Ireland: China Access Strategy - Ireland Opens The Door To Investment In China Through UCITS

In December 2013, Maples and Calder's Dublin office advised on the first Irish authorised UCITS with full access to the Chinese equity market via a Renminbi Qualified Foreign Institutional Investor ("RQFII") licence.

The RQFII licence is held by the UCITS fund's investment manager for its exclusive use.

Historically, Irish and other European domiciled funds were restricted to accessing the domestic China investment markets through the Qualified Foreign Institutional Investor ("QFII") programme. This has been in place since December 2002 and allows foreign institutional investors to invest (in the local currency) in China securities – in particular, China A Shares listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. The return on the investment, including dividends and capital gains, can be legally exchanged into foreign currency and repatriated.

The RQFII regime was introduced, initially in pilot phase, on 16 December 2011. Until recently the RQFII regime was confined to Hong Kong based entities. In January 2014, the first RQFII licence was granted to an entity from outside China or Hong Kong – a UK based entity. The requirement for the RQFII quota to be used through a Hong Kong domiciled fund was also removed. This opened up the RQFII market for the first time to investment funds domiciled in other jurisdictions such as Ireland.

Irish fund options

Ireland offers a range of regulatory structures that can accommodate a China access strategy. In the context of a QFII licence, the Qualifying Investor Alternative Investment Fund ("QIAIF") and the Retail Investor Alternative Investment Fund ("RIAIF") are both feasible for this. The QIAIF provides the greatest flexibility as the investment, borrowing and leverage restrictions which apply to RIAIFs are disapplied in full. The QIAIF offers a pre-launch authorisation without prior review and MiFID equivalent investor eligibility criteria (i.e. a €100,000 minimum subscription). Both the QIAIF and RIAIF are within the scope of the Alternative Investment Fund Managers Directive ("AIFMD") regime.

Ireland is also a key jurisdiction for the establishment of UCITS funds. UCITS funds are pan-European investment fund structures designed primarily for retail investment. UCITS are suitable for investment by institutional investors and can be sold on a public offering basis across the EU on a passport basis, as well as outside the EU on a country-by-county basis. Irish domiciled UCITS represent 3,307 funds (including sub-funds) and assets of approximately €1.1 trillion as at January 2014 and are distributed in over 70 countries around the world.

Increasingly UCITS are being viewed as key cross-border products for alternative investment strategies.

Ireland clears the way for UCITS investing into China

Initial lock-up

A QFII is subject to an initial three month lockup of assets in the China securities and cash accounts. This commences at the later of: (a) the date the full quota granted under the QFII licence is taken up; or (b) six months after the QFII quota was approved if it is initially taken up only partially. For a fund that trades any more frequently than monthly, this would present challenges, at least in theory, in the event of a large redemption.

While a monthly dealing QIAIF or RIAIF should be capable of meeting the liquidity challenges this initial lock-up presents, it has been a barrier for UCITS which are required to deal at least twice monthly.

Ongoing monthly repatriation limit

Generally repatriation out of China by a QFII is only permitted on a monthly basis on the net level of subscriptions/redemptions and is subject to China's State Administration of Foreign Exchange's approval being granted in the event the repatriation amount sought exceeds US$50 million in any given month.

The absence of both an initial lock-up restriction and any monthly repatriation limit for RQFII is why it is suitable for use in a UCITS.

Tax

The tax position of the fund as regards China will be an area to examine. All regulated Irish funds benefit from a range of attractive tax features.

  • 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 receive, 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 needs to be examined on a case by case basis. This issue is 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).

How does the custody element operate?

Irish funds are required to appoint an independent custodian or depositary located in Ireland with primary responsibility for safekeeping of the fund's assets. This entity will engage the local custody provider in China by way of a sub-custodian arrangement. On a dayto- day basis, the investment manager will engage directly with the local sub-custodian on the trading side.

Assets (held in a securities account and a cash account in China) will be fully segregated and recorded in the joint names of the QFII/RQFII quota holder and the fund. In the event of insolvency of the local sub-custodian or the QFII/RQFII, the fund's ownership of the assets is thus assured. An opinion from counsel in China on the specific arrangements may be necessary for the Central Bank of Ireland ("CBI") to be assured of proper safekeeping arrangements.

Irish China access funds

In line with the increase in QFII licences granted and now the granting of RQFII licences for utilisation by funds or other institutions or products outside Hong Kong, we are seeing significant interest in the establishment of Irish funds targeting the Chinese domestic markets. This is symptomatic of the increased attraction of the Chinese market from international investors and demand for China access products internationally.

It is also worth highlighting the memorandum of understanding entered into in 2008 by the CBI and the China Securities Regulatory Commission ("CSRC") and the China Banking Regulatory Commission ("CBRC"). This formalised the relationship and co-operation between the two jurisdictions.

Gaining access to Chinese domestic markets is increasingly becoming a key priority for asset managers with global portfolios and an international investor base. Now that RQFII has opened up to UCITS, the opportunities promise to increase further.

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
Peter Stapleton
Stephen Carty
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions