Real Estate Funds A Guide to using Irish Funds for International Real Estate Investments
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Real Estate Funds
Dublin, London
A Guide to using Irish Funds for International
& New York Real Estate Investments
Investment Funds
A Guide to using Irish Regulated
Investment Funds for International
Real Estate Investments
1. Introduction: Investment Funds in Ireland ......... 4
2. Advantages of using Irish Regulated
Investment Funds for Real Estate
Investments ....................................................... 5
3. General Overview of Irish Regulated
Investment Funds .............................................. 7
4. Using Irish Regulated Funds for Direct
Real Estate Investments .................................. 10
5. Using Irish Regulated Funds for Indirect
Real Estate Investments .................................... 12
6. Liquidity . ............................................................ 14
7. Investment Through Special Purpose
Vehicles .............................................................. 15
8. Taxation .............................................................. 16
9. Distribution Opportunities for Irish Funds ......... 18
10. Continuing Obligations ...................................... 19
11. Listing on the Irish Stock Exchange .................. 20
12. About Mason Hayes & Curran ........................... 21
Contacts ............................................................. 23
3
1. Introduction: Investment Funds in Ireland Over the last 20 years, Ireland has earned a reputation as a leading jurisdiction for regulated investment funds. Currently over US$1.4 trillion in fund assets are domiciled in Ireland while the Irish fund industry services close to US$2.75 trillion in assets. Ireland’s growth as a domicile and servicing centre Almost all of the world’s major fund service for investment funds is attributed to the successful providers, including custodian banks, have a establishment in 1987 of the International presence in Ireland, ensuring a competitive market Financial Services Centre (“IFSC”) in Dublin and and the broadest range of service offerings. the subsequent implementation of the European Another recent trend has seen the regionalisation Communities (Undertakings for Collective of the financial services industry, with major Investment in Transferable Securities) Regulations participants establishing additional fund servicing in 1989. Ireland is now recognised as a centre of operations outside Dublin. These companies excellence for investment funds. have thus harnessed a larger workforce and lower Irish funds are currently distributed in more than 70 operating costs - facilitating competition between countries. The attraction of Ireland as a domicile for Ireland and other newer jurisdictions now offering investment funds is based on a unique combination UCITS products. of the Irish legal and regulatory system, the This publication gives an overview of the reasons specialist skills and expertise of its workforce, the for using an Irish regulated investment fund as country’s pro-business approach, infrastructure, a vehicle for both direct and indirect real estate competitive tax environment and government related investments and summarises the legal support. and regulatory structures under which real estate In addition, the willingness of the Irish regulatory focussed funds may be established in Ireland. authority, the Central Bank of Ireland (the “Central Additional details on the procedure for authorisation Bank”), to implement timely authorisation in Ireland and all relevant supplementary matters processes and to adapt and develop its regulation to be considered are contained in our related to keep pace with developments in the investment publications “Investment Funds in Ireland” and funds industry has contributed hugely to Ireland’s “A Guide to UCITS in Ireland”. In addition, it success. The Central Bank has devised specific can be noted that it is also possible to establish rules to address the requirements of individual an unregulated collective investment scheme in industry sectors, including real estate funds. As a Ireland, for example as a limited partnership under result, the investment funds industry in Ireland has the Limited Partnership Act 1907 or using a simple developed rapidly, with more than 12,000 people corporate structure and although these structures now directly employed in investment funds related are not considered in this publication details are activities. available upon request from the Investment Funds Over 40% of global alternative investment funds contacts listed on page 23. are serviced in Ireland, which has fostered an expertise in administering hedge funds and the alternative industry generally. 4
2.
Advantages of using Irish Regulated Investment
Funds for Real Estate Investments
The primary considerations for fund promoters • Diversification: pooled resources facilitate the
when determining whether to establish funds in a creation of a larger capital sum thereby enabling
given jurisdiction are the regulatory environment, a greater level of diversification than otherwise
tax efficiency, distribution possibilities and available possible, which is particularly important given
expertise. For the reasons set out below, it is clear the potentially high capital costs of each
that there are a range of advantages to having a individual investment project and the illiquid
fund domiciled in Ireland which address all of these nature of the investment type; and
concerns. The fact that 63% of regulated European • Lower capital requirement: fund structures
alternative investment funds are now domiciled in facilitate participation in projects which have
Ireland, indicates that this is broadly recognised by massive capital requirements for a relatively low
the investor community. capital input.
However, prior to exploring the specific advantages
which Ireland offers to investment funds in
general, it would be useful to set out the benefits The following points are some of the key
which investment funds can bring to real estate advantages to domiciling a real estate focussed
investments and the advantages of routing such investment fund in Ireland:
investments through a fund.
2.2 Regulatory and Legal
2.1 General Advantages to using Environment
Investment Funds for Real Estate • Ireland is a member of the EU, the OECD and
Investments the FATF;
• Liquidity: Real estate is an illiquid asset class, • Ireland is a common law jurisdiction;
but using a fund as a holding vehicle provides an • the Central Bank has a strong track record of
effective mechanism through which investors prudential supervision of Irish investment funds
can realise their investment without requiring a and the regulated firms providing services to
sale of the underlying asset to be effected; them, but has also proven to be adaptable in
• Separation of asset realisation from investor amending its regulations to ensure these remain
distribution: Gains from asset sales can be held appropriate;
in the fund and distributed to investors when • Ireland is a member of the Euro zone;
appropriate to ensure they are received in a tax • funds that comply with the requirements of
efficient manner; EU legislation as implemented in Ireland may
• Economies of scale: pooled investment take advantage of pan European marketing
facilitates investing on a larger scale thereby opportunities (see Section 2.5 “Distribution
enabling the realisation of economies of scale; Opportunities” below);
• Pooled Resources and Leverage: the pooling • the regulatory rules applicable to Irish regulated
of resources in a fund structure affords access funds minimise the potential for fraud and abuse
to greater investment opportunities and can of investors; and
provide access to greater leverage; • the Central Bank has produced specific rules
• Access to Professional Expertise: a large pool relating to real estate funds (see Section 4
of capital under management will facilitate the “Using Irish Regulated Funds for Direct Real
cost effective usage of dedicated professional Estate Investments”)
management;
5
2.3 Tax Efficiency • there is a large pool of experienced support
professionals including lawyers, tax advisors,
• Irish regulated funds are exempt from tax consultants and auditors; and
on their income and gains irrespective of an
investor’s residency; • there are over 50 authorised fund administrators
in Ireland, the majority of which are subsidiaries
• no on-going or yearly tax is charged on the net of large global firms. Many of these firms
asset value of the fund; also have sister companies offering custody
• under domestic legislation, no withholding tax is operations.
applied on income distributions or redemption
payments by a fund to a non-Irish resident
investor; 2.5 Distribution Opportunities
• no Irish stamp duty is applied on the • Irish funds are distributed in over 70 countries;
establishment, transfer or sale of units or shares
• funds authorised as UCITS in Ireland can avail of
in an Irish regulated fund;
pan-European registration possibilities;
• Ireland is not regarded as a tax haven and
• funds authorised in Ireland as non-UCITS,
is listed on the OECD’s “white list” for
for example Qualifying Investor Funds, will
internationally agreed tax standards;
automatically be largely compatible with the
• Ireland is party to more than 60 double tax terms of the Alternative Investment Fund
treaties, the provisions of which may be Managers Directive and accordingly will be able
accessed by funds or structures involving funds; to avail of pan-European marketing possibilities
• the Irish Revenue Commissioners have clarified from 2013;
that funds redomiciling to Ireland may make use • Ireland is in the same time zone as London and
of a declaration on behalf of the fund in which only one hour removed from mainland Europe.
to the best of its knowledge there are no Irish The business day overlaps to an extent with that
resident investors; and of both Asia and the US.
• Ireland has signed up to the EU Taxation of
Savings Directive’s information exchange
provisions and therefore, unlike certain EU 2.6 Other Advantages
Member States, it does not need to apply The Irish Stock Exchange, which is an EU
withholding tax on fund distributions. recognised exchange, is the world’s leading stock
exchange for listings of investment funds and Irish
authorised funds receive automatic derogations
2.4 Industry Expertise from a number of its requirements.
• over 12,000 professionals work in the funds
industry in Ireland;
Total Assets of Irish Domiciled UCITS Funds Total Assets of Irish Domiciled Non-UCITS Funds
Eur Billion Funds including Sub-Funds
900 250
800
700 200
600
150
500
400 847 240
820 235
759 100 205
300 647 597 161 151
583 147
465 518 122 129
200 50
286 343 77 91
100 238 66
0 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jan-12 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jan -12
Source: Central Bank of Ireland Source: Central Bank of Ireland
6
3.
General Overview of Irish Regulated
Investment Funds
In Ireland, each regulated collective investment The 2001 UCITS Product Directive (Directive
scheme (a “fund”) is categorised as either a UCITS 2001/108/EC), which, together with the 2001
or a non-UCITS. The essential difference between UCITS Management Company Directive (Directive
the two regulatory frameworks is that UCITS funds 2001/107/EC), is referred to as UCITS III,
are established pursuant to European legislation significantly widened the range of investment
(as implemented in Ireland) and once authorised in possibilities for UCITS and following clarification in
Ireland, can be marketed cross-border throughout the Eligible Assets Directive (Directive 2007/16/EC
the EU (and increasingly in countries outside the as implemented in Ireland by S.I. 832 of 2007) it is
EU) without the need for further authorisation in clear that UCITS may indirectly invest in real estate
the target countries. Non-UCITS funds are, on the through holdings of real estate related securities,
other hand, established under indigenous Irish discussed in detail in Section 4 below.
legislation. As such, they are not as constrained
in terms of investment and leverage restrictions
but neither can they benefit from the “passport” 3.2 Non-UCITS
available under the UCITS regime.
Non-UCITS funds may be established in a
The Central Bank is the statutory regulator of all number of legal forms (detailed below) and will
investment funds in Ireland and its duties include be authorised as retail investor, professional
the authorisation and ongoing supervision of investor, or qualifying investor (institutional/high net
Irish investment funds. Funds are authorised by worth) funds. The investor profile will dictate the
the Central Bank in accordance with the relevant appropriate regulatory category of a non-UCITS:
legislation and any additional requirements as set
out in the Central Bank’s UCITS or non-UCITS
Notices (as appropriate) and Guidance Notes (i) Retail Fund
(collectively the “Notices”). If a fund has no minimum subscription
requirement, or one of less than €100,000, it will
be considered to be a retail fund (a “Retail Fund”).
3.1 UCITS Applicable investment and borrowing restrictions
A UCITS is an “Undertaking for Collective are quite stringent and are broadly similar to those
Investment in Transferable Securities” and applicable to UCITS.
may be established in a number of legal forms
(detailed below). UCITS are currently established
in Ireland pursuant to the European Communities (ii) Professional Investor Fund (“PIF”)
(Undertakings for Collective Investment in If a minimum subscription requirement of more
Transferable Securities) Regulations, 2011 (S.I. than €100,000 per investor is imposed (reduced
352/2011), (the “UCITS Regulations”). UCITS are from €125,000 in 2010), a fund will generally
regarded as the most highly-regulated funds and be considered to be a PIF. This means that the
operate on the basis of their potential for availability standard investment and borrowing restrictions for
to retail investors (although most are, in fact, a retail investor fund can be reduced or disapplied
targeted at institutional investors). to the extent agreed in advance with the Central
UCITS are subject to extensive investment Bank. Typically, the retail investment restriction
restrictions and may only directly purchase real levels are doubled for a PIF. Due to the recent
estate which is required for the purposes of its reduction in the minimum subscription requirement
business (rather than for investment purposes). As for QIFs, detailed below, new PIFs are rare.
such they are only suitable as vehicles for indirect
real estate investments (for example, securities
issued by companies with substantial exposure to
an underlying real estate market.)
7
(iii) Qualifying Investor Fund (“QIF”) of directors. The assets of a VCC are the real estate
The general investment and borrowing restrictions of the company in which the investors hold shares
imposed by the Central Bank on investment funds and those assets are held by a custodian.
are not applicable to QIFs and accordingly, QIFs are
typically used for real estate funds, hedge funds, 3.3.2 Unit Trust
venture capital funds and private equity funds. QIFs A unit trust can be established in Ireland pursuant
can be fast-tracked for approval in one day, subject to the Unit Trusts Act, 1990 (for non-UCITS funds)
to certain conditions. or pursuant to the UCITS Regulations (for UCITS
To be authorised as a QIF, a fund must impose funds). A unit trust is a contractual type of vehicle
a minimum subscription requirement of at least and is constituted by a deed between the manager
€100,000 per investor (reduced from €250,000 and the trustee. Both of these entities must be
in 2010) and be marketed solely to qualifying domiciled in Ireland. A unit trust does not have
investors, which are defined in accordance with the a separate legal existence, does not have the
MiFID requirements as follows: capacity to enter into contracts and cannot itself
• an investor who is a professional client within be sued.
the meaning of Annex II of Directive 2004/39/
EC (Markets in Financial Instruments Directive)
3.3.3 Common Contractual Fund (“CCF”)
(“MiFID”); or
A CCF is an unincorporated body constituted
• an investor who receives an appraisal from an
under contract either pursuant to the Investment
EU credit institution, a MiFID firm or a UCITS
Funds, Companies and Miscellaneous Provisions
management company, that the investor has
Act, 2005 (the “2005 Act” for a non-UCITS) or
the appropriate expertise, experience and
the UCITS Regulations (for a UCITS) and does
knowledge to adequately understand the
not have a separate legal personality. Investors
investment in the scheme; or
participate as co-owners of the assets of the fund,
• an investor who certifies that they are an which is constituted by way of deed of constitution
informed investor by providing the following: between the manager and the custodian.
- confirmation (in writing) that the investor has
such knowledge of and experience in financial
and business matters as would enable the 3.3.4 Investment Limited Partnership
investor to properly evaluate the merits and An investment limited partnership (“ILP”) may be
risks of the prospective investment; or established pursuant to the Investment Limited
- confirmation (in writing) that the investor’s Partnerships Act, 1994 as a non-UCITS fund only.
business involves, whether for its own An ILP is a partnership between one or more
account or the account of others, the general partners and one or more limited partners.
management, acquisition or disposal of real The ILP is not incorporated and therefore, is not a
estate of the same kind as the real estate of separate legal entity, cannot sue or be sued and
the scheme cannot enter into contracts in its own name. The
general partner would usually enter into contracts
on behalf of the ILP. ILP’s have not been a popular
structure to date in Ireland.
3.3 Legal Structures of Fund Vehicles
3.3.1 Variable Capital Investment Company
A variable capital investment company (“VCC”) 3.4 Single or Umbrella Investment
can be established pursuant to the provisions of Fund
Part XIII of the Companies Act, 1990, as amended
Unit Trusts, VCCs and CCFs can each be structured
(for non-UCITS funds) or the UCITS Regulations
as single stand-alone funds or as umbrella funds. It
(for UCITS funds). The VCC is, by far, the most
is possible to establish an unlimited number of sub-
common structure used for Irish-domiciled funds.
funds within an umbrella scheme and each sub-
A VCC is an incorporated entity with its own legal fund may also contain different classes of shares/
capacity as provided in its memorandum and units. Segregated liability between sub-funds in
articles of association. It has the capacity to enter a VCC is specifically provided for in the 2005 Act,
into contracts and to sue and be sued. The day-to- while sub-funds in Unit Trusts and CCF’s enjoy
day management and control is provided by a board segregated liability under operation of law.
8
3.5 Parties to Irish Regulated Funds The fund must also have auditors, who will also be
Irish based and in the case of funds structured as
investment companies a minimum of two directors
3.5.1 Promoter and Investment Manager must be Irish residents.
The Central Bank requires that a promoter be Where a fund appoints an Irish administrator,
identified to satisfy it that there is an entity of certain minimum activities must be either carried
substance backing the project. The promoter does out in Ireland or in accordance with the Central
not have to have physical operations in Ireland and Bank requirements on outsourcing. Relevant
does not have to have any financial or contractual activities include the following:
obligation to the fund, but it may also act as the • safekeeping and custody function;
investment manager (if so approved). The Central
Bank will require confirmation that prospective • NAV calculations;
promoters have at least €635,000 in shareholders’ • fund accounting;
funds. • maintenance of members’ register;
The promoter approval process usually takes • preparation of financial reports; and
between three and five weeks, but, in some
circumstances the Central Bank will permit the • retention of all investor correspondence and
promoter approval to proceed in parallel with the original documentation received.
fund’s authorisation process, in particular if the
promoter is regulated in an OECD member state.
There is no requirement for other service providers,
The Central Bank must be satisfied that any such as distributors, the investment manager or
proposed investment manager to a real estate investment advisors to be located in Ireland.
fund has specific experience in the area of real
estate investment, in accordance with its Notices.
However, while the Central Bank usually requires 3.6 Authorisation of Irish Funds
prospective promoters and investment managers
Depending on the nature and complexity of a fund,
to be regulated in their home jurisdiction, it has
a typical fund (UCITS or non-UCITS) should be
specifically confirmed that applications from non-
capable of authorisation within five weeks. An initial
regulated entities will be considered where they
application for authorisation of an investment fund
have such experience.
is made by lodging the following documentation, in
draft form, with the Central Bank:
3.5.2 Service Providers • prospectus;
Irish domiciled funds are specifically required to • custodian agreement, trust deed or deed of
have an Irish-based custodian which has been constitution (this will depend on the legal
approved by the Central Bank. However, while the structure of the fund); and
general requirement for Irish funds is for title to
• relevant Central Bank Application Forms and
fund assets to rest with the custodian (or an entity
ancillary letters.
in its sub-custody network), the Central Bank now
permits title to remain in the name of the fund (or
an SPV) in the case of real estate provided: The Central Bank will usually respond with its initial
comments within three weeks of receipt of an
1) there is a restriction on the title requiring the
application.
prior consent of the custodian to any sale; or
One exception to the above timeframe applies in
2) a caution is registered on the title giving the
relation to QIFs, which can use a fast track approval
custodian notice of any proposed sale or to
process whereby eligible funds can be approved in
warn that the consent of the custodian is
one day, subject to certain conditions. Specifically,
required for any such sale; or
this expedited process is available where the
3) where (1) or (2) are not possible, arrangements promoter, directors and investment manager have
are put in place which satisfy the custodian than been pre-approved by the Central Bank.
no sale is possible without its consent.
This concession has been agreed due to concerns
regarding strict liability arising from real estate for
example in relation to environmental damage etc.
9
4.
Using Irish Regulated Funds for Direct
Real Estate Investments
Funds that propose to invest directly into real redemption prices must be made available after
estate may be established in Ireland in accordance a valuation of the portfolio has taken place; and
with the Central Bank’s requirements as non-UCITS (4) if the scheme has failed to reach a minimum
funds. It can be noted that the Central Bank’s non- viable size within a specified period, both of
UCITS Notice 18 contains specific provisions for which are required to be defined in the offering
real estate schemes, set out below1. UCITS are document, then it must be wound up and
prohibited from investing directly in real estate and subscription proceeds returned to investors.
may only own real estate required for their own
business purposes.
In general, there are also investment restrictions
applicable to such schemes, as detailed further
4.1 General Requirements below. However, if the fund is authorised as a QIF,
except for No.1 below, these will automatically be
The following general provisions are applicable disapplied. QIFs also enjoy considerable freedom
to all regulated real estate funds (subject to any with respect to the use of wholly owned special
specific derogation being received): purpose vehicles to hold underlying real estate
(1) prior to authorising a real estate scheme, investments.
the Central Bank must be satisfied that the
investment management company has specific
experience in the area of investment in real 4.2 Investment Restrictions
estate; The following investment restrictions and
(2) a qualified independent valuer or valuer(s), regulatory requirements are applicable to Irish
selected on a basis approved by the Central authorised real estate funds authorised as Retail
Bank and set out in the prospectus, must be Funds or PIFs (the relevant percentages can
appointed and detailed in the fund’s periodic typically be doubled for PIFs) in accordance with
reports; the Central Bank’s Notices.
(3) the scheme must be valued at market value 1. Before any real estate is acquired for the fund
at least twice yearly (one of which must be a it must be valued. The valuation report must
full physical valuation), with provision being confirm that if the real estate was acquired for
made for frequent valuations to be undertaken the fund it could be disposed of at that valuation
if market conditions warrant it. Issue and within a reasonable period. The real estate must
Promoter Origin of Irish Domiciled Funds Other 8%
Percentage of Total Irish Domiciled Assets Germany 2%
by Promoter Origin Ireland 2%
Italy 3%
358 Promoters of Irish Domiciled Funds
Source: Lipper Ireland Fund Encyclopaedia, June 2009
UK
USA 46%
39%
10be acquired within six months from the date of 4.3 Custody Issues
the report and at a price which is within 5% of
the valuation price. The assets of real estate funds must normally
be registered in the name of the fund’s trustee.
2. Real estate related assets (i.e. securities of However, as this has the potential to create liability
entities whose main business is acquiring issues for trustees, assets may also be registered
or developing real estate) must be traded in in the name of the fund itself or in the name of its
or dealt on a market which is provided for in wholly owned SPV(s) subject to compliance with
the trust deed, deed of confirmation, articles the Central Bank’s conditions, which are:
of association or partnership agreements.
However, up to 15% of the fund’s net assets i. A restriction must be placed on the registered
may consist of real estate related assets which title of the real estate to the effect that title
are not traded in or dealt on such a market cannot be disposed of without the prior consent
provided that these assets are acquired under of the trustee; or
the same conditions as for properties above. ii. Where this is not possible, a caution is
3. Not more than 20% of the fund’s net assets registered on the title to put prospective
may be invested in any single piece of real purchasers on notice that the prior consent of
estate. This restriction is effective from the the trustee is required for sale of the real estate;
date of acquisition. However, real estate whose or
economic viability is linked to another piece of iii. Where neither of the above is possible, the
real estate is not considered as a separate item fund will undertake through a provision in the
of real estate for this purpose. The fund may custodian contract, that it will not invest in real
derogate from this restriction for two years estate assets unless the trustee is satisfied that
following the date of its launch provided it the real estate cannot be disposed of without its
observes the principle of risk spreading. prior consent or that arrangements equivalent to
4. Not more than 25% of the fund’s net assets those set out in (i) and (ii) are in place.
may be invested in properties which are vacant,
in the process of development or requiring
development.
5. Not more than 25% of the fund’s net assets
may be invested in properties which are subject
to a mortgage. (This provision does not affect
the ability of a fund to secure its borrowing
generally on the properties of the fund.) The
amount of the outstanding mortgage on any real
estate must not represent more than 50% of
the value of that real estate.
6. The granting of options to third parties to
purchase real estate held by the fund is not
permitted.
It can be noted that the above restrictions do
not apply to QIFs, save for the requirement for a
prior valuation and that the real estate should be
purchased for within 10% of this valuation.
115.
Using Irish Regulated Funds for Indirect
Real Estate Investments
By “indirect” real estate investments we mean UCITS are subject to considerable investment
investments in assets which do not themselves restrictions – relating both to the types of
comprise real estate but whose value is related investments which may be made and the extent of
to, or derived from, real estate. Examples might such investments.
include a listed security issued by a special purpose Investments of a UCITS are generally confined to:
vehicle entitled to the rent receivable from a
specific building. i. transferable securities and money market
instruments which are either listed on a stock
Unlike direct real estate investments, it is exchange or which are dealt on a market which
potentially possible for both UCITS and Non-UCITS is regulated, operating regularly, recognised and
to invest in real estate related assets, thereby open to the public;
gaining an indirect exposure to real estate.
ii. recently issued transferable securities which
will be admitted to official listing on a stock
5.1 Overview of UCITS Investment exchange or other market (as described above)
within a year;
Parameters iii. money market instruments, other than those
In order to seek to ensure investor protection, dealt in on a regulated market;
What are the principal investment restrictions?
• a UCITS may invest no more than 10% of its • the risk exposure of a UCITS to a counterparty
NAV in one issuer, with the aggregate of all to an OTC derivative may not exceed 5% of
investments in excess of 5% not to exceed 40% NAV. This limit is raised to 10% in the case of
of NAV. The 10% limit is raised to 25% for bonds credit institutions in the EEA or other specified
issued by EU credit institutions that are subject countries.
to laws protecting bondholders. The aggregate
• a combination of two or more of the following
of any such investments in excess of 5% may
issued by, or made or undertaken with, the
comprise up to 80% of the UCITS NAV.
same body may not exceed 20% of the net asset
• the limit of 10% above is further raised to 35% value of a UCITS:
if the securities or instruments are issued
– investments in transferable securities or money
or guaranteed by a government or its local
market instruments;
authorities or by a public international body.
– deposits; and/or
• a UCITS can invest up to 10% of its NAV in
unlisted transferable securities and money market – counterparty risk exposures arising from OTC
instruments. derivatives transactions.
• a UCITS can invest up to 20% of its NAV in any • the Central Bank may authorise a UCITS to invest
one CIS. Investment in non-UCITS CIS may not, in up to 100% of its NAV in different transferable
aggregate, exceed 30% of NAV. securities and money market instruments issued
or guaranteed by any government, local authority
• a UCITS can invest up to 20% of its NAV in
or public international body subject to certain
deposits made with the same credit institution.
conditions.
12iv. units of UCITS; the general requirement for funds structured as
v. units of non-UCITS Collective Investment investment companies to ensure a diversification
Schemes (“CIS”); of risk.
vi. deposits with credit institutions; and
vii. financial derivative instruments. 5.2.1 Fund of Funds
A non-UCITS fund of funds may be established as
The applicable risk spreading rules mean that a fund of regulated or unregulated funds. A non-
there are also limitations on the level and extent of UCITS retail fund of funds may not invest more
investments that may be held in these permitted than 20% of its net assets in the units of any one
investments. See below for further details. Collective Investment Scheme (“CIS”), except that
this limit may be raised to 30% in one specific CIS.
In practice, therefore, UCITS are likely to be able Like a UCITS, a non-UCITS retail fund of funds may
to invest in real estate related assets to the extent not invest in other fund of funds.
that these constitute transferable securities, as
defined pursuant to legislation such as the Product A non-UCITS retail fund of funds which invests
Directive (Directive 2001/108/EC) and the Eligible more than 10% (up to a maximum of 20% in any
Assets Directive (Directive 2007/16/EC). Other one scheme) in unregulated CIS is subject to
potential routes include investment in financial certain additional requirements.
indices, financial derivative instruments or fund A non-UCITS PIF fund of funds may invest up
of funds. This list is not exhaustive but illustrative to 40% of its net assets in the units of any
of the primary likely means through which UCITS one regulated CIS and up to 20% in any one
may obtain indirect exposure to real estate assets. unregulated CIS.
Additional details can be found in our separate
A non-UCITS QIF fund of funds may invest up
publication “A Guide to UCITS in Ireland.”
to 50% of its net assets in any one regulated or
unregulated CIS.
5.2 Non-UCITS 5.2.2 Feeder Funds
Non-UCITS are also able to indirectly invest in real It can be noted that the use of Irish regulated funds
estate assets subject to the generally applicable as feeder funds, which invest entirely into other
investment restrictions applicable in each case. funds are also possible subject to the relevant
requirements of the Central Bank, as set out in
the non-UCITS notices. In summary the general
5.2.1 General requirement is that these should be established
For Retail Funds the primary investment in a domicile that ensures an equivalent level of
restrictions, as set out in non-UCITS Notice 13, are regulatory protection, although derogations are
that: potentially available for QIFs.
• only 10% of net assets may be invested in
assets not traded in or dealt on a market;
• not more than 10% of assets may be invested 5.3 Leverage
in the securities of one issuer;
Irish real estate funds are subject to specific
• not more than 10% of assets may be held on rules in relation to the use of leverage. UCITS are
deposit with one institution (increased to 30% generally prohibited from borrowing for investment
for certain regulated institutions); purposes but may borrow up to 10% on a short
• not more than 10% of the securities of any term basis. Non-UCITS Retail Funds may borrow
class of issuer may be held. up to 25% of net assets. This figure can normally
be at least doubled in respect of PIFs. QIFs are not
subject to limitations in relation to the amount of
The above restrictions can generally be doubled in leverage they may use.
the case of PIFs.
QIFs are generally not subject to restrictions in
relation to their investment portfolio, subject to
136. Liquidity The relatively illiquid nature of real estate In terms of the duration of a closed-ended scheme, investments means that liquidity can be a concern in accordance with the Central Bank’s requirements in structuring real estate, or real estate-related as set out in Guidance Note 2/97 there is no investment funds. Irish non-UCITS funds can requirement to include any liquidity provisions be authorised as open or closed ended entities, where the scheme’s duration is up to five years. meaning that investors may have a right to redeem Where it is between five and ten years there is their investment on a periodic basis or they may a requirement that Retail Funds (only) make a be locked-in until the expiration of a set period, realistic provision for liquidity in their units. In the which facilitates their use for real estate related case of funds which are closed for between ten investments. and fifteen years there is a similar requirement that In general, open-ended Retail Funds must generally PIFs make a realistic provision for liquidity in their have at least one dealing day per month and PIFs units. Funds which are closed for 15 or more years one per quarter but QIFs are free to determine their may only be established as QIFs and on a case by dealing frequency (subject to the points below). case basis, unless there is a realistic provision for UCITS are required to be open-ended and must liquidity in their units and an opportunity to redeem have at least two dealing days per month. after ten or fifteen years (respectively). In relation to closed-ended funds, which can be The Central Bank has set out examples of what established pursuant to the specific non-UCITS it would expect to see in order to show evidence Notice 23 providing for such structures, a finite of a “realistic provision” for liquidity. This includes closed-ended period must be provided for in the limited redemptions periods, listing on a stock constitutional documents of the fund. The Central exchange which includes appointment of brokers Bank will only authorise such a fund where it to execute orders on a matched bargain basis and deems this prudent and appropriate given the the appointment of market makers. nature of the scheme, its listing status and any It can be noted that closed-ended funds may be proposals from the manager to arrange for a subject to additional legal provisions such as the market to be made in the shares. Prospectus Directive (Directive 2003/71/EC) as Once the closed period is completed, the implemented in Ireland. constitutional documents must provide that the fund will either (i) apply for revocation of authorisation and wind up; (ii) convert into an open-ended fund; or (iii) obtain investor approval for an extension of the closed period. In relation to (iii), a majority of 75% or more will typically be required for any such extension but where a redemption opportunity is made available to any investors who wish to redeem at the end of the initial period of closure a 50% majority will suffice for an extension. 14
7.
Investment Through Special
Purpose Vehicles
The potential use of wholly owned special purpose 7.1 Restrictions on SPVs
vehicles (“SPVs”) is of particular interest for real
estate funds where each real estate investment Use of SPVs is also subject to compliance with a
can be made through a separate SPV in order to number of requirements:
ringfence liability relating to each project. This • such subsidiaries are required to be private
may be deemed necessary in cases, for example, limited companies rather than public limited
where there is a large potential environmental companies and must be wholly owned by the
liability arising from individual properties or there fund or by its wholly owned subsidiary(ies);
are concerns in relation to the making of a direct • the shares in each SPV must be registered
investment by the fund into a particular jurisdiction. in the name of the fund’s trustee and the
The following diagram illustrates a structure using underlying assets must be registered in the
SPVs: name of the trustee or in the name of the
fund or its SPV. The fund’s trustee must be
appointed as trustee to each SPV and must be
in a position to demonstrate to the Central Bank
INVESTORS
that it has sufficient controls in relation to each
layer of the SPV structure;
FUND
• the prospectus must clearly disclose the
intention to establish SPVs and the fund’s
periodic reports must include information (i.e.
name and where established) on those in
IRISH SPV 1 IRISH SPV 2 IRISH SPV 3 existence on the reporting date;
• the majority of directors appointed to the
board of the SPV must be directors of the
BUILDING 1 BUILDING 2 BUILDING 3
fund. Derogation from this requirement may
be granted to PIF and QIF schemes but at a
minimum, at least one director of the scheme
must be on the board of the SPV; and
In the above example each building is held in • the assets of each SPV must be valued by the
a separate SPV, but it would also be possible fund or its delegate.
to group assets into one SPV. For example all
real estate in a given jurisdiction to simplify the The SPV itself will also be required to reflect
structure. the requirements of the Central Bank in its
It can be noted that only non-UCITS funds may memorandum and articles of association.
use SPVs and in the case of Retail Funds prior Where the fund is investing indirectly into real
authorisation is required before the utilisation of estate, for example by acquiring rent receivables
such an investment structure. or other derivative real estate assets, it may be
appropriate to seek to structure the SPV under
Section 110 of the Taxes Consolidation Act 1997.
See Section 8.1 “Tax Effective Use of SPVs” for
further details.
158.
Taxation
Irish regulated funds, both UCITS and non-UCITS, 8.1 Tax Effective Use of SPVs
benefit from the following attractive tax provisions:
Dividends (if any) and interest which a fund
• they are exempt from Irish tax on their income receives with respect to its investments of
and gains irrespective of an investor’s residency. issuers may be subject to local taxes, including
This allows investors’ returns to roll up on a withholding taxes, in countries in which the issuers
gross basis; of investments are located. However, a structure
• under Irish legislation, no withholding tax can be put in place to benefit from Ireland’s double
is applied on income distributions or the tax treaty network to effectively avoid or reduce
redemption of units by a fund to a non-Irish any such withholding taxes. Where withholding
resident investor, provided a relevant declaration tax is applied in the foreign source jurisdiction, the
is in place to demonstrate that the investor is Irish fund can be structured to hold its interest
not an Irish resident (see amendment below in the foreign security through an Irish qualifying
introduced by the Finance Act 2010). It is not special purpose vehicle (“SPV”) which avails
necessary for an investor to be resident in a of the provisions of Section 110 of the Taxes
country with which Ireland has a double tax Consolidation Act 1997.
treaty to avoid withholding tax; An illustration of the structure is as follows:
• no Irish stamp duty is applied on the
establishment, transfer or sale of units or shares
in an Irish regulated fund; INVESTORS
• many of the services provided to a fund are
exempt from VAT, e.g. investment management,
administration and custodial services; FUND
Profit 100%
• no on-going or yearly tax is charged on the net Participating Shareholding
Loan Notes
asset value of the fund; and
IRISH SPV
• Ireland is not regarded as a tax haven.
The Irish Finance Act 2010 introduced changes INVESTMENT INVESTMENT INVESTMENT
A B C
with the intention of enhancing Ireland’s
competitive position in the funds industry. One
such change is the easing of the administration
burden on non-resident declarations forms.
This change means that the Revenue Irish tax law includes favourable provisions for
Commissioners (“Revenue”) can grant investment qualifying SPVs who hold and/or manage, or have
funds an exemption from the requirement to an interest (including a partnership interest) in
obtain and maintain declarations of non-Irish tax qualifying assets. Qualifying assets include:
resident unitholders/shareholders where Revenue • leases and loan and lease portfolios;
is satisfied that the investment undertaking has
appropriate measures in place to ensure that the • all types of receivables (including rent
relevant unitholders/shareholders are not resident receivables from real estate);
or ordinarily resident in Ireland. • shares, bonds and other securities;
• futures, options, swaps, derivatives and similar
instruments;
16• bills of exchange, commercial paper, promissory The countries with which Ireland has a double tax
notes and all other kinds of negotiable or treaty are:
transferable instruments; and Armenia (signed but not yet in force), Australia,
• contracts for insurance and contracts for Austria, Bahrain (signed but not yet in force),
reinsurance. Belarus (signed but not yet in force), Belgium,
Bosnia Herzegovina (signed but not yet in force),
Bulgaria, Canada, Chile, China, Croatia, Cyprus,
Accordingly, although real estate as such does not Czech Republic, Denmark, Estonia, Finland, France,
constitute an eligible asset for a S110 company, Georgia, Germany, Greece, Hong Kong, Hungary,
because receivables including rent do, S110 Iceland, India, Israel, Italy, Japan, Republic of
companies may be useful in structuring indirect Korea, Kuwait (signed 23 November 2010), Latvia,
property investments. The main conditions to Lithuania, Luxembourg, Macedonia, Malaysia
satisfy, in order to be a qualifying SPV, are that (A Protocol was signed on 16 December 2009
the company must be Irish tax resident and the but is not yet in force), Malta, Mexico, Moldova,
de-minimis asset value limit in respect of the first Montenegro (signed 7 October 2010), Morocco
transaction carried out by the SPV is €10 million. (signed 22 June 2010), Netherlands, New Zealand,
The SPV is typically taxed in Ireland at a Norway, Pakistan, Poland, Portugal, Romania,
corporation tax rate of 25%. However, critically, Russia, Serbia, Singapore, Slovak Republic,
its transactions are generally structured so that Slovenia, South Africa (A Protocol was signed
the level of taxable profit is negligible or zero. on 17 March 2010 but is not yet in force), Spain,
This is achieved because the return paid in profit Sweden, Switzerland, Turkey, United Arab Emirates
participating loan rates is tax deductible thus (signed 1 July 2010 but not yet in force), United
generally leaving the SPV tax neutral. Kingdom, United States of America, Vietnam and
Zambia.
The net effect is that an SPV, as an Irish resident
taxable company, can avail of Ireland’s double Negotiations for new treaties with Panama, Saudi
tax treaty network to avoid or reduce foreign Arabia, Thailand and Uzbekistan as well as a new
withholding tax being applied on the foreign agreement replacing the existing treaty with
security. Germany, are expected to be signed shortly.
Funds authorised in Ireland are exempt from Irish Negotiations for new treaties with Argentina,
tax on their income and gains irrespective of where Azerbaijan, Egypt, Tunisia and Ukraine are at
their investors are resident. No Irish withholding various stages.
taxes will apply either.
8.2 Double Tax Treaties
Ireland has signed comprehensive double tax
treaties with 62 countries, of which 55 are in
effect. The agreements cover direct taxes, which
in the case of Ireland are income tax, corporation
tax and capital gains tax.
179.
Distribution Opportunities
for Irish Funds
Irish funds are distributed in over 70 countries. 358 fund promoters, based in
over 50 countries, have chosen to domicile their investment funds in Ireland,
making it one of the world’s leading jurisdictions for the cross-border distribution
of funds.
UCITS are authorised under European legislation When advertising and marketing in a Host State,
which entitles them to avail of a pan European the UCITS must comply with the generally
passport permitting distribution throughout the applicable local laws, for example, local advertising
EU without the necessity to obtain any additional standards. It is also necessary to ensure that
regulatory authorisation in any host Member State adequate measures have been taken to provide
once authorisation has been received in the original facilities in the Host State for making payments to
home state. In addition, due to the level of investor unit holders, repurchasing or redeeming units and
protection afforded by UCITS, they are recognised making available the information which UCITS are
by regulatory authorities in a range of countries obliged to provide. In practice, this usually requires
outside Europe, including in South America, MENA the appointment of a local distributor.
and the Far East. Non-UCITS are authorised under Irish legislation
Accordingly, registration of such schemes in and therefore can only currently be sold in other
countries outside of the EU is facilitated, in some jurisdictions following a re-registration there or
cases by a specific “fast-track” approval process. pursuant to an exemption in their securities law
Some of the primary markets for distribution of (such as a private placement). However, it can
Irish UCITS outside the EU are: Bahrain, Chile, be noted that Irish funds largely automatically
Hong Kong, Singapore, Switzerland and Taiwan. comply with the terms of the new Alternative
Where a UCITS is to be sold into another EU Investment Fund Managers Directive (Directive
Member State (a “Host State”) under improved 2011/61/EU) and therefore should be able to avail
UCITS IV registration process, all that is required of the pan European passport provided for under
is to notify the local regulator in the home state that legislation when it becomes fully effective
and, under the new straightforward regulator-to- from 2013. The greater popularity of more easily
regulator notification, marketing can commence distributed UCITS is illustrated by the fact that
10 days later. AUM in Irish UCITS is over three times that of Irish
non-UCITS funds, notwithstanding the applicable
restrictions on UCITS.
Global Distribution of Irish UCITS
Source: Lipper FMI & IFIA, 2010
1810.
Continuing Obligations
Irish funds must publish an annual report for each The Central Bank is responsible for the on-going
financial year and (except QIFs which benefit supervision of funds and (in addition to any
from an exemption from the requirement to requirements imposed by the Companies Acts,
produce semi-annual accounts) a half yearly report 1963-2009) all necessary filings are made with the
covering the first six months of the financial year. Central Bank. The Central Bank enjoys extensive
The annual report must be published within four powers of inspection and intervention in the
months of the fund’s financial year end and the half discharge of its statutory functions. Irish domiciled
yearly report must be published within two months funds are obliged to keep such books and records
of the end of the period to which it relates. These as the Central Bank may require and must notify
reports must be filed with the Central Bank, must the Central Bank of the address of every office at
be supplied to investors free of charge and must which these
be made available to the public for inspection at a are kept.
specified location. The Central Bank has power to revoke authorisation
Monthly returns must also be made to the Central where it appears to it that the provisions of the
Bank containing information regarding the gross UCITS Regulations, the Units Trusts Act, 1990, Part
asset value and the net asset value of the fund at XIII of the Companies Act, 1990 or the Investment
month-end together with the number of shares in Limited Partnerships Act, 1994, as applicable, have
circulation and the NAV per share at month-end. been contravened and that the prudential interests
Irish domiciled fund management companies and of unitholders/shareholders are threatened.
corporate general partners of an ILP are required Real Estate funds will also need to have at least
to submit annual audited accounts and half-yearly two valuations on their underlying assets carried
reports to the Central Bank. The annual audited out per year, as further detailed in their prospectus.
accounts of the promoter and the investment
manager must also be submitted to the Central
Bank.
1911.
Listing on the Irish Stock Exchange
The Irish Stock Exchange (“ISE”) is the world’s 11.4 Primary Advantages of Listing
leading exchange for listings of investment funds.
A stock exchange quote on the ISE is available to a Fund on the ISE
both Irish and non-Irish UCITS. a. A listing increases a fund’s potential investor
base. An ISE listing gives the fund a “listed”
security status on an EU regulated exchange
11.1 Listing UCITS which may improve the marketability of the
fund. The listed and admitted to a regulated
UCITS are particularly suited for listing as
market status may appeal to investors, as
they automatically comply with many of the
often legal, regulatory or internal mandate
requirements of the ISE for funds seeking to be
requirements restrict their exposure to unlisted
listed. In particular their units are freely transferable
securities.
and the investment restrictions applicable are
generally compatible. There is no minimum initial b. A listing increases a fund’s prestige and profile.
investment amount applied by the ISE for listed A listing on a long established, well regulated
“regulated” funds including UCITS. and recognised European stock exchange
provides a valuable marketing tool for fund
promoters.
11.2 Funds Authorised by the c. A listing provides publicly available information
Central Bank to investors. All announcements made by listed
In addition, due to the close working relationship funds and NAVs notified are reported through
between the ISE and the Central Bank, the ISE the ISE information dissemination system.
automatically accepts the suitability of service These appear on the ISE website and are carried
providers, such as the custodian, administrator and by Reuters, Bloomberg and other international
investment manager, to all funds authorised by news services.
the Central Bank, and likewise the fund’s dividend d. ISE represents best practice. The ISE’s
policy is deemed to be acceptable. listing rules represent best practice within
the investment funds industry and these
are updated regularly to take account of
11.3 Timing changes within the industry. ISE monitoring of
Under normal circumstances, a listing can be compliance with these regulatory best practice
obtained within approximately three to six weeks. standards ensures an investor can take comfort
The ISE reserves the right to take up to five from an ISE listing.
business days to review the first draft Listing
Particulars, but will only take two business days to
review any subsequent draft.
Irish Stock Exchange Listings
Nos. of Funds and Sub-Funds Listed
3,000
2,575
2,500 2,436
2,249 2,284 2,209
1,918 1,939
2,000 1,884 1,804 1,902 1,897
1,667 1,605
1,347 1,549
1,500 1,393
1,159 1,270
1,000
500
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Irish Stock Exchange Funds Sub Funds
2012.
About Mason Hayes & Curran
Mason Hayes & Curran is a full service, business law firm with 64 partners and
over 300 employees specialising in Irish law. With offices in Dublin, London and
New York the firm delivers sophisticated legal services to an extensive Irish and
international client base.
Investment Funds at Mason Hayes These services often include:
& Curran • structure formation
Our investment funds lawyers have a wealth • corporate governance
of experience in the investment funds industry • regulatory compliance
and have been involved in the development of
• tax issues
policy and regulation in Ireland. We advise on the
establishment and ongoing operation of the full • income repatriation
range of Irish domiciled investment funds and • employment related issues
recognise the need for responsive, innovative and
• raising finance or grant assistance
strategic legal advise. For further information with
regard to the topics covered in this guide or Irish • ongoing company secretarial requirements
investment funds law generally, please see the
Investment Funds contacts listed on page 23. Consistently recognised as one of Ireland’s leading
business law firms, Mason Hayes & Curran is
committed to providing optimum solutions to
Complementary Services promoters, asset managers and fund service
When advising clients, our dedicated team of providers looking to establish or carry out business
investment fund lawyers can also draw upon in Ireland or using Irish Funds. At Mason Hayes
the expertise of specialist lawyers from our & Curran, we can assist you with every aspect of
commercial, real estate, tax, corporate, banking, your business.
litigation, intellectual property, data protection,
regulatory and compliance practices whenever
required.
As a full service law firm, we regularly advise
financial services clients on a wide range of
matters in addition to regulatory issues that need
to be considered when setting up in business or
establishing an investment fund in Ireland.
21You can also read
