Ireland
Ireland
Answers to frequently asked questions pertaining to setting up investment funds in Ireland
Ireland
Ireland
Answers to frequently asked questions pertaining to setting up investment funds in Ireland
1. What if any are the investor restrictions (number, by category)?
Irish Funds are not required to have a minimum number of investors, however, on the whole, Irish regulated tax exempt funds must, depending on the category of fund, and the specific wording of the legislation, be offered directly or indirectly to the public or must be available to the public.
The following additional fund categories are not widely used either due to their tax status (non-designated funds) or the narrow investor requirements (collective investor funds):
- Non-designated funds (no minimum subscription requirement; only available as variable capital investment companies and may not be sold to the public; these are private investment fund vehicles and are subject to Irish corporation tax at a rate of 10%/12.5% on income/capital gains);
- Collective investor funds (available to life assurance companies, pension funds and other collective investors; tax exempt, do not have to be sold publicly).
2. What if any are the investor restrictions (minimum investment, qualifications, by category)?
UCITS must be offered in European Economic Area, but may also, but not alternatively, be offered elsewhere. UCITS and Non-UCITS established as common contractual funds may not be offered to natural person investors. Apart from that, there are no substantive Irish restrictions in relation to the nature or quality of UCITS investors outside of those related to contractual capacity.
There are no Irish restrictions in relation to the offering of Irish Non-UCITS retail funds other than that retail funds which are authorised by the Financial Regulator as private equity funds must impose a minimum initial subscription requirement of 12,500 on each investor and other than as provided above in relation to common contractual funds. Non-UCITS Professional Investor Funds are required to impose a minimum initial subscription requirement of 125,000 otherwise there are no Irish restrictions. Non-UCITS Qualifying Investor funds are required to apply a minimum initial subscription requirement of 250,000 and investors must meet a wealth test on a self-certification basis; natural persons must have minimum net worth (which excludes main residence and household goods) in excess of 1,250,000 and non-natural persons must own or invest on a discretionary basis at least 25,000,000 or have beneficial owners which are qualifying investors in their own right.
In relation to Professional Investor Funds and Qualifying Investor Funds, an exemption from the minimum initial subscription requirement and, in the case of Qualifying Investor Funds, the investor criteria, is available to directors of the fund, the investment management company, directors of the investment management company, the promoter and its affiliates, and employees of the investment management company who are directly involved in the fund’s management or are senior employees with experience in the provision of investment management services.
All Qualifying Investor Fund investors must certify in writing to the fund that they meet the minimum criteria listed above and that they are aware of the risk involved in the proposed investment and of the fact that inherent in such investments is the potential to lose the entire sum invested. Please see “1” above in relation to non-designated funds and collective investor funds.
3. Is there a requirement for an Irish fund’s sponsor to be approved by the Irish Regulator?
Before the Financial Regulator will accept an application for the authorisation of an Irish investment fund, the Financial Regulator must be satisfied that the fund sponsor or promoter is of good repute, has a minimum level of financial resources and a relevant track-record in collective investment schemes. With limited exceptions, the promoter is required to be regulated by a supervisory authority recognised by the Financial Regulator. Promoters are required to have audited shareholder funds of not less than 635,000 on an ongoing basis (though there is no requirement to submit audited accounts on an ongoing basis). The requirements are essentially the same for all categories of Irish fund though for retail funds, experience in the distribution of retail funds or access to a retail distribution network will be an additional consideration.
4. Is there a requirement for the investment manager of an Irish fund to be approved by the Irish Regulator?
Before the Financial Regulator will accept an application for the authorisation of an Irish investment fund, the proposed discretionary investment management company(ies) of the fund must be cleared in advance. Acceptable investment management firms include those which are regulated under the Markets in Financial Instruments Directive (MiFID) (Directive 2004/39/EC) and non-EU firms regulated by a supervisory authority recognised by the Financial Regulator.
In relation to all Irish funds, non-EU investment managers must confirm in writing to the Financial Regulator, as a condition of being approved, that they have and will maintain net shareholders’ funds of not less than 125,000 or its equivalent in another currency.
In relation to Irish UCITS, the investment managers must be authorised or registered for the purpose of asset management and must be subject to prudential supervision. In addition, where a non-EU investment manager is proposed to be appointed, there must be a form of co-operation agreement in place between the Financial Regulator and the supervisory authority of the third country that regulated the investment manager.
5. What are the custodian/depository bank requirements for an Irish fund?
The assets of Irish regulated funds must be entrusted to a depository for safe-keeping. The depositary must be a credit institution authorised in Ireland, an Irish branch of an EU credit institution or an Irish incorporated company which is wholly owned by an EU credit institution (or equivalent from a non-EU jurisdiction) provided that the liabilities of the Irish company are guaranteed by its parent.
The prescribed role of the depositary is to ensure, as a general rule, legal separation of non-cash assets and to ensure that certain core aspects of the management of the fund are carried out in accordance with applicable legislation, regulatory conditions and the fund’s constitutive documents, for example, valuation, sale, issue, repurchase and cancellation of fund units. In addition, the depositary must enquire into the conduct of the management company, investment company or general partner in each annual accounting period and reporting thereon to the fund’s unitholders.
6. What are the local Director requirements?
Both UCITS and non-UCITS investment companies are required to have a minimum of two Irish resident Directors on their boards. Common contractual funds and unit trusts are required to have an Irish management company and such management companies are required to have at least two Irish resident Directors on their boards. Investment limited partnerships are required to have an Irish General Partner and such entity is required to have at least two Irish resident Directors on its board. The board of Directors of a fund or its management company/general partner cannot have Directors in common with the board of the depositary of the fund. All Directors appointed to such entities must be approved in advance by the Financial Regulator pursuant to a fitness and probity regime applicable to all regulated financial services sectors in Ireland on the basis that the Regulator is satisfied that each has appropriate expertise and integrity and is of good repute. The names and biographies of the directors must appear in the fund’s Prospectus. Resignations of Directors from Irish funds and their management companies/general partners must be notified immediately to the Financial Regulator.
7. What are the Prospectus/offering document/constitutive document requirements?
All UCITS and Non-UCITS must issue a prospectus, which must be dated, and the essential features of which must be kept up to date. Investors must be offered a copy of the Prospectus, free of charge, prior to subscribing for units in the relevant fund. Any changes to the Prospectus must be made by prior approval of the Financial Regulator or, in the case of Qualifying Investor Funds, provided that the changes fall within certain parameters, prior notification to the Financial Regulator. Any material changes to the Prospectus must be notified to investors in the fund’s subsequent periodic reports. The overriding regulatory consideration is that the Prospectus should contain sufficient information to enable investors to make an informed decision whether to invest in the fund. In particular, the investment objectives and policies of a fund must be clearly described in the prospectus with sufficient information to enable investors to be fully aware of the risks associated with an investment in the fund. Separate prospectuses may be issued by funds established as umbrella funds in respect of each of their sub-funds. Separate prospectuses may not be issued in respect of separate share classes, other than in the context of Qualifying Investor Funds, provided that the Prospectuses are consistent with the other Prospectus(es) for the fund/sub-fund of an umbrella fund (except in relation to that information which is class specific).
8. Are Irish funds required to be licensed?
Broadly speaking, units of Irish investment funds that are available for public participation may not be sold or purchased nor may sales or purchases be solicited without the fund having sought and obtained authorisation of the Financial Regulator under Irish funds legislation.
9. What are the regulatory requirements before an Irish fund can launch?
Before an Irish investment fund can launch, the fund must be in possession of a written authorisation from the Financial Regulator pursuant to the relevant Irish legislation. There are no minimum capitalisation requirements except in the case of UCITS investment companies which have not appointed Irish UCITS management companies, which must have a minimum capital of 300,000 prior to authorisation by the Financial Regulator.
10. What ongoing regulatory requirements apply to Irish funds?
The ongoing core regulatory requirements can be broken down into:
Disclosure
Please see “7” above in relation to the Prospectus.
Each fund must issue annual audited financial statements and (other than in the case of corporate Qualifying Investor Funds) semi-annual financial statements, comprising a balance sheet, income statement (in the case of the annual audited financial statements only), a portfolio statement and statement of changes in the composition of the portfolio during the period and any significant information which will enable investors to make an informed judgement on the development of the fund and its results.
Valuation and pricing
Fund assets must be valued on the basis of market prices where available or, where unavailable, generally at probable realisation value calculated by a competent third party appointed by the fund or its management company/general partner with the objective of achieving fair value, the appointment of which is approved by the depositary. The valuation rules must be set out in the fund’s Prospectus and must be set out, or referred to, in the fund’s constitutive document. The calculation of the fund’s net asset value, including the updating/confirmation of the prices of the underlying securities must be carried out in Ireland by staff located in Ireland, in the absence of a derogation from the Regulator. Valuation rules must be applied consistently throughout the life of a fund. The valuation policy is ultimately the responsibility of the board of Directors of the fund/management company/general partner.
Client asset protection; independent custody of assets
The applicable rules are outlined in “5” above.
Trustee as fiduciary of investors
The applicable rules are outlined in “5” above.
Portfolio regulation
The Regulator imposes diversification requirement and concentration requirements on Irish UCITS, non-UCITS retail funds and Professional Investor Funds.
A retail Non-UCITS’ general investment restrictions prohibit it from investing more than 10% of its net asset value in securities which are not listed or traded on an approved market, more than 10% of net asset value in the securities of any one issuer, no more than 10% of its net asset value in any class of security issued by a single issuer and net maximum potential exposure through efficient portfolio management techniques and borrowings cannot exceed 25% of net asset value.
There are exceptions and specific restrictions for retail Non-UCITS funds of funds including funds of unregulated funds, feeder funds, real estate funds, private equity funds and managed futures funds.
In the case of Professional Investor Funds, the standard investment and borrowing restrictions applicable to retail Non-UCITS can be disapplied to the extent agreed with the Regulator. As a general rule of thumb, the quantitative limits are doubled.
The Regulator disapplies all but a small number of normally insignificant restrictions in relation to Qualifying Investor Funds.
Duty to act in investors’ best interest and to avoid conflicts of interest
The fund’s prospectus must contain a description of the potential conflicts of interest which could arise between the management of the fund and the fund, with details, where applicable, of how these are going to be resolved.
Any transaction carried out with a fund by a promoter, manager, depositary, investment adviser and/or associated or group companies of these must be carried out as if effected on normal commercial terms negotiated at arms length and transactions must be in the best interests of the investors.
Regulatory Reporting
The fund must submit a monthly report within ten days of its effective date, setting out the fund’s net asset value, net asset value per unit and net subscription and redemptions in the fund’s units during the month. The annual and semi-annual financial statements of the fund must be submitted to the Financial Regulator within four and two months respectively of the balance sheet date.
Reporting to investors
The annual audited financial statements and semi-annual unaudited financial statements (where required) must be made available to investors free of charge upon request and must be available for inspection at a specified location. Qualifying Investor Funds in the form of investment companies are not required to produce semi-annual unaudited financial statements.
Changes to the Fund
Any change to the Prospectus or any material service agreement of the fund is subject to approval by the Regulator. Any change to the investment policy of the fund as disclosed in the prospectus must be notified in advance to investors enabling them to redeem their units in the fund prior to the implementation of the change. Material changes to the investment policy of the fund or any change to the fund’s investment objective are subject to prior investor approval.
Enforcement
The Financial Regulator has independent statutory powers of enforcement that are not dependent upon judicial action. The Regulator enforces on the basis of periodic reporting requirements, a requirement for the Directors/management company/general partner and depositary to deal with the Regulator in an open and co-operative manner and inspections, the frequency of which is based on risk assessment or on complaint.
11. What are the regulatory requirements applicable to service providers to Irish funds?
All Irish investment funds are required to appoint an Irish Administrator (or Irish management company) which will perform certain minimum activities in Ireland such as the calculation of the net asset value of the fund and its dealing price, maintenance of the books and records of the fund and maintenance and updating of the fund’s shareholder register.
Irish investment funds are also required to appoint a depositary. The depositary must have its registered office within Ireland or have established a place of business in Ireland if its registered office is in another Member State of the European Union. The depositary’s fiduciary duties may not be delegated to a third party and must be performed by the depositary appointed in Ireland. The custody functions may however be delegated to a custodian located (inside or) outside of Ireland.
All Irish funds are required to appoint an investment manager (or Irish management company) that will be responsible for the investment management of the Irish fund’s assets. The conditions applicable such companies’ clearance to act by the Financial Regulator as described in “4” above.
Irish Professional Investor Funds and Qualifying Investor Funds are entitled to appoint prime brokers. Prime brokers must be regulated to provide prime brokerage services and each prime broker or its parent company must have financial resources of not less than 200 million and a credit rating of not less than A1/P1.
12. What is the regulatory procedure in getting an Irish fund licensed?
All fund authorisations must be obtained pre-launch. Post-authorisation changes to fund documentation require the approval of the Regulator.
To obtain this authorisation, the fund, or in the case of a unit trust, common contractual fund or limited partnership, its management company or general partner, must apply to the Financial Regulator in writing. In the case of UCITS and Non-UCITS retail and Professional Investor Funds, this application is initially made in draft form.
In the case of Qualifying Investor Funds, application is made on the business day prior to the proposed date of authorisation and no formal review of the documentation is undertaken by the Regulator.
In all cases, before making an application, the proposed promoter of the fund must have been cleared by the Financial Regulator, as must the proposed investment manager. Non-discretionary investment advisers are not required to be cleared by the Financial Regulator. The Directors of the proposed fund must be approved in advance by the Regulator. Any management company or general partner being appointed must be approved in advance by the Regulator. In the case of a UCITS, the risk management procedures of the UCITS relating to the fund’s use of derivatives must be approved in advance and must the fund’s management company or, if it is not appointing a management company, the fund’s business plan. The proposed administrator and depositary of the Fund must be in possession of the relevant license or approval from the Regulator, and this will be an approval under investment services legislation or banking regulation. Any derogations from the regulatory requirements that a fund requires must be obtained in advance of submitting the formal application for authorisation.
13. What is the role of the service providers in authorisation/ongoing regulation?
Authorisation
UCITS, retail Non-UCITS and Professional Investor Funds are authorised by application from the fund, or in the case of a unit trust, common contractual fund or limited partnership, its management company or general partner as appropriate. The depositary and administrator will be required to make certain certifications to the Regulator as part of the authorisation process.
In the case of Qualifying Investor Funds, which are effectively authorised by means of a self-certification process, the fund/management company/general partner makes the formal application, which is undertaken by its Irish legal advisers; the depositary certifies that the information contained in the application, as it relates to the depositary, is accurate.
Ongoing
The Irish administrator/management company will be generally be responsible for carrying out the minimum activities referred to in “11” above and for preparing the regulatory reporting and financial statements referred to at “10” above.
The depositary will prepare the report referred to in “5” above for inclusion in the fund’s annual audited financial statements.
The administrator, depositary and management company are each expected to deal in an open and co-operative manner with the Financial Regulator and to participate in such meetings as the Financial Regulator considers necessary to review its operations and its business developments.
14. What leverage restrictions apply to Irish funds?
UCITS: UCITS may not borrow except for temporary purposes subject to a limit of 10% of net asset value and have a “global exposure” limit that is applicable to the UCITS’ use of derivatives. In calculating their global exposure, UCITS currently have the choice whether to use the so-called commitment approach, a simple but conservative method of calculating global exposure, or Value-at-Risk (“VaR”), an advanced risk-measurement methodology, to determine global exposure. VaR may be calculated using an acceptable proprietary or commercially available model. The commitment approach methodology is normally used by non-sophisticated users of derivatives and the latter by sophisticated users of derivatives. The commitment approach calculates risk exposure based on the marked to market value of the underlying assets to which the derivative contract refers, and this risk exposure may not represent more than 100% of the net asset value of the UCITS (in other words, a UCITS total exposure may be 210% of the net asset value of the UCITS). If VaR is used, the UCITS may not have an exposure greater than 20% of the net asset value (known as “absolute VaR”) based on a confidence level of 99% and a holding period of twenty days or a lesser holding period (for example, one day) may be agreed subject to the scaled down VaR limit (for example, 5%), or the UCITS may not have a VaR greater than twice the VaR of a relevant benchmark or a corresponding, derivative-free portfolio (known as “relative VaR”). The degree of exposure that a UCITS has may be reduced by the use of allowable position netting and hedging positions.
At the time of writing, the Commission of European Securities Regulators (CESR) was shortly due to release detailed guidelines on risk measurement and the calculation of global exposure and counterparty risk for UCITS.
Retail Non-UCITS: 25% of net asset value other than managed futures which in respect of which leverage is controlled by a margin to equity restriction of 50%;
Professional Investor Funds: 100% of net asset value;
Qualifying Investor Funds: unlimited
In each case, the extent of leverage must be disclosed in the Prospectus of the Fund.
15. What is the tax status of Irish funds in Ireland?
A fund that is authorised in Ireland is not subject to Irish tax on its income or gains with the exception of non-designated funds in respect of which please see “1” above. There are no Irish withholding taxes on distributions to investors provided they have made the appropriate tax declaration of non-Irish residence to the fund. There are no Irish withholding taxes on distributions made to certain categories of Irish investors. There is no stamp duty or subscription tax is payable in Ireland on the issue, transfer, repurchase or redemption of units in a fund. Most of the key services provided to Irish funds (eg. fund administration, investment management, etc) are exempt from Irish VAT.
16. What tax applies to Irish investment managers?
Generally 12.5% on fee income derived from investment management services.
The Irish tax authorities impose a 20% withholding tax on dividends and other profit distributions. However there are significant exemptions under domestic law from this withholding tax in relation to (i) payments made to persons resident in EU Member States and/or tax treaty countries (including countries with whom a tax treaty has been signed but not yet ratified and effective) and (ii) payments made to companies resident outside the EU or a non-tax treaty country provided more than 50% of the recipient company is ultimately controlled by persons resident in a treaty country (including countries with whom a tax treaty has been signed but not yet ratified and effective) and/or EU member state (other than Ireland), once certain declarations are put in place.
17. What are the asset valuation rules applicable to Irish funds?
These are described in “10” above.
By Dillon Eustace
Please click here to access the full details on Irish regulation and to access the full guide