Entidades de Inversión Colectiva de Tipo Cerrado (“SGEIC”). Consequently, the name of SGEIC can only be used by any legal person with this sole purpose. All SGEIC must be a public limited company whose corporate purpose is the managing of AIFs.Please take into account that management companies managing UCTIS or open-ended AIFs (“Sociedad Gestora de Instituciones de Inversión Colectiva” or “SGIIC”, in Spanish terminology) can also manage closed-ended AIFs complying with Law 22/2014. The legal status of SGIIC is similar to SGEIC.


The management companies of open-ended AIFs issue and redeem shares at the same intervals as net asset value calculations upon the request of any participant, under the terms established in the relevant regulations. Notwithstanding the foregoing, AIFs do not have to grant the requested redemption on a net asset value calculation date set by the participant, and so it does not constitute any right by itself and shall be expressly stated in the prospectus. However, in the CNMV, on its own initiative or upon the request of the management company, this may temporarily suspend the subscription or redemption of units when it is not possible to determine its price or concur on other force majeure events. In principle, subscription or redemption of shares may only be restricted or suspended if there is just cause or in cases of force majeure. Closed-ended AIFs can establish restrictions on redemptions and will be subject to their own ruling provisions.


No, there are no specific legislative restrictions. However, general principles of public order and of company law may apply.


As mentioned, for close-ended AIFs, Law 22/2014 focus mainly in the authorisation process of management companies (“SGIEC”), considering that this type of fund is more flexible than UCITS and there are no significant requirements for their investment and liquidity structure.



Spai

n

entities, shall perform activities related to the selling, buying, transferral or subscription of participations in AIFs.


No, there are no specific restrictions in the applicable laws or regulations. However, we would recommend that an in-depth analysis be carried out, on a case-by-case basis, on the individual restrictions resulting from legal or statutory provisions of the relevant sponsor or investor.

4 Investments


Compared to UCITS, AIFs have lower investment rules and the possibility to have a higher leverage ratio. Their investment object can consist of either financial or non-financial activities. The distinction between open-ended and closed-ended has been already explained (please see question 1.4).Closed-ended funds are subject to different restrictions regarding their object, as this cannot constitute a commercial or industrial purpose. The object of closed-ended funds must be related to a predefined investment policy.


Law 35/2003, states that requirements for financial UCITS are applicable to open-ended AIFs.To comply with the principle of risk diversification, AIFs must comply with the limitations that are imposed regarding the minimum percentage of the assets which shall be invested (in some cases, investment in assets and financial instruments may not exceed certain thresholds). In both open-ended and closed-ended AIFs, a minimum of 60% of their assets shall be invested. However, open-ended AIFs cannot invest more than 10% of their assets in another hedge fund. In the case of closed-ended funds, the aforementioned minimum of 60% of their assets must be invested in financial instruments as shares or profit-participating loans. Those AIFMs authorised within any Member State of the EU or in those countries not included in the Financial Action Task Force (“FATF”) list of countries not co-operating in the exchange of information, are able to invest up to 100% of their assets in other ECRs. As mentioned, Law 22/2014 mainly focus on the requirements for management companies (SGEIC). Compared to UCITS, Law 22/2014 establishes only high-level principles regarding due diligence procedures that the SGEIC need to perform in managing close-ended AIFs, especially regarding conflicts of interest, valuation procedures, risk and liquidity levels. Indeed, there is no specific limit on leverage. In any case, SGEIC have to disclose to the potential investors sufficient information regarding the main characteristics of every single fund, level of risks and leverage limits.

required. Registration of the prospectus and the document containing key investor information will require prior verification by the CNMV.


From a client perspective, there is a very relevant distinction between the marketing of UCITS and AIFs. UCITS can be marketed both to retail or professional investors. However, as a general rule, AIFs are to be marketed to professional clients, as defined in the Spanish Securities Market Act. The marketing to retail clients is an exception limited to those retail clients who commit to invest a minimum of EUR 100 and acknowledge in writing that they understand the risks of the fund marketed.AIFs and their management companies must respect, in any event, the regulations concerning marketing and advertising in Spain. The CNMV monitors compliance with these obligations. It is especially relevant that authorisation is required for marketing in Spain. The CNMV monitors compliance with these obligations. Authorisation for marketing in Spain may be refused due to prudential reasons, specifically: (i) not being treated in an equivalent manner to investment funds in the respective country of origin; (ii) non-compliance with the rules of order and discipline in the Spanish securities markets; (iii) not sufficiently ensuring the adequate protection of investors resident in Spain; or (iv) the existence of disruption in the conditions of competition between AIFs authorised outside Spain and those authorised in Spain.


Please see the answer to question 3.4.According to AIFMD and MiFID, those AIFs managed by AIFMs regulated by AIFMD may be marketed and advertised to retail investors but subject to enhanced investment requirements set forth in the Spanish legislation in order to ensure protection for such retail investors. Accordingly, open-ended funds can be marketed to retail investors provided the following conditions are fulfilled: (i) an investment of, at least, EUR 100,000; and (ii) a written declaration from the retail investor confirming that it is aware of the associated risks. Despite the fact that the advertising of closed-ended AIFs is targeted to professional investors, this does not preclude the possibility for retail investors to invest in closed-ended funds, provided they fulfil the conditions mentioned above.


Prior to investment, investors shall declare, in writing, that they acknowledge the investment risks.


The legislation does not provide any additional restrictions on marketing to public bodies.


Financial intermediaries, which can be banking or non-banking



Spai

n

SGIIC, SGEIC or any other management companies providing services on a cross-border basis need to report statistical information on a regular basis to the CNMV. Circular 2/2017 of the CNMV defines the information requirements.


Any preferential treatment shall be disclosed in the prospectus. However, AIFs shall comply with the relevant provisions in relation to conflicts of interest and the overall obligation to keep investors duly informed.

6 Taxation


The tax treatment of the main forms of Alternative Investment Funds depends on whether the fund is an open-ended or a closed-ended fund.Open-ended funds are subject to a special tax regime foreseen in the Spanish Corporate Income Tax Law, which includes the application of a 1% tax rate if certain requirements are met.Closed-ended funds (e.g. private equity entities) are subject to the general Spanish Corporate Income Tax rate of 25% on their worldwide income. However, these sorts of funds will benefit from: (i) a 99% tax exemption for capital gains derived from the sale of subsidiaries; and (ii) a full exemption for dividends obtained from their subsidiaries, both subject to certain requirements.These tax measures are compatible with the existing participation exemption regime, which may also be applicable.


The Spanish tax system does not foresee any special tax treatment for investment managers or advisers. Consequently, the provisions set out in the Spanish Corporate Income Tax Law will apply and the tax rate will be 25% on their worldwide income.The management of the fund may be exempt from VAT if several requirements are met.


No. However, further analysis would be required on the tax implications derived from the transfer of participations in a fund with more than 50% of its assets in real estate located in the Spanish territory. In particular, Spain has introduced an anti-abuse clause in order to avoid the transfer of real estate through the sale of real estate companies. However, this clause will not apply if the real estate owned by these companies is used for business activities.


Both resident and non-resident investors, or pension fund investors,


While the applicable law does not state a specific cap for closed-ended AIFs, in the case of open-ended AIFs, debt may not exceed five times the value of its assets and must be consistent with the implementation of its strategy and investment policy. In both open-ended and closed-ended funds, the cap on borrowing shall be specified in the prospectus.



In general, AIFMs shall disclose any facts considered specifically relevant to the situation or development of the institution and must be communicated immediately to the CNMV. Once analysed, the CNMV must disseminate and include any relevant development in the quarterly and annual or semi-annual report immediately. The legislation applicable to open-ended AIFs states that a series of documents must be provided on a mandatory basis, the most important of which are: (i) a prospectus, containing the investment fund rules; (ii) the document containing the main information for the investor; (iii) an annual report containing, among others, the annual accounts, the management report and the audit report; and (iv) two quarterly reports. These are provided in order to ensure that all relevant circumstances that may influence the determination of the value of the assets and prospectus of the institution are publicly known, on a continually updated basis, as well as the inherent risks involved, and compliance with the applicable laws. In the case of closed-ended funds, AIFMs must notify the CNMV, within 10 days, of any acquisition or loss of a significant interest held by the AIF, provided that the voting rights of the AIF in such company increase or decrease from a certain triggering percentage (10% to 50% or 75%). However, in the case of open-ended funds, the obligation to inform the CNMV arises when the investor position reaches, goes above, or falls below the triggering percentage (20%, 40%, 60%, 80% or 100% of the company capital or fund assets).


An AIFM must provide the CNMV with any information it requires at any time, and shall provide on a regular basis, information about: (i) the principal markets and instruments in which it trades on behalf of the fund, company or entity it manages; (ii) the main instruments in which the fund trades; and (iii) the principal exposures and concentration of each of the funds it manages. In particular, and as noted in question 5.1 above, AIFMs shall provide the CNMV with an annual report. Open-ended AIFs must submit to the CNMV a monthly memorandum containing the operational statistics, and another investment portfolio. Also, they must provide every investor with a semi-annual and a quarterly report. AIFs should inform the CNMV about, inter alia: (i) the percentage of the fund’s assets that are subject to special arrangements arising from their illiquid nature; (ii) any new arrangements for managing the liquidity of the fund; (iii) the actual risk profile of the fund and risk management systems used by the management company for, among others, market risk, liquidity risk, counterparty risk and operational risk; (iv) the main categories of assets in which the Collective Investment Undertaking (“CIU”) has invested; and (v) the results of the stress tests.



Spai

n

to the Spanish tax authorities in order to comply with the FATCA provisions. Spanish Royal Decree 1065/2007 Regarding the Obligation to Report Information on Financial Accounts, has also been adapted to incorporate the FATCA provisions.Like many other jurisdictions, Spain will begin to report information after a maximum of nine months after December 31st 2017 with regards to complying with the CRS provisions.


Spain has passed measures to adopt the actions of the OECD’s Action Plan with regard to Action 6 (“Prevent treaty abuse”). Spain has signed tax treaties with several countries (Belgium, Bolivia, Croatia, Cuba, Ireland, Israel, Nigeria, Portugal, Russia, Slovenia, etc.), with a specific Limitation on Benefits (“LoB”) clause. The tax treaty between Spain and the United States contains a global LoB clause. Spain has also introduced excluding clauses for several entities or regimes (for example, in the tax treaties with Barbados, Jamaica, Luxembourg and Uruguay). In addition, in 2017 Spain signed the multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.


There are not any tax-advantaged structures others than what is described in question 6.1.


No, there are not.


No, there are not.

7 Reforms


No reforms at a Spanish level have been proposed so far. Nevertheless, in 2018 we shall see the adaptation of the Spanish legal order to the provisions of Directive 2014/65/EC, on markets in financial instruments and amending Directive 2002/92/EU (recast) (“MiFID II”) and Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (“MiFIR”), which have been partially transposed to the Spanish legal system through the Royal Decree 21/2017, of 29 December, on urgent measures to adapt the Spanish legal order to the European regulations regarding the securities market.

will be taxed on dividends and capital gains, if any, derived from the sale of shares. Capital gains will be assessed for the difference between the transfer value and the acquisition cost.ResidentsIndividuals will be subject to a 19% to 23% tax rate, and companies will be subject to a fixed 25% tax rate.It is important to point out that Spanish tax-resident individuals will not be taxed on the capital gains derived from the sale of participations in an investment fund, provided a subsequent investment in a qualifying investment fund is made.Non-residentsDepending on the tax treaty enforced with Spain, capital gains may be taxed at the source or only in the country of residence of the seller. In addition, EU residents may apply for an exemption on the capital gains obtained in Spain. As a general rule, the applicable tax rate will be 19%. However, if the non-resident constitutes a permanent establishment (“PE”) in Spain, the tax rate will be 25% and the Corporate Income Tax provisions will apply.Capital gains arising from the transfer or reimbursement of participations in a closed-ended Alternative Fund obtained by a non-resident investor would not be considered to be obtained in Spain for tax purposes. However, this rule will not apply if the non-resident investor resides in a country qualified as a tax haven for tax purposes or if capital gains are obtained through a tax haven. Pension fund investorsTax treatment of pension fund investors will depend on their tax residence as indicated in previous paragraphs.Income obtained by a Spanish-resident pension fund will be subject to Corporate Income Tax at 0% over its income if it is covered under the scope of the Act 1/2002, of 29 November.Dividends obtained by a pension fund resident in the EU or EEA will not be subject to withholding tax in Spain.


It is not strictly necessary to obtain a tax ruling from the Administration as a step prior to establishing an AIF. However, it would be advisable to file a tax ruling in order to foresee the tax treatment given by the Administration to a particular AIF.The ruling must be issued by the General Tax Directorate within six months following the request. Tax rulings duly requested are binding on the tax authorities, and their criteria must be compulsorily applied to taxpayers in similar cases, provided the regulations existing at the time of issuance and the applicable case law remains unchanged. However, in practice, the tax authorities may change their criteria on newly issued tax rulings from time to time, but such changes will not have retroactive effects for taxpayers (the new criteria will supersede the previous ones for future cases).The filing of a tax ruling prevents penalties in case of a tax audit, provided the facts are the same.


FATCA has been developed in Spain by Orden HAP/1136/2014, which regulated Form 290, and which is used to provide information



Spai

n

Cases & Lacambra is a client-focused boutique law firm with a top-tier specialisation in financial services and tax law. We offer bespoke advice and solutions to our clients, which rank among the most highly reputed national and international financial institutions, family offices, investment firms, group companies and high-net-worth individuals.

Cases & Lacambra has offices in both Spain and the Principality of Andorra.

Miguel Cases is the Managing Partner of Cases & Lacambra and leads the Commercial & Corporate law and Financial Services Group practices. He has extensive experience advising credit institutions, investment services firms and undertakings, being the legal counsel of several national and international financial institutions, public authorities and investment funds in respect of their regulatory situation, banking agreements, structuring and negotiating financial derivatives, and debt transactions.

Miguel CasesCases & LacambraAv. Pau Casals, 2208021 BarcelonaSpain

Tel: +34 93 611 92 32 +34 91 061 24 50Email: [email protected]: www.caseslacambra.com

Toni Barios is a Partner of Cases & Lacambra and leads the Finance practice of the Financial Services Group. He has extensive experience in banking and finance, having been involved in debt and equity capital markets transactions and all sorts of public and private financings and debt restructuring transactions. He provides advice on the structuring, formation and operation of public and alternative investment funds, and represents institutional and private investors.

Toni BariosCases & LacambraPaseo de la Castellana 828046 MadridSpain

Tel: +34 93 611 92 32 +34 91 061 24 50Email: [email protected] URL: www.aseslacambra.com



Chapter 33

Harvest Advokatbyrå AB

Gustav Sälgström

Emelie Persson

Sweden

the detailed contents of the applications are set out in AIFMA and FFFS 2013:10. In order to be an adviser, an external AIF Manager must obtain authorisation for discretionary portfolio management, and such a manager can, in addition, apply for authorisation to provide investment advice under the Swedish Securities Market Act and the SFSA’s regulations governing investment services and activities (FFFS 2017:2) implementing the MiFID II Directive 2014/65/EU.


The authorisation requirements in AIFMA addresses AIF managers. In respect of internal AIF managers, the AIF must be authorised accordingly since the AIF manager and the AIF acts as one legal entity.Management of additional AIFs does, however, require: ■ notification to the SFSA if the Swedish AIF manager is

registered under AIFMA; or■ authorisation by the SFSA if the Swedish AIF manager is

authorised under AIFMA.Regarding special funds, the fund’s articles of association must be approved by the SFSA.


The regulatory regime does distinguish between open-ended and closed-ended AIFs, for example, with regards to regulation regarding asset valuation. Furthermore, the regulatory regime, to some extent, distinguishes between special funds and other AIFs. Unlike other AIFs, a special fund is obligated to be opened for redemption at least once a year.


A Swedish AIF manager, exceeding the thresholds mentioned above (question 1.2), must apply for authorisation in accordance with AIFMA and FFFS 2013:10. After the application has been filed and the application fee paid (currently SEK 350,000), the SFSA starts processing the matter. The handling time for the application is three months but if there are special circumstances the SFSA can



Alternative Investment Funds (AIFs) are regulated by the Swedish Alternative Investment Fund Managers Act (AIFMA), although the AIFMA primarily addresses AIF managers. Further regulation of AIFs is stipulated under the Swedish Financial Supervisory Authority’s (SFSAs) Regulations regarding Alternative Investment Fund Managers (FFFS 2013:10).AIFs structured as, e.g. a Swedish limited liability company or a limited partnership must, in addition, comply with applicable company law.For a special fund, which falls within the definition of an AIF, the Swedish UCITS Act and the SFSA’s Regulation regarding Swedish UCITS funds (FFFS 2013:9) apply in relevant parts.


i. Registration For a Swedish AIF manager, registration with the SFSA is sufficient if the following criteria are met:■ the assets of the AIFs, including those acquired through

financial leverage, do not exceed EUR 100 million; or■ the assets of the AIFs do not exceed EUR 500 million,

provided that the portfolios consist of AIFs without financial leverage and without the right to redemption for a period of five years from the date of the first placement of the AIF.

An application for registration to manage AIFs shall include the following:■ information regarding the AIF manager and the AIFs and

their investment strategies;■ information set out in Article 5 (1) and (2) of the AIFM

Delegated Regulation 231/2013/EU (Annex IV need not be completed at registration);

■ information about the investors’ right to redemption; and■ a description of how marketing to retail investors is prevented.ii. Authorisation Given that the assets of the AIFs exceed the aforementioned thresholds, the Swedish AIF managers must apply for authorisation. In comparison with a registration process, a licence application requires additional documents to be filed with the SFSA whereby


Swed

en

2 Fund Structures


An AIF can take the legal form of a special fund, or an association, such as a limited liability company, trading partnership or a limited partnership. Whether an association constitutes an AIF is, however, to be determined based on the object of the association, i.e. if the object meets the criteria of an AIF pursuant to Article 4 of the AIFM Directive 2011/61/EU.In Sweden, real estate funds and private equity funds are commonly structured as limited liability companies or limited partnerships.


As a main principle, an investor of an AIF is only liable to the amount invested. However, exceptions may occur based on the legal structure of the AIF manager. For example, in relation to an internal AIF manager legally structured as a limited partnership (Sw. kommanditbolag), the general partner and investor (Sw. kommanditdelägaren) is personally responsible for the agreements and debts of the limited partnership.


An AIF manager can either be internal meaning that the AIF manager, due to its legal structure, can manage the administration of the AIF itself (for example, a limited liability company that also constitutes the AIF); or external (for example, a Swedish limited liability company authorised to manage AIFs) meaning that the AIF manager is separate from the AIFs.


There are no legal limits except from the limits on special funds. For special funds, a Swedish AIF manager must specify in the fund’s articles of association the conditions for transfers and whether it shall be possible to close the fund for subscription of new units. If the special fund can be closed, the fund’s articles of association must state under what objective conditions such a measure is possible. According to AIFMA special funds must, however, be open for redemption at least once a year.


There is no explicit legislative restriction on this matter. Restrictions on transfers of investors’ interests may, however, be stipulated in the AIF’s articles of association, investment policy or equivalent regulation of the AIF.


In addition to the asset stripping provision in AIFMA, implementing

extend the handling time by an additional three months. However, it should be noted that the process can be delayed and applicants should expect a handling time of six to nine months.


A Swedish AIF manager must have its registered office and conduct its business in premises located in Sweden. Additionally, the Swedish AIF manager shall, depending on its legal structure, comply with certain residency requirements under company law. For example, in the case of a Swedish AIF manager legally structured as a limited liability company not less than one-half of the members of the board of directors, and the managing director, shall as a main rule be domiciled within the EEA. At least one of the persons authorised to represent the company and act as an authorised signatory shall be domiciled within the EEA. In the event that the limited liability company has no authorised representative who is resident in Sweden, the board of directors shall authorise such person to act as agent for service of process on behalf of the company (special agent for service of process).


A Swedish AIF manager shall ensure that a depositary is designated for each Swedish AIF managed by the company. The depositary shall maintain its registered office in Sweden or, in cases where the depositary is a branch established in Sweden, in another country within the EEA.


The following applies to foreign AIF manager wishing to offer AIFs in Sweden:■ A foreign EEA-based AIF manager, who has such

authorisation in its home Member State as referred to in the AIFM Directive 2011/60/EU may, following a notification to the SFSA market units or shares in an AIF (not a special fund) domiciled in Sweden. If the AIF manager’s authorisation in its home Member State includes the right to provide investment advice, such services may, after notification to the SFSA be carried out in Sweden in accordance with Chapter 5, Section 1 (2) of AIFMA.

■ A foreign EEA-based AIF manager, who has such authorisation in its home Member State as referred to in the AIFM Directive 2011/60/EU may, following authorisation from the SFSA market units or shares in a special fund.

■ A foreign AIF manager based in a country outside the EEA may market units or shares in an AIF managed by a manager in Sweden, following authorisation from the SFSA.

The detailed contents of the authorisation applications and notifications are stipulated in AIFMA and FFFS 2013:10.Regarding marketing to retail investors, see question 3.5.


Information on co-operations and information sharing agreements entered into by the Swedish government, is available on https://www.government.se/.

Harvest Advokatbyrå AB Sweden


Swed

en


There are restrictions on marketing to retail investors. AIF managers marketing AIFs to professional investors must take measures to prevent units and shares in the AIF from being marketed to retail investors.In addition, see question 3.6.


i. Swedish-based AIF managers Swedish AIF managers authorised under AIFMA can market special funds to retail investors. Other AIFs can also be offered to the public, but in that case the AIF must have been admitted to trade on a regulated market.A Swedish AIF manager registered in accordance with AIFMA can, after approval by the SFSA, market units to a retail investor who (i) undertakes to invest a minimum of EUR 100,000, and (ii) in writing, in a separate document, states the awareness of the risks associated with the investment. ii. EES-based and Non-EES-based AIF managers An EES-based and non-EES-based AIF manager’s marketing of units or shares in AIFs to retail investors requires authorisation from the SFSA. If a foreign AIF is equivalent to a special fund, there is a possibility to apply for authorisation to market the fund to the public, even though the fund is not admitted to trade on a regulated market. However, in practice, the SFSA hardly ever approves such an application.


A Swedish AIF manager solely authorised under AIFMA, must take measures to prevent units and shares in the AIFs from being unintentionally marketed to prospective investors domiciled abroad. In addition, see question 3.4.


No, there are no such additional requirements.


A Swedish AIF manager can use intermediaries to assist in the fundraising process. The fundraiser may, however, require a licence under, e.g. the Swedish Securities Market Act. In accordance with the AIFM Directive 2011/61/EU, an EES-based AIF manager’s fundraising in another EES Member State may be considered a cross-border activity. Such activity requires authorisation or notification, depending on the type of activity being pursued by the AIF manager.


Except for what is stated above regarding professional and retail investors, there are no such legal restrictions. However, the AIF’s

Article 30 of the AIFM Directive 2011/61/EU, there are general legal limitations imposing the AIF manager to act honestly, fairly and in the best interest of the AIF, and to ensure public confidence in the financial market. In effect, the AIF manager must adhere to the fund’s articles of association, investment policy or equivalent regulation of the AIF, which normally contains certain diversification requirements.For special funds additional legal restrictions apply, see question 4.1.

3 Marketing


The legislation governing the production and offering of marketing materials are:■ The Swedish Marketing Practices Act. ■ The Swedish UCITS Act (partly with regards to special

funds).■ The AIFMA.■ The Swedish Investment Fund Association’s (Sw.

Fondbolagens Förening) guidelines for marketing and information by fund management companies.

■ The Swedish Consumer Agency (Sw. Konsumentverket) and the Swedish Investment Fund Association’s agreement on rules for the marketing of funds.


All marketing shall be designed and formulated in accordance with good marketing practice (laws and other ordinances, legal precedents, good business practice, etc). The content requirement varies, e.g. depending on whether the AIF is offered to professional or retail investors, and whether the AIF and/or the AIF manager is based within or outside the EEA. However, in general the key information to be provided is the AIF’s articles of association or equivalent documents, prospectus, information on risks, fees and other charges, and information identifying the AIF’s depositary. An AIF manager solely marketing AIFs to professional investors shall within the application to the SFSA, provide information on the measures adopted and taken to prevent units and shares in the AIF from being marketed to retail investors.If marketing material extends an offer to retail investors, it shall be made clear in the offer that the KIID and full prospectus of the AIF are available and details shall be provided of where they can be obtained. AIF managers are under a duty to provide a clear account of all fees and charges in the fund’s KIID and full prospectus, which shall be made available to customers before any units are bought.


Except from the documents being filed to the SFSA within the notification and/or the authorisation process, no other marketing or legal documents need to be registered with or approved by the local regulator.



Swed

en

■ EEA-based AIF managed by the AIF-manager.■ AIF marketed by the AIF manager within the EEA.The AIF’s investors shall be provided with the annual report upon request. The SFSA shall also be provided with the annual report, as well as the home country authority if the fund is domiciled outside Sweden.An AIF manager which manages a special fund shall submit a quarterly report for each special fund to the SFSA at the end of every quarter. The quarterly report shall contain a profit and loss account and a balance sheet with specifications as well as information regarding the calculation of own funds and capital requirements. The quarterly report shall relate to the conditions on the last day of every calendar quarter (the report date) and the SFSA should have received the report no later than 21 April, 21 July, 21 October and 21 January, respectively.An AIF manager shall provide regular reports to the SFSA on:■ the principal markets where the AIF manager trades;■ the financial instruments the AIF manager trades in; and■ each fund’s principal exposure and concentration of risks.AIF managers shall for each EEA-established managed AIF and for each of the funds it markets in the EEA provide the following information to the SFSA:■ the percentage of the fund’s assets which is of a illiquid

nature;■ any amendments or new arrangements for managing the

liquidity;■ the fund’s risk profile and the risk management systems used

to manage those risks;■ information on the main categories of assets in which the

fund invests in; and■ the results of the stress tests performed in the fund.AIF managers shall upon the SFSA’s request provide the following documents:1. a detailed list of the AIFs managed by the AIF manager

updated at the end of each quarter; and 2. the annual reports for each fund managed by the AIF manager

marketed in the EEA.


No, there are no legal restrictions, but when side letters are used they shall be disclosed for the investors.

6 Taxation


All Swedish special funds are exempt from taxation and are not liable to pay Swedish income tax.AIFs that do not meet the requirements of special funds are liable to pay Swedish corporate tax, if domiciled in Sweden.


External and internal AIF managers are taxed in accordance with applicable tax rules of the legal structure at hand. For example,

articles of association, investment policy or equivalent regulation of the AIF may stipulate specific boundaries on participation.

4 Investments


A Swedish special fund must adhere to the following requirements: ■ the fund’s sole purpose must be to invest in liquid financial

assets only (in principle eligible assets as defined under the UCITS Directive 2009/65/EU although the SFSA may grant exemptions from the UCITS requirements);

■ the fund must apply the principle of risk diversification; and ■ the fund units are repurchased or redeemed at the unit

holder’s request at least once every year.Furthermore, there are specific requirements of acquisition of non-listed companies and issuers. These requirements are listed in Chapter 11 AIFMA and do, e.g. contain the asset stripping rule (see question 2.6).


There are legal restrictions with regards to Swedish special funds (see question 4.1). Otherwise, there are generally no such legal limitations.


A Swedish special fund cannot have cash loans exceeding 10 per cent of the fund’s assets, unless the SFSA has granted an exemption. Otherwise there are no such legal restrictions.



Swedish and other EES-based AIF managers must comply with the disclosure requirements stipulated in the Commission Delegated Regulation 231/2013/EU. Furthermore, Swedish AIF managers must publish information on their website regarding sustainability, and if such issues are considered when managing the AIF. AIF managers legally structured as Swedish limited liability companies shall, in addition, publish on their websites the name of the company, the address of its registered office, as well as the company’s registration number.For Swedish special funds, the AIF manager must publish KIID for each fund on its website.


Each AIF manager shall, within a six-month period from the end of each fiscal year, provide an annual report for each:



Swed

en

av rapporteringspliktiga konton med anledning av FATCA-avtalet, and lagen (2015:911) om identifiering av rapporteringspliktiga konton vid automatiskt utbyte av upplysningar om finansiella konton). Recently, several technical clarifications regarding, e.g. the identification of reportable accounts and content of control data on reportable accounts have been proposed. The proposal is, at the time of writing, still under review.


A proposal regarding the implementation of OECD’s Action Plan on Base Erosion and Profit-Shifting (BEPS) has been published by the Swedish government and is currently pending approval from Parliament, since new legislation is required to realise the minimum standards that follow Articles 6 and 7 of BEPS.


No, there are not.


It is worth mentioning that financial institutions such as securities institutions, investment funds and management companies, who are intending to conduct business in Sweden without establishing a branch or similarly establishing in Sweden, must submit an undertaking to file income statements to the SFSA.


No, there are not. The changes referred to in question 6.6 are mainly clarifications of already existing legislation.

7 Reforms


No major reforms are proposed. However, within the EEA the Commission has proposed new regulation in order to facilitate cross-border distribution of AIFs and UCITS.

for an external AIF manager in the capacity of a limited liability company a corporation tax of 22 per cent applies.


Investors of special funds, domiciled in Sweden with no investment savings account must pay income tax on an annual flat income amounting to 0.4 per cent of the value of the shares at the beginning of the calendar year. The flat income is then taxed by 30 per cent (an individual) or 22 per cent (legal entity). In addition, dividends on the shares or units of the special fund are taxable. Furthermore, any profit derived from a transfer initiated by the investor is taxable. The calculation of taxation depends on whether the special fund is listed or unlisted. Regarding investors domiciled outside Sweden, see question 6.4.


(a) Resident See question 6.3.(b) Non-residentNon-residents are as a main rule taxable in their country of residence. In accordance with the FATCA and CRS agreements, the Swedish Tax Agency shall forward information on taxable accounts of non-residents to the designated foreign competent authority of the agreements. (c) Pension fund investorsPension fund investors domiciled in Sweden do not pay capital gains tax in relation to transfers or pension pay-outs but do, however, pay tax on the return on capital and income tax on paid-out pension.


It is not necessary, but can be requested from the National Tax Board (Sw. Skatterättsnämnden).


In Sweden FATCA and CRS have been implemented mainly through two separate Acts (Sw. lagen (2015:62) om identifiering



Swed

en

Harvest offers comprehensive legal advice for anyone engaged in licensable activities. We assist, among others, banks, asset managers, securities companies and other financial institutions in Sweden and abroad with matters such as compliance, internal audits, application procedures, financing and other types of legal issues. We also assist clients with matters such as establishment, authorisation or capital structure, to name just a few.

We maintain regular and close contact with the Swedish Financial Supervisory Authority (Sw. Finansinspektionen), and a number of our employees have previously worked for the authority. Thanks to a large number of assignments involving the authority, we are constantly kept up to date with new rule interpretations and handling of different types of cases.

Our services include assisting companies within the financial sector to implement GDPR (the General Data Protection Regulation) and to adapt and review their procedures. We also assist with the relevant consents and information texts, and undertake the role of data protection officer.

We have extensive experience and specialist expertise on matters regarding different kinds of capital market transactions such as IPOs, EMTNs, high-yield debt instruments and takeover bids.

Gustav Sälgström is a partner at Harvest, specialising in exchange and securities law, banking and finance legislation and fund operations. Gustav has significant regulatory experience representing clients contact with the Swedish Financial Supervisory Authority. He has participated in a number of long-term projects implementing new legislation, such as MIFID and AIFMD in the course of his career.

Gustav’s client portfolio includes banks, securities institutions, payment institutions and asset management companies. During his career, Gustav has held a number of senior legal positions, among others in Alfred Berg Asset Management AB (part of BNP Paribas Investment Partners).

Gustav was recommended by The Legal 500 2016 guide.

Gustav SälgströmHarvest Advokatbyrå ABHamngatan 15, Box 7225 103 89 Stockholm Sweden

Tel: +46 76 149 73 00Email: [email protected]: www.harvestadvokat.se

Emelie Persson is an associate at Harvest, specialising in securities law, banking and finance legislation and fund operations.

Emelie PerssonHarvest Advokatbyrå ABHamngatan 15, Box 7225 103 89 Stockholm Sweden

Tel: +46 76 146 92 00Email: [email protected]: www.harvestadvokat.se



Chapter 34

Lenz & Staehelin

Dr. François Rayroux

Dr. Patrick Schleiffer

Switzerland


Swiss Alternative Investment Funds are required to be licensed by FINMA irrespective of the type of investors to whom their shares/units are distributed.With respect to foreign (i.e. non-Swiss) Alternative Investment Funds, the licensing requirements depend on what types of investor are approached in Switzerland. The distribution of shares/units in a foreign Alternative Investment Fund to non-qualified investors requires prior authorisation from FINMA. The distribution of a foreign Alternative Investment Fund to non-supervised qualified investors, such as pension funds, does not trigger the obligation to register or license such foreign Alternative Investment Fund with FINMA, but entails certain consequences as to the content of the fund’s documentation and the obligation of the foreign Alternative Investment Fund to appoint a Swiss representative and a paying agent in Switzerland, and the obligation of the Swiss representative to enter into a distribution agreement with each person distributing the fund to non-supervised qualified investors in Switzerland. The distribution of foreign Alternative Investment Funds to supervised qualified investors, such as banks, securities dealers, insurance companies or Swiss-licensed fund management companies or asset managers of collective investment schemes, is not considered to be a distribution activity subject to authorisation by FINMA. The specific regulatory requirements applicable to the distribution of foreign collective investment schemes to non-qualified investors as well as to non-supervised qualified investors are further detailed below (see questions 3.2 to 3.5).


The Swiss regulatory regime distinguishes between open-ended and closed-ended collective investment schemes. The main differences between open-ended and closed-ended collective investment schemes are the different rules regarding the redemption of shares/units of collective investment schemes and different legal structures. Open-ended collective investment schemes must be established in the form of either a contractual fund or an investment company with variable capital (“SICAV”). On the other hand, closed-ended collective investment schemes may only be set up as either a limited partnership for collective investments (“LP”) or an investment company with fixed capital (“SICAF”).



The establishment and operation of Alternative Investment Funds (“AIFs”) (and their managers) is mainly governed by the Swiss Collective Investment Schemes Act (“CISA”) and the implementing ordinance, the Collective Investment Schemes Ordinance (“CISO”). Further, the Swiss Financial Market Supervisory Authority (“FINMA”) has enacted additional ordinances that provide for specific rules regarding (i) the investment policy, bookkeeping, valuation and publication duties of collective investment schemes (regulated in FINMA’s Collective Investment Schemes Ordinance), and (ii) the insolvency of collective investment schemes (regulated in FINMA’s Collective Investment Schemes Insolvency Ordinance). In addition, FINMA has published a number of circulars addressing specific areas of collective investment schemes law (such as the distribution of collective investment schemes). Further, a number of guidelines of the Swiss Funds & Asset Management Association (“SFAMA”) have been recognised as a minimum standard by FINMA. Hence, these are of general application, regardless of SFAMA membership.Investment companies that are incorporated as a Swiss corporation and that are either listed on a Swiss stock exchange or restricted to qualified investors (within the meaning of the CISA) do not fall within the scope of the CISA. Accordingly, the establishment and the operation of such investment companies are governed by Swiss corporate law and, in the case of a listed company, the listing rules and any additional regulations of the relevant stock exchange.


Asset managers of collective investment schemes are required to obtain a licence from FINMA regardless of whether they manage a Swiss or a foreign collective investment scheme. With respect to asset managers that only manage foreign collective investment schemes, the CISA provides for certain de minimis exemptions. The licence is subject to specific licence requirements that include, inter alia, minimum capital requirements and rules regarding the organisation and the operation of the asset manager.The mere advisory activity is not subject to any licensing requirements.


Switz

erla

nd

Swiss paying agent, unless the distribution is strictly limited to (i) supervised financial intermediaries (e.g. banks, securities dealers and insurance companies), or (ii) investors that entered into a written discretionary asset management agreement with a supervised financial intermediary and provided the distribution activities are made through such supervised financial intermediary.


Foreign managers or advisers cannot as such act as fund managers of Swiss funds. A Swiss fund management company, a SICAV, a Swiss asset manager of collective investment schemes and a Swiss representative of foreign collective investment schemes may, however, delegate certain fund administration activities, as well as asset management to foreign asset managers who are subject to a recognised supervisory body under certain circumstances. The tasks delegated to third parties shall be set out in written agreements. These shall include a precise description of the delegated tasks as well as the powers and responsibilities, any authorities in respect of further delegation, the agent’s duty to give an account of its activities, and the control rights of the licensee. The delegation of tasks may not hinder the audit by the audit company or supervision by FINMA. In particular, where tasks are delegated abroad, the licensee must be able to demonstrate that it, the regulatory audit company and FINMA are able to exercise their respective rights and enforce them under the law. The regulatory audit company must review the confirmatory documentation before outsourcing takes place.


In December 2012, FINMA entered into a co-operation arrangement with the EU securities regulators (represented by the European regulator ESMA) for the supervision of Alternative Investment Funds, including hedge funds, private equity and real estate funds. The co-operation arrangements include the exchange of information, cross-border on-site visits and mutual assistance in the enforcement of the respective supervisory laws. Such co-operation arrangement applies to Swiss Alternative Investment Fund managers (“AIFMs”) that manage or market Alternative Investment Funds in the EU and to EU AIFMs that manage or market AIFs in Switzerland. The agreement also covers co-operation in the cross-border supervision of depositaries and delegates of AIFMs.In addition, with respect to the distribution of foreign collective investment schemes to non-qualified investors, FINMA has entered into various agreements regarding co-operation and the exchange of information. As of 24 April 2017, FINMA had entered into such agreements with the supervisory authorities of Austria, Belgium, Denmark, Estonia, France, Germany, Guernsey, Hong Kong, Ireland, Jersey, Liechtenstein, Luxembourg, Malta, the Netherlands, Norway, Sweden and the United Kingdom.

2 Fund Structures


Swiss Alternative Investment Funds are often set up as open-ended contractual funds of the category of “other funds for alternative

The CISA further distinguishes open-ended funds based on the type of investments. Accordingly, securities funds, real estate funds, other traditional investment funds and Alternative Investment Funds each follow a different set of rules regarding the investment policy and permitted investment techniques.The CISA as such does not distinguish between different types of strategies. However, the Swiss limited partnership for collective investments (Kommanditgesellschaft für kollektive Anlagen/la société en commandite de placements collectifs) (“Swiss LLP”), which is provided by CISA, is often used as an investment vehicle for private equity, real estate and hedge funds.


The formation of a Swiss Alternative Investment Fund, as well as the formation of a Swiss Alternative Investment Fund manager, are subject to authorisation by FINMA. In addition to an extensive application that has to be filed with FINMA, a FINMA-recognised audit firm has to be appointed to carry out the review of the application in the case of the authorisation of a Swiss Investment Fund manager. For the purpose of the performance of this “entry audit”, such audit firm may not be the fund’s or the manager’s regular auditor.The duration of the authorisation process may vary and will depend on the complexity and the scope of the application, the applicable investment strategies and also on the organisation of the applicant.


Swiss Alternative Investment Funds are required to have their central administration in Switzerland. Accordingly, the ultimate supervision of the fund must be carried out in Switzerland. However, the delegation of investment decisions to third parties (including foreign entities) is possible, provided such third parties are subject to a recognised supervision and, furthermore, that a co-operation agreement has been entered into with the relevant jurisdictions where the third parties are located, in case such jurisdictions (typically European Union (“EU”) countries under the EU Directive on Alternative Investment Fund Managers (“AIFMD”)) require on their part that third countries conclude such co-operation agreements.The members of the executive board of Swiss fund management companies or Swiss asset managers of collective investment schemes are required to take up residence at a location which is suitable for the proper management of the business operations. Furthermore, both the members of the Board of Directors, as well as the persons responsible for management, must possess adequate professional qualifications.


Open-ended Swiss Alternative Investment Funds are required to appoint a custodian. The custodian must be a Swiss bank. Single Alternative Investment Funds may, subject to the approval of FINMA, also appoint a prime broker. If the prime broker is a licensed Swiss securities dealer or a Swiss bank, a separate custodian is not required.In addition, the fund management company, the SICAV, the SICAF and the LP must appoint an auditor.Foreign Alternative Investment Funds that are distributed in Switzerland are required to appoint a Swiss representative and a

Lenz & Staehelin Switzerland


Switz

erla

nd

restrictions in their articles of association to ensure that their shareholders are exclusively qualified investors.Typically, Swiss collective investment schemes, whether for alternative investments or not, provide for a compulsory redemption in their fund documentation in case an investor no longer meets the eligibility requirements to invest in the fund or if their investment in the fund could jeopardise the interests of all the other investors.


Generally, there are no other limitations on a manager’s ability to manage its funds than the investment restrictions as defined in the fund contract or fund regulations.

3 Marketing


The production and offering of marketing materials are governed by the CISA and its implementing ordinances. The production and offering of marketing materials of investment companies that are not subject to the CISA are governed by Swiss corporate law and, in the case of a listed investment company, the listing rules of the relevant stock exchange.Further, marketing activities in Switzerland are also subject to the Swiss legislation against unfair competition that provides for a number of prohibited marketing practices.


The minimum content requirements for marketing materials (i.e. prospectus, simplified prospectus, or key investor information document) are set out in the CISO and in the revised Guidelines on the Distribution of Collective Investment Schemes (“Distribution Guidelines”) as well as in the revised Guidelines on Duties Regarding the Charging and Use of Fees and Costs (“Transparency Guidelines”), which specify certain requirements regarding the distribution of funds and investor information, issued by SFAMA, and which entered into force on 1 July 2014. According to the relevant provisions, the prospectus of a Swiss Alternative Investment Fund must contain, inter alia, information on: (i) the Alternative Investment Fund, such as place of incorporation, types of shares/units and the rights attached thereto; (ii) the modalities and conditions for the repayment and/or redemption of shares/units; (iii) the investment policy and investment restrictions; (iv) the fees payable to the fund management company, the custodian and any other third party; (v) other fees and costs, such as performance fees, commissions, retrocessions and other financial benefits and rebates; (vi) the relevant tax provisions (including any withholding taxes); (vii) the fund management company and the custodian; and (viii) third parties that carry out delegated tasks.With respect to the distribution of funds to non-qualified investors, FINMA will verify in the context of the registration process the contents of such foreign funds prospectus. That prospectus has to be completed with a “Swiss wrapper”, containing specific Swiss information, including the name of the Swiss representative and of the paying agent, the place where the prospectuses, the last annual

investments”. Contractual funds are based on a collective investment agreement under which a fund management company commits itself to managing the fund’s assets in accordance with the provisions of the fund contract at its own discretion and of its own account. A different Swiss legal structure that could be used for Alternative Investment Funds is the SICAV launched as an “other fund for alternative investments”. The SICAV is also an open-ended fund structure. Further, Swiss law provides for a “closed LP”. However, only a few Swiss LPs have been established so far and they are typically used for private equity investments or investments in real estate projects.


The liability of investors is capped at the amount of their investments in the Swiss Alternative Investment Fund. In the case of an umbrella fund, investors are only entitled to the income and assets of the respective sub-fund in which they are participating and each sub-fund is only liable for its own liabilities.


Typically, Swiss managers and advisers are incorporated as a corporation within the meaning of art. 620 et seq. of the Swiss Code of Obligations. According to the CISA, a Swiss-based manager must use one of the following Swiss legal structures: (i) corporation; (ii) partnership limited by shares; (iii) limited liability company; (iv) general partnership; or (v) limited partnership.Foreign asset managers of collective investment schemes may, subject to certain additional requirements, open a branch in Switzerland.


Investors in open-ended funds are, in principle, entitled to request the redemption of their units and payment of the redemption amount in cash at any time. This right to redeem at any time may only be restricted in the case of collective investment schemes whose value is difficult to ascertain, or which have limited marketability (e.g. investments which are not listed or traded on another regulated market open to the public; mortgages; or private equity investments). In any event, the right to redeem at any time may only be suspended for a maximum period of five years and such restrictions must be stated explicitly in the fund’s regulations and in the prospectus.


The transferability of investors’ interests in an Alternative Investment Fund depends on the fund’s legal structure. Generally speaking, there are no legislative restrictions on transfers of investors’ interests in open-ended Alternative Investment Funds. However, restrictions may be provided for in the fund’s regulations. This would be the case if a contractual fund or a SICAV were not open to retail clients.Further, the Swiss LP is, by design, a legal structure that is only available to qualified investors. Consequently, interests in an LP may only be transferred to other qualified investors.Finally, investment corporations that do not fall within the scope of the CISA (see question 1.1) are required to provide for transfer



Switz

erla

nd

custodian’s organisation, investor rights and investment policy, is equivalent to the provisions of the CISA; (iii) the designation of the collective investment scheme does not give reason for deception and confusion; (iv) appointment of a Swiss representative and a Swiss paying agent; and (v) FINMA and the foreign supervisory authorities have entered into an agreement on the co-operation and exchange of information regarding the distribution of the fund. As a matter of practice, since a couple of years ago, FINMA has only registered investment funds which are organised as Undertakings for Collective Investments in Transferable Securities (“UCITS”). Due to the FINMA practice which requires that a non-UCITS fund meets equivalent criteria to those which apply to Swiss Alternative Investment Funds, there have been no new registrations of foreign Alternative Investment Funds in Switzerland recently. Existing foreign Alternative Investment Funds are grandfathered.


If a foreign Alternative Investment Fund has not been approved for distribution to retail clients in Switzerland, the fund’s manager and any third-party distributor must ensure that the fund is only distributed to qualified investors. According to the CISA, the following investors are considered as qualified investors: (i) supervised financial intermediaries (i.e. banks, securities dealers, insurance companies, fund management companies, asset managers of collective investment schemes and central banks); (ii) public bodies and pension funds with professional treasury management; (iii) corporations with professional treasury management; (iv) investors that have entered into a written discretionary asset management agreement with a supervised financial intermediary or an independent asset manager, provided such investors have not opted out of their qualified investor status; (v) independent asset managers (if the relevant independent asset manager meets the requirements of the CISA and undertakes in writing to exclusively use the fund-related information for clients who are themselves qualified investors); and (vi) high-net-worth individuals, provided they have declared that they may be considered as qualified investors.


Public bodies such as government pension funds are considered qualified investors provided that the assets are managed on a “professional basis”. The marketing and subsequent distribution of Alternative Investment Funds to qualified investors do not need to be authorised by FINMA. In particular, there are no rules that require the fund’s manager, investment adviser or placement agents to obtain a separate licence or registration to market the fund’s shares/units to public bodies. However, to market and distribute foreign Alternative Investment Funds to such non-supervised qualified investors (including public bodies), a Swiss representative and a Swiss paying agent must be appointed and distribution agreements have to be entered into between the relevant Swiss representative and the persons distributing the Alternative Investment Fund in Switzerland. In addition, pension funds are subject to certain investment restrictions (see question 3.9).


The fundraising process is considered a part of the distribution of collective investment schemes. Consequently, any third parties that

and semi-annual reports as well as the articles of association can be obtained without costs. Swiss law also requires, for private placements to non-supervised qualified investors, that the prospectus (or any other marketing documentation) contain information on the identity of the Swiss representative and paying agent, the place where the prospectus, the annual and semi-annual reports as well as the articles of association can be obtained free of charge and the place of jurisdiction in Switzerland.In addition, the fund’s regulations and the prospectus distributed to non-qualified investors in Switzerland must contain a notice regarding the special risks involved in alternative investments. The wording of such warning clause must be approved by FINMA and must be placed on the first page of the fund’s regulations and the prospectus.Unlike traditional investment funds, Alternative Investment Funds are not required to prepare a simplified prospectus or a key investor information document.


Swiss Alternative Investment Funds must submit their prospectus and any amendments thereto to FINMA. Foreign Alternative Investment Funds must only submit their prospectus to FINMA (along with any other relevant fund documentation) if they distribute their shares/units to non-qualified investors in Switzerland. Accordingly, no registration or approval of the marketing or legal documents of foreign Alternative Investment Funds is required as long as the shares/units of such funds are exclusively distributed to qualified investors. In respect of foreign Alternative Investment Funds, the placement restrictions applicable to the distribution of all non-registered funds applies (see also question 3.6 below), whereby a distinction must be made between the placement to non-supervised qualified investors as opposed to the placement to supervised institutions, as well as within the context of discretionary asset management agreements (in which case no “distribution” is deemed to occur).


There are no specific restrictions on the marketing of Swiss Alternative Investment Funds. However, reference to the special risks involved in alternative investments must be made in the fund’s name, prospectus and other marketing materials (see also question 3.2). Additionally, Swiss Alternative Investment Funds that are incorporated as an LP may only be marketed and distributed to qualified investors (see question 3.5).


Swiss Alternative Investment Funds can be marketed to retail investors. However, Alternative Investment Funds that are structured as an LP may not be marketed to retail investors, but only to qualified investors. In addition, the fund’s regulation may provide for further restrictions with respect to retail clients.Foreign collective investment schemes may be marketed to retail investors if they were authorised for distribution in Switzerland by FINMA. In order to obtain an authorisation, the following criteria have to be met: (i) the collective investment scheme, the fund management company or the fund company, the asset manager as well as the custodian, are subject to public supervision intended to protect investors; (ii) the regulatory framework regarding the fund management company’s or the fund company’s as well as the



Switz

erla

nd



Alternative Investment Funds or its manager must prepare a prospectus that has to include, inter alia, information on the investment policy, investment techniques, and any fees paid to managers and third parties (see question 3.2). In addition, the fund or its manager must publish the fund’s regulations and prepare annual and semi-annual reports (see question 5.2). Investors may request the disclosure of additional information, such as the basis for the calculation of the net asset value per unit or information on specific business transactions effected by the fund.


Open-ended collective investment schemes are required to keep separate accounts and to publish an annual report within four months of the end of the financial year. Such annual report has to include, inter alia, financial statements, information on the number of shares/units redeemed and newly issued during the financial year, the inventory of the fund’s assets at market value, the performance of the open-ended collective investment scheme, as well as a short-form report by the auditors regarding the information provided in the annual report.In addition, open-ended collective investment schemes are required to publish a semi-annual report within two months of the end of the first half of the financial year. The semi-annual report must include, inter alia, an unaudited statement of net assets or an unaudited balance sheet and income statement, respectively.Further, the fund management companies and the SICAV must publish the net asset value of their funds at regular intervals.


The use of side letters is, as such, not expressly restricted or prohibited. However, the use of side letters raises delicate issues in light of the principle of the equality of treatment which applies strictly among investors in the context of Swiss Alternative Investment Funds. Where the use of side letters leads to potential conflicts of interest, the Alternative Investment Fund and/or its manager has to implement effective measures to detect, prevent and supervise such conflicts of interest. If conflicts of interest arising from the use of side letters cannot be avoided, the side letter arrangement has to be disclosed. In addition, side letter arrangements that cannot be justified by objective reasons (e.g. enticing early investors or attracting investors that are willing to contribute a large amount of assets) could be considered a breach of the CISA’s rules of conduct, in particular the duty of loyalty, and could trigger civil liability as well as administrative measures.

6 Taxation


Swiss collective investment schemes (i.e. a contractual fund, SICAVs and LPs) are viewed in a transparent manner from

assist in the fundraising process, such as placement agents or other intermediaries, are considered distributors of collective investment schemes. Swiss distributors of collective investment schemes are required to obtain a licence from FINMA. Foreign distributors may only engage in distribution activities in Switzerland if (i) the fund is exclusively distributed to qualified investors, (ii) the foreign distributor is subject to adequate supervision in its home country, and (iii) the distributor entered into a distribution agreement with the Swiss representative.


There are no restrictions per se. However, certain financial institutions and other qualified investors, such as pension funds and insurance companies, are only allowed to invest a certain amount of their net assets in Alternative Investment Funds.

4 Investments


Alternative Investment Funds may only (i) pledge or cede as collateral up to 100 per cent of the fund’s net assets, and (ii) commit to an overall exposure of up to 600 per cent of the fund’s net assets. The fund’s regulations must explicitly set out those investment restrictions.Further, Swiss Alternative Investment Funds are allowed to engage in short selling transactions, but only to the extent permitted in the fund’s regulations.


According to the CISO, the following types of investments can be included in a Swiss Alternative Investment Fund: securities; units in collective investment schemes; money market instruments; sight and time deposits with a maturity of up to 12 months; precious metals; derivative financial instruments; and structured products. In addition, FINMA may authorise other investments such as commodities and commodity certificates.Any investment that (i) has only limited marketability, (ii) is subject to strong price fluctuations, (iii) exhibits limited risk diversification, or (iv) is difficult to value, may only be made if it is explicitly permitted under the fund’s regulations.


Alternative Investment Funds may only raise loans for an amount of up to 50 per cent of the fund’s net assets, provided that this is expressly laid down in the regulations on Swiss Alternative Investment Funds.



Switz

erla

nd

or partially, depending on the terms of the applicable double taxation treaty, if any (see question 6.1). There is in general no special tax regime for pension fund investors in Alternative Investment Funds. A number of double taxation treaties do, however, allow for a full withholding tax refund for taxes paid on dividends to a pension fund. Furthermore, a collective investment scheme whose investors consist exclusively of tax-exempt domestic occupational pension institutions may apply for the declaration procedure for the purposes of the withholding tax. Certain foreign occupational pension institutions are considered tax-exempt investors for transfer stamp duty purposes.


The laws and regulations applicable to Swiss collective investment schemes are clear. Thus, it is generally not necessary to obtain a tax ruling as regards the Alternative Investment Fund itself. This being said, when an entire structure is set up, including an asset manager in Switzerland with Alternative Investment Funds located offshore, then it is market practice to require rulings from the competent local tax authorities in respect mainly, but not exclusively, of the allocation of profits between the different entities of the structure (i.e. asset manager in Switzerland, manager offshore, and investment funds). Furthermore, when dealing with private equity or hedge funds, tax rulings may be necessary to confirm the tax treatment of the carried interest or performance fees. In this respect, the practice of the tax authorities may vary widely from one Swiss canton to another.In light of developments regarding the spontaneous exchange of information in tax matters, such a ruling may be subject to a spontaneous exchange of information with the tax authorities of countries of residence of entities involved in the structure and the country of residence of the ultimate shareholder of the structure.


Switzerland has entered into a FATCA inter-governmental agreement (“IGA”). This Swiss IGA follows the Model 2 IGA. Accordingly, a Swiss Financial Institution (as such term is defined in the Swiss IGA) is required to register with the US Internal Revenue Service (“IRS”) and enter into a Foreign Financial Institution (“FFI”) agreement. Under the Swiss IGA, the Reporting Swiss Financial Institution will report its US-related accounts directly to the IRS. Further, it should be noted that the Swiss IGA provides for certain exemptions with respect to Swiss collective investment schemes. The Swiss IGA, as well as the Swiss Federal Act on the Implementation of the FATCA Agreement with the United States of America, entered into force on 30 June 2014 and non-compliance with the provision of the Act or the Swiss IGA may be sanctioned by a fine of up to CHF 250,000. Unlike most jurisdictions, which have entered into a Model 1 type IGA, Switzerland has not issued any official guidance notes regarding the implementation of the Swiss IGA. However, a committee known as the FATCA Qualification Committee, headed by the State Secretariat for International Financial Matters (“SIF”) and consisting of representatives of the major financial industry associations including SFAMA, publishes a Q&A section in order to provide some assistance regarding questions arising from the implementation of the Swiss IGA.Switzerland has also created the necessary legal basis for the implementation of CRS. The national legislation entered into force and data is being collected as of 1 January 2017.

a Swiss corporate income tax perspective. They are thus not subject to Swiss corporate income taxes on their income or gains (except if they directly hold real estate situated in Switzerland. A collective investment scheme directly holding real estate situated in Switzerland may nevertheless be tax-exempt for the purposes of corporate income tax if its investors consist exclusively of tax-exempt occupational pension institutions).Distributions made by Swiss collective investment schemes are subject to withholding tax at a 35 per cent rate, unless they correspond to distributions of capital gains or income realised from real estate held directly by the fund. Swiss investors may claim the refund of withholding tax if they declare the income in their tax return or account for it in their financial statements. Foreign investors may qualify for an exemption from Swiss withholding tax under the so-called affidavit procedure (exemption provided for by Swiss internal law irrespective of the applicability of a treaty). This requires that more than 80 per cent of the Swiss collective investment scheme’s assets are from a non-Swiss source and that the investors demonstrate (typically via their bank) that they are not Swiss residents. Foreign-resident investors may further qualify for a partial or total exemption from Swiss withholding tax under a double taxation treaty existing between their country of residence and Switzerland. The relief is typically granted by way of reimbursement rather than by way of exemption.SICAF and investment companies that are incorporated as a Swiss corporation not regulated under the CISA (see question 1.1) are taxed as corporate entities and hence subject to corporate income tax and tax on net equity. In addition, their distributions are subject to withholding tax at a 35 per cent rate.


Swiss investment managers/advisers are subject to corporate income tax at federal, cantonal and communal levels on their net profit as accounted for in the statutory financial statements and, as the case may be, adjusted for tax purposes. They may also be subject to tax on their net equity at cantonal and communal levels. There is no special tax status available for investment managers/advisers.


Liability for issuance stamp duty does not generally arise on the issuance and redemption of Swiss collective investment scheme shares/units. However, the issuance of shares of a SICAF or any other investment company in the form of a Swiss corporation (see question 1.1) is subject to the Swiss issuance stamp duty. The discussion of the Swiss parliament on the proposal to abolish the issuance stamp duty has been suspended.Further, the transfer of shares/units in a Swiss collective investment scheme (irrespective of its legal form) is subject to a 0.15 per cent transfer stamp duty if a Swiss securities dealer (e.g. Swiss bank, Swiss broker-dealer, etc.) is involved in the transaction as a party or an intermediary.


Non-resident investors financially suffer the withholding tax paid by the fund, whereby such withholding tax may be recovered in full



Switz

erla

nd

7 Reforms


On 1 March 2013, the amended CISA entered into force. In addition to new rules for private placements of non-Swiss collective investment schemes, the amended CISA aligns the Swiss regulatory framework applicable to investment managers with international standards, in particular with the EU Directive on Alternative Investment Fund Managers (“AIFMD”), by requiring all Swiss investment managers of non-Swiss collective investment schemes to obtain an authorisation from FINMA. However, as Switzerland is part of neither the EU nor the European Economic Area (“EEA”), Swiss Alternative Investment Funds and Swiss Alternative Investment Fund managers will not yet be able to benefit from the EU passport rights provided for in the AIFMD and the respective national implementing laws. As a last part of the amended CISA, on 1 January 2014, a new duty to keep documentary records entered into force. This new obligation applies when a distributor (including any third parties mandated by such distributor) of an Alternative Investment Fund provides individual advice to an investor to buy units or shares in one or more Alternative Investment Funds. The documentary record must contain information on investment objectives and the investor’s risk profile, as well as the reasons for making the specific personal recommendation. It should be noted that this new obligation does not, however, apply in cases where the relevant marketing activity is not considered distribution within the meaning of the CISA (such as distribution of funds to supervised qualified investors).The revision of the CISA and CISO led to the issuance of a new circular of the Swiss financial regulator, the FINMA Circular “Distribution of Collective Investment Schemes” (FINMA-Circ. 2013/9). The FINMA Circular entered into force on 1 October 2013. In this context, on 22 May 2014 SFAMA issued its revised Distribution Guidelines as well as its revised Transparency Guidelines, which specify certain requirements regarding the distribution of funds and investor information. The Guidelines have been recognised as a minimum standard by FINMA. This means that the Guidelines are of general application, regardless of SFAMA membership. The Guidelines entered into force on 1 July 2014 (see question 3.2).The Distribution Guidelines are applicable to fund promoters, in particular to fund managers, SICAVs and Swiss Representatives of foreign funds distributed in Switzerland. The Distribution Guidelines incorporate several provisions applicable to distributors (“Provisions for Distributors”). The Provisions for Distributors must be incorporated in the distribution agreement entered into between the foreign distributors and the Swiss representative. As of 1 July 2014, the Distribution Guidelines are applicable to all distributors and representatives that started their activities after 1 March 2013. Existing distribution agreements had to be amended by 30 June 2015.In substance, the Transparency Guidelines are applicable to Swiss representatives of foreign funds, and distributors (Swiss or foreign) of these funds in Switzerland. In particular, the Transparency Guidelines apply to foreign funds distributed to qualified investors and non-qualified investors by their incorporation by reference in the distribution agreement entered into with the Swiss representative.Further, in November 2015, the Swiss Federal Council published a new law on financial services, inter alia, aimed at improving investor protection. Among the measures proposed are, inter alia, the introduction of cross-sector rules of business conduct,

Certain collective investment schemes may qualify as non-reporting financial institutions. Additionally, for an automatic exchange of information to actually take place, an international agreement between the respective countries is needed. Switzerland has entered into such agreements with various countries (i.a. the EU Member States, Japan, Canada and Australia).


Switzerland, as a member of the OECD, has actively participated in the base erosion and profit-shifting (“BEPS”) project. The Federal Council has instructed the Federal Department of Finance (“FDF”) to offer analyses and proposals in order to implement the outcomes.Currently, Switzerland is undergoing a third series of corporate tax reforms. These reforms address certain BEPS outcomes. In particular, a patent (or royalty) box that complies with internationally accepted standards is to be introduced and internationally criticised tax regimes are to be abolished. However, the Swiss voters rejected the proposal in February 2017. The Federal Council charged the FDF to draw up the substantive parameters for a new tax proposal including the abolishment of special tax arrangements for status companies. The foreseen exchange of information on tax rulings requires a legal basis in Swiss law. Switzerland has ratified the multilateral administrative assistance convention of the Organisation for Economic Cooperation and Development (“OECD”)/Council of Europe and put in place national legislation on this matter. Additionally, the total revision of the Tax Administrative Assistance Ordinance (“TAAO”) entered into force on 1 January 2017. The new ordinance defines the framework and the procedures required for the spontaneous exchange of information. The implementation of country-by-country reports is also in need of legal foundations. To this effect, the Federal Council adopted the dispatch on the multilateral agreement on the exchange of country-by-country reports and the federal act required for its implementation. Treaty abuse is combatted through the respective anti-abuse clauses in double taxation treaties. Switzerland will, in light of the OECD’s work, make the necessary adjustments either multilaterally or bilaterally where the new standard does not already apply.Regarding the other recommendations not part of the minimum standards, the Federal Council has charged the FDF to collaborate with the cantons and business circles to conduct further analysis on the amendment of Swiss corporate tax law in accordance with international developments.






This is not applicable, besides the changes mentioned under question 6.7 above.



Switz

erla

nd

While Lenz & Staehelin is acknowledged by most as Switzerland’s leading law firm, its connections and expertise span the globe. With over 200 lawyers, its ability to innovate and adapt to the ever-changing complexities of legal and regulatory environments in Switzerland and beyond has attracted many of the world’s top corporations as well as private individuals.

Continuity, stability and a pragmatic understanding of the big picture have all played a significant part in the firm’s development and success – and in its ability to attract the best young talent. Swiss-orientated but globally attuned, Lenz & Staehelin is rightly recognised in Switzerland and abroad as ‘The world’s Swiss law firm’.

Dr. François Rayroux has been a partner with Lenz & Staehelin since 1998. He is considered a leading lawyer in banking and financial services in Switzerland. As such, he has been nominated by various professional organisations as an expert in Switzerland in banking, financial as well as capital markets law, including by Chambers in 2016 as a leading individual in Investment Funds. François Rayroux is the co-head of the Banking and Finance group of Lenz & Staehelin in Geneva. He advises a number of Swiss and international financial institutions in all banking and regulatory matters, with a particular focus on funds management and distribution as well as all types of financial products; in particular, derivative instruments. François Rayroux teaches investment funds law in professional organisations and is also a frequent speaker at professional conferences on banking and financial law issues.

Dr. François RayrouxLenz & StaehelinRoute de Chêne 30CH-1211 Geneva 6Switzerland

Tel: +41 58 450 70 00Fax: +41 58 450 70 01Email: [email protected]: www.lenzstaehelin.com

Dr. Patrick Schleiffer has been a partner with Lenz & Staehelin since 2002 and is co-head of the capital markets group in Zurich and regarded as a leading expert on financial market law, particularly capital markets, stock exchange and securities law, investment fund law, financial services regulation and corporate law and corporate governance matters. Patrick Schleiffer holds lic. iur. and Ph.D. degrees from the University of Zurich and an MCJ degree from the New York University School of Law. He was admitted to the Zurich Bar in 1995 and to the New York Bar in 1997. Patrick Schleiffer is admitted as a recognised representative for the listing of securities on the SIX Swiss Exchange. He is a frequent speaker at professional conferences on capital market and banking law topics. He is co-editor of the Swiss internet-based law journal CapLaw and the newsletter editor of the Securities Law Committee of the International Bar Association (IBA).

Dr. Patrick SchleifferLenz & StaehelinBrandschenkestrasse 24CH-8027 ZurichSwitzerland

Tel: +41 58 450 80 00Fax: +41 58 450 80 01Email: [email protected]: www.lenzstaehelin.com

the improvement of product documentation for clients and stricter rules for the cross-border distribution of financial products into Switzerland. The debate on this new law started in the Swiss Parliament in December 2016. The new law is expected to be approved by the Swiss Parliament in June 2018 and should enter into force in 2020, at the earliest.



Chapter 35

Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Heather Cruz

Anna Rips

USA

limited liability protections applicable to investors in such entities. Delaware also has sophisticated court systems that are experienced in matters involving alternative entities, and the governing statutes generally support the principles of freedom of contract among sponsors, managers and investors to order their affairs as they wish. All of these factors make Delaware the most common choice for U.S.-domiciled Alternative Investment Funds.


Investment advisers to Alternative Investment Funds are subject to regulation by the SEC under the Advisers Act and by the state securities regulators in the states in which the adviser conducts business.In general, an adviser is required to register with the SEC if it has at least $110 million in assets under management (“AUM”), subject to certain exemptions. Advisers with less than $110 million but more than $100 million AUM may but are not required to register with the SEC. Advisers with less than $100 million in AUM are generally prohibited from registration with the SEC and instead must comply with the registration requirements of the states in which the adviser conducts business. The state-level registration requirements and exemptions vary on a state-by-state basis.Registering as an investment adviser with the SEC provides for pre-emption from the various state registration requirements. However, investment advisers that are exempt from registration with the SEC or are ineligible to register with the SEC based on their AUM may be required to comply with multiple states’ investment adviser regimes. Generally, a non-U.S. adviser may register with the SEC regardless of its AUM. Further, under the SEC’s “territorial” approach to Advisers Act jurisdiction, a non-U.S. adviser that is registered with the SEC is generally subject to the substantive requirements of the Advisers Act only with respect to its U.S. clients.In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) revised the exemptions applicable to investment advisers in the United States. Prior to the Dodd-Frank Act, many investment advisers were exempt from both SEC and state registration by virtue of the “private adviser exemption”, which exempted any adviser that (i) had fewer than 15 clients during the course of the preceding 12 months, and (ii) neither held itself out generally to the public as an investment adviser nor acted as an investment adviser to any registered investment company or business development company. The Dodd-Frank Act eliminated the private adviser exemption and in its place introduced certain narrower exemptions, which are summarised below.



In the United States, Alternative Investment Funds and their advisers are subject to the laws of the federal government and of the individual state or jurisdiction in which the entities are incorporated, doing business and/or selling securities.At the federal level, investment companies organised in and/or operating in the United States, including Alternative Investment Funds, are generally subject to the jurisdiction of the Securities and Exchange Commission (“SEC”). The SEC’s jurisdiction comes by way of the Investment Company Act of 1940, as amended (“Investment Company Act”), which governs the activities of investment companies, and the Investment Advisers Act of 1940, as amended (“Advisers Act”), which governs the operations and activities of investment advisers. In addition, the offering and sale of interests in Alternative Investment Funds is regulated by the SEC under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”), and are also regulated by the Financial Industry Regulatory Authority (“FINRA”), a self-regulatory agency.In addition, depending on the activities of the Alternative Investment Fund, other federal regulators may have jurisdiction over the Alternative Investment Fund or its adviser. Alternative Investment Funds that invest in futures, options on futures, or swaps (other than certain security-based swaps) are subject to the jurisdiction of the Commodity Futures Trading Commission (“CFTC”). Further, Alternative Investment Funds sponsored by banks or bank holding companies may also be subject to certain requirements under the federal banking laws and may be subject to the jurisdiction of the Board of Governors of the Federal Reserve System (“Federal Reserve”). Alternative Investment Funds that trade or invest in electricity are subject to regulation by the Federal Energy Regulatory Commission (“FERC”).Most Alternative Investment Funds operating in the United States are formed as limited partnerships or limited liability companies and are therefore subject to the laws of their state or jurisdiction of incorporation. Alternative Investment Funds offered in the United States may be formed either under the laws of a U.S. state or in a non-U.S. jurisdiction. Alternative Investment Funds that are domiciled in the United States are typically formed in the state of Delaware, which offers well-established statutes governing the formation and operation of alternative entities, including the


USA

pursuant to the Investment Company Act. However, most Alternative Investment Funds qualify for an exemption or exclusion from registration under the Investment Company Act and therefore from most of its substantive requirements. Most Alternative Investment Funds are designed to qualify for the exclusions provided by Sections 3(c)(1) or 3(c)(7) of the Investment Company Act. Section 3(c)(1) provides an exclusion for any fund whose securities are beneficially owned by not more than 100 persons and which does not publicly offer its securities. Section 3(c)(7) provides an exclusion for any fund whose securities are owned exclusively by “qualified purchasers”; i.e., purchasers who meet certain net worth/investor sophistication tests and who do not publicly offer their securities. Alternative Investment Funds that are exempt from registration are still subject to certain requirements under the Investment Company Act, such as anti-pyramiding requirements that limit investments in U.S.-registered investment companies.Further, as described above, investment advisers to Alternative Investment Funds are regulated pursuant to the Advisers Act. When an adviser registers under the Advisers Act, the adviser is required to report certain information about the adviser’s Alternative Investment Funds to the SEC on both Form ADV (the SEC’s annual reporting form, which is publicly available) and Form PF (a private fund reporting form which is kept confidential by the SEC). The SEC conducts periodic examinations of registered investment advisers and exempt reporting advisers, and at such examinations the SEC may inspect records relating to any Alternative Investment Funds advised by the investment adviser.

1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different types of funds or strategies (e.g. private equity v hedge)) and if so how?

In general, the U.S. regulations do not distinguish between open-ended and closed-ended Alternative Investment Funds. The new private fund reporting regime on Form PF seeks different information for hedge funds (which generally allow redemption rights) and private equity funds (which generally do not allow redemption rights in the ordinary course); however, this distinction does not impact the operations or strategies of the funds.


Unlike the securities laws in many other countries, U.S. federal securities laws do not provide for any suitability requirements, capital requirements, or qualification requirements for owners and key personnel of investment advisers. Rather than providing a comprehensive regulatory regime, the Advisers Act provides for disclosure requirements and imposes on advisers a broad fiduciary duty to act in the best interests of their clients. As a result, investors have the responsibility to negotiate their own arrangements with investment advisers based on the disclosure they receive.Investment advisers register with the SEC and with state securities regulators by filing Form ADV. Within 45 days of filing Form ADV, the SEC must either grant registration or institute an administrative proceeding to determine if registration should be denied.Form ADV is publicly available and consists of the following parts:1.5.1 Part 1A: this part requires information about the adviser’s

business practices, ownership and employees in a “check-the-box” or “fill-in-the-blank” format, although certain sections and schedules require brief, narrative disclosure about various matters, including disciplinary events. It is filed electronically with the SEC.

1.2.1 Foreign Private Adviser ExemptionTo be eligible for the Foreign Private Adviser Exemption, an adviser must: (i) have no place of business in the United States; (ii) have, in total, fewer than 15 clients (e.g., managed accounts or pooled investment vehicles) and investors in the United States in private funds advised by the investment adviser; (iii) have less than $25 million in aggregate assets under management that are attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser; and (iv) neither hold itself out generally to the public in the United States as an investment adviser nor act as an investment adviser to any registered investment company or business development company.Advisers relying on the Foreign Private Adviser Exemption are not subject to reporting or recordkeeping provisions under the Advisers Act and are not subject to examination by the SEC. While this exemption is narrow in scope, the full exemption it provides from the Advisers Act is desirable for many non-U.S. investment advisers.1.2.2 Private Fund Adviser ExemptionThe Private Fund Adviser Exemption provides an exemption for investment advisers to private funds only with less than $150 million in assets under management in the United States. For investment advisers with their principal office and place of business outside the United States, the exemption applies if (x) the investment adviser has no client that is a U.S. person except for one or more private funds,1 and (y) all assets managed by the investment adviser at a place of business in the U.S. are solely attributable to private fund assets, with a total value of less than $150 million.Advisers exempt under the Private Fund Adviser exemption are subject to certain SEC reporting and recordkeeping requirements with respect to their private funds. The “place of business” requirement allows a non-U.S. adviser to manage an unlimited amount of private fund assets from outside the United States, which allows many non-U.S. advisers to make use of the Private Fund Adviser Exemption.1.2.3 Venture Capital Fund Adviser ExemptionThe Venture Capital Fund Adviser Exemption exempts from registration investment advisers that solely advise venture capital funds. The definition of “venture capital fund” is relatively narrow, encompassing any private fund that: (i) holds no more than 20 per cent of the fund’s capital commitments in non-qualifying investments as defined by the SEC (other than short-term holdings); (ii) does not borrow or otherwise incur leverage, other than limited short-term borrowing (excluding certain guarantees); (iii) does not offer its investors redemption or other similar liquidity rights except in extraordinary circumstances; (iv) represents itself as pursuing a venture capital strategy to its investors and prospective investors; and (v) is not registered under the Investment Company Act and has not elected to be treated as a business development company.Like the advisers exempt under the Private Fund Adviser Exemption, advisers exempt under the Venture Capital Fund Adviser Exemption are subject to certain SEC reporting and recordkeeping requirements with respect to their private funds.Advisers relying on the Private Fund Adviser Exemption or the Venture Capital Fund Adviser Exemption are referred to as “exempt reporting advisers” by the SEC, reflecting the fact that these advisers are not registered but are subject to SEC reporting and recordkeeping requirements.


In the United States, Alternative Investment Funds are regulated

Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates USA


USA


The regulations discussed in the answer to question 1.1 above will apply to any foreign manager or adviser wishing to manage, advise, or otherwise operate funds domiciled in the United States. Further, as stated in the answer to question 1.6 above, a non-U.S. adviser registering with the SEC must consent to appointing the Secretary of the SEC as such adviser’s agent for receiving service of process. If the non-U.S. manager or adviser is operating a fund domiciled in the U.S. that is investing in certain industries or assets that may implicate U.S. national security, the Committee on Foreign Investment in the United States (“CFIUS”) could review those transactions if they might result in control of a U.S. business by a foreign person. A portfolio company owned by a fund generally would be deemed controlled by the non-U.S. manager or adviser to such fund.


The United States government authorities have entered into a memoranda of understanding with numerous governments and regulators, including almost all EU countries in connection with the implementation of the AIFMD. The agreements underlying such MOUs vary country by country, and may permit on-site visits, sharing of information, and provision of other types of reciprocal assistance among regulators party to each such MOU with respect to investment advisers, including investment advisers to Alternative Investment Funds.

2 Fund Structures


Alternative Investment Funds organised in the U.S. most commonly take the form of a limited partnership organised in Delaware. The Delaware limited partnership allows great flexibility in the terms governing the relationship between the sponsor, as general partner, and the investors, as limited partners. Delaware has a relatively well-developed body of law governing partnerships and experienced courts, and the resulting legal certainty together with the fact that practitioners in major legal centres in the U.S. are likely to be familiar with Delaware partnership law contribute to the general tendency to use Delaware partnerships. The limited partnership form’s prevalence among Alternative Investment Funds is attributable to the limited liability status it affords investors as limited partners, the flow-through treatment it receives for U.S. federal and state income tax purposes, and the operational efficiencies of capital (as opposed to share) accounting. In general, a Delaware limited liability company offers equivalent advantages, but it remains a less commonly used vehicle for Alternative Investment Funds due to the widespread familiarity with limited partnerships. In addition, limited liability companies may attract franchise taxes in certain jurisdictions within the United States and are not treated as transparent in certain non-U.S. jurisdictions for foreign tax and treaty purposes. Delaware statutory trusts offer advantages similar to those of a limited partnership but also are not commonly used for Alternative Investment Funds.

1.5.2 Part 1B: this part requires additional information about certain Part 1A responses, as well as narrative disclosure with respect to disciplinary events. It is only completed by advisers registered with one or more states and is filed electronically with the states.

1.5.3 Part 2A: this part is known as the “brochure”. It requires a narrative, plain English response to a number of specific items, including a description of the business, fees and compensation, disciplinary information, and key risk factors. It is filed electronically with the SEC and delivered to clients.

1.5.4 Part 2B: this part is known as the “brochure supplement”. It requires résumé-like information about certain personnel of the adviser who provide advisory services to the particular client. The brochure supplement does not have to be filed with the SEC for federally-registered advisers but must be delivered to relevant clients of the adviser.

The SEC uses the information provided in Part 1 of Form ADV for regulatory purposes, including determining whether to approve the registration of a new adviser. Part 2 of Form ADV includes information that must be provided to clients. Advisers must keep their Form ADV current by filing periodic amendments as long as they are registered. Amendments are required promptly in accordance with Form ADV instructions in the event that certain types of information become inaccurate (such as identifying information, custody information and disciplinary information), or certain other types of information become materially inaccurate (such as information about successions, client transactions and control persons). Amendments are otherwise required at least annually within 90 days of the adviser’s fiscal year-end.


The SEC does not impose any local residence requirements for a registered adviser. However, as part of the registration process, a non-U.S. adviser registering with the SEC or with a state must consent to appointing the Secretary of the SEC and/or the applicable Secretary of State as the adviser’s agent to receive service of process in the United States. Additionally, if an Alternative Investment Fund or its investment adviser is domiciled in a particular state, that state may have similar requirements regarding the appointment of an agent for service of process.


Alternative Investment Funds typically engage service providers including accountants, auditors, administrators and custodians. One or more prime brokers may be engaged as well, and the adviser will typically engage legal counsel with respect to the formation and offering of the Alternative Investment Fund.Most of these engagements are customary rather than required, although in certain cases the applicable laws will indirectly require the use of certain service providers. For example, the Advisers Act requires that any registered adviser with custody of client funds or securities take certain steps to safeguard those assets. These steps include maintaining the client funds and securities with a “qualified custodian” (which includes banks, broker-dealers, and certain non-U.S. financial institutions that customarily hold such assets separate from their own). The qualified custodian may be the adviser or an affiliate thereof; although in such cases the adviser or affiliate is required to undergo an annual examination by an independent public accountant.



USA

through a seat on a limited partnership advisory board provided for in the partnership agreement will fall within this safe harbour. Even if the limited partner’s conduct falls outside of the statute’s safe harbours, the limited partner will only be liable to persons transacting business with the limited partnership that reasonably believed, based upon the limited partner’s conduct, that the limited partner is a general partner. The position under the limited liability company statute in Delaware is slightly better because it does not contain an exception to the limited liability status of the members of a limited liability company that is based on their participation in control or management, though in most cases this is unlikely to be critical given the extensive protections described above for limited partners.Note that the limited liability of limited partners and members of limited liability companies described above relates to liability arising from their status as such, and is not a general shield against liabilities they may incur due to actions giving rise to any independent basis for liability. Moreover, in the case of both the partnership and the limited liability company, all amounts distributed to investors may be clawed back in certain bankruptcy or fraudulent conveyance scenarios to pay partnership liabilities unless otherwise agreed in the organisational document. In addition, courts may (though rarely) apply a doctrine similar to “piercing the corporate veil” in the context of corporations to find limited partners or members liable for partnership or company debts or obligations in cases of actual fraud. In no event would an investor be liable for more than the amounts contributed by it and amounts distributed to it.


Fund sponsors may control the Alternative Investment Fund and receive compensation solely through the general partner (or equivalent governing body) of the fund vehicle. However, they often choose to divide this role between the general partner and a separate vehicle, usually called the “manager”. The manager, acting pursuant to a management agreement with the Alternative Investment Fund, manages the fund’s day-to-day operations, and often enters into transactions on behalf of the fund pursuant to a power of attorney. These services are provided in return for a fee, typically calculated as a percentage of commitments, capital contributed to the fund, net asset value of the fund or some combination thereof. The general partner retains ultimate control of the management of the fund delegated to the manager, and receives some share of the fund’s profit in the form of an allocation or distribution, commonly referred to as an “incentive allocation”, “carried interest” or “promote”. The general partner often also serves as the vehicle through which the sponsor contributes capital to the fund.The decision to bifurcate the sponsor’s role and compensation as between the general partner and the manager results from the interplay of various liability and tax considerations. A general partner of a fund organised as a partnership is likely to face greater exposure to liability than a manager providing services pursuant to contract due to the general partner’s unlimited liability for the debts and obligations of the partnership, as well as the liabilities associated with any duties and undertakings owed by the general partner to limited partners (for example, the general partner owes a duty of good faith and fair dealing to the limited partners under Delaware law but does not owe a fiduciary duty to them under Delaware law if the partnership agreement so states). This fact will often lead sponsors to seek to cordon off fund-specific liability by establishing a separate general partner for each fund or fund complex, while maintaining one manager entity to provide common infrastructure

Alternative Investment Funds are often structured as a complex of several pooled investment vehicles rather than one vehicle in order to accommodate the tax preferences of different types of investors (and occasionally regulatory requirements and investors’ internal policies). A common approach is to establish “parallel” or “mirror” funds that invest in a side-by-side manner. This allows the form and the jurisdiction of the organisation to be varied according to investor type, the most common variation being to house non-US investors within an entity located offshore in a tax-neutral jurisdiction such as the Cayman Islands. It also permits each parallel fund to structure its holding of particular portfolio investments or categories of investments in whatever manner is optimal for the investors in that parallel fund. For example, a parallel fund through which U.S. tax-exempt investors or foreign investors invest may hold certain investments through corporations, real estate investment trusts (“REITs”) or other vehicles that are non-transparent for tax in order to “block” income that might otherwise subject them directly to income tax or reporting requirements in the U.S. while choosing not to “block” for other investments.The parallel fund structure is often used by private equity, real estate and other closed-ended funds likely to be holding investments large enough and for long enough to warrant structuring their holdings on a case-by-case basis. Hedge funds, on the other hand, often opt to forego this flexibility in favour of a “master-feeder” or “spoke-and-hub” structure. In this structure, investors subscribe for interests in “feeder funds” that in turn all invest in one “master” fund that holds all investments. Typically, U.S. taxable investors invest in an onshore feeder and foreign and U.S. tax-exempt investors invest through a “blocker” vehicle classified as a corporation for U.S. tax purposes and organised in a tax-neutral jurisdiction. By making all investments through a master fund, the “master-feeder” structure avoids the need to rebalance holdings among parallel funds as investors subscribe and redeem, and the loss of flexibility is a small price to pay given that the volume and velocity of hedge fund trading strategies tend to make it impractical to hold one investment or group of investments through multiple structures, and the nature of assets held tends to reduce the need to structure for tax. Another potential advantage of the “master-feeder” structure relates to “ERISA”, the U.S. federal regime protecting U.S. private pension fund investors. Many Alternative Investment Funds seek to avoid the application of ERISA by assuring that the portion of their equity held by private pension funds is not “significant” (generally assumed to mean 25 per cent or more of any class of equity). By assuring that all capital is invested through a master fund, the “master-feeder” structure opens up the possibility that, with certain additional precautions, this test can be performed by reference to U.S. private pension fund investors’ indirect interest in the master fund as opposed to applying this test to each feeder fund vehicle in which these investors invest directly. This is helpful because U.S. private pension fund investment will tend to be concentrated in certain feeder fund vehicles, such as those established for U.S. tax-exempt investors.


The Delaware limited partnership statute provides that limited partners of Delaware limited partnerships are not liable for the obligations of the partnership unless they participate in the control of the business of the partnership. The statute does not define control for this purpose but it provides numerous safe harbours, including that no limited partner will be deemed to “participate in the control of the business” solely by virtue of exercising or possessing the rights granted to it under the partnership agreement. Accordingly, for example, voting as a limited partner or exercising control



USA

in the fund and reselling them through its distribution channels), transfers could result in disqualification of the fund’s offering from relying on an exemption from the otherwise applicable requirement to register issuances of securities with the SEC. Similarly, if the interests were issued outside of the United States in reliance on the registration exemption under the SEC’s Regulation S, transfers resulting in the interests coming to rest in the United States could result in disqualification from that exemption. In addition, the sponsor must ensure that transfers do not result in 2,000 or more investors holding interests in the fund in order to avoid a requirement to register the fund’s interests under the Exchange Act (the limit was fewer than 500 until it was raised to 2,000 under the Jumpstart Our Business Startups Act (“JOBS Act”)). If the fund chooses to avoid registration and regulation as an investment company under the Investment Company Act by relying on the Section 3(c)(1) exclusion described in question 1.3 above, it must also ensure that transfers do not result in the fund exceeding the 100 U.S. beneficial owners limitation of such exclusion. Otherwise, the fund would need to come within another investment company registration exemption available for funds, such as the exemption for funds whose investors are all “qualified purchasers” (generally, individuals owning $5 million or more in investments, institutions owning and investing on a discretionary basis $25 million or more in investments and directors, officers and certain other “knowledgeable employees” of the fund or its affiliates). Finally, depending on the precise circumstances of the fund, it may want to restrict transfers in order to ensure that it avoids treatment as a “publicly traded partnership”, which could subject it to entity-level U.S. federal income taxation if it is a U.S. entity or engaged in certain activities in the U.S.


Though there are no further limitations on a manager’s ability to manage its funds under the Advisers Act or the Investment Company Act, as discussed in the answer to question 4.2 below, there exists a range of federal and state regulatory functions with jurisdiction over a number of industries in which a fund may be making its investments (for example, investments in insurance companies or utility companies are subject to certain restrictions).

3 Marketing


Section 10(b), the general antifraud provision of the Exchange Act, permits the SEC to adopt rules that prohibit any “manipulative or deceptive device or contrivance” in connection with the purchase or sale of securities. Pursuant to such authority, the SEC adopted Rule 10b-5, which generally prohibits the use of any “device, scheme, or artifice to defraud”, and which creates liability for any misstatement or omission of a material fact. Rule 10b-5 and the other Exchange Act antifraud rules have a broad scope of applicability, which encompasses the marketing of Alternative Investment Funds. Alternative Investment Fund marketing is also regulated by the Advisers Act, specifically the general antifraud provisions set forth in Section 206 and the rules promulgated thereunder. The SEC has generated layers of additional Advisers Act marketing guidelines through various means, including no-action letters and enforcement actions against advisers. The Advisers Act regulations and the additional guidelines articulated by the SEC collectively form a

such as employment and service provider contracts and ownership of intellectual property. General partner liability also militates in favour of compensating the sponsor uniquely through fee payments to the manager. However, structuring compensation as an allocation of fund profits to the general partner of the fund may allow the profits to retain their tax character in the hands of the sponsor, which profits may include capital gains and/or dividend income (recent legislation generally requires a three-year holding period for the favourable tax treatment of profit allocations consisting of capital gains). Moreover, the activities delegated to the manager may subject its fee income to state or local tax (for example, the Unincorporated Business Tax in New York City), and this provides the additional advantage of a profits allocation to the general partner.The Delaware limited liability company is the form used most often for general partners and managers. This form offers the benefits of the Delaware limited partnership referenced above under question 2.1, including the ability to elect pass-through tax treatment. In addition, a limited liability company can be governed by a managing member or board of directors, which, unlike a general partner, are not by virtue of their status exposed to liability for the entity’s debts and obligations. Certain sponsors still use an older form of entity called a “subchapter S corporation”, which also offers limited liability and pass-through tax treatment. However, this older form has generally fallen out of use because it imposes numerous restrictions, including that only one class of stock may be issued and the holders typically cannot be other entities or non-U.S. persons. The limited liability company by contrast permits great variation in the treatment of members, on an individual or class basis, both as to governance and economic rights. For example, control may be given solely to senior management, and the share of profits and terms governing vesting of profits interests may easily be varied as among members according to any number of criteria. If the general partner or manager entity will include non-U.S. persons, a Delaware limited partnership is often preferable to a Delaware limited liability company due to the fact that the limited liability company is not treated as transparent in certain non-U.S. jurisdictions for foreign tax treaty purposes.


“Open-ended” in the United States is a term for registered investment companies under the Investment Company Act. Alternative Investment Funds are not open-ended as they all restrict redemption to a greater or lesser degree varying from hedge-style (e.g., monthly) to private-equity-style (no redemptions absent special situations). No restrictions are imposed by generally applicable law on the ability of sponsors of Alternative Investment Funds to restrict the liquidity of an investor’s interest in an Alternative Investment Fund by restricting frequency or volume of redemptions, withdrawals or transfers.Both hedge-style and private equity-style investment funds usually do not permit transfers to unaffiliated parties without sponsor consent on a case-by-case basis due, among other things, to the need to assure compliance with the regulatory requirements noted directly below.


If made in connection with an offering of interests as part of a distribution (for example, by an underwriter purchasing interests



USA

determinations, without in each case prominently disclosing the limitations thereof and the difficulties with respect to its use; or (d) any statement to the effect that any report, analysis or other service will be furnished free or without charge, unless such materials or services are entirely free and without any direct or indirect condition or obligation.Rule 206(4)-1 also prohibits an adviser from publishing, circulating or distributing any advertisement that contains any untrue statement, or which is otherwise false or misleading. The foregoing “catch-all” prohibition has generated various no-action letter interpretations by the SEC, particularly in connection with the standards and methodology for calculating and presenting past performance and for the construction of model performance results. For example, in Clover Capital Management, Inc. (available October 28, 1986), one of the most important no-action letters regarding advertisements, the SEC identified a wide range of specific practices that would be misleading with respect to the presentation of past performance, including, among other things: (a) failing to disclose the effect of material market or economic conditions on the results portrayed; (b) failing to reflect the deduction of investment advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid; (c) suggesting or making claims about the potential for profit without also disclosing the possibility of loss; and (d) failing to disclose any material conditions, objectives, or investment strategies used to obtain the performance advertised. In Clover, the SEC also stated that several practices would be misleading with respect to the presentation of model results, including, among other things, (i) failing to disclose the limitations inherent in model results, and (ii) failing to disclose if any of the securities or strategies reflected in a model portfolio do not relate, or relate only partially, to the services currently offered by the adviser.The standards set forth in Clover are just one part of a broader set of guidelines created by the SEC to interpret the “catch-all” provision and the other requirements of Rule 206(4)-1. Although a summary of the Rule 206(4)-1 guidelines is beyond the scope of this article, any adviser that is subject to the U.S. advertising rules must become familiar with all aspects of the SEC’s requirements. In addition, advisers should be mindful that SEC no-action letters generally advise that whether any particular advertisement is false or misleading also depends on the facts and circumstances involved in its use, including: (i) the form as well as the content of the advertisement; (ii) the implications or inferences drawn from the advertisement in its total context; and (iii) the sophistication of the prospective client.Rule 206(4)-1(b) defines “advertisement” as including “any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, that offers: (1) any analysis, report, or publication concerning securities, or that is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell; or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell; or (3) any other investment advisory service with regard to securities”. Any material that promotes advisory services for the purpose of maintaining existing clients or soliciting potential clients to buy those services will typically be considered an “advertisement”. Because of the broad definition of “advertisement”, advisers should exercise caution before making a determination that any communication with existing or prospective clients falls outside of the definition of advertisement and is not subject to the advertising requirements under Rule 206(4)-1.

complex and non-intuitive framework of detailed requirements that extends across all aspects of Alternative Investment Fund marketing. Care should be taken to avoid conflating the Advisers Act regulations with the Exchange Act antifraud provisions. For example, in contrast to Rule 10b-5, the Advisers Act regulations are not limited to situations involving the purchase or sale of a security. To the extent that an adviser’s communications with an investor are outside of the federal securities laws, they remain subject to common-law and state securities law prohibitions against fraud.


The communications of all advisers, whether or not they are registered with the SEC, are subject to the general antifraud provisions of Section 206 of the Advisers Act, which prohibit advisers from engaging in any act, practice, or course of business which is fraudulent, deceptive or manipulative. In addition, the Supreme Court in SEC v. Capital Gains Research Bureau, Inc. (75 U.S. 180, 186 (1963)) stated that an adviser, as a fiduciary, has “an affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts’, as well as ‘an affirmative obligation’ ‘to employ reasonable care to avoid misleading’... clients”. The duty of full and fair disclosure is especially important when an adviser’s interests may conflict with those of its clients. An adviser is required to make appropriate disclosure to clients regarding any facts that may affect the adviser’s independence, including situations that involve a potential conflict of interest. An adviser may be found to have violated Section 206 in cases where the prohibited conduct was unintentional.Advisers to Alternative Investment Funds are also subject to Rule 206(4)-8 of the Advisers Act, which defines fraud to include certain conduct not commonly considered fraudulent. Rule 206(4)(8) deems it to constitute a fraudulent, deceptive or manipulative act, practice or course of business within the meaning of Section 206 for any registered or unregistered adviser to a pooled vehicle to (a) make any untrue statement of material fact, (b) omit to state a material fact necessary to make a statement not misleading, or (c) otherwise engage in any other fraud on investors or prospective investors in the pooled investment vehicle. The SEC does not have to establish scienter on the part of an adviser in order to bring an enforcement case specifically for fraud. Even an unintentional violation of the substantive provisions of Rule 206(4)-8 that occurs due to negligence would be deemed to constitute fraud within the meaning of Section 206. For example, if an adviser inadvertently and in good faith neglected to include a material fact necessary to make its offering memorandum not misleading, the SEC could bring an enforcement case for fraud against the adviser under Rule 206(4)-8.In addition to the foregoing antifraud provisions, Rule 206(4)-1 of the Advisers Act specifically prohibits an adviser that is registered or required to be registered with the SEC from certain practices that the SEC considers to be misleading or likely to be misleading. Rule 206(4)-1 prohibits including in an advertisement any of the following: (a) direct or indirect references to a testimonial of any kind concerning the adviser or concerning any advice, analysis, report or other service it has rendered; (b) direct or indirect references to past specific recommendations by the adviser that were or would have been profitable to any person, unless the advertisement sets out or offers to furnish a detailed list of all recommendations made within the immediately preceding period of not less than one year, and includes certain disclaimers; (c) any direct or indirect representation that any graph, chart, formula or other device being offered: (i) can in and of itself determine which securities to buy or sell or when to buy or sell securities; or (ii) will assist any person in making such



USA

also confirmed that an offering in the United States under amended Rule 506 involving general solicitation or general advertising will not prevent an issuer from conducting a concurrent offshore offering pursuant to Regulation S under the Securities Act.An unregistered offering by an Alternative Investment Fund that fails to comply with all aspects of the exemption from the Securities Act’s registration requirements will generate rescission rights under state and federal law for each investor at the original purchase price. These rescission rights are exercisable at any time, regardless of performance, with the adviser potentially bearing the economic risks involved.


Alternative Investment Funds generally must be sold only to “accredited investors” as defined under Regulation D in order to avoid being required to register under the Securities Act, subject to a 35-investor exception for non-accredited investors.2 The definition of “accredited investors” is discussed in question 3.6 below.


As noted in the prior section, Alternative Investment Funds generally must be sold only to “accredited investors” in order to avoid being required to register under the Securities Act, subject to a 35 investor exception for non-accredited investors. An “accredited investor” includes: an individual who either has a net worth (taken together with the net worth of any spouse) of $1 million,3 or in the last two years has had either an annual income of $200,000 or a combined annual income (with spouse) of $300,000 and a reasonable expectation of the same income level in the current year; a bank or other financial institution; a tax-exempt or other entity with assets in excess of $5 million; or any entity in which all such entities’ beneficial owners are accredited investors. As noted previously, issuers wishing to avail themselves of the opportunity under amended Rule 506 to make general solicitations and use general advertising must take “reasonable” steps to verify that purchasers of their securities are accredited investors. Issuers who do not make general solicitations and do not use general advertising only need to have a “reasonable belief” that all of their investors are accredited investors.In addition, Alternative Investment Funds typically avail themselves of the exclusion from the definition of an “investment company” contained in either Section 3(c)(1) or 3(c)(7) of the Investment Company Act (Alternative Investment Funds operating under such exclusions are referred to herein as “3(c)(1) funds” and “3(c)(7) funds”, respectively). Alternative Investment Funds whose securities (other than short-term paper) are beneficially owned by no more than 100 persons are exempted from the definition of an investment company under Section 3(c)(1). A “look-through” provision applies in determining the number of beneficial owners for purposes of Section 3(c)(1). In the case of a 3(c)(1) fund investor that itself is both (i) a 10 per cent or greater owner of the voting securities of such 3(c)(1) fund, and (ii) a registered investment company, a 3(c)(1) fund, a 3(c)(7) fund, or an owner that would have to register were it organised under U.S. law, then the 3(c)(1) fund must “look through” to such investor’s underlying security holders for the purposes of calculating its number of owners. In addition, a 3(c)(1) fund must “look through” any investing entity that was formed for the purpose of investing in the 3(c)(1) fund. It should also be noted that under the Advisers Act a registered investment adviser may not


The SEC does not impose any requirements for registering or approval of the marketing documents of an Alternative Investment Fund. Nor does the SEC generally provide assistance to advisers in determining whether they are in compliance with the advertising rules. However, during any SEC examination of a registered adviser, the SEC will often request to view advertising materials distributed by the adviser, along with documentation supporting the claims made in the advertisements. In addition, any inconsistencies between an adviser’s advertising materials and its statements made in filings such as its Form ADV and Form PF are likely to attract the attention of the SEC.


Securities sold in the United States (including interests in Alternative Investment Funds) must be registered with the SEC absent an exemption from the registration requirements under the Securities Act. Interests in Alternative Investment Funds are typically sold in the United States pursuant to an exemption from such requirements because registration would subject an Alternative Investment Fund to regulation under the Investment Company Act and to substantive disclosure and reporting obligations. Alternative Investment Fund interests are sold either under the private placement exemption under Section 4(2) of the Securities Act or the safe harbour thereunder contained in Regulation D. Generally, to fall within either exemption an adviser must adhere to the following requirements: (a) sales only to “accredited investors” as defined under Regulation D; (b) a “reasonable belief” that its investors are accredited; (c) no general solicitation through television, newspapers, the internet and the like; (d) maintenance of records of all solicitations made in the U.S.; and (e) no interviews or co-operation with the U.S. press or with press likely to be directed into the U.S. The definition of “accredited investors” is discussed in greater detail in question 3.6 below.With the 2013 adoption of amendments to Rule 506 of Regulation D implementing certain components of the JOBS Act, Alternative Investment Funds gained the ability to employ general solicitations and general advertising to offer their securities without becoming subject to Securities Act registration requirements. However, in order to engage in such activities, an issuer is required to take “reasonable” steps to verify that purchasers of its securities are accredited investors. Whether the steps taken by the issuer are “reasonable” is determined based on the particular facts and circumstances of each offering and each purchaser. An issuer making a general solicitation should retain records that document the processes and procedures used to verify that all of its purchasers are accredited investors. To date, Alternative Investment Funds have generally not availed themselves of the opportunity to make general solicitations and use general advertising. Most continue to abide by the pre-existing requirements prohibiting general solicitation.In order to avoid registration as an “investment company” under the Investment Company Act, Alternative Investment Funds typically rely on one of the exclusions from the definition of an investment company provided by the Investment Company Act that are discussed in question 3.6 below. While under the Investment Company Act these exclusions cannot be relied upon if an Alternative Investment Fund makes a public offering of its securities, the SEC takes the view that with the adoption of the amendments to Rule 506, Alternative Investment Funds may now employ general solicitations and general advertisements without losing the private fund exclusions under the Investment Company Act. The SEC has



USA

to remove the connection between political contributions to state and local officials who may have influence over the awarding of government and public pension investment advisory business (i.e., “pay-to-play” practices). This is accomplished by:■ prohibiting advisers from being compensated for investment

advisory services provided to a state or local government entity for two years if covered employees of the firm make political contributions to certain officials of that government entity;

■ prohibiting solicitation or coordination of political contributions to such officials or certain state or local party committees;

■ only allowing employees of the adviser and certain regulated entities to solicit investment advisory business from government entities; and

■ requiring advisers to maintain books and records relating to state and local government entity clients, political contributions, use of placement agents, and information relating to covered employees.

Each state and many localities also have lobby laws that impose lobby registration and reporting requirements on persons who contact certain public officials for the purpose of influencing certain governmental decisions or actions. In addition to requiring registration for “traditional” lobbying activity such as lobbying legislation and regulations, the majority of states and numerous localities also require registration for procurement lobbying, including marketing to public bodies or attempting to influence any other non-ministerial official action of the executive branch or any of its agencies.Each state also has its own gift laws regulating gifts, e.g., meals, entertainment, gift items, transportation, or lodging, given to its state and/or local public officials. Also note that certain local jurisdictions have their own separate gift laws. These laws vary depending on the jurisdiction, and tend to fall into four categories: jurisdictions which: (1) absolutely ban gifts regardless of value; (2) impose dollar limits on gifts – some are per occasion and some are per time period; (3) prohibit gifts that may reasonably tend to influence an official; and (4) only restrict gifts which may be problematic under a bribery standard.


Section 3(a)(4) of the Exchange Act defines the term “broker” to mean “any person engaged in the business of effecting transactions in securities for the accounts of others”. The Exchange Act further requires that brokers be registered as such with the SEC. In addition, depending on various fact-based circumstances, brokers may have to register with the securities commissions of the states in which they are effecting transactions in securities. Accordingly, when interests in an Alternative Investment Fund are sold, the question should be asked whether the person selling such interests in an Alternative Investment Fund is acting as a “broker” and should therefore be registered as such.However, Rule 3a4-1 under the Exchange Act provides a safe harbour, which deems certain partners, directors, officers, employees, and other agents (collectively, “associated persons”) of an issuer not to be brokers. This exemption permits associated persons of an adviser to participate in the sale of the interests of an Alternative Investment Fund provided that certain requirements are met, including, among others, that each person selling interests is not (a) subject to certain statutory disqualifications, (b) directly or indirectly compensated in connection with sales of interests in an Alternative Investment Fund, or (c) currently (and, with respect to certain employees, has not recently been) associated with a registered broker. This exemption is

charge performance fees (typically measured based on the amount of both realised and unrealised gains and losses) in connection with an Alternative Investment Fund unless its investors are deemed to be “qualified clients” capable of bearing the risks associated with performance fee arrangements. Qualified client status requires that net worth or assets under management meet certain dollar thresholds that are generally higher than the thresholds required to be an accredited investor. Accordingly, 3(c)(1) funds that charge performance fees must ensure that their investors are qualified clients in addition to being accredited investors.For an Alternative Investment Fund to qualify as a 3(c)(7) fund, each investor must be a qualified purchaser or knowledgeable employee. Under the Investment Company Act, qualified purchasers include: (a) any natural person that owns not less than $5 million in “investments” (as defined by the SEC); (b) any company directly or indirectly owned entirely by two or more closely related natural persons, their estates or foundations, charities, or trusts formed by or for their benefit that owns not less than $5 million in “investments”; (c) any person, acting for its own account or the accounts of other qualified purchasers, that in the aggregate owns and invests on a discretionary basis not less than $25 million in “investments”; (d) any other trust not formed for the specific purpose of acquiring the 3(c)(7) fund’s securities and as to which both the person with investment discretion with respect to the trust and each of the contributors is a qualified purchaser under (a), (b) or (c) above; (e) any person who received securities of a 3(c)(7) fund as a gift or bequest, or due to an involuntary event (such as death, divorce or legal separation) from a qualified purchaser; and (f) any entity in which all beneficial owners of all securities issued are qualified purchasers. Section 3(c)(7) does not “look through” its investors, provided that the investors were not formed for the purpose of making the investment. A 3(c)(7) fund may have an unlimited number of investors without having to register under the Investment Company Act. In practice, however, onshore 3(c)(7) funds typically stay below 499 total investors and offshore 3(c)(7) funds typically stay below 1,999 U.S. investors (with unlimited non-U.S. investors) in order to remain within certain exemptions from Exchange Act registration.


Some jurisdictions have so-called “pay-to-play” laws which prohibit a corporation from entering into business arrangements or contracts with certain governmental entities if the corporation, its PAC, its affiliates, and in many cases certain covered directors, employees, and their family members (such as spouses or children) make or solicit political contributions in that jurisdiction.4 These bans on government contracting could last up to five years in some cases. In some jurisdictions, a contribution by a covered donor does not trigger a ban on government contracts but rather requires such contractor to report contributions made by its covered donors. Directors and employees individually making or soliciting political contributions can under many of these laws automatically trigger legal liability for the company. Thus, to address these laws, a company will have to institute a policy pre-clearing or prohibiting director and employee contributions. The question is how broadly to apply such policy. Applying a ban on contributions too broadly can have implications under applicable labour laws.Rule 206(4)-5 under the Advisers Act and the related recordkeeping rules in Rule 204-2 provide one example of such a pay-to-play restriction, in this case specifically restricting political activity by investment advisers who do business with government entities, and the use of placement agents. The intent of Rule 206(4)-5 is



USA

(iv) the banking entity is prohibited from entering into a relationship with any covered fund that would be a “covered transaction” under Federal Reserve Act Section 23A. Unlike Section 23A of the Federal Reserve Act, pursuant to which “covered transactions” are subject to limits and certain conditions and exemptions, the Volcker Rule prohibition is absolute (subject to certain exemptions) and thus is frequently referred to as “Super 23A”;

(v) the banking entity may not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered fund or of any covered fund in which such covered fund invests;

(vi) the fund, for corporate, marketing, promotional or other purposes, may not share the same name or a variation of the same name with the banking entity (or an affiliate or subsidiary thereof) and may not use the word “bank” in its name;

(vii) no director or employee of the banking entity may take an ownership interest in the covered fund except for any director or employee who is directly engaged in providing investment advisory or other services to the covered fund; and

(viii) the banking entity must clearly and conspicuously disclose, in writing, to any prospective and actual investor in the covered fund certain enumerated disclosures and comply with any additional rules of the appropriate agencies designed to ensure that losses in such covered fund are borne solely by investors in the covered fund and not by the banking entity.

4 Investments


Limitation on Insider TradingFederal and state securities laws prohibit Alternative Investment Funds from trading securities – including equity and debt securities and derivative instruments – based on “inside information” or “material, nonpublic information”. These laws also prohibit the distribution of inside information to others who may use that knowledge to trade securities (also known as “tipping”).Information is material where there is a substantial likelihood that a reasonable investor would consider that information important in making his or her investment decisions. Generally, this includes any information the disclosure of which may have a substantial effect on the price of a company’s securities. No simple test exists to determine when information is material; assessments of materiality involve a highly fact-specific inquiry.Material information often relates to a company’s financial results and operations, including, for example, dividend changes, earnings results, changes in previously-released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidity problems, and extraordinary management developments.Material information also may relate to the market for a company’s securities. Pre-publication information regarding reports to be published in the financial press also may be material.Information is “public” when it has been disseminated broadly to investors in the marketplace. For example, information is public after it has become available to the general public through a public filing with the SEC or some other government agency, a news reporting service or publication of general circulation, and after sufficient time has passed so that the information has been disseminated widely.

relatively narrow and requires attention to the precise circumstances surrounding the sale of the Alternative Investment Fund’s interests. For example, in order to comply with the exemption’s requirement that associated persons not be compensated in connection with sales of the Alternative Investment Fund’s interests, an adviser that is contemplating a bonus for an associated person must consider whether that bonus may be correlated with, or may even have the appearance of being correlated with, such associated person’s sales of the interests of the Alternative Investment Fund.The safe harbour offered by Rule 3a4-1 is especially significant given that the use of a broker who should be, but is not, registered, to sell interests of an Alternative Investment Fund can result in substantial sanctions for the broker, the Alternative Investment Fund and its adviser. Such sanctions could include the granting of rescission rights to investors, such that the relevant investors may recoup the original price of their investment in an Alternative Investment Fund regardless of the current valuation of that holding.Practitioners sometimes encounter the claim that a person who introduces a potential buyer of securities to an issuer is not engaged in the business of effecting transactions in securities for the accounts of others and therefore is merely a “finder” who is not required to register as a broker. However, the circumstances in which a person could be considered a “finder” are extremely rare because the concept of a “finder” does not include the normal range of selling activities (e.g., discussions regarding an Alternative Investment Fund and the delivery of an Alternative Investment Fund’s offering materials). Consequently, it is unusual to find a person who confines the scope of his activities in such a way as to meet the definition of a “finder”. As such, advisers must take precautions to ensure that paid sales agents are properly registered or actually exempt from registration.Rule 206(4)-3 under the Advisers Act prohibits an adviser that is required to be registered under the Advisers Act from directly or indirectly paying a cash fee to a solicitor with respect to solicitation arrangements unless certain additional conditions are met. Among the requirements is an agreement by the solicitor to provide the client with a copy of the investment adviser’s Form ADV Part 2A and a separate written solicitor disclosure.5 Form ADV also requires that an adviser disclose that it pays solicitation fees and describe the fee arrangements.


The Volcker Rule, a provision of the Dodd-Frank Act, prohibits banking entities (including asset manager subsidiaries of such banking entities) from organising and offering, or investing in, hedge funds or private equity funds. Despite the ban on investments in such funds, however, the Volcker Rule allows banking entities to continue to sponsor and invest in covered funds, subject to certain exemptions.The primary exemption available to banking entities is the “permitted funds exemption”. In order to qualify for the permitted funds exemption, a banking entity must satisfy the following conditions:(i) the banking entity must provide bona fide trust, fiduciary,

investment advisory or commodity trading advisory services;(ii) the fund must be organised and offered only in connection with

the provision of bona fide trust, fiduciary, investment advisory, or commodity trading advisory services and only to persons that are customers of such services of the banking entity;

(iii) the banking entity must limit (a) its ownership of the fund to less than 3 per cent of the fund’s ownership interests, and (b) its aggregate ownership in all covered funds to less than 3 per cent of the banking entity’s Tier 1 capital;



USA

■ the Alternative Investment Fund’s depositor or principal underwriter must be a registered broker-dealer, or a person controlled by a registered broker-dealer; and

■ the purchase of Registered Fund shares must be made pursuant to an arrangement whereby the Alternative Investment Fund is required to vote all proxies: (i) in accordance with the instructions of its security holders; or (ii) in the same proportion as the vote of all other shareholders of the Registered Fund.

Finally, Alternative Investment Funds may be permitted to invest in certain registered, exchange-traded funds (“ETFs”) beyond the 3 per cent aggregate limit established by Section 12(d)(1). The ETF, however, must have obtained an exemptive order from the SEC that specifically permits investments above 3 per cent by Alternative Investment Funds, and an Alternative Investment Fund’s investment in the ETF must meet all terms and conditions contained in the order.Short SalesShort selling involves selling securities that may or may not be owned by the seller and borrowing the same securities for delivery to the purchaser, with an obligation to replace the borrowed securities at a later date. “Naked” short selling generally refers to a practice whereby securities are sold short without the seller’s owning or having borrowed the requisite securities and therefore may result in a “failure to deliver”. Short selling allows the investor to profit from declines in securities prices. A short sale creates the risk of a theoretically unlimited loss, in that the price of the underlying security could theoretically increase without limit, thus increasing the cost to the Fund of buying those securities to cover the short position. There can be no assurance that the security necessary to cover a short position will be available for purchase. Consequently, certain market participants could accumulate such securities in a “short squeeze”, which would reduce the available supply, and thus increase the cost, of such securities. Purchasing securities to close out the short position could itself cause the price of the securities to rise further, thereby exacerbating the loss. In order to reduce “failures to deliver” and address certain concerns and abuses associated with naked short selling, the SEC adopted Rule 203(b) of Regulation SHO under the Exchange Act to limit the ability of a broker or dealer to accept short sale orders unless the person entering the order, e.g., the Firm, has already arranged to borrow the security necessary to cover the position or has reasonable grounds to believe the security can be borrowed in time to meet the delivery date. Additionally, Rule 201 of Regulation SHO (the “circuit breaker” rule) limits the ability to execute orders on short sales on certain securities that are not marked “short exempt” (within the meaning of Rule 200(g) of Regulation SHO) and that have declined in value by 10 per cent or more from the prior day’s closing price.SEC Rule 105 of Regulation M under the Exchange Act (“Rule 105”) prohibits any “person” from purchasing from a secondary offering of equity securities for cash if the person has effected a short sale in such security during the “Rule 105 Restricted Period”, that is, the shorter period beginning: (i) five business days prior to the pricing of the offered securities; or (ii) with the initial filing of the registration statement or other offering document with the SEC and, in each case, ending with the pricing of the offered securities. Generally, all Alternative Investment Funds managed by a single adviser would be treated collectively as a “person” for the purposes of Rule 105, unless formal information barriers are adopted that prevent coordination of trading and sharing of information between portfolio managers of different Alternative Investment Funds directly or indirectly.Further, another possible exception is the “bona fide purchase” exception, as defined in Rule 105.


Generally, advisers advising Alternative Investment Funds are obligated to cause such funds to invest in the types of investments that are consistent with such fund’s investment objective, as disclosed in such fund’s offering materials. In addition, certain other restrictions on the types of investments that can be included in an Alternative Investment Fund’s portfolio apply, as discussed below.Investments in Regulated IndustriesA variety of federal and state laws place limits on ownership of the securities of certain companies. Most of these federal and state laws apply to companies in highly regulated industries. The laws are designed to prevent a single person or group from acquiring an influential or controlling position in a company. These laws may require prior consent of a regulator before the securities can be purchased, and, for purposes of determining ownership or control, an investment adviser may be required to aggregate the holdings of all accounts over which it exercises investment discretion along with any proprietary accounts and accounts of its principals. Some of the types of issuers where applicable laws place restrictions include:■ public utility companies or public utility holding companies;■ bank holding companies;■ owners of broadcast licences, airlines, railroads, water

carriers and trucking concerns;■ casinos and gaming businesses;■ defence-related industries, including CFIUS review of

transactions that could result in control of a U.S. business by a foreign person;

■ insurance companies; and■ public service companies (such as those providing gas,

electric or telephone services).In addition, the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976 (the “HSR Act”) places notification requirements and waiting periods before transactions subject to the HSR Act may be consummated. The HSR Act is intended to address antitrust concerns, and the notification and waiting periods are designed to allow government officials to review and approve certain transactions. The HSR Act’s requirements may be triggered by the proposed acquisition of voting securities and assets of the acquired person having an aggregate value of $50 million (as adjusted). Such an acquisition, however, would be exempt from these requirements of the HSR Act if the acquisition were for investment purposes only and if, as a result of such acquisition, the acquirer would hold 10 per cent or less of the issuer’s outstanding voting securities.Investments in Registered FundsAlthough Alternative Investment Funds are not registered under the Investment Company Act, they are nevertheless subject to the restrictions of Sections 12(d)(1)(A)(i) and (B)(i) of that Act. These provisions require that any Alternative Investment Fund and any entity controlled by the Alternative Investment Fund, may not own, in the aggregate, more than 3 per cent of the total outstanding voting securities of any registered open-ended or closed-ended investment company (each, a “Registered Fund”), including money market funds. The 3 per cent limit is measured at the time of investment.Alternative Investment Funds that invest all of their assets (other than cash) in a Registered Fund pursuant to a master-feeder arrangement, however, are not subject to the restrictions of Section 12(d)(1), provided that the following conditions are met:



USA

■ Large private fund advisers. This includes any adviser with:■ $1 billion or more in liquidity and registered money

market fund assets under management, which must file Form PF quarterly, within 60 days of the end of each fiscal quarter.

■ $1.5 billion or more in hedge fund assets under management, which must file Form PF quarterly, within 15 days of the end of each fiscal quarter.

■ $2 billion or more in private equity fund assets under management, which must file Form PF annually, within 120 days of the end of the fiscal year.

These investment advisers must include more detailed information than smaller investment advisers. The reporting focuses on the following types of private funds that the investment adviser manages:■ Hedge Funds. Large hedge fund advisers must report on

an aggregated basis (and not on a position-level basis) information regarding exposures and turnover by asset class and geographical concentration. In addition, for each managed hedge fund having a net asset value of at least $500 million, these advisers must report certain information relating to that fund’s exposures, leverage, risk profile and liquidity.

■ Liquidity Funds. Large liquidity fund advisers must provide information on the types of assets in each of their liquidity fund’s portfolios, certain information relevant to the risk profiles of the funds and the extent to which a fund has a policy of complying with all or certain aspects of the Investment Company Act’s principal rule concerning registered money market funds (Rule 2a-7).

■ Private Equity Funds. Large private equity fund advisers must respond to questions focusing primarily on the extent of leverage incurred by their funds’ portfolio companies, the use of bridge financing and their funds’ investments in financial institutions.

■ Smaller private fund advisers. This includes all other private advisers that are not considered large private fund advisers. These investment advisers must file Form PF annually within 120 days of the end of the fiscal year and report only basic information regarding the private funds they advise. This includes information regarding size, leverage, credit providers, investor types and concentration and fund performance and, additionally for hedge funds, fund strategy, counterparty credit risk and use of trading and clearing mechanisms.


See question 5.1 above.


There are no outright restrictions on the use of side letters. However, advisers to Alternative Investment Funds are subject to fiduciary duties under Section 206 of the Advisers Act and Rule 206(4)-8 under the Advisers Act, which prohibit an adviser from making false or misleading statements of material fact to current and prospective investors or engaging in other fraudulent conduct with respect to a fund’s investors. Therefore, to the extent side letters provide investors with preferential terms that may have an adverse effect on other investors in the Alternative Investment Fund, the Alternative Investment Fund should make the disclosures reasonably necessary to give other investors the ability to assess the impact of such side letters on their investment, if any. Such preferential terms include any modifications to the voting or control rights, preferential liquidity rights, and terms that materially alter the investment programme. In addition, to the extent an Alternative Investment Fund agrees to


There are no restrictions on borrowing by the Alternative Investment Funds but the leverage and its attendant risks must be disclosed in the fund’s offering materials.



An Alternative Investment Fund that relies on the exemptions from registration under Regulation D of the Securities Act to offer its interests must file a Form D at the time of the first closing of such fund in which U.S. investors participate and must amend it annually for so long as the fund continues to offer its interests. Form D requires disclosure of certain information about the fund, including: the identity of the issuer’s executive officers, directors, promoters and other related persons; the amounts sold; and any sales commissions paid. Filed Forms D are publicly available online. Furthermore, Alternative Investment Funds are subject to similar filings with states under Blue Sky Laws.Alternative Investment Funds and their advisers must make certain public filings, including, but not limited to, the following:■ SEC Reporting on Ownership of Equity Securities. The

Securities Exchange Act requires any person who, directly or indirectly, acquires more than 5 per cent of any class of shares of a domestic public company to file a report with the SEC within 10 days of such acquisitions. Additional reporting is required if a person acquires more than 10 per cent of the shares of a U.S. public company.

■ SEC Portfolio Reporting. Any institutional investment manager with investment discretion over $100 million or more in equity securities at the end of a calendar year must file quarterly reports with the SEC containing position information about the equity securities under the discretion of the fund manager, and the type of voting authority exercised by the fund manager.

■ Filings with the Internal Revenue Service.■ Form ADV, the form used by investment advisers to register

with the SEC, which requires certain disclosure about:■ the types of services offered by an investment adviser;■ the adviser’s fee schedule;■ disciplinary information relevant to the adviser or its

employees;■ conflicts of interest;■ the educational and business background of management

and key advisory personnel of the adviser; and■ certain information regarding each Alternative Investment

Fund managed by the adviser, including each fund’s gross asset value, number and nature of beneficial owners, minimum investment or commitment amount, and information pertaining to such fund’s auditors, prime brokers, custodians and administrators.

In addition, the SEC has adopted substantial reporting obligations with respect to Private Investment Funds under Form PF.Under these rules, only SEC-registered private fund advisers with at least $150 million in private fund assets under management must file Form PF. Within this group, private fund advisers are divided by size into the following two broad groups with different reporting requirements:



USA

passive foreign investment company (“PFIC”) rules (or potentially the CFC rules if the U.S. investor owns a significant interest (at least 10 per cent) of the fund). (Although PFIC tax treatment is similar to that of a partnership, certain differences may be important, including that losses do not flow through to investors and expenses of the fund are not subject to the miscellaneous itemised deduction limitations that apply to U.S. taxable individual investors. CFC tax treatment is similar except the investor generally loses the potential for long-term capital gain treatment, with the result that all income and gain is taxable at ordinary income rates.)U.S. managers of investment funds with non-U.S. investors typically take steps to ensure that fund investments qualify under a safe harbour for trading in stocks or securities for the fund’s own account, which ensures that the fund will not be subject to tax in the U.S. despite the manager’s activities in the U.S. on behalf of the fund. Likewise, managers typically monitor investments to avoid taxation under the “FIRPTA” rules that can apply if the fund invests in U.S. real property (or entities holding substantial U.S. real property that constitute United States real property holding companies (“USRPHCs”)). These constraints may pose additional considerations in structuring investments or sales of fund assets. For example, investments in newly originated loans or debt instruments may not qualify for the trading safe harbour. Likewise, investments in USRPHCs would subject the fund to U.S. federal income tax and reporting obligations unless the investment was in the form of debt or 5 per cent or less of the equity of a publicly traded company.Private investment funds with U.S. tax-exempt or non-U.S. investors often take additional steps to structure investments and sales of assets in a manner that avoids triggering U.S. tax for non-U.S. and tax-exempt investors, as noted above.


U.S. sponsors typically form the fund investment manager/advisor as an entity classified as a partnership for U.S. federal income tax purposes, although some have recently considered incorporating in light of reduced corporates tax rates under the Tax Act (see below). As noted above, the sponsors often form separate vehicles to serve as the manager and the fund general partner so that the general partner is not subject to certain state or local franchise taxes (such as the Unincorporated Business Tax in New York City) with respect to the profits it receives in the form of a “carried interest” or “promote” from the fund. Under current U.S. federal income tax law, profits allocated to the general partner from the fund (which profits may include capital gains and/or dividend income) retain their tax character when they flow through to the sponsor’s equity owners, except that, under carried interest provisions contained in U.S. tax legislation enacted in December, 2017, commonly known as the “Tax Cuts and Jobs Act” (the “Tax Act”), assets generally must be held for at least three years (as opposed to the usual 12 months) in order for individuals to obtain long-term capital gains treatment (subject to more favourable rates than ordinary income). The holder of a partnership interest generally recognises capital gain upon a sale of his interest in the partnership (except to the extent attributable to the value of certain inventory items). Thus, if the equity owners of the fund manager and fund general partner sell their interests in the manager and general partner entities, they would generally recognise capital gain on the sale. Although not completely clear, the Tax Act likely requires owners to have held their interests for at least three years in order to obtain long-term capital gain treatment.

provide any additional material information to an investor pursuant to a side letter, such Alternative Investment Fund should take steps to disclose such information to all investors simultaneously.

6 Taxation


Most U.S.-sponsored private investment funds are classified as partnerships, which are transparent for U.S. federal income tax purposes. If the fund will make significant non-U.S. equity investments, forming the fund as a non-U.S. entity in a tax-neutral jurisdiction, such as the Cayman Islands, minimises the likelihood that the portfolio investments will be subject to the anti-deferral controlled foreign corporation (“CFC”) rules, which can require taxable U.S. investors to include their share of the portfolio company’s earnings in income in advance of the receipt of cash attributable to such income. Transparent tax treatment may be obtains for corporate entities (such as Cayman limited companies) by filing a “check-the-box” election with the IRS to elect partnership classification for U.S. federal income tax purposes.As noted above, in order to accommodate structures that take into account the tax considerations relevant to different categories of investors, private investment funds are often established with several “parallel” or “mirror” funds that invest in a side-by-side manner. This permits each parallel fund to structure its holding of particular portfolio investments or categories of investments in the manner that is optimal for the investors in that parallel fund. For example, certain U.S. tax-exempt investors are subject to U.S. federal income tax on “unrelated taxable business income”, which includes income treated as debt financed (“UBTI”). U.S. tax-exempt investors may invest in a parallel fund that structures any investments that would give rise to UBTI through investments in corporations, real estate investment trusts (“REITS”) or other non-transparent entities that “block” income that might subject them directly to income tax or reporting requirements in the U.S. Similarly, a parallel fund established for non-U.S. investors will allow the fund to “block” any investments that would result in U.S. tax and reporting obligations for those investors if held on a flow-through or transparent basis by making such investments through corporations, REITS or other non-transparent entities.Hedge funds, by contrast, often employ a “master-feeder” type of structure. In this structure, investors subscribe for interests in “feeder funds” that in turn all invest in one “master” fund that holds all investments. Typically, U.S. taxable investors invest in an onshore feeder that is classified as a partnership (and thus transparent) for U.S. federal income tax purposes, while foreign and U.S. tax-exempt investors invest through an offshore feeder classified as a non-U.S. corporation for U.S. tax purposes and organised in a tax-neutral jurisdiction. The offshore feeder’s corporate classification “blocks” any UBTI that would result from leverage used by the master fund. The feeder’s corporate status also ensures that the feeder, rather than the investors, would be subject to any U.S. tax reporting obligations should they arise.The master fund is typically classified as a partnership for U.S. federal income tax purposes. If classified as a corporation, provided it is formed in a non-U.S. jurisdiction, the fund generally will not be subject to entity-level tax in the U.S. so long as the fund is not treated as engaged in a U.S. trade or business in the U.S. as discussed below. U.S. taxable investors in the onshore feeder generally will include their share of the fund’s income and gains in income on a current basis (much like the tax treatment of a partnership) under the



USA

of the fund). (Although PFIC tax treatment is similar to that of a partnership, certain differences may be important, including that losses do not flow through to investors and expenses of the fund are not subject to the miscellaneous itemised deduction limitations that apply to U.S. taxable individual investors. CFC tax treatment is similar except the investor generally loses the potential for long-term capital gain treatment, with the result that all income and gain is taxable at ordinary income rates.)Non-U.S. Investors. Provided the fund is structured to ensure that non-U.S. investors are not treated as engaged in a U.S. trade or business (including by way of their direct investment in a partnership or other transparent entity that is treated as so engaged) or subject to state and local tax and that the fund’s investments are not subject to tax under FIRPTA, no U.S. federal income tax or reporting obligations should apply to a non-U.S. investor’s participation in, or sale or transfer of its interests in the fund.Non-U.S. investors (or, in hedge fund master-feeder structures, the offshore feeder fund) may be subject to U.S. withholding tax at a 30 per cent rate on their share of interest, dividends, dividend-equivalents and other fixed or determinable annual or periodical (“FDAP”) income from sources within the U.S. Certain interest is exempt from this withholding tax.Separately, under the Foreign Account Tax Compliance Act (“FATCA”), certain foreign financial institutions, including most investment funds and non-U.S. custodians (“FFIs”), will be subject to a 30 per cent withholding tax on U.S. source dividends, interest and certain other payments, and, starting in 2019, on the gross proceeds from the sale of equity interests or debt issued by U.S. issuers and possibly other payments, unless the institution enters into an agreement with the U.S. Internal Revenue Service (the “IRS”) to report certain information regarding beneficial ownership by U.S. persons and complies with other requirements (or, where the U.S. has entered into an intergovernmental agreement with a relevant jurisdiction (an “IGA”), the institution complies with requirements under the IGA, which will entail reporting information regarding beneficial ownership either to the IRS or the taxing authority in the relevant jurisdiction). A non-U.S. investor that is considered to be an FFI under FATCA or a relevant IGA may be subject to U.S. withholding tax unless it complies with applicable requirements.Pension Fund Investors. U.S. state pension funds generally take the position that they are not subject to U.S. federal income tax, including with respect to UBTI. Non-U.S. pension funds are generally subject to the same consequences described above for non-U.S. investors, except to the extent they qualify for the benefits of a treaty. Certain more favourable rules may apply to them if the fund makes investments potentially subject to tax under FIRPTA.


No tax ruling is typically obtained in the U.S., although tax counsel to private investment funds may render an opinion to the sponsor, based on customary assumptions and representations from the sponsor, on the expected U.S. federal income tax classification of the fund.Funds may make certain non-U.S. investments in the form of investments in special purpose vehicles in non-U.S. jurisdictions in order to allow the funds to obtain the most efficient non-U.S. tax treatment of certain investments. In this case, it may be advisable to seek a tax ruling from the relevant tax authorities confirming the intended tax treatment.

The Tax Act significantly reduced the corporate tax rate – from the previous maximum rate of 35 per cent to the new rate of 21 per cent. The Tax Act also prohibits individuals from deducting state and local taxes but allows corporations to continue to deduct these taxes, and the carried interest provisions described above do not apply to corporations. As a result, sponsors may consider the benefit of forming the manager and/or advisor as a corporation. Dividends distributed from the corporation would be subject to a second-level of tax, however, and potential buyers generally prefer to acquire assets in order to obtain a fair market value (stepped-up) tax basis for the assets. As a result, it is likely that most manager/advisor entities will continue in pass-through form.Sponsors may utilise different and more complex structures where key employees or other service providers are located in both U.S. and non-U.S. jurisdictions. These structures may involve separate vehicles for U.S. versus non-U.S. service providers and/or sub-advisory agreements between the main fund advisor and sub-advisors operating in different jurisdictions. Transfer pricing considerations are relevant to ensuring that the economic arrangements among the different vehicles, the advisor and the sub-advisors minimise the likelihood of double taxation.


Provided the fund is structured to ensure that non-U.S. investors are not treated as engaged in a U.S. trade or business (including by way of their direct investment in a partnership or other transparent entity that is treated as so engaged) and that the fund’s investments are not subject to tax under FIRPTA, no U.S. federal income tax or transfer tax generally applies to a non-U.S. investor’s participation in, or sale or transfer of its interests in the fund. Likewise, U.S. tax-exempt investors are not subject to U.S. federal income tax or transfer tax provided that their investment is structured in a manner that “blocks” UBTI (for example, investment in the offshore feeder of a master-feeder hedge fund structure or investment in a parallel private investment fund that structures investment to prevent UBTI) and that an investor does not finance its investment in the fund with debt.Investors (or the fund itself) may be subject to certain U.S. withholding taxes as described below.Typically, funds will endeavour to structure their investments so that the fund is not treated as having a permanent establishment in the jurisdiction by reason of its investments or activities in that jurisdiction. Non-U.S. jurisdictions may impose withholding or transfer taxes on the fund or fund investors.


U.S. Taxable Investors. Typically, U.S. taxable investors invest in a fund vehicle that is classified as a partnership (and thus transparent) for U.S. federal income tax purposes. U.S. taxable investors generally will include their share of the fund’s income and gains in income on a current basis. If instead the fund is classified as a corporation, U.S. taxable investors generally will include their share of the fund’s income and gains in income on a current basis (much like the tax treatment of a partnership) under the passive foreign investment company (“PFIC”) rules (or potentially the CFC rules if the U.S. investor owns a significant interest (at least 10 per cent)



USA

With respect to Action 7 (permanent establishment status), the U.S. is reportedly awaiting completion of a report on the attribution of profits. The U.S. has taken steps with respect to Action 13 (country-by-country (“CbC”) reporting), releasing final regulations requiring CbC reporting by U.S. parents of multi-national groups with annual revenues of $850 billion. The Treasury and IRS based the regulations on the OECD model template for CbC reporting. The U.S. is currently expected to enter into bilateral agreements providing for automatic exchange of CbC information.


Depending on the facts, certain entities may allow for tax-efficient investment in certain assets classes, such as real property in the case of REITs. Provided they distribute their income and gains to shareholders, REITs are not subject to U.S. federal income tax at the entity level. Likewise, certain trusts or other entities may qualify for similar treatment, such as trusts classified as regulated investment companies (“RIC”s) or real estate mortgage investment conduits (“REMIC”s). All of the foregoing are only suitable for certain asset classes (e.g., real property, mortgages) and favourable tax treatment requires compliance with a number of restrictions, including asset composition, distribution and other requirements. These types of structures tend to be less common due to their heightened compliance and other restrictions.


The foregoing is a general summary of certain U.S. federal income tax issues. A private investment fund may encounter other material U.S. tax issues depending on the relevant facts and circumstances.


The recently enacted Tax Act represents the most significant U.S. tax reform legislation since 1986. Among other things, the Tax Act reduced the maximum individual rates through 2025 and permanently reduced the corporate rate (to 21 per cent from the previous 25 per cent); eliminated most itemised deductions for individuals (including deductions for management and advisory fees and state and local taxes), allowed a 20 per cent deduction for individuals’ share of certain types of U.S. business income earned through pass-through entities (the “section 199A deduction”), restricted deductions for business interest to an amount not to exceed 30 per cent of adjusted taxable income, disallowed deductions for excess business losses from pass-through entities, imposed a one-time transition tax on accumulated earnings of “specified foreign corporations” (generally, a non-U.S. corporation in which a U.S. person owns, directly or indirectly, including through attribution, a 10 per cent interest), expanded the definition of “controlled foreign corporation” for purposes of the CFC rules, imposed a new category of “subpart F” income for CFC shareholders (termed global intangible low-tax income or “GILTI”)), and made numerous other significant changes to the U.S. federal income tax law. Many aspects of the Tax Act are uncertain, and the U.S. Treasury Department and IRS have published notices and are working on several sets of proposed regulations to provide guidance in many of these areas, which they plan to release before the end of 2018.


Congress enacted FATCA as part of the HIRE Act in 2010 in order to stop U.S. taxpayers from evading U.S. taxes through undisclosed offshore accounts and investments. FATCA requires foreign financial institutions – including most non-U.S. investment funds and other collective investment vehicles – to report information about the holdings of U.S. taxpayers or face 30 per cent withholding on certain payments they receive. FATCA also imposes withholding and reporting obligations on U.S. funds.The U.S. Treasury Department and IRS have finalised detailed regulations and forms necessary for FATCA compliance and continue to update online FATCA Questions & Answers (“Q&As”) to facilitate compliance through its internet web portal, which each foreign financial institution must use to register and receive a global intermediary identification number (“GIIN”) needed to evidence FATCA compliance to payors.Meanwhile, local jurisdictions are implementing FATCA through local regulations and guidance, as envisioned under intergovernmental agreements (“IGAs”) with the U.S. The IGAs address local law impediments, such as bank secrecy and data protection laws, that would prevent institutions in those countries from fully complying with FATCA.Finally, the OECD’s common reporting standard (“CRS”) for Automatic Exchange of Financial Account Information, modelled on FATCA, has taken effect for many countries who have chosen to participate. Under the CRS, participating countries are able to obtain annual financial information from financial institutions in their jurisdictions and then automatically exchange that information with their exchange partner countries. Many countries have taken steps to translate the CRS into domestic law. The CRS supplements existing exchange of information arrangements (e.g. tax treaties and the OECD Multilateral Convention on Mutual Assistance in Tax Matters).


The U.S. has taken steps with respect to certain aspects of BEPS and is considering others. Specifically, with respect to Action 6 (prevention of treaty abuse), the U.S. generally already satisfies the minimum standard through limitation on benefits (“LOB”) articles in its tax treaties in force or in treaties or protocols awaiting ratification and its anti-conduit rules. Certain treaties with LOB provisions (e.g., Poland and Hungary) are stalled awaiting ratification in the U.S. Senate. In 2016, the Treasury Department released for comment a revised U.S. Model Tax Convention on Income, used by Treasury as the template when it negotiates tax treaties. The Treasury sought to address issues arising from local tax regimes that provide for low rates of taxation in certain countries with respect to mobile income, such as royalties and interest. The Treasury stressed its concern that taxpayers can easily shift such income across the globe through deductible payments that can erode the U.S. tax base. The draft model is intended to prevent a taxpayer from utilising provisions in the tax treaty, combined with special tax regimes, to pay no or very low tax in treaty partner countries.



USA

Endnotes

1. For these purposes, a “private fund” is any fund that would be an investment company under the Investment Company Act but for Sections 3(c)(1) or 3(c)(7) of that Act.

2. Certain barriers to accepting non-accredited investors exist. Rule 506 requires that non-accredited investors have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment. Non-accredited investors are unlikely to be “qualified clients” that are eligible to be charged performance fees. In addition, Alternative Investment Funds that wish to avail themselves of the opportunity to make general solicitations following the implementation of the amendments to Rule 506 of Regulation D will be unable to accept non-accredited investors.

3. Net worth calculation includes personal property and other assets, provided that the value of the individual’s primary residence, as well as the amount of indebtedness secured by the primary residence up to the fair market value of the primary residence, is excluded, but (i) indebtedness secured by the primary residence in excess of the value of the primary residence is considered a liability, and (ii) if the amount of indebtedness secured by the primary residence outstanding at the time of the individual’s purchase of the interests in an Alternative Investment Fund exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess is considered a liability.

4. Providing gifts and entertainment to public officials triggers pay-to-play restrictions in some jurisdictions as well. Please also note that a number of states and entities have imposed restrictions or outright bans on investment advisers’ use of “placement agents” as intermediaries when contacting public pension funds.

5. The solicitor disclosure is required to include: (a) the name of the solicitor; (b) the name of the adviser; (c) the nature of the relationship between the solicitor and the adviser; (d) a statement that the solicitor will be compensated by the adviser for the referral; (e) the terms of such compensation arrangement including a description of the fees paid or to be paid to the solicitor; and (f) the amount that will be charged in addition to the investment advisory fee and the differential attributable to such a solicitor arrangement.

AcknowledgmentThe authors would like to acknowledge the assistance of their colleague Pamela Lawrence Endreny in the preparation of this chapter. Pamela is a Partner in Skadden’s Tax practice. Email: [email protected]

7 Reforms


The Dodd-Frank Act represented a significant change in the regulatory regime governing Alternative Investment Funds and their advisers. Prior to the Dodd-Frank Act, many investment advisers to Alternative Investment Funds were exempt from registration under the Advisers Act and as a result did not have to comply with the reporting and compliance obligations that apply to registered investment advisers. However, as a result of the Dodd-Frank Act’s changes to the Advisers Act (described in question 1.2), nearly all advisers to Alternative Investment Funds that are offered or sold in the United States are either required to be registered with the SEC (or state regulatory agencies) or are “exempt reporting advisers” and required to file annual reports with the SEC.Additionally, the Dodd-Frank Act led to the creation of Form PF, the SEC’s and CFTC’s systemic risk reporting form described in question 1.3. Form PF requires registered investment advisers with over $150 million in private fund assets under management to report detailed portfolio-level information about the private funds they advise. Unlike Form ADV, Form PF is a confidential form that is reported only to the SEC and CFTC, and may be shared with other regulatory agencies and with Congress. The information contained in Form PF is designed, among other things, to assist the U.S. financial regulators in their assessment of systemic risk in the U.S. financial system.These recent changes have increased the compliance obligations applicable to advisers. They have also given the SEC a great deal more information about the Alternative Investment Funds industry in the United States.Separately, the U.S. executive branch and members of the U.S. Congress have stated that U.S. federal tax reform is one of their top legislative priorities, including significant changes to taxation of business entities. There is substantial uncertainty as to the likelihood, timing and details of any such tax reform and the effect of any potential tax reform on Alternative Investment Funds or their sponsors.



USA

Skadden is one of the world’s leading law firms, serving clients in every major financial centre with over 1,700 lawyers in 22 locations. Our strategically positioned offices across Europe, the U.S. and Asia allow us proximity to our clients and their operations. For almost 60 years Skadden has provided a wide array of legal services to the corporate, industrial, financial and governmental communities around the world. We have represented numerous governments, many of the largest banks, including virtually all of the leading investment banks, and the major insurance and financial services companies.

Heather Cruz is a member of the firm’s Investment Management Group. She represents investment advisers and investment banks in connection with the structuring and distribution of U.S. and non-U.S. private investment products, including multi- and single-strategy hedge funds, private equity funds and hedge and private equity funds of funds, including traditional private equity, credit and trading strategies, and infrastructure strategies. She also advises clients on the establishment, operation and sale of investment adviser and broker-dealer businesses.

With respect to private investment funds, Ms. Cruz advises clients on a broad spectrum of legal issues and considerations relating to the establishment and operation of private investment funds marketed and operated on a global basis. She also represents institutional investors seeking to invest in private investment funds and in investment advisers.

In addition, Ms. Cruz has extensive experience in providing regulatory advice to broker-dealers and investment advisers, including regarding compliance with various aspects of the Dodd-Frank Act, the U.S. Investment Advisers Act, the U.S. Investment Company Act and the rules and regulations of FINRA. When counselling these clients, she is often asked to conduct detailed reviews of their investment management, administrative and marketing operations and to assist in the development of policies and procedures intended to enable them to meet their fiduciary and other legal obligations.

Heather CruzSkadden, Arps, Slate, Meagher & Flom LLP and Affiliates4 Times SquareNew York, New York 10036USA

Tel: +1 212 735 2772Fax: +1 917 777 2772Email: [email protected]: www.skadden.com

Anna Rips is a member of the firm’s Investment Management Group. She represents investment advisers in connection with the structuring and distribution of U.S. and international private offerings of investment funds, including hedge funds, private equity funds and hybrid funds, and in connection with managed accounts, funds of one and investment advisory agreements. She also represents institutional investors in all aspects of their investments in private investment funds, managed accounts and investment advisers. Ms. Rips advises clients on related general corporate and regulatory matters, such as compliance with the U.S. Investment Advisers Act, the U.S. Investment Company Act, and the rules and regulations of FINRA.

Anna RipsSkadden, Arps, Slate, Meagher & Flom LLP and Affiliates4 Times SquareNew York, New York 10036USA

Tel: +1 212 735 3237Fax: +1 917 777 3237Email: [email protected]: www.skadden.com



NOTES

59 Tanner Street, London SE1 3PL, United KingdomTel: +44 20 7367 0720 / Fax: +44 20 7407 5255

Email: [email protected]

www.iclg.com

Other titles in the ICLG series include:

■ Anti-Money Laundering■ Aviation Law■ Business Crime■ Cartels & Leniency■ Class & Group Actions■ Competition Litigation■ Construction & Engineering Law■ Copyright■ Corporate Governance■ Corporate Immigration■ Corporate Investigations■ Corporate Recovery & Insolvency■ Corporate Tax■ Cybersecurity

■ Data Protection■ Employment & Labour Law■ Enforcement of Foreign Judgments■ Environment & Climate Change Law■ Family Law■ Fintech■ Franchise■ Gambling■ Insurance & Reinsurance

■ Investor-State Arbitration■ International Arbitration■ Lending & Secured Finance■ Litigation & Dispute Resolution■ Merger Control■ Mergers & Acquisitions■ Mining Law■ Oil & Gas Regulation■ Outsourcing■ Patents■ Pharmaceutical Advertising■ Private Client■ Private Equity■ Product Liability■ Project Finance■ Public Investment Funds■ Public Procurement■ Real Estate■ Securitisation■ Shipping Law■ Telecoms, Media & Internet■ Trade Marks■ Vertical Agreements and Dominant Firms

Alternative Investment Funds 2018 · 8 Angola Vieira de Almeida: Pedro Simões Coelho & Carlos...

Documents

Transcript of Alternative Investment Funds 2018 · 8 Angola Vieira de Almeida: Pedro Simões Coelho & Carlos...