On 21 December 2016, the People's Bank of China ("PBoC") announced that Ireland had been granted a RMB 50 billion Renminbi Qualified Foreign Institutional Investor ("RQFII") quota. Ireland is only the sixth European country to be granted an RQFII quota after the United Kingdom, France, Germany, Switzerland and most recently, Luxembourg.
The RQFII regime was introduced in 2011 with the aim of further opening up mainland China's securities market to foreign investment. Under RQFII, foreign entities can invest offshore RMB in domestic securities in mainland China provided certain eligibility requirements are met. To date, Irish fund structures could only access the quota via a licence held by an asset manager in an RQFII eligible jurisdiction. This announcement means that Irish fund structures will now be able to gain direct access to the RQFII regime through an Irish RQFII quota.
The application process
Entities which have been authorised by the Central Bank of Ireland (the "CBI") as a UCITS management company or an Alternative Investment Fund Manager ("AIFM") will need to engage in a two-stage process in order to be permitted to invest in mainland China's capital market. The first stage is an application to the China Securities Regulatory Commission ("CSRC") for a Securities Investment Business Licence (a "Licence"). The CSRC will decide within 60 working days whether the manager is eligible to receive a Licence. If granted a Licence, the manager must apply to the State Administration of Foreign Exchange ("SAFE") for an investment quota. If the manager fails to apply for the quota within one year of being granted a Licence, such Licence will be revoked by the CSRC. SAFE will make a decision in respect of the quota within 60 working days of receiving the application documents.
The size of the quota granted will be linked to the size of the assets under management of the respective manager. If the manager envisages that it will want access to the inter-bank bond market, a separate licence must be obtained from the PBoC. A manager must appoint a custodian in the People's Republic of China ("PRC") to liaise with the relevant Chinese authorities during application process and the PRC custodian will also be responsible for safeguarding the relevant assets.
Investment management delegation
Typically, an RQFII quota is granted to an entity that has a discretionary investment mandate. However, in Ireland, a delegation arrangement will exist whereby an Irish UCITS management company or an authorised AIFM which has obtained a Licence and RQFII quota will be permitted to delegate to a third party investment manager, provided the requirements of the UCITS Directive or the AIFM Directive are respected. The delegated investment manager is not required to be located in an RQFII eligible jurisdiction. In such circumstances the Irish UCITS management company or AIFM will retain responsibility for the requirements and constraints attached to the grant of the Licence and RQFII quota. Furthermore, it should be noted that a UCITS management company or AIFM is permitted to allocate its RQFII quota to investment funds and/or discretionary portfolio management mandates subject to notification or approval by SAFE (if necessary).
Since the advent of Stock Connect in November 2014, we understand that it has been clarified by the Chinese authorities that RQFIIs are temporarily exempt from Chinese withholding tax on gains derived from the trading of equity investment assets. Advice should be taken on this point from a Chinese advisor. The State Administration of Taxation in China has not stipulated how long this exemption will remain in place.
In the event that the status of the withholding tax exemption changes, the tax position of the fund as regards China will be an area that should be examined. All regulated Irish funds benefit from a range of attractive tax features in Ireland (other than certain funds invested in Irish real estate assets which are subject to new rules).
- They are exempt from Irish tax on their income and gains;
- Non-Irish resident investors are exempt from Irish tax in respect of distributions from the fund or redemptions of units in the fund (provided either an appropriate investor declaration or certain procedures at fund level are put in place);
- No Irish stamp duty arises on the issue, sale or transfer of shares or units; and
- Certain services which the fund receives, such as qualifying investment management services, are VAT exempt.
The entitlement of an Irish regulated fund to avail of the Ireland / China double tax treaty would need to be examined on a case by case basis and advice taken from an Irish and a Chinese advisor. This issue would be subject to the particular investment structure and to Chinese law and the Chinese State Administration circulars regarding treaty entitlement. Where access to the Ireland / China treaty is available, the treaty can relieve an Irish resident company from Chinese capital gains tax on sale of shares in a Chinese company (other than a company which consists principally of Chinese land). In addition, the use of an Irish subsidiary "section 110 company" held by the Irish regulated fund may assist in this analysis.
Maples and China investment access
To date, Maples and Calder has been at the forefront of each new China access strategy:
- First Irish fund authorised to access Shanghai-Hong Kong Stock Connect – Central Bank clearance obtained for an Irish UCITS in July 2015;
- China Access Funds in UCITS via RQFII – first European China A UCITS launched in January 2014;
- Retail China Bond Fund – non-UCITS retail fund with QFII quota investing on China bond markets authorised in July 2013;
- Retail fund with 100% exposure to China as an issuer – full exposure permitted to Chinese government bonds for a non-UCITS retail fund/RIAIF; and
- China Interbank Bond Market cleared as a permitted market – for a non-UCITS retail fund/RIAIF.
This announcement affords an exciting opportunity for fund managers with Irish products to access the Chinese market, which is timely, as it is expected that there will be a surge in interest for China A Shares once China is included in the MSCI Emerging Markets Index which is under review in June 2017. China A Shares would make up a fifth of the MSCI Emerging Markets Index in a full inclusion and it would mean billions of dollars flowing to China's markets from funds benchmarked to MSCI indexes. It is estimated that approximately USD1.5 trillion of assets, both active and passive, are currently tracking the index.
The grant of the RQFII quota to Ireland is a welcome development for the Irish funds industry. Ireland is a leading international centre for domiciling and servicing investment fund structures such as UCITS and alternative investment funds.
We expect UCITS management companies and AIFMs in Ireland to eagerly snap up this new opportunity to gain greater access to the Chinese market. The quota will be allocated to fund managers by SAFE on a first come first served basis so it is important that fund managers do not delay in their consideration of whether to avail of this new means of access to the Chinese securities market for their Irish funds.
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.