Malta: Professional Investor Funds In Malta

Introduction

Ever since joining the European Union in 2005 Malta has attracted an ever-increasing interest in its Financial Services and is steadily becoming an alternative European fund domicile of choice.

There are a number of clear advantages that Malta offers as a jurisdiction in which to set up a fund. The main reason is the tax treatment of funds in Malta:

• A fund which owns 15% or more of its portfolio invested in assets outside of Malta is exempt from any income or capital gains tax;
• Capital gains realized by investors in the fund who are non-residents of Malta are not subject to any tax whatsoever in Malta;
• Management and performance fees charged by service companies can end up being taxed at the rate of 5% if the country of origin has a double taxation agreement with Malta.

However, there are numerous other advantages which give Malta a competitive edge including:

• Low set up costs, efficient regulation, a beneficial tax treatment and Malta's specialised professionals;
• a comprehensive legislative and regulatory framework for Financial Services activities and international business which have incorporated the latest European standards and EU Directives that is geared to address all industry needs;
• Service providers do not need to be established or have a physical presence in Malta;
• extensive network of Double Taxation Agreements;
• Efficient licensing process.

What is a Professional Investor Fund (PIF)?

A PIF is a type of Collective Investment Scheme (CIS) that, generally, takes the form of an open-ended investment company in the form of a SICAV due to the separate legal personality and flexibility this vehicle offers. However, a number of other vehicles may be used to set up a Malta registered fund such as close-ended corporate entities (INVCO), trusts and limited partnerships.

The principal legislation that affects PIFs is the Investment Services Act, 1994 (ISA). The Malta Financial Services Authority (MFSA) is responsible for the licensing, regulation and supervision of PIFs.

Interesting feature of PIFs

Since a PIF is a non-retail form of CIS, it is not subject to the rigid requirements traditionally associated with other retail forms of CISs.

Indeed, if a PIF appoints functionaries (i.e. the Manager, Custodian, Prime Broker, Investment Advisor etc.) and, consequently, does not itself carry out any investment services licensable activity, it is not regulated in Malta. In this case, however, the MFSA would not accept any regulatory responsibility. Functionaries need not necessarily be licensees under the ISA although the principal functionaries (wherever located) must be regulated to a standard acceptable to the MFSA.

There are no residence requirements for any of the fund's service providers other than the need for a local judicial representative.

If, on the other hand, a PIF carries out an investment services licensable activity as, for example, by acting as its own Fund Manager, then that activity must be regulated and, accordingly, a CIS licence would be required.

PIFs are not subject to any restrictions on their investment and borrowing powers and to any of the Standard Licence Conditions contained in the Investment Services Guidelines.

Copies of interim (if produced) and annual audited financial statements must be provided to the investors and to the MFSA. A PIF may be requested to provide information about its investments for statistical purposes.

Categories of PIFs

The MFSA's regulatory regime caters for 3 principal categories of PIFs being:

• PIFs promoted to Experienced Investors (or Experienced Investor Funds);
• PIFs promoted to Qualifying Investors (or Qualifying Investor Funds); and
• PIFs promoted to Extraordinary Investors (or Extraordinary Investor Funds).

Uses of PIFs

Uses include: (i) fully-fledged Hedge Fund for a variety of assets; or (ii) holding vehicle for high net worth individuals or entities seeking an efficient vehicle to structure their assets and investments.

Location of a PIF and licensing

A PIF may be established outside Malta or, alternatively, established in Malta but operated from outside Malta. If an external Fund Manager is appointed, then either the PIF or its Fund Manager must be established in Malta.

A PIF that is established in Malta and operated from abroad must appoint a judicial representative who must be either a licensee under the ISA, an advocate or an accountant recognised by the MFSA.

To whom may PIFs be sold?

Since PIFs are non-retail and due to the high degree of risk associated with them, 2 main conditions are imposed: (i) they may not be sold to the general public but only to Authorised Investors who must satisfy certain criteria; and (ii) they are subject to a minimum investment thresholds for each fund member.

Who are Authorised Investors?

There are 3 types of authorised investors being: (i) Experienced investors; (ii) Qualifying Investors; and (iii) Extraordinary Investors.

Experienced Investors

In order to qualify as an Experienced Investor, an investor must certify that he/she meets one or more of the following criteria: i. he has relevant work experience having at least worked in the financial sector for 1 year in a professional position or a person who has been active in these type of investments; or ii. he has reasonable experience in the acquisition and/or disposal of funds of a similar nature or risk profile, or property of the same kind as the property, or a substantial part of the property, to which the PIF in question relates; or iii. he has carried out investment transactions in significant size at a certain frequency (for example a person who within the past 2 years carried out transactions amounting to at least EUR50,000 at an average frequency of 3 per quarter); or iv. by providing any other appropriate justification.

Qualifying Investors

A Qualifying Investor is required to certify that he/she meets one or more of the following criteria: i. the investor must be a limited liability company or an unincorporated body of persons or association or a trust which possesses net assets in excess of EUR750,000 (or the equivalent in any convertible currency); or ii. if an individual, such person must prove that he/she has reasonable experience in the acquisition of funds of a similar nature or risk profile or in the acquisition of property of the same kind as the property to which the PIF relates or that his net worth (or joint net worth together with his/her spouse) exceeds EUR750,000 or the equivalent in any convertible currency; or iii. the investor is a senior employee or a director of a service provider to the PIF; or iv. a relation or a close friend of the promoters of the PIF (limited to a total of 10 persons per PIF); or v. an entity, or part of a group, with, at least, EUR3.75 million (or the equivalent in any convertible currency) under discretionary management or advice investing on its own account or on behalf of its clients.

Extraordinary Investors

An Extraordinary Investor should satisfy one or more of the following criteria: i. the investor must be a limited liability company or an unincorporated body of persons or association or a trust which must possess net assets in excess of EUR7.5 million (or the equivalent in any convertible currency); or ii. if an individual, such person must prove that he/she has reasonable experience in the acquisition of funds of a similar nature or risk profile or in the acquisition of property of the same kind as the property to which the PIF relates or that his net worth (or joint net worth together with his/her spouse) exceeds EUR7.5 million or the equivalent in any convertible currency; or iii. the investor is a senior employee or a director of a service provider to the PIF; or iv. an entity (body corporate or partnership) wholly owned by persons or entities satisfying any of the criteria listed above which is used as an investment vehicle by such persons or entities.

Investment thresholds

In the case of an umbrella fund comprising of sub-funds each of which is set up as a Professional Investor Fund, the above listed thresholds may be applicable on a per scheme basis rather than on a per sub-fund basis. Thus, for example, a Qualifying Investor may hold less than EUR75,000 in a sub-fund provided that his total holding in the scheme is at least EUR75,000.

Fund Manager

Exceptionally, the appointment of an external Fund Manager is not mandatory for a PIF since self-managed funds are permissible.

Accordingly, a PIF may act as its own Fund Manager in which case the directors and officers of the PIF will be held responsible for the functions and duties of a Fund Manager.

Typically, where the board of directors is acting as fund manager the management agreement will grant the board powers of delegation to established fund managers. In this case, the PIF will not require a separate investment services license (in addition to the CIS license) to act as Fund Manager to itself.

A PIF may not, however, act as Fund Manager to another PIF, but a licensed Fund Manager may act for a number of PIFs.

Administrator

The role of administrator is to liaise with the shareholders, day to day calculation of NAV and the retention of the necessary documentation of the members' unit allocation and investments. Although the appointment of an administrator is not compulsory, it is always advisable to appoint an administrator.

Custodian/Depositary

Exceptionally, the appointment of an external Custodian or Prime Broker is not mandatory for a PIF. In the absence of an appointed Custodian, however, responsibility remains with the directors and officers of the PIF to establish proper arrangements for the safe-keeping of the PIF's assets which measures should be described in the Offering Document. A separate investment services license (in addition to the CIS license) will not be required in this case.

If appointed, however, the external Custodian need not be in Malta. The Custodian takes instructions on the disposal of assets from the Manager acting within the parameters of the Offering Document.

It should be noted that a PIF promoted to Experienced Investors should appoint a third party Custodian who should be in possession of a Category 4 Investment Services Licence issued in terms of Article 6 of the ISA.

Investment advisor/Advisory Committee

A PIF may choose whether or not to appoint an Investment Advisor in addition to a Fund Manager whose role is to offer specialised advice on specific markets or instruments. Unless the board of directors possesses expertise related to the investment strategy of the fund it is always advisable and recommended to appoint an advisor.

Where the Investment Adviser is appointed directly by the Manager, rather than by the PIF, such Investment Adviser is not subject to MFSA's approval and no eligibility criteria apply.

Redomiciliation of PIFs

This is allowed from all the EU, EEA and OECD states, the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Guernsey, the Isle of Man, Jersey and Mauritius.

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.