James Lasry, Anthony Jimenez, and Peter Young examine recent developments within Gibraltar's vibrant fund industry.
The Gibraltar Income Tax Act 2010 – The Birth of an International Onshore Finance Centre
Gibraltar’s transition from an ‘offshore tax haven’ into a modern international ‘onshore’ finance centre was completed at the beginning of 2011 with the enactment of the Gibraltar Income Act 2010 (the ‘ITA 2010’).
The ITA 2010 came into force on the 1 January 2011 and completes a sequence of undertakings which have transformed Gibraltar into an onshore jurisdiction; these include the signing of 18 tax information exchange agreements by the Gibraltar government and Gibraltar’s compliance with EU money laundering and cooperation rules. There is now no distinction between ‘onshore’ and ‘offshore’ business in Gibraltar.
The ITA 2010 reduced the corporate tax rate in Gibraltar from 22 per cent to 10 per cent to coincide with the abolition of the tax exempt company regime. Corporate tax is calculated by reference to accounting profits and subject to all the usual deductions including rents, salaries, external costs etc. The low corporate tax rate, along with a separate attractive regime for individuals on high salaries who bring specialist skills, has seen fund managers seriously consider setting-up or re-domiciling their investment management company to Gibraltar.
Under the ITA 2010, funds domiciled in Gibraltar will continue not to suffer Gibraltar tax on general principles because income will consist of exempt investment income, trading income from a trade conducted outside of Gibraltar, dividends or interest, none of which are to be taxed in Gibraltar.
Experienced Investor Fund regime - Private Equity and Real-Estate Investments
The Experienced Investor Fund (‘EIF’) has continued to be a popular product throughout 2011 amongst fund managers. The EIF regime is Gibraltar’s fund offering specifically for high-net worth or sophisticated investors. EIFs have a rapid and inexpensive post launch registration procedure, there are no statutory investment restrictions and the entity itself is regulated by the Gibraltar Financial Services Commission (the ‘FSC’).
EIFs have proved particularly robust and suitable for private equity and real-estate investments. Gibraltar funds can benefit from the European Parent Subsidiary Directive (‘PSD’), which means that dividends to a Gibraltar company from subsidiaries in certain European jurisdictions (such as Luxembourg) will not be subject to withholding tax. Gibraltar funds will also benefit from the Interest and Royalties Directive (‘IRD’), which along with the PSD, eliminates many withholding taxes on returns from European investments.
Another benefit, from the point of view of a European-based investment advisor to a Gibraltar private equity fund, is that Gibraltar, despite being in the EU, is outside of the VAT area. Therefore the services provided by a European investment advisor to a Gibraltar private equity fund are outside the scope of VAT and there is no irrecoverable VAT cost for the fund in Gibraltar.
Gibraltar and the Alternative Investment Managers Directive
Gibraltar’s position in the EU means that any manager considering Gibraltar as a jurisdiction to domicile a fund or establish a licenced investment manager must consider the impact that the Alternative Investment Managers Directive (‘AIFMD’) will have on their business. It is anticipated that the introduction of AIFMD will have a positive impact on Gibraltar’s fund industry and that AIFMD is likely to apply to fund managers that manage EIFs.
The rationale behind AIFMD is that decisions taken by managers of alternative investment schemes could potentially have a significant impact on the financial markets and thus managers should be exposed to stricter and more harmonised regulation across the EU. The requirements imposed by AIFMD on managers of alternative investment schemes include enhanced disclosure levels, remuneration rules, leverage limitations and capital requirements. In light of this, each manager that complies with AIFMD will be effectively allowed to passport the marketing of the European domiciled funds they manage into all EU member states. This will allow AIFMD compliant managers to market Gibraltar the EIFs they manage across Europe and will change the way managers perceive professional funds.
However, the European Commission has yet to accept advice on the Level 2 implementing measures for AIFMD as submitted by the European Securities and Markets Authority (‘ESMA’) in November 2011. Formal adoption of implementing measures based on ESMA’s proposals is expected in the course of 2012. There is still some uncertainty about how onerous the requirements will be, and it is not always possible at the outset of establishment to assess just how beneficial the marketing passport may be for a manager.
Therefore, a manager may want to consider an EIF as a vehicle, to allow the decision to opt in or out of AIFMD to be delayed until a later stage. Although the majority of EIFs are structured as Gibraltar limited companies or protected cell companies, there is an increasing interest in using Gibraltar’s limited partnerships, given their commercial flexibility and tax advantages especially when the investment is private equity and/or real-estate. A general partner could be incorporated as an overseas limited partnership in Gibraltar, with a view to moving the general partner out of Gibraltar if AIFMD turns out to be disadvantageous. This would be easier than re-domiciling the whole fund.
A Gibraltar limited partnership is comparable to the English version, but there are some key differences. A Gibraltar limited partnership has perpetual succession and separate legal personality, the two key common law ingredients for body corporate status. This means that a fund structure as a Gibraltar limited partnership is free of the marketing restrictions imposed by the unregulated Collective Investment Scheme regime in the UK (provided it is not open-ended).
UCITS IV Arrives in Gibraltar
The Financial Services (Collective Investment Schemes) Act 2011 (the ‘CIS Act 2011’) came into force on 13 October 2011 and is now the primary legislation with regards collective investment schemes in Gibraltar. It repeals the Financial Services (Collective Investment Schemes) Act 2005 (the ‘CIS Act 2005’) in its entirety. The central objective behind the enactment of the CIS Act 2011 was to transpose EU Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (otherwise known as the UCITS IV Directive) into Gibraltar law. The CIS Act 2011 allows for UCITS IV funds and UCITS management companies to be domiciled and operate in Gibraltar.
One key feature of the UCITS IV regime is that UCITS funds will benefit from a new streamlined passport. A Gibraltar UCITS intending to distribute its shares/units in another member state must follow a simplified notification procedure. The Gibraltar UCITS fund must submit a notification letter of its intention to market in the target member state to the FSC, who will verify the application and transmit the request, along with other relevant documents relating to the fund, to the competent authority of the member state where the Gibraltar UCITS wishes to distribute and raise investment. Once the transmission has been confirmed by the FSC, the Gibraltar UCITS may begin marketing in that member state. This removes the burden of undergoing time-consuming authorisation procedures in each member state where the UCITS wishes to raise investment.
Looking into 2012 – EIF Amendments
A working group from the Gibraltar Funds and Investment Association (‘GFIA’) met with the FSC on several occasions over 2011 in order to discuss amending the Financial Services (Experienced Investor Fund) Regulations 2005 (‘EIF Regs 2005’). The two main focus areas are to allow, in certain circumstances, foreign administration of an EIF and to permit investment by ‘professionally advised investors’. It is expected that the amended EIF Regs 2005 will come into force in early 2012.
It is anticipated that the amended EIF Regs 2005 will further boost Gibraltar’s popularity as a fund domicile jurisdiction and will open Gibraltar to a wider market. These amendments, plus the potential marketing benefits derived from AIFMD, will see Gibraltar advance into 2012 with all the necessary ingredients required to compete with other European and international fund domicile jurisdictions.
James Lasry, Anthony Jimenez, and Peter Young, Hassans International Law Firm, Gibraltar