Professional Investor Funds
Malta is today an active player in the international financial services industry. Indeed, Malta is fast becoming an established alternative, onshore, financial services centre within the European Union. The implementation of a pragmatic regime regulating Professional Investor Funds (PIF‘s) has allowed for parallel expansion in the hedge fund industry. By the end of September 2007, a total of 109 PIF licenses had been issued by the Malta Financial Services Authority.
A PIF may be set up as:
- An open-ended investment company with variable share capital (SICAV);
- A close-ended investment company;
- A limited partnership;
- A unit trust;
- A mutual fund.
Thus Maltese law provides full flexibility to promoters to structure their fund as they consider appropriate.
Classes of Investors
The PIF framework allows promoters to target three classes of investors:
- Experienced Investors;
- Qualifying Investors;
- Extraordinary investors;
Extraordinary Investor Funds are the most recent addition on Malta‘s PIF legislation.
Whereas the main eligibility criterion for investors in ‘Experienced Investor Funds‘ is past experience, in order for a person to be eligible to invest in a‘Qualifying Investor Fund‘ such person must declare to have appropriate experience or a net worth of at least Euro 750,000. In relation to ‘Extraordinary Investor Funds‘, the net worth of the investor must be of at least Euro 7,500,000.
Minimum investment in an Experienced Investor Fund is Euro 15,000 whereas that in a Qualifying Investor Fund is Euro 75,000. Investment in Extraordinary Investor Funds requires a minimum investment of Euro 750,000. No minimum investment requirements are imposed for subsequent subscriptions.
Both Experienced and Qualifying Investor Funds must publish an offering memorandum, which is to meet the approval of the MFSA prior to publication thereof. Extraordinary Investor Funds are not required to publish an offering memorandum provided that such funds issue a short marketing document.
None of these types of funds are subject to any investment restrictions, unless the fund is limited by investment objectives, policies and restrictions outlined in the offering memorandum or marketing document. Leverage can be unlimited in Qualifying and Extraordinary Investor Funds. However, in the case of Experienced Investor Funds the direct borrowing for investment purposes and leverage via the use of derivatives is restricted to 100% of NAV.
In all three types of funds it is possible for the service providers thereof (namely the manager, the administrator or the prime broker) to be established outside Malta so long as such they are regulated in a jurisdiction which is acceptable to the MFSA.
Approval of Service Providers
The MFSA‘s in-principle approval is required in respect of all persons involved in the fund‘s operations. This requirement extends to the directors, the manager, the administrator and the custodian. Consents and approvals should be sought prior to launch. As regards PIF‘s promoted to Extraordinary Investors, the MFSA‘s due diligence of service providers is not performed at a per-licencing stage provided that these are regulated in a recognized jurisdiction. The consequence of obtaining such approvals is that it could take around 4 weeks for a fund to obtain a license. In the case of Extraordinary Investor Funds, the MFSA has committed itself to provide feedback on application documents within three working days from their submission.
In the case of PIF‘s promote to Extraordinary Investors, a custodian is to be appointed having the duty to monitor the fund‘s observance of the investment and borrowing powers as enshrined in the offering document as well as to safe keep the assets of the fund. However, no custodian is required in the case of PIF‘s promoted to Qualified Investors and Extraordinary Investors. Nevertheless, such fund may entrust its assets to a custodian or prime broker. Where no custodian is appointed, the Fund is responsible for putting in place arrangements for the safekeeping of the assets.
The Malta tax effects of a PIF will depend mainly on whether it is categorised as a‘Prescribed Fund‘ or a ‘Non-Prescribed Fund‘. A PIF would be treated as a Prescribed Fund if the value of assets situated in Malta allocated to such fund for the purpose of its operations would be of at least 85% of the value of its total assets.
Assuming that a PIF is set up for non-resident investors and that based on its targeted investments and assets it would fall to be classified as a Non-Prescribed Fund, insofar as its assets would be wholly or mostly situated outside Malta (as per the requirements outlined above), then it should be noted that:
- Except for income from immovable property situated in Malta, any income it would receive (including dividends from Malta resident or non-resident companies) would be exempt from tax;
- Any capital gains realized from the disposal of shares or units in other schemes would not be subject to tax;
- Any profits (including dividends) distributed by the PIF to non-resident investors , as well as any capital gains realized by non-resident investors on the disposal of units in the PIF are not subject to tax in Malta, whether by withholding or otherwise. Any transfer of marketable securities by the PIF itself as well as the transfer of units held in a licensed PIF by an investor are not subject to any duty.
The efficiency of the PIF regime is further enhanced by the existence of a sound legal structure providing for close-out netting and segregated cell-legislation (also called ‘Protected Cell Legislation‘ in other jurisdictions) allowing umbrella funds to segregate the assets and liabilities of their various sub-funds.