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Gibraltar – Onshore European option for managers using AIFMD

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Gibraltar is a peninsula located on the southern tip of Iberia and is home to 32,000 people. It is the only British jurisdiction located in continental Europe. For managers, particularly those based in the UK, who are searching for options on where to establish an AIF, and indeed an AIFM, to comply with the AIFM Directive, the fact that Gibraltar is an English-speaking peninsula, uses Sterling as its currency, and has a legal system based on English common law, makes it highly appealing. 

For lovers of golf, there are hundreds of golf courses within a 50-kilometre radius. There are great beaches, the Spanish city of Malaga is within easy reach, and for the winter, the Sierra Nevada ski resort is no more than a 3-hour drive away. Most air links are to the UK from Gibraltar. It's a 2.5-hour flight. BA flies from Heathrow, while EasyJet flies from Gatwick and Bristol. 
Malaga airport is just over a 1-hour drive away and that offers direct flights to numerous European cities including Paris and Frankfurt.

Whereas Jersey and Guernsey are well-known offshore jurisdictions, Gibraltar provides an onshore European option for managers who wish to make full use of the funds marketing passport under AIFMD; something that Jersey and Guernsey are still not yet able to avail of, despite ESMA's recent recommendation that they should achieve `Third Country' status. 
The AIFMD was transposed into Gibraltar law on 22nd July 2013 but the FSC chose not to gold plate the regulations. 
"We've had roadshows in Singapore, Hong Kong, Switzerland, London and New York; we've been on the road quite a bit spreading the word and telling people about the benefits of Gibraltar. We've raised the profile of the jurisdiction and put it on people's radar," says Philip Canessa (pictured), Senior Executive, Funds & Asset Management, Gibraltar Finance. 
"One of the main points we stress is that Gibraltar is in the EU. If you are a manager based in the US or Asia and you want to market into the EU, Gibraltar is a good option. In Hong Kong, managers automatically think of the BVI and Cayman as leading offshore jurisdictions to incorporate a fund; what we like to say is that we can be thought of as the onshore European equivalent of Cayman."

Over the years, Gibraltar's funds industry has been steadily growing with respect to its specialist workforce, its service provider infrastructure and the number of investment funds that today form a key tenet of Gibraltar's financial sector alongside banking, insurance and private client services. In total, it is home to approximately 100 Experienced Investor Funds (‘EIFs'), managing in excess of GBP2.5billion of assets under management. 
The EIF regime continues to grow, and thanks to one particular feature, known as the pre-authorisation launch mechanism, managers are able to enjoy unrivalled speed to market within the EU.

Given that many EIFs are structured as Protected Cell Companies, using a sub-fund arrangement, it is estimated by the Gibraltar Funds & Investments Association that as of December 2014, some 180 different sub-funds were active on Gibraltar. 
"Regulation, reputation and speed to market are the three key features of Gibraltar. We are a small jurisdiction so we take reputation extremely seriously. We are well regulated but we don't go as far as gold plating regulation. We work in partnership with the FSC and the private sector to help Gibraltar's financial services industry to grow. And speed to market is vital for managers (who already have asset commitments from investors)," says Canessa.

EIFs versus private funds

Gibraltar's flexible funds legislation provides for a variety of fund products, ranging from small unregulated private schemes to regulated professional funds for experienced investors and UCITS retail funds.

A significant step forward in Gibraltar's development as a fund domicile jurisdiction was the introduction of the Experienced Investor Fund regime in 2005. This was revised in 2012 to build on the progress achieved through the previous legislation. 
EIFs currently established in Gibraltar are a diverse assortment of open-ended and closed-ended funds with asset classes ranging from standard tradable securities to property, private equity, venture capital, fund of funds and other alternative investment classes.

"If you want to set up a fund with your own money, and perhaps friends and family money, and you don't want the pressure of complying with the regulation of having an EIF, you have the option to set up a Private Fund. A Private Fund does not require an annual audit, nor does it need an administrator or custodian. It can help managers dip their toe in the water and test out their investment strategy prior to establishing a regulated fund vehicle. 
"After a year, depending on the size of AUM, a manager could then choose to convert the Private Fund into an EIF whilst still retaining the full track record of the investment strategy. That would allow them to open up the fund to a wider range of potential investors. Whereas a Private Fund can only be marketed to a maximum of 50 investors, an EIF has no such restriction," explains Canessa. 
If and when a manager running a Private Fund (as a self-managed fund) reaches EUR100million, they must become licensed as an AIFM and either take on the day-to-day responsibilities of complying with the AIFMD, or choose to appoint a third party management company (‘ManCo'). 
It takes just 10 days to get an EIF registered and approved by the FSC, with Canessa noting that there are two options for managers. One is that they launch the fund prior to notification – this is a `pre-authorisation launch' whereby the manager submits all the necessary documentation within 10 business days of launch. The other option is a `pre-launch authorisation' where the documents are submitted 10 business days before the fund launch. 
"The EIF is registered with the FSC and is regulated to the extent that all the service providers appointed to the fund are themselves licensed and regulated. This means it has to have a regulated fund administrator, two licensed and regulated Gibraltar resident directors, a regulated custodian, and a regulated investment manager. If the manager is located outside of Gibraltar they need to be in a jurisdiction with an equivalent regulatory regime.

"If the manager is already an AIFM, they can establish an EIF in Gibraltar and get it passported within 20 days," clarifies Canessa. 
Since Gibraltar funds can trade as private companies, they are eligible under US law to make a "tick the box" election and thereby be treated, for US tax purposes, as partnerships. In some cases, this obviates the need to set up a US feeder fund structure for US investors.

Gibraltar therefore offers managers the opportunity to stay out of scope of the AIFMD with the Private Fund regime, or to opt in under the full scope of the AIFMD with the establishment of an EIF, which they are then free to passport across the EU. 
That flexibility makes the jurisdiction particularly appealing to start-up managers.
Experienced Investor Funds – summary features:

• Pre-launch approval mechanism (speed to market)
• No investment or borrowing restrictions
• Fund may be self-managed
• Expedited start-up process and competitive start-up costs
• No limit to number of investors
• Reasonable ongoing operating costs
• Tax neutrality
• Two Gibraltar resident directors
• Available to Experienced Investors as per rules.

Common EIF structures include:

• A Gibraltar limited company, unit trust or limited partnership. This can include foreign structures approved by the FSC where management and control is located in Gibraltar;
• Other form recognised by the FSC; and
• A Protected Cell Company under the PCC Act 2001.

The Protected Cell Company structure is one of the most popular EIF structures. It has been in use in Gibraltar since 2001 and funds have been using the PCC structure since the enactment of the original EIF regulations in 2005.

Using this structure, the manager might set up different cells (or sub-funds) within the PCC for different strategies, or versions of a single strategy, under the umbrella, and may even establish different cells for different investors, different currency classes etc. There are no cross-liabilities between cells in the umbrella structure. As such, the PCC is ideal for managers wishing to provide investment products to clients with varying risk and return appetites. 

The PCC structure is sufficiently flexible to permit individual cell assets to be managed by separate investment managers; a structure common with high net worth individuals.

"Every time a cell is added to the corporate structure of the PCC the manager is required to inform the regulator. The FSC has to know how many cells there are in the PCC and what each is doing. 
"I would estimate that roughly two-thirds of EIFs in Gibraltar are set up as a PCC," says Canessa. 

Thanks to its size, Gibraltar is both accessible and business-friendly. Gibraltar's regulator, the Financial Services Commission (‘FSC'), is often available to meet with managers within one to two days' notice. Many of the law firms in Gibraltar are locally based. They all have international connections and many of them have a deep expertise in financial services. 
"We have three or four AIFMD-licensed depositaries in Gibraltar; three of the banks here are well positioned to support managers who need `depo lite' or full depositary services. We've got a steadily growing number of AIFMs – many of which are self-managed, formerly Private Funds – and we have 10 licensed fund administrators. Up until 2012, EIFs had to have a Gibraltar-based administrator. The regulations were then changed in 2012 that now allow managers to appoint an externally approved administrator. As a result, we now have seven externally approved administrators that fund managers can choose from," confirms Canessa.

The application process, with respect to the AIFM, is also much quicker than other jurisdictions (which is important for managers who need speed to market). The FSC has a service level standard of 18 weeks to review and approve a manager application. 
Tax regime

The corporate rate of tax in Gibraltar is 10 per cent. For a professional who relocates to Gibraltar and fulfills certain criteria (i.e. they have skills that aren't readily available in the local economy) they can apply for a status called High Executive Possessing Specialist Skills (HEPSS). What this means is that their personal taxation is limited to the first GBP120,000 of earned income with maximum tax payable of approximately GBP30,000. So a hedge fund manager whose remuneration isn't fixed (i.e. they receive a bonus) would pay tax on their annual salary up to GBP30,000, and anything in excess of that salary would be completely tax-free. 
"At a jurisdictional level, Gibraltar has signed the equivalent of 135 Tax Information Exchange Agreements (TIEAs) with over 80 jurisdictions. It is also preparing to adopt the upcoming Common Reporting Standards (CRS). "We were subjected to an OECD peer group review in October 2014 and we were classified as `largely compliant'. Out of 10 separate essential elements of Gibraltar's record in exchange of information, 7 were rated as compliant and 3 were largely compliant. To put that into context, we have the same rating as the UK and Germany," says Canessa. 
AIFMs on the rise

The FSC has started to authorise a number of AIFMs and some of these provide a third-party platform for external advisers (i.e. start-ups, or non-EU managers). This is something that Gibraltar is using as part of its marketing strategy to attract managers, in particular Swiss managers, who lie outside the EU and who are looking for a flexible option to establish an onshore European fund.

Canessa notes that Gibraltar is starting to see the number of AIFMs slowly start to rise, but exact numbers at this stage are not known. 
"We have excellent relations with Switzerland; Gibraltar is home to four Swiss banks, two of which have been here for more than 30 years. What we tend to say to Swiss managers is that they can have the AIFM in Gibraltar, the investment adviser in Switzerland, and use the AIFM to passport services throughout the EU. 
"The FSC signed a Memorandum of Understanding (MoU) with FINMA, the Swiss regulator, earlier this year, and ditto the same applies with the Hong Kong SFC. We are using this as a key driver of our marketing push when speaking to non-EU managers who are looking for a solution to market their fund(s) in Europe," concludes Canessa.

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