In fact the jurisdiction now hosts around 700 funds pursuing a variety of strategies, as well as acomplete ecosystem of support services providers such as fund administrators, law firms and audit firms. The sector has now evolved to the point where managers are not just using the country as a domicile for funds, but are also increasingly looking at the jurisdiction as a domicile for their fund management operations.
A key driver of this growth has been the professional investor fund (PIF) regime for fund managers pursuing unorthodox investment strategies, which remains in place following the introduction of the Alternative Investment Fund Managers Directive (AIFMD) and which will still apply for de minimis fund managers. Malta is now widely seen as a serious contender for all types of funds business and as operating on a level playing field with jurisdictions other funds jurisdictions. The table below illustrates the matter by contrasting Malta with Ireland and Luxembourg, the two other well established EU fund jurisdictions.
Malta.
Service Providers.
A PIF may appoint service providers according to its own needs. Typical service providers would be a Manager, an Administrator, an Investment Advisor, and/or a Custodian/Prime Broker. The appointment of a Custodian is a mandatory requirement for PIFs promoted to Experienced Investors.
Other service provider requirements.
Service Providers should be established and regulated in a Recognised Jurisdiction, that is, EU and EEA Members, as well as signatories to a Multilateral MoU or Bilateral MoU with the MFSA covering the investment services sector.
There are instances where MFSA could accept Service Providers not established in a Recognised Jurisdiction if the Service Provider is the subsidiary of a firm that is regulated in a Recognised Jurisdiction, or if MFSA considers that the Service Provider is subject to equal adequate regulation in its jurisdiction.
EU investment services providers can use the licence attained in their member state to passport their services and set up branches in Malta without the need to apply for a licence in Malta.
Available legal structures
- Companies with variable share capital (SICAV);
- Companies with fixed share capital (INVCO);
- Limited Partnership;
- Unit Trust;
- Mutual Fund.
Investment restrictions
- PIFs promoted to Experienced Investors (Experienced Investor Funds).
Direct borrowing and leverage via the use of derivatives is limited to 100% of Net Asset Value.
A PIF may invest up to 20% of its total assets in securities issued by the same body, and up to 30% of its assets in money market instruments issued by the same body.
The scheme may invest up to a maximum of 35% of its total assets in deposits held with a single body.
The Scheme may invest up to a maximum of 30% of its total assets in any single collective investment scheme which is a non-UCITS or which is not an open-ended collective investment scheme subject to risk-spreading requirements.
Where the PIF is a fund of hedge funds, it shall invest in at least five hedge funds.
Where the PIF enters into OTC derivative transactions, its exposure to a single counterparty should not exceed 20% of its total assets.
- PIFs promoted to Qualifying
- Investors (Qualifying Investor Funds)
There are no investment or borrowing restrictions applicable to these types PIFs, except those which may be specified in their offering document, or if the Fund invests in immovable property.
- PIFs promoted to Extraordinary Investors (Extraordinary Investor Funds)
These PIFs are not subject to any borrowing or investment restrictions other than those which may be specified in their officering document.
Available Fund Types.
There are three categories of professional investor funds: Experienced Investor Funds An'Experienced Investor'is a person who has the expertise, experience and knowledge to be in a position to make his own investment decisions and understand the risks involved.
The minimum investment requirement is €10,000, whilst in the case of PIFs licensed prior to 1st January 2010, the minimum investment requirement remains €15,000.
- Qualifying Investor Funds.
A qualifying investor is required to meet one or more out of ten criteria, such as an individual whose net worth or joint net worth with that person's spouse, exceeds €750,000.
The minimum investment requirement is set at €75,000.
- Extraordinary Investor Funds.
An extraordinary investor must fulfil one or more out of seven criteria, such as being an individual whose net worth or joint net worth with that person's spouse, exceeds EUR7.5 million or USD7.5 million.
The minimum investment requirement is set at €750,000.
Approximate Regulatory Approval time.
The response of MFSA on proposed fund structure is usually: 7 business days in the case of Experienced and Qualifying Investor Funds; 3 business days in the case of Extraordinary Investor Funds.
The processing of a Collective Investment Scheme Licence application will normally be finalized within six to twelve weeks from the date that a complete application is submitted to the MFSA.
Tax Treatment.
Malta is the only EU Member State to operate a full imputation system, meaning that the tax paid by the company is regarded as prepaid tax on behalf of the tax liability of shareholders. A company registered in Malta pays tax on its profits, however, upon distribution of profits to shareholders, the latter are entitled to a substantial refund of the tax paid by the distributing company. Under Maltese law, the tax treatment of prescribed funds differs from that of non-prescribed funds. A prescribed fund must have over 85% of its assets situated in Malta.
Prescribed funds are charged 15% withholding tax on bank interest, 10% final withholding tax on interest or premiums, tax on gains or income derived from immovable property in Malta. Any other income will not be subject to tax in Malta.
Non-prescribed funds are generally exempt from tax in Malta, the only exception being in the case of income derived from immovable property situated in Malta.
Available Tax Treaty Network.
Malta has double tax treaties in force with 63 countries. There are other treaties which have been signed but are not yet in force, including one with Luxembourg, as well as other treaties which are being negotiated or renegotiated.
A PIF will benefit under double tax treaties depending on whether it qualifies as a 'person' under the said treaties, given that in the vast majority of existing double tax treaties, no specific reference is made to collective investment schemes.
Relevant Financial Services Authority.
Malta Financial Services Authority (MFSA)
Application Formalities.
An application form has to be filled in, identifying the objects of the scheme, the competence of its directors and officers, the target investors, and other information relating to the structure and operation of the scheme. MFSA will grant a CIS licence if the fund will comply with the relevant regulations and the directors or other officers are fit and proper persons to perform their functions.
Standard licence conditions apply if the scheme is available to the public, whilst schemes restricted to classes of knowledgeable investors may be subject to conditions as stipulated by the MFSA.
There are three distinct phases in an application process:
- Phase One - Preparatory
During this phase the promoters submit a preliminary outline of the proposal to the MFSA, together with a draft Application Form and supporting documents. The application fee has to be paid, which is non-refundable.
MFSA will provide its comments to the applicant regarding the draft application form and the supporting documentation within three weeks from submission. MFSA will also conduct fit and proper checks, and determine whether the relevant Standard Licensing Conditions should apply according to the nature of the proposed scheme.
- Phase Two - Pre-Licensing
The MFSA will issue its "in principle" approval for the issue of a licence. At this stage, signed copies of the revised application form should be submitted, together with supporting documents in their final format. Any other outstanding matters raised during the application process need to be resolved for the licence to be issued.
- Phase Three - Post Licensing/ Pre-Commencement of Business
The Applicant may be required to comply with a number of specific post-licensing matters before the formal commencement of business.
Any other relevant criterion.
When assessing applications for CIS licences, the MFSA will give particular importance to?
- the degree of protection afforded to the investors;
- the impact on the reputation of Malta taking into account Malta's international commitments;
- the promotion of competition and choice; and
- whether the applicant and key parties connected with the CIS are reputable and suitable persons.
Another fundamental regulatory concept is that qualifying shareholders, that is, founding shareholders holding 10% or more in the fund, directors, officers, Trustees and/or General Partners and senior staff of the fund must show solvency, competence and integrity in all their dealings on a continuous basis. Personal questionnaires must be completed by each relevant person, highlighting their experience standing, competence and track record.
Ireland.
Service Providers.
Irish fund service providers require authorization either under the Investment Intermediaries Act
(1995) or the Markets in Financial Instruments and
Miscellaneous Provisions Act (2007).
Whilst core fund administration activities must be performed by an Irish service provider, it is possible to outsource certain administration activities, for which the fund administration company retains ultimate responsibility.
Other service provider requirements.
EU investment services providers can use the licence attained in their member state to passport their services and set up branches in Ireland without the need to apply for a licence in Ireland.
Available legal structures.
- Unit Trust;
- Investment Company (fixed or variable capital);
- Investment Limited Partnership;
- Common Contractual Fund (CCF);
- Qualifying Investor Fund (QIF) - this investment fund vehicle is targeted at sophisticated and institutional investors;
Investment restrictions.
Notice 13.12 issued by the Central Bank of Ireland delineates the general investment restrictions which are applicable to collective investment schemes other than UCITS.
In particular, an investment by the scheme in securities which are not traded in or dealt on a market which is provided for in the deed of constitution or articles of association may not exceed 10% of the net assets of the scheme.
There is a limit of 10% of net assets of the scheme concerning investment in securities issued by the same institution, unless the sole objective of the scheme is to invest in Irish equities.
There are other restrictions concerning deposits with a single institution, investments in classes of securities issued by a single issuer, acquisition of units in other open-ended collective investment schemes and leverage, which may not exceed 25% of the net assets of the scheme at any time.
However, notice 12.8 stipulates that the above conditions and restrictions may, on a case by case basis, be disapplied in the case of schemes marketing their units to professional investors only.
Available Fund Types.
It is possible to set up professional investor funds as well as qualifying investor funds, the latter targeting institutional and sophisticated investors. The minimum subscription requirement is €100,000, or its equivalent in other currencies, although certain exemptions may be granted, for instance to the management company or general partner.
Funds which are set up as QIFs are:
- Alternative investment funds, including hedge funds;
- Fund of funds;
- Sovereign wealth funds;
- Property / real estate funds;
- Venture capital / private equity funds;
- Emerging markets funds;
- Infrastructure funds;
- Capital protected or guaranteed funds;
- Single country or regional funds.
Approximate Regulatory Approval time.
Typically a fund in Ireland can be approved within 6 to 8 weeks. If a fast track approval is resorted to, the first comments by the Central Bank will normally be issued within 10 working days.
Tax Treatment.
Irish investment funds are not subject to tax, whilst no Irish tax is chargeable in the case of non-resident investors.
Irish investment funds and their investors are not subject to wealth tax. Inheritance or gift tax is only applicable if the fund units gifted or inherited involve Irish parties. Moreover, there is no stamp duty on fund units.
Ireland's 12.5% corporate tax rate can be availed of by fund management companies, investment managers and fund service providers.
Available Tax Treaty Network.
Ireland has signed double taxation agreements with 69 countries, of which 64 are in operation.
Relevant Financial Services Authority.
Irish Financial Services Regulatory Authority (IFSRA)
Application Formalities.
In order to set up an investment fund in Ireland, a two-stage process must be adhered to, where first the promoter/investment manager is approved, followed by approval of the fund itself and the relevant service provider arrangements. The promoter/investment manager can be located outside Ireland, and need not be subject to direct authorization or supervision by the Irish Central Bank.
The promoter must submit an application form to the Central Bank for approval of the investment fund, accompanied by a prospectus, business plan, individual questionnaires or declarations for the directors of the fund, administration and investment agreements, as well as a Memorandum and Articles of Association or other documents depending on the legal structure of the fund.
Any other relevant criterion.
The prospectus must indicate its minimum subscription requirements and that it is authorised to market solely to professional investors. The following declaration must be included in the prospectus:
'Accordingly, the requirements of the Central Bank which are deemed necessary for the protection of retail investors, in particular the conditions set down by the Central Bank in relation to investment and leverage, do not apply to the scheme.
Luxembourg.
Service Providers.
The main service providers for a SIF include the management company (common fund), depositary, central administration, registrar, transfer agent and auditor.
Other service provider requirements.
EU investment services providers can use the licence attained in their member state to passport their services and set up branches in Luxembourg without the need to apply for a licence in Luxembourg.
Available legal structures.
- Specialized Investment Fund (SIF);
- Société d'investissement en capital à risque - SICAR - undertaking for collective venture capital investment; A SICAR can be incorporated as public company, private company, partnership limited by shares, private partnership, or a cooperative company;
- Undertakings for Collective Investment (UCI);
Investment restrictions.
As a rule, a SIF cannot invest more than 30% of its assets in securities of the same nature issued by the same issuer. However, this limitation does not apply to securities issued or guaranteed by an OECD Member State, or target UCIs which are subject to risk diversification principles similar to those applicable to SIFs.
When making use of Financial Derivative Instruments (FDIs), appropriate diversification of the SIF's underlying assets is necessary.
Similarly, not more than 10% of net assets may be invested in securities issued by one particular issuer. Furthermore, it is not possible to subscribe to more than 10% of securities issued by one issuer.
There are also rules concerning alternative investments, venture capital, future contracts and options as well as regarding real estate.
An investment fund may borrow up to 200% of its net assets for investment purposes from first class credit institutions on a permanent basis.
Available Fund Types.
Specialized Investment Fund (SIF) - two forms:
- The common fund, with the capital divided into units and formed by unit holders, and
- The investment company, formed by shareholders and with the capital divided into shares.
Approximate Regulatory Approval time.
The registration process of a SIF in Luxembourg may take from 2 to 4 months, depending on the complexity of the fund.
Tax Treatment.
Luxembourg UCIs are tax exempt, except for registration duty which is fixed at €75 and annual subscription tax. In the case of annual subscription tax, a reduced tax rate would be applicable if the UCI invests in money market instruments and deposits, and the reduction extends to individual compartments of multiple compartment UCIs. A number of exemptions may also apply in the case of investment in other Luxembourg UCIs, Institutional cash UCIs, pension fund pooling vehicles, microfinance UCIs, or exchange traded funds.
Luxembourg UCIs may incur withholding tax on dividends and interest, as well as tax on capital gains in the country of origin of their investment. Only certain double tax treaties signed by Luxembourg are applicable to Luxembourg SIFs.
Available Tax Treaty Network.
Luxembourg has 64 double tax treaties in force with other countries, and some 27 others which are still pending.
However, only certain double tax treaties with some 35 countries are applicable to investment companies.
Relevant Financial Services Authority.
Commission de Surveillance du Secteur Financier (CSSF);
Application Formalities.
The authorization process consists of several stages:
First, there must be an initial request for authorization, comprising the application form and any draft documents as required. The CSSF will acknowledge the receipt of the application file within 2 working days, and upon examination provide its comments together with requests for any further information or supporting documents. Once the examination is complete, the applicant must submit the final documents to the CSSF, upon receipt of which the CSSF will proceed with the registration of the Investment Fund on the relevant list.
A fast track authorization procedure may be availed of for the creation of a side pocket, the transfer of foreign UCIs to Luxembourg and the liquidation of UCIs and compartments.
