Setting up an alternative investment fund in Guernsey
Guernsey provides a robust, yet flexible, regulatory environment and an attractive tax regime for financial services businesses and investment funds. There is a strong corporate governance culture and understanding of central management and control issues. Guernsey retains jurisdictional independence from the UK, allowing the Island’s government to make its own laws, set its own budget and determine its own levels of taxation.
Regulation of investment funds
The Guernsey Financial Services Commission (the “Commission”) regulates investment funds to protect investors and to maintain the island’s reputation. Guernsey has established a sophisticated infrastructure to foster the establishment of investment funds. The criteria for granting an authorisation or consent to a fund and the manner in which that fund will be regulated largely depends on whether the fund is open or closed-ended and the type of investor targeted. The Commission also regulates the licensing of fund service providers in Guernsey.
The formation and operation of investment funds in Guernsey is regulated by the Commission pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (the “POI Law”) and certain rules and regulations made thereunder. In granting authorisation or consent, the Commission will consider the status, reputation and track record of the promoter, the scope of the fund’s investment activities and the nature of its business. It will also consider the protection and/or enhancement of Guernsey’s reputation as a financial centre.
The two types of fund, open-ended and closed-ended, may make application for authorisation or consent under one of three routes:
Authorised Fund by standard application;
Authorised Fund by Qualifying Investor (“QIF”) application;
Registered Fund application.
The distinction between opened-ended and closed-ended funds is based on redemptions; open-ended funds will allow investors to have their holdings redeemed or repurchased art a price related to the value of the underlying property or assets, whereas closed-ended funds will allow only discretionary redemptions, if any.
There is no requirement to establish a Guernsey fund manager, but all Guernsey funds must have a local administrator. Open-ended funds, whether Authorised or Registered must also have a Guernsey-based custodian. An application fee is payable on submission of the initial fund application and an annual authorisation fee is payable on receipt of final consent or authorisation.
Where the promoter of a fund is not known to the Commission, it must submit a new promoter check list, which gives information on the track record of the promoter or its principals, the proposed investment business to be undertaken in Guernsey and personal information on the directors, managers and shareholders of the promoter, the shareholders and directors of any management company and the directors of the proposed fund.
Authorised funds by standard application
The standard application for authorisation of an open-ended or closed-ended fund in Guernsey is a three-stage process, comprising outline, interim and final authorisation.
Open-ended funds can be structured as one of the following which, to a large extent, will determine the applicable level of regulation:
- Class A funds are regulated by the Authorised Collective Investment Schemes (Class A) Rules 2008 (the “Class A Rules”), correspond to a UK authorised unit trust or OEIC and may be marketed to retail investors in specific jurisdictions, including the UK, following registration in the relevant jurisdiction.
- Class B funds are regulated by the Commission under the Collective Investment Schemes (Class B) Rules 1990 (the “Class B Rules”) and allow greater flexibility in investment and borrowing powers. Class B funds vary in scope from retail funds through to strictly private funds established as vehicles for a single institution, but have historically been targeted at institutional investors and high net worth individuals. Certain derogations from the Class B Rules are available on application to the Commission.
- Class Q funds, regulated under the Collective Investment Schemes (Qualifying Professional Investors) (Class Q) Rules 1998 (the “Class Q Rules”), are restricted to professional investors and allow the investment manager an even greater degree of flexibility.
Closed-ended funds are regulated under the Authorised Closed-Ended Investment Schemes Rules 2008 (the “Closed-Ended Rules”), which set out such matters as administration and custodian (if any) duties in relation to such funds, disclosures required to be made in the prospectus and the requirements to notify the Commission in respect of changes to the fund or its service providers.
Where a local fund manager is used in the structure of an authorised fund, it must apply for a licence to conduct restricted activities under the POI Law, the approval process for which typically takes four to six weeks.
Authorised funds by QIF application
Promoters of authorised funds which will be offered to professional or experienced investors, knowledgeable employees or persons willing to invest a minimum of US$100,000 may take advantage of the qualifying investor fund or “QIF” fast-track application process. An appropriately licensed Guernsey administrator must certify to the Commission that it has performed sufficient due diligence on the promoter and the procedures for offering the scheme (including procedures for effectively restricting the offer to qualifying investors) and that the requisite disclosures are made in the offering document of the scheme. By placing much of the onus of due diligence on the administrator, the Commission has been able to reduce substantially its period for processing such applications. Once all requisite documentation and the administrator’s certification have been submitted, the Commission has a guaranteed response time of three working days.
The QIF regime is complemented by a fast track process for consideration of any local fund manager’s licence application. A local fund manager is not legally required, but where the fund structure includes a Guernsey fund manager or the fund is structured as a limited partnership and has a Guernsey general partner, the Commission will process the application for the licence of such entity (again with reliance on the administrator’s certification) under the fast track licensee application process and put it before the Commission’s Licensing Committee within ten business days of receipt.
Open-ended Qualifying Investor Funds are subject to the Class A, Class B or Class Q Rules and the QIF Guidelines published by the Commission. Closed-ended Qualifying Investor Funds are subject to the Closed-Ended Rules and the QIF Guidelines.
Guernsey’s Registered Fund regime provides a lighter regulatory touch and a fast-track process to obtain consent from the Commission. As with QIF applications, the Commission’s reliance on the administrator’s certificate of due diligence on the promoter and the principal documents of the fund reduces the Commission’s response time to three working days.
Registered funds may not be offered directly to the public in Guernsey, but may be offered to regulated entities in Guernsey or offered to the public by entities appropriately licensed under the POI Law.
The Registered Fund regime is complemented by a fast track process for consideration of a licence application for a local fund manager (if any). Where the fund structure includes a fund manager or the fund is structured as a limited partnership and has a Guernsey general partner, the Commission will process the application (again with reliance on the administrator’s certification) under the fast track licensee application process and put it before the Commission’s Licensing Committee within ten business days of receipt.
Registered funds, whether open-ended or closed-ended are subject to The Registered Collective Investment Scheme Rules 2008 and The Prospectus Rules 2008 (the “Prospectus Rules”). The former set out such matters as administration and custodian duties (optional for closed-ended funds), disclosures required to be made in the prospectus and the requirements to notify the Commission in respect of changes to the fund or its service providers and the latter set out information for inclusion in the prospectus of any Registered fund.
Funds in Guernsey can be structured as limited liability companies, protected or incorporated cell companies, unit trusts or limited partnerships.
All Guernsey companies, whether cellular or non-cellular are incorporated under the Companies (Guernsey) Law, 2008 (the “Companies Law”), and are subject to that law and to their memorandum and articles of incorporation. Companies may elect a stated or unstated share capital and par or no par value shares.
Protected Cell Companies (PCCs)
In a PCC assets are segregated into cellular and non-cellular assets and held in individually created cells, or the core respectively. The assets of each individual cell include the share capital and reserves (including retained earnings, capital reserves and share premiums) attributable to that cell. The noncellular assets are, in effect, the general assets of the company. Importantly, the assets of each individual cell are only available to the creditors of that particular cell.
The segregation of assets and liabilities in one legal entity readily lends PCCs to be used for guaranteed or protected products.
Incorporated Cell Companies (ICCs)
An ICC is similar to a PCC but in an ICC each individual cell is an incorporated company with separate legal personality. The incorporated cells are not subsidiaries of the ICC and cannot bind the ICC but must contract in their own individual names. Each incorporated cell will have the same directors as the ICC. Only certain regulated businesses may be incorporated as, or converted into, an ICC. The conversion provisions under the Companies Law are very flexible permitting an existing PCC or ICC to convert into a company and vice versa.
A unit trust is constituted by an instrument of trust, usually between the manager and the trustee (or in certain circumstances made by a managing trustee only) and is subject to the Trusts (Guernsey) Law, 2007. A unit trust is not a separate legal entity in itself but is based on the concept of a trustee who has legal title to the assets and who holds them on trust for the benefit of the unit holders. There is no capital duty on the establishment of a unit trust and no annual registration fee. A unit trust may obtain exemption from Guernsey tax on all income except income arising in Guernsey (other than bank interest). Distributions to unit holders are not subject to Guernsey tax unless the unit holder is Guernsey resident.
The Limited Partnerships (Guernsey) Law, 1995 as amended provides an enabling framework for the establishment and operation of Guernsey limited partnerships. A Guernsey limited partnership is not a legal entity in its own right (unless it elects to have legal personality) but is a partnership managed by a general partner, the limited partners of which are not liable over and above the amounts which they have agreed to contribute to the partnership. There is no limitation on the number of limited partners and the general partner will ordinarily have unlimited liability for the debts of the partnership.
Profits and losses of a partnership are attributed to the partners according to their proportionate share. A partner who is not resident in Guernsey will not be liable to any Guernsey income tax except to the extent that any part of that share is derived from Guernsey source income (other than bank interest), which includes profits from a trade carried on in Guernsey but excludes profits from international activities carried on outside of Guernsey.
Limited partnerships are popular in the constitution of private equity funds and carried interest vehicles.
The rate of corporation tax for companies registered in Guernsey is zero percent. This follows the introduction into Guernsey of a ‘zero-ten’ tax regime. It is possible for open- or closed-ended funds (whether constituted as a company, a unit trust or a limited partnership) and their wholly-owned subsidiaries to apply to the Administrator of income tax for ‘exempt status’, which grants exemption from tax on all income, save for any income arising in Guernsey (other than Guernsey bank interest). The fee for exempt status is £600 per annum as an exempt company charge. There are no Guernsey withholding taxes on dividends other than those paid to Guernsey resident shareholders, and there is no Guernsey capital gains tax.
There are no stamp duties or transfer taxes payable on the issue or transfer of shares or other securities. Similarly, there are no exchange control or currency restrictions in Guernsey.
If the investment manager or adviser is structured as a company, and its activities are confined to acting within its licence under the POI Law, then it would currently be taxed in Guernsey at the rate of zero percent.
There are no capital gains, inheritance taxes, goods and services tax or VAT payable in Guernsey.
The shares, units or interests of Guernsey investment funds may be listed on stock exchanges, but QIF schemes must have a mechanism to remove investors admitted via an exchange who do not fall within the Qualifying Investor” definition.
Guernsey has proven to be a popular choice of jurisdiction in which to establish funds that are to be listed on stock exchanges. Guernsey’s focus on alternative asset class investment funds has made it a natural choice for AIM listings. The Dutch regulator, the Authority for Financial Markets, has ruled that Guernsey is one of the few jurisdictions to have the requisite adequate home supervision so Guernsey funds do not need any further licensing in order to list on Euronext. Changes to the main board LSE listing rules such as the removal of quarterly portfolio disclosures have favoured hedge funds and fund of funds, which have become niche businesses for Guernsey.
Circulation of a prospectus
The Prospectus Rules apply to regulate the content of the prospectus of a Registered fund and also to any offer of general securities or derivatives either made by a Guernsey entity (company, limited partnership or unit trust) or made to the public in the Bailiwick wherever the offeror is domiciled. The “public” is defined as an identifiable category of persons exceeding 50 in number. The Prospectus Rules do not apply to offers of investments which are listed on an exchange supervised by a member of the International Organization of Securities Commissions (IOSCO), such as the London Stock Exchange or AIM.
Any prospectus circulated to the public in the Bailiwick of Guernsey or outside the Bailiwick by a Guernsey entity must meet the requirements of the Prospectus Rules and be delivered to the Commission for registration on payment of an application fee. Any changes to the contents of the prospectus must be notified to investors.
By Darren Bacon, Partner, Mourant Ozannes
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