Gibraltar: Establishing Funds In Gibraltar

Last Updated: 16 December 2008
Article by Marc X Ellul

Introduction

The significant global expansion in funds has exerted considerable pressure on established fund centres. Gibraltar has been proactive in attracting fund business by enacting specific legislation for the setting up of funds quickly whilst maintaining high professional and regulatory standards.

Gibraltar has a high quality infrastructure in that it has major international banks, accountancy firms and skilled financial services professionals and lawyers who are able to service the funds industry. Gibraltar offers very high standards, and being a small jurisdiction, it is able to provide such services at competitive rates.

All of the above has made Gibraltar an increasingly attractive funds location.

Although reference is made below to "Authorised Schemes" and "Recognised Schemes" (as they are able to operate in and from Gibraltar), the main focus of this paper is to provide information on the establishment of a Private Scheme and an Experienced Investor Fund in Gibraltar.

Firstly, it is useful to set out Gibraltar's status as an EU territory.

Gibraltar within the EU

Gibraltar is an overseas territory of the United Kingdom and is part of the European Union by virtue of Article 299(4) of the Treaty of Nice. It is also a part of the European Economic Area ("the EEA") by virtue of the UK Treaty of Accession. Entities established in Gibraltar can therefore take advantage of European rules on the free movement of services.

As long as a Member State has implemented legislation giving effect to relevant European Directives, an entity in that Member State will be able to provide its services or operate throughout the EU and the EEA states. Gibraltar entities enjoy passporting rights into the EU and the EEA single market in respect of investment services, insurance and banking.

Additionally, Gibraltar entities are able to provide services within the EU which are not regulated by relevant directives provided they comply with the laws of that Member State.

There is no other offshore finance centre that can claim to have these advantages.

Legislation Enabling the Establishment of Funds in Gibraltar

The Financial Services (Collective Investment Schemes) Act 2005 ("the CIS Act") regulates and sets out the basic framework for the promotion, establishment and operation of all funds (referred to in the legislation as collective investment schemes) in Gibraltar.

The Financial Services (Collective Investment Schemes) Regulations 2006 ("the CIS Regulations") deals with the detail of the regulatory regime.

The Financial Services (Experienced Investor Funds) Regulations 2005 allows and regulates Experienced Investor Funds.

The Protected Cell Companies Act 2001 allows funds to be set up so that there is a segregation of assets and liabilities in different cells in an umbrella structure with a number of sub-funds.

Gibraltar law prevents the promotion of collective schemes from within Gibraltar unless they are:

  • Authorised Schemes;
  • Recognised Schemes;
  • Private Schemes;
  • Experienced Investor Funds.

All of the above are referred to in more detail in this paper.

Authorised Schemes

Authorised schemes are either UCITS schemes (pursuant to the UCITS EU Directive relating to undertakings for collective transferable securities) or non-UCITs retail schemes. In either case, an application for authorisation has to be made to the Gibraltar Financial Services Commission ("the FSC") which is the regulator in Gibraltar. The FSC must determine an application within 6 months.

Recognised Schemes

Recognised schemes are either UCITS schemes in EEA States or foreign schemes that comply with certain conditions.

An EEA UCITS scheme is a scheme set up in another EEA State pursuant to the UCITS Directive. For the purposes of the CIS Act a collective investment scheme is constituted in an EEA State if it is constituted under the law of that State by a contract or under a trust and is managed by a body corporate under that law or it takes the form of an open-ended investment company. Such schemes can take advantage of principles of home state regulation and passporting. The entity continues to be regulated by the home State where it is domiciled.

As required by the UCITS Directive, the operator, trustee or depositary of a recognised EEA UCITS Scheme does not require to be authorised by the FSC in that capacity.

Recognised Foreign Schemes are collective investment schemes that are managed in a jurisdiction outside Gibraltar and do not satisfy the requirements for recognition as a UCITS scheme. The FSC may grant such schemes recognition if it is satisfied that the scheme, inter alia, is subject to an authorisation and supervisory regime in the jurisdiction in which it is constituted that, in the opinion of the FSC, provides to participants in Gibraltar protection at least equivalent to the protection provided under the CIS Act.

Private Funds

Private funds have proved to be very popular in Gibraltar. These are permitted under section 6(3)(c) of the CIS Act provided that the scheme is promoted in accordance with, and is permitted by, the CIS Regulations. The CIS Act refers to private funds as "private schemes" and, in essence, these are collective investment schemes that are not listed on a stock exchange and are limited to no more than 50 participants.

The main advantages of a private scheme are: (i) they are very fast to set up; (ii) they do not need to apply for authorisation to the FSC to commence its investment activities and (iii) they do not require a custodian/depositary, an FSC authorised Gibraltar resident directors/trustees or an FSC authorised administrator. This allows private schemes to be set up cost-effectively and quickly.

The main disadvantages of Private Schemes are: (i) that the extra level of comfort provided to investors by an FSC authorised administrator, FSC authorised Gibraltar resident directors/trustees and custodian/depositary is not there and (ii) there are restrictions on the marketing of such schemes. Many funds start off as private schemes and, as they become more successful, they convert to Experienced Investor Funds which do require the above.

Private Schemes also enjoy significant fiscal benefits which are set out in a section below specifically dealing with the tax position in Gibraltar.

Experienced Investor Funds ("EIFs")

The restriction on the promotion of a collective investment scheme does not apply to EIFs established and promoted in accordance with the Financial Services (Experienced Investor Funds) Regulations 2005 ("the EIF Regulations") created under section 52 of the CIS Act.

The EIF Regulations are, in effect, a self-contained piece of secondary legislation dedicated to EIFs which establishes a streamlined process for authorising and establishing open-ended or closed-ended funds where the investor is an experienced investor based on a system of

self-certification by the investor, the fund's Administrator and its lawyers.

The Meaning of Experienced Investor

The EIF Regulations are permissive in defining an experienced investor based on either his experience, minimum investment, the minimum value of the assets of a trust or company or self certification by the investor that he has a net worth of a minimum amount. This makes Gibraltar attractive, for instance, to independent asset managers who manage assets of a small or medium sized investor base of high net worth individuals.

An experienced investor is defined as:

  • a person or partnership whose ordinary business or professional activity includes, or it is reasonable to expect that it includes, acquiring, underwriting, managing, holding or disposing of investments, whether as principal or agent, or the giving of advice concerning investments;
  • a body corporate which has net assets in excess of €1,000,000 or which is part of a group which has net assets in excess of €1,000,000;
  • an unincorporated association which has net assets in excess of €1,000,000;
  • the trustee of a trust where the aggregate value of the cash and investments which form part of the trust's assets is in excess of €1,000,000;
  • an individual whose net worth, or joint net worth with that person's spouse, is greater than €1,000,000, excluding that person's principal place of residence;
  • a participant who invests a minimum of €100,000 in the fund.

The Vehicle

The EIF Regulations also seek to ensure that those establishing funds can use a wide range of vehicles. As well as the traditional vehicles for establishing funds such as a company or unit trust, a fund can also be established as a limited liability partnership or a protected cell company under the Protected Cell Companies Act 2001.

Gibraltar EIF companies enjoy a significant advantage in that they can have more than 50 participants without having to be incorporated as a plc. The usual restriction to remain as a private company to having no more than 50 members, does not apply (under section 40(3) of the Gibraltar Companies Act). Therefore, EIFs can conduct business with a large number of investors without having to take on the extra administrative burdens of a plc.

EIFs established as protected cell companies allow for the creation of one master fund with a number of sub-funds protected in their own cell.

In addition, funds can be established in any other form recognised under the laws of Gibraltar that is approved by the FSC either generally or in relation to a particular fund.

Self Certification & Authorisation of an EIF

Authorisation under the EIF Regulations is based on a system of self-certification by the investor, the Fund Administrator and the Fund's lawyer. The EIF Regulations provide that no person shall be accepted as a participant of an experienced investor fund unless he has provided:

  • written confirmation that he is an experienced investor within the meaning specified in the EIF Regulations; and
  • a written acknowledgement that he has received and accepted the investment warning required by the EIF Regulations to be contained in the offer document.

The controller, administrator, manager or trustee of the fund is not required to verify the factual accuracy of a confirmation provided by a participant or potential participant.

Within 14 days of establishment of the Fund the Fund Administrator will then provide the FSC with:

  • written notification of the establishment of the Fund as an experienced investor fund;
  • a copy of the offer document;
  • an opinion from an approved Gibraltar lawyer that the fund complies with the EIF Regulations;
  • any other document required by the FSC.

Where these conditions have been complied with, the fund is deemed to be authorised by the FSC to commence its investment activities and the fund does not have to wait for prior approval. This will provide investors with a tremendous amount of certainty in an area where uncertainty costs money.

Offer Document

This normally takes the form of a private placement memorandum or a prospectus.

The main requirement as to the content of the offer document is contained in the EIF Regulations. This specifies that it shall contain such information as would reasonably be required and expected by participants and their professional advisers to make an informed judgment of the merits of and risks of investing in the fund.

It must also contain a specific investment warning stating, inter alia, that the fund is only suitable for those who fall within the definition of an "experienced investor" as defined in the EIF Regulations.

Specific Requirements

There are certain requirements all EIFs must comply with.

  • All EIFs must have an FSC authorised fund administrator. There are several financial services firms which provide these services. They would also be responsible for maintaining the share register and compiling and maintaining all due diligence and anti-money laundering documentation on investors.
  • All EIFs set up as corporate vehicles, must have two resident directors authorised by the FSC. Approved Gibraltar lawyers and the same financial services firms who provide fund administration services can provide authorised directors as well.
  • All EIFs set up as a Unit Trust must have at least one trustee resident in Gibraltar authorised by the FSC. Authorised trustees can be provided by Gibraltar lawyers and financial services firms as above.
  • EIFs must produce annual audited accounts prepared by a Gibraltar registered auditor. These must be deposited with the fund administrator and copies made available to the FSC.
  • An annual return in the specified form must be filed.

Management and Control

As referred to above, there must be at least two FSC authorised resident Gibraltar directors if the fund is set up as a corporate vehicle. If the vehicle is a trust, at least one of the trustees must be an FSC authorised resident in Gibraltar.

This does not mean that there cannot be other non-resident trustees or directors. However, the majority of the management and control has to be resident in Gibraltar, which will, in any event, be necessary if the vehicle is to take advantage of the tax regime for funds.

It should be noted that nothing prevents an experienced investor fund from delegating its functions of investment management to an approved third party in another jurisdiction. A typical structure may involve a company in Gibraltar with two resident Gibraltar directors and a third director resident in another jurisdiction exercising the functions of investment manager. Indeed, the Gibraltar directors can delegate the investment management functions to entities outside Gibraltar which are not themselves directors of the company.

Protected Cell Companies

Introduction

The Protected Cell Companies Act 2001 ("PCC Act") allows funds to be set up so that there is a segregation of assets and liabilities in different cells in an umbrella structure with a number of sub-funds. Whilst a protected cell company ("PCC") remains a single legal entity, the liability of the company in respect of each cell is limited to the assets attributable to the relevant cell, not for the debts of any other cell.

Many EIFs are set up as PCCs as they can, for example, allow sub-funds to pursue different investment strategies and allow sub funds to be created for different clients.

Single Legal Entity

The PCC Act states that a protected cell company is a single legal person and that the creation by a PCC of a cell does not create, in respect of that cell, a legal person separate from the company.

Separation of assets

It is the duty of the directors of a PCC to keep the assets of each cell separately identifiable. Specifically, they must (a) keep cellular assets separate and separately identifiable from non-cellular assets and (b) keep cellular assets attributable to each cell separate and separately identifiable from cellular assets attributable to other cells.

Cell shares, cellular capital and cellular dividends

A PCC may create and issue cell shares in respect of any of its cells. The proceeds of the issue ("cell share capital") are comprised in the cellular assets attributable to the cell in respect of which the cell shares are issued. A PCC may pay a cellular dividend.

Provisions in relation to winding-up

The rights of creditors are limited to the assets of the cell of which they are creditors.

In the winding up of a PCC, the assets forming part of the estate shall only be the non-cellular assets. The winding up shall not terminate any agency, or in any way whatsoever affect the authority or power of any officer, receiver, administrator, servant or agent of the PCC in respect of the cellular assets.

Any liquidator of a PCC has a duty to keep cellular assets separate and separately identifiable from non-cellular assets. The liquidator must also keep cellular assets attributable to each cell separate and separately identifiable from those assets attributable to other cells.

Tax Position in Gibraltar

Generally

In Gibraltar there is no capital gains tax and, therefore, no tax is payable on the redemption of shares. There is no inheritance tax, no wealth tax and no tax on interest earned by Gibraltar residents. In addition, there is no taxation on dividends and interest paid by a Gibraltar Company to a non-resident recipient which includes investors in a fund. There is also no withholding tax on dividends.

Specifically in Relation to Funds

An approved fund is exempted from tax by the Commissioner of Income Tax under Rule 3(17) of the Income Tax (Allowances, Deductions and Exemptions) Rules 1992. This includes an exemption from investment and derivative premiums, interest income, income from trading securities, financial instruments and property of any class, including real property and capital gains achieved from the trading of any of these.

EU Parent Subsidiary Directive

Gibraltar funds can also benefit from the EU Parent Subsidiary Rules.

The European Commission has communicated to EU Member States that the Parent Subsidiary Directive should be applied to Gibraltar tax-resident companies. Nevertheless, at present some States are either unaware of or (incorrectly in the writer's view) do not apply this. However, some jurisdictions, including Luxembourg, have decided to do so.

This has opened up enormous opportunities for private equity and property funds looking to set up tax-efficient structures. If a Gibraltar fund wholly owns (or has a sufficient participation in) a Luxembourg company, it will not only benefit from the Parent Subsidiary Directive but also from Luxembourg's tax treaties.

A Gibraltar fund investing through its Luxembourg subsidiary in an EU property company can serve as an example. The EU property company will have to pay taxes on its trading profits and capital gains in its own State. However, dividends due to the Luxembourg company and in turn to the Gibraltar fund can be paid entirely free of withholding tax. This is possible as a direct result of the provisions of the Parent Subsidiary Directive.

Once the dividends are received by the fund these can be paid to the shareholders (as long as they are not Gibraltar residents) entirely free of tax. Therefore, in this example, the dividends paid by the EU property company have been repatriated to the investors without suffering any tax loss whatsoever.

Conclusion

As a result of the legislation implemented in Gibraltar to facilitate the establishment and operation of funds, Gibraltar is fast becoming an offshore jurisdiction catering for an extremely wide variety of collective investment schemes; from UCITS schemes, where the scheme will be able to take advantage of Gibraltar's position within the EU to passport into other EU or EEA States to lightly regulated EIFs and PCCs and private schemes.

The regulatory regime and tax benefits enjoyed by funds in Gibraltar place it in a unique position to service the funds industry, particularly regarding the efficient and cost-effective way in which private schemes and EIFs can be set up in Gibraltar.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.