Increasingly Ireland has proven to be the domicile of choice for asset managers seeking to establish investment funds investing in India which can be marketed to European and global investors.
More recently there has been significant interest by Indian asset managers seeking to establish and manage an EU fund that can be marketed easily across the European Union to investors who anticipate further growth in the Indian market as it begins to realise its undoubted potential. This interest has been enhanced by the relaxation of the foreign investment rules and the permanent establishment rules in India. Indeed, a number of Irish domiciled funds managed by Indian asset managers have recently obtained approval from the Central Board of Direct Taxes of the Indian Ministry of Finance under Section 9A of the Income-tax Act 1961, pursuant to which the Irish fund is not deemed to be resident in India by virtue of that fund being managed on a discretionary basis by an Indian asset manager.
Why Ireland?
There are a number of reasons why an Indian asset manager may choose Ireland as a domicile for its offshore investment fund, but the principle reasons are: (i) the regulatory environment; (ii) the common law legal system that Ireland and India share; (iii) tax efficiencies; and (iv) global reach given Ireland is a major hub for cross-border distribution and Irish funds are sold in 90 countries across Europe, the Americas, Asia and the Pacific, the Middle East and Africa.
Ireland is an internationally recognised jurisdiction with membership of the EU, Eurozone, OECD, FATF and IOSCO.
Ireland’s tax regime is highly efficient, clear and certain, open, transparent and fully compliant with OECD guidelines and EU law. Irish regulated funds are exempt from Irish tax on income and gains derived from their investments and unlike Luxembourg funds are not subject to any Irish tax on their net asset value. There are additionally no net asset, transfer or capital taxes on the issue, transfer or redemption of units owned by non-Irish resident investors. Other than in respect of certain funds which hold interests in Irish real estate (or particular types of Irish real estate related assets), non-Irish investors are not subject to Irish tax on their investment and do not incur any withholding taxes on payments from the Irish fund.
Ireland has one of the most developed and favourable tax treaty networks in the world, spanning over 90 countries including India resulting in reduced withholding taxes on income/gains from underlying investments.
Irish Fund Legal Structures
Although Irish funds can be established in many legal forms such as an investment company, unit trust, investment limited partnership and common contractual fund, the ICAV (Irish Collective Asset-management Vehicle) is the preferred legal structure. The ICAV is a corporate structure and provides the maximum flexibility for the operation of a collective investment scheme.
Unlike an Irish investment company which is treated as a corporation for US federal tax purposes, the ICAV can, similar to an Irish unit trust or Irish ILP, “check-the-box” to be treated as a partnership for US tax purposes and therefore can accommodate both US taxable investors and US tax-exempt investors.
Irish Fund Regulatory Structures
The regulatory fund structures in Ireland are UCITS and non-UCITS (the latter of which are referred to as “Alternative Investment Funds” or “AIFs”).
An AIF can be established as a retail alternative investment fund (a “RIAIF”) or a qualifying investor alternative investment fund (a “QIAIF”). However the QIAIF is the more widely used.
Both the UCITS and QIAIF regulatory structures can be marketed cross border within the EEA without the requirement to have the Irish fund approved or authorised in each EEA member state.
The main distinctions between a UCITS and a QIAIF are:-
(i) the UCITS is a fund that can be marketed to all categories of investors including retail investors whereas the QIAIF can only be marketed to qualifying investors. A qualifying investor is:
(i)(a) an investor who is a professional client within the meaning of the EU MiFID Directive; or
(i)(b) an investor who receives an appraisal from an EU credit institution, a MiFID firm or a UCITS management company to the effect that the investor has the appropriate expertise, experience and knowledge to adequately understand the investment in the QIAIF; or
(i)(c) an investor who certifies that it is an informed investor by providing the following:
- confirmation (in writing) that the investor has such knowledge of, and experience in, financial and business matters as would enable the investor to properly evaluate the merits and risks of the prospective investment; or
- confirmation (in writing) that the investor’s business involves, whether for its own account or the account of others, the management, acquisition or disposal of property of the same kind as the property of the QIAIF.
(ii) an investor in a UCITS is not subject to any regulatory minimum subscription amount whereas an investor in a QIAIF is subject to a minimum subscription amount of EUR 100,000 or its equivalent;
(iii) UCITS must provide for a redemption frequency of at least twice a month whereas QIAIFs can be (a) open ended (with a redemption frequency of once a quarter); or (b) open ended with limited liquidity (with a redemption frequency of less than once a quarter); or (c) closed ended;
(iv) while long only and certain hedge fund strategies can be structured as UCITS, a QIAIF can facilitate any investment strategy including one that involves alternative investments.
Irish regulated funds (whether a UCITS structure or a QIAIF) may be externally managed (e.g. by a fund management company which delegates various functions such as portfolio management, etc.) or may be self-managed (i.e. where no external fund management company is appointed and therefore the board of directors of the Irish fund remain responsible for all managerial functions notwithstanding any delegation of such functions such as portfolio management, etc.).
However, given the onerous regulatory obligations applicable to a self-managed fund for which the board of that fund are responsible, the establishment of externally managed funds has become the market trend.
Why Ireland for Domiciled Investment Funds
1. Certain regulatory environment.
2. Tax efficiencies.
3. English speaking common law system.
4. $4.2 Trillion Assets Under Management.
5. 16,000 professionals employed in the sector.
6. Over 950 Fund Managers from 53 countries.
7. 30 languages and 28 currencies supported.
8. Irish Funds marketed into 90 countries worldwide.
9. Full Access to the EU.
Timeframe for Authorisation of an Irish Regulated Fund
Before an Irish regulated fund may commence any activities, the fund must be authorised by the Central Bank of Ireland.
The timeframe for the establishment and authorisation of an externally managed UCITS is generally three to four months taking into account the fact that once the prospectus is drafted and stakeholders have had an opportunity to review and comment on the draft prospectus, it must be submitted to the Central Bank for review and clearance before a formal application for authorisation of the UCITS may be submitted. Such an application must include all relevant fund documentation such as the final prospectus, constitutional document and service agreements.
The timeframe for the establishment and authorisation of an externally managed QIAIF is shorter than that for a UCITS given the Central Bank does not require to review any fund documentation in advance of authorisation of the QIAIF.
Notwithstanding the above, the overall timeframe for the establishment and authorisation of an externally managed UCITS or QIAIF is project dependent and among the milestones that require to be met on a timely basis to ensure that a reasonable timeframe is achievable is the selection of service providers, the Central Bank pre-approval of the directors of the Irish fund and of the investment manager and the finalisation of the prospectus, constitutional document and service agreements.
FPI Registration
In order to invest in India, a foreign fund must obtain registration as a foreign portfolio investor (“FPI”) under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2015 (“FPI Regulations”). Irish regulated funds generally obtain the FPI Category II licence on the basis that such Irish funds are appropriately regulated broad based funds.
Although this application can be prepared in tandem with the Irish fund authorisation process, registration can only be finalised once authorisation of the Irish regulated fund has been obtained.
The application is made via the local Indian custodian (the “Designated Depository Participant” or “DDP”) who is designated by the Securities and Exchange Board of India to process such applications.
About the author
Brian Kelliher is a partner in Dillon Eustace. He is a highly experienced adviser on Irish financial services law focusing on asset management and investment funds, derivatives, foreign fund registrations, investment services, and regulatory and compliance. His investment funds practice covers all fund product types – from traditional UCITS, ETFs, money market funds and alternative UCITS to the full spectrum of Alternative Investment Funds (AIFs).
www.dilloneustace.com
About Dillon Eustace
Dillon Eustace is one of the leading law firms in Ireland with offices in New York, Toyo and Cayman. In relation to the practice area of asset management and investment funds, Dillon Eustace represents the largest number of Irish domiciled funds (Monterey 2014/2015/2016/2017/2018, Lipper 2009 to 2013), as well as funds domiciled in the Cayman Islands. Dillon Eustace has to date established approximately 22 % of all regulated Irish funds which provides it with unrivalled experience.