Simon Mitchell, Seychelles Attorney-at-Law and Consultant to Mayfair Trust Group Limited, Seychelles
Simon Mitchell analyses The Mutual Fund and Hedge Fund Act 2008.
Seychelles is an independent republic within the Commonwealth, consisting of 115 islands situated in the northern Indian Ocean. Seychelles gained independence from Great Britain in 1976. Seychelles is now well known as an international financial centre. The tax-exempt Seychelles International Business Company (IBC) has enjoyed substantial popularity, with 10,200 new IBC incorporations during 2007. Judging by present incorporation rates, it is estimated that new incorporations for 2008 will exceed 13,000. Success in the global corporate services market has enabled Seychelles to steadily develop more value-added areas of offshore business, including trusts, limited partnerships, securities and mutual funds. Seychelles will also shortly be adding the foundation to its repertoire of offshore products.
Seychelles Mutual Funds
The Mutual Fund and Hedge Fund Act 2008 (the Act), which replaced the overly-restrictive Mutual Fund Act 1997, is modern, comprehensive and strikes a smart balance between sound regulation and pleasing the market. The Act only regulates open-ended mutual funds, whose shares, trust units or partnership interests carry an entitlement to participate in the profits or gains of the company, unit trust or partnership, as the case may be, and are redeemable or re-purchasable at the option of the investor. As such, the Act does not apply to closed-end funds (e.g. private investment companies whose shares are not redeemable at the investors’ option).
Seychelles mutual funds may be administered in Seychelles by a Seychelles licensed fund administrator or outside of Seychelles by an approved foreign administrator. An approved foreign administrator is an entity licensed or otherwise authorised to operate as a fund administrator in a ‘recognised jurisdiction’. Recognised jurisdictions include: Austria, Australia, Belgium, Bahamas, Bahrain, Bermuda, British Virgin Islands, Canada, Cayman Islands, Cyprus, Denmark, France, Germany, Gibraltar, Guernsey, Holland, Hong Kong, Isle of Man, Ireland, Japan, Jersey, Luxembourg, Malaysia (including Labuan), Mauritius, New Zealand, Singapore, South Africa, Switzerland, United Arab Emirates, United Kingdom and United States of America.
Under the Act, Seychelles licensed funds and exempt foreign funds enjoy (without limitation):
Exemption from Seychelles business tax on the fund’s income (except for funds wishing to use a Company Special License (CSL) structure, to benefit from overseas tax relief available under a Seychelles double taxation avoidance agreement).
Exemption from Seychelles withholding tax.
Exemption from Seychelles stamp duty (on nearly all dealings, except for transfers of, or interests in immovable property (real estate) within Seychelles).
The Act requires that licensed funds have their accounts audited annually by either a Seychelles licensed auditor or by a foreign auditor approved by the Authority (Central Bank of Seychelles). While most offshore fund jurisdictions only permit foreign auditors qualified in the UK, the US or Canada, Seychelles funds may be audited by accountants qualified with approved accountancy bodies in Singapore, Hong Kong, South Africa and Australia as well as the UK, the US or Canada.
The Act enables the following wide range of entities to be used as mutual fund vehicles:
Seychelles tax-exempt IBCs (international business companies):
CSLs – these tax resident companies are liable to Seychelles business tax at the rate of 1.5 per cent of worldwide taxable income (which may be avoided by the application of tax credits if CSL is accessing a Seychelles double taxation avoidance agreement);
Seychelles tax-exempt limited partnerships;
Seychelles international trusts (unit trusts); or
Companies, unit trusts or limited partnerships constituted in a recognised jurisdiction.
The Act envisages four types of mutual funds: professional funds, private funds, public funds and exempt foreign funds.
The Act defines ‘private fund’ as a mutual fund: (a) the constitutional documents of which specify that it will have no more than 50 investors; or (b) the constitutional documents of which specify that an invitation to the public to subscribe for or purchase equity interests in the mutual fund is prohibited, and provided that an invitation to the public shall not have been made if it is made: (i) to a specified person(s) or specified ascertainable class of person(s) and is not calculated to result in equity interests becoming available to other persons; or (ii) by reason of a private client or other private business connection between the person making or causing the invitation and the investor.
The Act defines ‘professional fund’ as a mutual fund the equity interests of which can only be acquired by professional investors (see definition below) and in respect of which the initial minimum investment per investor is not less than $100,000 or its equivalent in any other convertible currency.
Professional funds enjoy a lighter regulatory touch, as they are only open to professional or ‘sophisticated’ investors and not the general public. For example, while professional funds are required to submit their draft offering document to the Authority in the initial fund licence application, the Authority’s consent is not required in respect of either subsequent offerings or changes to the offering document. ‘Professional investor’ is defined under the Act to mean a person (a) whose ordinary business or employment involves, whether for his own account or the accounts of others, the acquisition or disposal of property of the same kind or substantially the same kind as the property of the relevant fund; or (b) who has a net worth, whether individually or jointly with his spouse, exceeding $1,000,000 or its equivalent in any other convertible currency, and has signed a declaration to such effect and consenting to be treated as a professional investor; or (c) a bank licensed in Seychelles or in a recognised jurisdiction (as defined above); or (d) a mutual fund licensed in Seychelles or a recognised jurisdiction; or (e) an insurance company licensed in Seychelles or a recognised jurisdiction; or (f) a securities dealer or stock broker licensed in Seychelles or in a recognised jurisdiction.
‘Public fund’ is defined under the Act to mean any mutual fund which is not a private mutual fund or a professional fund (for example, retail funds offered to the general public). Public funds are required to obtain prior approval from the Authority in respect of intended offering documents when the fund proposes to: (a) make an invitation to the public or any section thereof to subscribe for or purchase equity interests in the fund, or (b) make a material change to an offering document previously approved by the Authority. The Act sets out the minimum content requirements for an offering document.
Exempt Foreign Fund
The purpose for the ‘exempt foreign fund’ provisions under the Act is to allow foreign funds to operate from and be administered from Seychelles without having to undergo the formal Seychelles Fund Licence application process. In particular, the Act allows for foreign funds to operate from Seychelles without a Seychelles Fund Licence provided the fund is: (a) already licensed as a mutual fund in a recognised jurisdiction (as defined above); and (b) administered by a Seychelles licensed fund administrator; and (c) is either listed on a stock exchange or the minimum investment amount is not less than US$100,000 per investor.
The Proposed Seychelles Foundation
Foundations are well known in many civil jurisdictions, such as Liechtenstein, Austria and Panama. In recent years, several common law jurisdictions have introduced foundation legislation, and the popularity of foundations is on the rise. Seychelles aims to enact a Foundations Act by late 2008.
Anticipated highlights include:
A foundation will be established by a foundation charter and registered under the Act.
A foundation will be a separate legal entity, capable of suing and being sued (unlike a trust, which can only operate and hold property via a trustee). A foundation may adopt regulations relating to, for example, providing for the identification and designation of beneficiaries, the distribution of foundation assets etc. Unlike the charter, the regulations will be a private document (not filed at the Registry (Seychelles International Business Authority)).
A founder may reserve, in the foundation charter or regulations, to himself or for other persons, various rights, for example, the right to appoint or remove councillors, the right to appoint or remove protectors and the right to add or exclude beneficiaries.
The business and affairs of a foundation will be managed by a board of councillors known as the foundation council, which will consist of one or more persons (i.e. either a legal entity or ‘natural’ person).
Assets transferred to a foundation shall be the assets of that foundation, with full legal and beneficial title; shall cease to be the assets of the founder, once transferred to or otherwise vested in the foundation by or on behalf of the founder; and shall not become the assets of a beneficiary unless distributed in accordance with the provisions of this Act and the foundation’s charter or regulations.
No foundation governed by the laws of Seychelles, and no transfer or other disposition of property to a foundation, shall be void, voidable, liable to be set aside or otherwise defective in any manner by or by reference to a foreign rule of forced heirship or any other law of a foreign jurisdiction.
No transfer of property to a foundation shall be void by reason of the founder’s bankruptcy or the liquidation of the founder’s property or in any claim against the founder by any creditor of the founder, except the court may, where it is proved beyond all reasonable doubt that the founder was insolvent, or intended to defraud any person who was a creditor of the founder, at the time when the founder transferred property to the foundation, declare that such transfer of property was void or voidable to the extent necessary to satisfy a proven claim of a creditor of the founder. Notwithstanding the Civil Code of Seychelles, such a claim with respect to any property of a foundation, shall not be made against a foundation, and shall be barred absolutely, on the expiry of two years from the date of the transfer of such property to the foundation.
A foundation will be exempt from Seychelles business tax, stamp duty and withholding tax.
Seychelles has seen a surge in offshore business growth, volumes and international profile over the last five years. The key to this has been attractive products, value for money, speed and quality of delivery as well as a modern and effective regulatory environment. Seychelles has also adopted a proactive approach of continuous reviewing and strengthening, including adding strong new product such as the Seychelles mutual fund and foundation. These strategies, coupled with its increased global profile and substantial market interest mean that Seychelles is well placed to ensure continued growth and success as an international financial centre.
Simon Mitchell, Seychelles Attorney-at-Law and Consultant to Mayfair Trust Group Limited, Seychelles