UCITS can be established in Ireland as variable capital investment companies, unit trusts, or as common contractual funds (*fixed capital investment companies are also available but not in practice used).
All three legal structures are subject to the standard UCITS investment and borrowing restrictions, the same authorization process and operating conditions and each must have as its sole object the collective investment in eligible assets of capital raised from the public and provide for at least fortnightly redemption facilities.
Under current legislation, each of the structures must have an Irish based Trustee/Custodian (responsible for safekeeping of assets and performance of certain fiduciary type duties).
Typically, the administration function (calculation of the NAV, the accounting function, maintenance of books and records and the transfer agency function) is carried out by an Irish administrator although, under UCITS IV, there is now scope for such services to be passported into Ireland (please refer to the following Chapter, which sets out further information with regard to the management company passport).
Most UCITS will appoint an Investment Manager (responsible for discretionary asset management of the UCITS portfolio) and many will appoint a Global Distributor or local Distributors. Notwithstanding the above there are a number of distinctions between the three legal structures as summarised below.
- UCITS variable capital investment
companies
UCITS variable capital investment companies or "VCCs" are public limited liability corporate vehicles with their own legal personality. In addition to the UCITS Regulations they are subject to Irish company law (with relevant exceptions) as it applies to public limited companies.
Their constitutive document is the Memorandum and Articles of Association and ultimate management authority resides with a board of directors, two of whom must be Irish resident. VCCs issue shares to investors which shares do not represent a legal or beneficial interest in the VCCs assets, those assets being legally held by the Custodian, beneficially by the VCC itself. Unlike both unit trusts and CCFs, VCCs are required to convene and hold an annual general meeting of shareholders and any changes to their Memorandum and Articles of Association require investor approval.
Self-managed VCCs require a minimum paid up capital of Euro 300,000 before commencing operations and are also subject to the "substance" requirements applicable to Management Companies (as further set out in the Chapter relating to UCITS Management Companies).
Box 1 – Self Managed UCITS Investment Company
VCCs enter into contracts themselves as corporate entities, principally with the Investment Manager, Administrator and Distributor (or via the Management Company if not self-managed) and with the Custodian. VCCs who use a Management Company do not need to meet the "substance" or capital adequacy requirements for SMICs.
Box 2 – UCITS Investment Company with Irish Management Company
VCCs can be established as umbrella schemes and umbrella VCCs are subject to specific statutory provisions dealing with segregated liability between sub-funds.
- UCITS unit trusts
Unit trusts are contractual arrangements created under a deed of trust (the "trust deed") made between the Management Company and the Trustee. Unit trusts do not have their own legal personality and contracts are entered into in repsect of unit trusts by the Management Company and, in certain cases, by the Trustee. The ulimate management authority rests with the Management Company which can act as Management Company for multiple collective investment schemes (UCITS and Non-UCITS; VCCs, unit trusts and CCFs). The Management Company must itself be authorised separately to the unit trust's own UCITS authorisation and it must meet the "substance" and captial adequacy requirements (as further set out in the Chapter relating to UCITS Management Companies).
Unit trusts issue units to investors and a unit represents an undivided beneficial interest in the assets of the unit trust. The assets are legally held by the Trustee.
Box 3 – UCITS Unit Trust
Unit trusts are not required to hold annual investor meetings and, provided both the Management Company and Trustee certify that such changes do not prejudice the interests of investors, changes can be made to the trust deed without having to obtain prior investor approval.
- UCITS Common Contractual Fund
The common contractual fund or CCF is a contractual arrangement similar to the FCP (fonds commun de placement) structures in other European jurisdictions, notably Luxembourg and France, and the Dutch FGR (fonds voor gemene rekening) enabling the assets held on behalf of investors to be managed through a single pool in proportion to the assets or cash subscribed to the pool.
A CCF is constituted under contract law by means of a deed of constitution ("deed") executed under seal by the Management Company. The deed provides for the safekeeping of assets of the CCF by a Custodian - who is also a party to the deed – and specifies the fiduciary responsibilities of the Custodian which are equivalent to those of custodians/trustees of other UCITS schemes. The deed also provides that the Custodian will be appointed on the terms of a custodian agreement to be entered into by the Management Company and Custodian.
Importantly, the CCF is an unincorporated body and does not have legal personality. Because a CCF does not have legal personality, it may act only through the Management Company (or investment manager, if authority is delegated to an investment manager).
Participants in the CCF hold their participation as co-owners and each participant holds an undivided co-ownership interest as "tenants in common" with other participants. A "tenancy in common" is a form of co-ownership in which the joint owner (the "tenant in common") has a distinct but undivided interest or share in the property the subject of the co-ownership but with no right of survivorship (e.g. on death of one co-owner) in favour of any of the other joint owners (tenants in common). Investors do not have any beneficial entitlement to any particular asset, rather a proportional beneficial entitlement to an interest in the underlying pool of assets.
To assist in achieving tax transparency (these characteristics differentiate a CCF from an opaque corporate body), a CCF will normally have the following additional characteristics:
- income derived through the pooling vehicle should be distributed on a mandatory basis annually, pro rata to each participant's investment in the CCF. This ensures that the income is both accounted for and taxed on an "arising"/ current basis;
- the CCF participant should be provided with an annual breakdown of income on investments by type and source;
- no redemption charge should be levied on participants;
- no "investor" meetings (i.e. meetings similar to shareholder meetings) should be permitted;
- the Irish tax authorities must view a CCF as a transparent vehicle for Irish tax purposes;
- holdings/units in a CCF should not be freely transferable but are redeemable. It has, however, been accepted that units may be transferred in limited circumstances, i.e. with the prior consent of 100% of unitholders and the Management Company; and
- assets should be jointly held by participants pro-rata to their investment.
Box 4 – Common Contractual Fund (CCF)
- Umbrellas, Sub-Funds and Classes
Whichever legal structure is chosen, UCITS can be established as single stand-alone funds and as umbrella funds, and can offer different unit or share classes within a fund, the normal differentiating factors being target audience (retail, professional, institutional), minimum subscription/holding requirements, designated currency and fees.
It is a fundamental principle, however, that assets/liabilities within a single fund are not allocated to individual classes, but may be "attributable" to classes in certain cases such as in the case of hedged currency classes where the gains/losses are attributed to the relevant classes, as well as other class liabilities such as fees. The Central Bank will also consider proposals where financial derivative instruments may be used at share class level to provide (i) a different level of participation in the performance of the underlying portfolio; or (ii) different levels of capital protection, subject to and in accordance with the requirements of the Central Bank as set out in the Central Bank Policy Update – 1 / 2010.
To read "A Guide to UCITS in Ireland" in full, please click here.
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.
