Ireland is a world-class EU location of choice for fund promoters to domicile and service investment funds. Ireland complies with international standards in financial services regulation, and is the largest hedge fund administration centre in the world. The regulatory environment represents international ''best practice'' and provides for independent, regulated administration and trustee/custodian functions.

For non-resident investors, Irish investment funds are exempt from Irish tax on income and gains, and no withholding taxes apply on income distributions or redemption payments.

This article summarises some of the key considerations involved in deciding, firstly, whether or not to opt for a UCITS fund or a non-UCITS fund (such as the Qualifying Investment Fund, or QIF) and, secondly, the key elements in obtaining authorisation for a fund.

1. UCITS or non-UCITS

Key Issue No 1: Is EU or Wider Distribution Required?

If EU distribution is required, only a UCITS fund qualifies for an EU retail passport, meaning that once authorised in one EU Member State, the fund can be sold in all other Member States without further authorisation. If private placement only is planned, as is the case with many private equity vehicles, then a non-UCITS such as the QIF should be considered. Both UCITS and non-UCITS vehicles can be listed on the Irish Stock Exchange and can also be migrated to the London Stock Exchange. There are no investor qualification or minimum investment criteria for investment in UCITS, whereas in general non-UCITS such as QIF are available to certified ''professional investors'' with a minimum subscription of €100,000 per investor.

Key Issue No 2: Which Legal Structure is Appropriate?

Both UCITS and non-UCITS funds are usually set up as variable capital investment companies, but circumstances may determine that a unit trust or common contractual fund (CCF) may be more appropriate. Both types of fund permit umbrella structures. UCITS generally do not permit subsidiaries to be used. Non-UCITS such as QIFs may utilise underlying subsidiaries to improve access to Double Taxation Agreements.

Key Issue No 3: What Investments are Intended for the Fund?

Non-UCITS funds such as the QIF have in general very few limitations on investment policy (which is why they are so popular worldwide as private equity vehicles). On the other hand, UCITS are limited in general to transferable securities or money market instruments traded on regulated markets, cash, currencies, other UCITS and exchange traded or over-the-counter derivatives within defined parameters. To date, QIFs have invested not only in investments permitted for UCITS, but also derivatives, unregulated funds, property, movable assets, precious metals and many other asset classes.

Key Issue No 4: What are the Intended Liquidity Requirements in the Fund?

The key difference is that liquidity is a key requirement of a UCITS fund, with full redemption facilities to be provided at least once every two weeks, whereas non-UCITS such as the QIF permit a full range of options from liquid to semi-liquid, to illiquid with no redemptions permitted.

Key Issue No 5: What Borrowing and Leverage is Required in the Fund?

The non-UCITS QIF has no borrowing limit, whereas a UCITS can only borrow up to a maximum of 10 per cent of assets and even then only on a temporary basis. The QIF has no leverage limit, whereas in general in a UCITS fund the global exposure cannot exceed the Net Asset Value.

Key Issue No 6: What Governance Requirements Apply to UCITS and non-UCITS?

Selection of the following parties is required for both UCITS and non-UCITS (QIF) funds, all of which require pre-approval by the regulator (the Central Bank) :-

  • Promoter, which must be in possession of minimum €635,000 in shareholder funds, with a verifiable track record in the promotion of funds
  • Directors
  • Discretionary Investment Manager, which must be recognised in an EU jurisdiction
  • Custodian/Administrator/Trustee (must be authorised to carry out business in Ireland)

In addition, Irish legal advisors and registered auditors to the fund must be appointed.

The governance requirements for UCITS are much more onerous, notwithstanding the existence of a voluntary general Fund Governance Code applicable to all funds, including:-

  • Requirement for a detailed business plan (not required for non-UCITS)
  • Detailed Derivatives Risk Management Process (RMP), also not required for a non-UCITS
  • The UCITS Directive imposes strict rules on custodian liability, whereas a non-UCITS can exclude liability for sub-custodians
  • UCITS must submit annual audited accounts plus semi-annual unaudited accounts, while non-UCITS require submission only of annual audited accounts.

2. Fund Authorisation Process

The authorisation process for a regulated fund will normally require the following:

  • Pre-approval of promoter and investment manager for both UCITS and non-UCITS
  • For UCITS the process is necessarily thorough and will frequently take up to 3 months from initial filing of an application with draft documents including fund Prospectus, Business Plan, custody agreement and derivatives RMP. There follows a round of reviews of the application by the Central Bank and this will often result in further queries to be addressed.
  • Provided the promoter and other parties are pre-approved by the Central Bank, and that confirmation is supplied confirming compliance with the authorisation criteria, a non-UCITS QIF application is fast tracked: it is normally authorised by the Central Bank within 24 hours of receipt of completed documentation. An application must be filed by 3pm on the day before the proposed date of authorisation. From the time of initial client meeting, the timeframe for the assembly of information, the filing of the application itself and obtaining the necessary pre-approvals of parties to the fund, is usually only one month. This is followed by approval within 24 hours of submission of the application.

How Verfides Can Assist

Verfides acts as experienced and trusted Project Manager for clients in the establishment of Irish domiciled UCITS and non-UCITS vehicles, assisting in the selection of some or all of the professional parties needed (legal adviser, investment manager, custodian/depository bank; administrator, auditor and directors), according to each client's requirements. We have strong relationships with many of the leading professionals in this field and as such are able to secure competitive rates. After approval, we offer a menu of bespoke services in the ongoing administration of a fund, including company secretarial services and tax compliance services.

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.