Legal measures are now in place for corporate investment funds to re-domicile to Ireland. This paper considers some of the more practical questions facing asset managers considering re-domiciling funds to Ireland under the new regime and provides a guide as to how the process shall work in practice.

INTRODUCTION

The Companies (Miscellaneous Provisions) Act, 2009 (the "2009 Act") was signed into law on 23 December, 2009. A commencement order has now been signed into law giving full immediate effect to the measures within the 2009 Act relating to the re-domiciliation of corporate investment funds.

The 2009 Act introduces a procedure for corporate investment funds to relocate to Ireland from elsewhere or vice versa. This legislation was driven by an Irish funds industry initiative to simplify the way funds located elsewhere can relocate to Ireland.

Ireland is widely regarded as the jurisdiction of choice for asset managers seeking to establish regulated fund products for global distribution. The introduction of the corporate migration regime under the 2009 Act strengthens this position and further enhances the efficiencies of the Irish regulatory framework.

WHY CONSIDER MOVING A FUND'S DOMICILE?

For a variety of reasons, there is an increased interest in investment funds being domiciled in regulated jurisdictions. In many cases, this will be a factor when asset managers consider new products to add to their existing range. However, there are also factors driving asset managers to consider moving existing products to a new domicile and restructuring these funds within a new regulatory regime. Some of these factors are considered below.

Retaining Investors

On a macro level, the recent financial crisis has left investors risk-averse. This has led to an increased demand for regulated funds, which are considered better suited to addressing investor concerns. Existing investors may seek assurances that the product they are invested in has adequate investor protections.

Potential New Lines of Capital

The decision to move to a new domicile and regulatory regime is designed to make the fund more marketable. The perception is that investors will be more inclined to invest in regulated funds than unregulated. UCITS (Undertakings for Collective Investment in Transferable Securities), in particular, are benefiting from this strong marketing message.

UCITS is now recognised worldwide as a robust, regulated fund product. Within the EU, UCITS can be offered to the public across the EU under a passporting regime. UCITS also offer distinct distribution opportunities beyond the EU. UCITS presently hold more than €4.5 trillion in assets.

For further details on UCITS, see "Product range" below.

WHY CHOOSE IRELAND?

Ireland is the largest centre for hedge fund administration worldwide and one of the world's leading regulated fund domiciles, offering a wide range of products to international asset managers. Being able to promote a structure as Irish-based will have positive implications from a global marketing perspective.

While the robust regulatory regime and the independent administration and custody requirements are likely to be the key elements in the promotional message, there are a range of factors that make Ireland a compelling prospect when considering choice of domicile for a fund. Some of these are considered below.

HOW DOES THE PROCESS WORK?

The 2009 Act permits any non-Irish corporate fund, established in a prescribed jurisdiction that has a corresponding corporate migration regime, to apply to be registered with the Companies Registration Office (the CRO) and continue in existence as an Irish company and to simultaneously seek authorisation by the Financial Regulator as an Irish domiciled fund. The 2009 Act also provides for a corresponding facility to allow Irish corporate funds to move domicile from Ireland to another jurisdiction with a similar corporate migration regime. This paper focuses on the process of corporate migrations into Ireland.

What About the Tax Impact?

Re-domiciliation will not constitute a tax event for the fund and there should be no adverse tax implications for investors as they will continue to hold the same shares in the same fund. However, promoters should advise investors to seek their own tax advice on the possible tax consequences of the re-domiciliation on their investment.

Will Investor Consent be Required?

Assuming the corporate migration regime in the jurisdiction the fund is migrating from broadly corresponds with the Irish regime, it is unlikely that investor consent will be a legal requirement in that jurisdiction. There is no requirement from an Irish perspective for funds migrating in to obtain investor consent.

Each fund will however need to be mindful of the requirements of its existing memorandum and articles of association as well as any applicable regulatory requirements in the jurisdiction the fund is migrating from and, in particular, any requirements triggered by the need to amend the memorandum and articles of association for use under Irish law.

In any case, it would be advisable to communicate with investors to inform them of the change of domicile. While it may not be necessary to send each investor the new Irish prospectus, it would be advisable to make copies available to investors on request.

What are the Steps and How Long Does it Take?

The process operates along two channels simultaneously. There is the legal process – effected by making a filing application with supporting documentation to the CRO. Separately, there is the regulatory process – whereby an application is made to the Financial Regulator for the fund to be authorised as an Irish fund under the appropriate regulatory regime. An illustration of how the two procedures shall operate is contained in "The re-domiciliation process" below. The Financial Regulator is expected to issue guidelines shortly on the authorisation procedure for re-domiciling funds.

No prescribed timeframe has been given yet as to how long the CRO will take to process applications under the corporate migration regime. In the case of funds seeking UCITS authorisation, the CRO filing will be able to run concurrently with the regulatory review process and should not impact on timing. In the case of funds seeking QIF (Qualifying Investor Fund) authorisation, the timing of the CRO process may be more critical but would not be expected to impact significantly.

What Type of Regulatory Regime Would the Existing Fund Fall Into?

The existing fund may fit neatly within one of the available product ranges under the Irish regulatory regime. Alternatively, the fund may need to be adapted slightly (for example, in terms of asset diversification or frequency of redemptions) in order to fit it into a chosen regime, such as UCITS.

A brief overview of the product ranges available in Ireland is set out below under "Product range".

How can US Taxable Investors be Accommodated?

An investment fund, structured in Ireland as an investment company, will not be capable of "checking the box" (on IRS form 8832) to elect to be treated as a partnership for US federal tax purposes. Therefore, it would be prudent to channel any US taxable investors coming into the structure (usually via a Delaware feeder) into a unit trust master fund. An Irish unit trust, authorised under the Unit Trusts Act, 1990 can check the box to elect to be treated as a partnership for US federal tax purposes.

The migrating corporate fund would then operate as a feeder fund for US tax-exempt and non-US investors.

Such a master/feeder structure thus enables an asset manager to attract capital from US taxable investors in a tax efficient way and also accommodate US tax-exempt and non-US investors within a single product range.

This master/feeder structure would not operate within a UCITS context and would generally be more popular in the context of QIFs.

Costs

Whether the costs of migration are chargeable to the fund or not will be an important consideration for any fund considering a move. It should be possible to charge the migration costs to the fund, particularly if the decision to move is driven by investor interests (provided this is permitted under the fund's memorandum and articles of association).

The CRO registration fee is €445.

The Financial Regulator imposes an annual industry funding levy on collective investment schemes. The current annual fee is €2,000 per fund. Umbrella funds also pay an additional annual fee of €450 per sub-fund on the first five sub-funds resulting in a maximum contribution for umbrella funds of €4,250.

Other Transfer Options and Other Vehicles

The corporate migration regime is limited in scope to non-Irish funds that are constituted as corporate entities.

While legislative measures are not necessarily required for the migration of vehicles such as unit trusts, it is likely that some form of procedure for non-corporate funds to migrate in a similar fashion to that prescribed under the 2009 Act will be formulated.

The traditional merger process remains an alternative means of re-domiciling a fund to Ireland. This involves setting up a new Irish fund and transferring the assets across from the existing fund located elsewhere. For foreign funds constituted as limited partnerships, for example, (where a corresponding Irish regulated vehicle is not available) this option will still be available.

Some Other Points of Note

Anti-money laundering issues will apply in similar terms as in a merger scenario. It is possible that moving a fund to Ireland could require existing investors to give more information on identity and source of funds in compliance with Irish anti-money laundering requirements.

Under current Irish regulation, participating shares must be afforded full or limited voting rights. The Financial Regulator's guidelines may address how this will apply to migrating funds with non-voting shares.

THE RE-DOMICILIATION PROCESS

PRODUCT RANGE

Depending on the migrating company's investment policies, the application to the Financial Regulator for authorisation will be either as a UCITS or non-UCITS investment company. Below is a high level overview of these two product ranges.

UCITS

UCITS is an EU based product designed primarily for retail investment but also suitable for institutional investors. These can be offered to the public throughout the European Union under a passporting regime. Increasingly UCITS are being viewed as a product for alternative investment strategies. This follows EU measures broadening the scope of investment flexibility for UCITS (UCITS III) which were introduced in Ireland in 2007.

Under the UCITS regime, traditional asset classes can be easily accommodated and many UCITS funds have been established following such strategies as: long-only equity, fixed income securities, money market etc. More recently, UCITS have been used as a vehicle for exchange traded funds – given their public offering potential across the EU and beyond.

Following UCITS III, alternative strategies are now more prevalent in the UCITS space with increased focus on investment through derivatives. Subject to specific rules/restrictions, the following strategies can be pursued within a UCITS:

Some highlights of UCITS regulatory requirements are outlined below:

  • liquidity - a UCITS will generally invest in liquid assets and must be able to offer redemptions on a fortnightly basis
  • Asset Eligibility - at least 90% of assets must be in liquid (UCITS eligible) instruments (such as listed equities, fixed income, money market instruments and derivatives on eligible assets or financial indices) – no direct short selling permitted
  • Asset Diversification – generally no single asset can represent more than 10% of the fund's assets; holdings of more than 5% cannot in aggregate exceed 40% of the fund's assets - there are prescribed exceptions to this 5/10/40 rule
  • Borrowing and Leverage Limits - temporary borrowing is limited to 10% and not permitted for investment purposes; general leverage limit of 100% is applied (although use of VaR to measure global exposure gives flexibility in this regard)
  • Retail Investors - no minimum investment level is applied (although funds may fix levels themselves); no investor eligibility criteria is applied.

In terms of legal structures, UCITS can be established as corporate vehicles (investment companies) and may be single pool vehicles or umbrellas with multiple pools each with segregated liability. UCITS can also be established as unit trusts and common contractual funds (CCFs).

Non-UCITS

Ireland has a range of non-UCITS products available under domestic legislation. Again, in terms of legal structure these can be investment companies, unit trusts or common contractual funds (there is also legislation for investment limited partnerships).

The specific product offerings are as follows:

Retail Fund - the non-UCITS retail fund is a product quite similar in terms of regulatory requirements as UCITS. There is, however, a retail fund of hedge funds product that does not correspond with UCITS.

Professional Investor Fund (PIF) - the PIF is a product for more sophisticated investors and there is an according level of product flexibility as a result.

PIF highlights:

  • minimum investment amount of €125,000 (although no investor eligibility criteria)
  • issuer limit of 20% (rather than 10% for retail funds)
  • up to 20% in unlisted securities (rather than 10% for retail funds)
  • fund of hedge funds permitted (20% limit in single fund investment)
  • general leverage limit of 150%
  • direct shorting permitted

Qualifying Investor Fund (QIF) - the QIF is the most flexible Irish fund vehicle and consequently the most popular in the area of alternative investments. A QIF is a suitable vehicle for hedge funds, fund of hedge funds, property and private equity funds.

In the set-up context, the QIF offers the particularly appealing element of requiring no prior product review by the Financial Regulator. Once the promoter is cleared to promote Irish funds and the documentation has been prepared in compliance with relevant regulatory provisions, documentation is simply filed with the Financial Regulator and authorisation is effected the business day following the filing.

QIF highlights:

  • minimum investment amount of €250,000*
  • investor eligibility test (individual must have in excess of €1.25 million in assets (excluding principal private residence/contents); institution must own or invest €25,000,000)
  • no issuer limits (although requirement for investment companies to spread investment risk)
  • up to 50% in one underlying fund in the case of fund of hedge funds
  • feeder funds permitted (including master/feeders designed for optimal tax treatment for US investors)
  • open-ended funds must deal quarterly and settle within 90/95 days; limited liquidity and closed ended funds also available
  • no leverage limits applied – only disclosure requirement
  • prime broker may be appointed; no limit on rehypothecation levels; prime broker must be appointed by the custodian as a sub-custodian

CONCLUSION

The new Irish corporate migration procedure provides an asset manager with a solution that will enable it to relocate its funds to a regulated jurisdiction with the minimum of disruption to its day-to-day operations. As the final elements enacting the legislation have now been put in place, relocating a fund to Ireland is now a genuine and compelling option.

Footnote

* The Financial Regulator's guidelines will address how this minimum subscription and investor eligibility criteria will be applied to existing investors in a migrating fund.

Disclaimer

This information is for guidance purposes only. It does not constitute legal or professional advice. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. No liability is accepted by Eversheds O'Donnell Sweeney for any action taken in reliance on the information contained herein. Any and all information is subject to change. Eversheds O'Donnell Sweeney is not responsible for the contents of any other website or third party material which can be accessed through this website.

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