Ireland: Collective Investment Schemes In Ireland

5. APPROVAL OF PROMOTER AND AUTHORISATION OF PUBLIC COLLECTIVE INVESTMENT SCHEMES

In order to establish a UCITS or a non-UCITS Scheme in Ireland, application must firstly be made to the Central Bank using the Bank’s prescribed form for the approval of the promoter of the Scheme. The application form requires the following information:

• details of all shareholders holding directly or indirectly shares or other interests representing 10% or more of the capital or voting rights of the promoter and audited accounts of such entities;
• details of the activities of the promoter, its countries of operation and expertise in the promotion and management of collective investments schemes;
• value of assets under management of the promoter in collective investment schemes and non-collective investment schemes;
• latest audited accounts of the promoter;
• details of regulatory status of the promoter together with appropriate contact names;
• details of Irish service providers to the proposed Scheme;
• details of the types of Schemes which it is intended to promote and the manner of distribution.

Where the promoter intends to establish a management company, a separate application should also be made to the Central Bank which requires details of its incorporation, direct shareholders and ultimate parent, directors, auditors, year end accounting date, bankers, legal advisors and money laundering reporting officer.

Any application will be treated by the Central Bank as being confidential.

Generally the Central Bank will only review and approve the documentation for the Scheme once the promoter has been approved.

As indicated in Chapter 2, a public Scheme domiciled in Ireland may be constituted either as a unit trust or as an investment company incorporated in Ireland as a public limited company.

If constituted as a unit trust, the Scheme must act through a fund management company which must be incorporated in Ireland. Such a management company must also be approved by the Central Bank which will require that it has a minimum level of financial resources equivalent to IR£100,000 or three months expenditure, whichever is greater.

An investment company may establish a management company for those reasons indicated in Chapter 4. If an investment company chooses not to utilise such a management company then it must have a minimum paid-up share capital of IR£100,000 or its equivalent in foreign currency, within three months of authorisation.

A minimum of two directors of a management company and a minimum of two directors of an investment company must be Irish residents. Appointments to the board of directors must be approved by the Central Bank and departures from the office of director must be notified to the Central Bank immediately. The board of directors of the management company should not have directors in common with the board of directors of the trustee/custodian of the Scheme for which it acts. Approval of the Central Bank is required in respect of any proposed change in ownership or in significant shareholdings of a management company. A significant shareholding for these purposes is defined as a shareholding of 10 per cent or more.

A management company is not permitted to manage non-Irish Schemes.

Public Schemes must appoint a trustee/custodian to safeguard their assets. Only credit institutions licensed in Ireland, their branches or subsidiaries (provided the subsidiaries have been guaranteed) or IFSC companies which are subsidiaries of, and guaranteed by, appropriate credit institutions, may be trustees/custodians. A trustee may not be replaced without the approval of the Central Bank.

The Central Bank has published guidelines for both UCITS and non-UCITS Schemes which detail the Bank’s supervisory requirements in relation to the Schemes and the service providers to the Schemes. The Central Bank also publishes guidance notes from time to time which are intended to assist in the interpretation of their requirements.

A UCITS must at all times comply with the UCITS Regulations. The Central Bank closely monitors Schemes. It has bi-annual review meetings with the management of the investment company or the management company, and the trustee/custodian. A management company or investment company must always have sufficient financial resources at its disposal to enable it to conduct its business effectively and meet its liabilities. The Central Bank must approve any replacement of the management company or the trustee/custodian and any amendment to the prospectus and the trust deed or articles of association. The Central Bank must also be informed of matters on an on-going basis. A copy of the UCITS' prospectus (and any amendments made to it), its monthly, half-yearly and annual reports must be sent to the Central Bank. A UCITS must inform the Central Bank when it intends to:

• suspend temporarily the repurchase or redemption of its units;
• employ techniques and instruments relating to transferable securities for the purposes of efficient portfolio management or for protection against exchange risk; or
• market its units in other EU member states.
• The Central Bank is entitled to monthly reports from a UCITS. These monthly reports must include details of:
• the total gross asset value of the UCITS at month-end;
• the total net asset value of the UCITS at month-end;
• the number of units in circulation at the month-end;
• the net asset value per unit at the month-end;
• net proceeds from the issue of units during the month;
• payments made for the repurchase of units during the month; and
• the net issues and net repurchases during the month.

These reports must be submitted to the Central Bank within 20 working days of the month-end to which it refers. The Central Bank is also entitled to receive half-yearly financial accounts and the annual audited accounts of the management company. The Central Bank is further entitled to receive the annual audited accounts of shareholders of the management company or promoters of the investment company, and of the investment adviser.

The Central Bank non-UCITS guidelines impose similar supervision and information requirements for non-UCITS public Schemes.

In the exercise of its role as the principal regulatory authority for Schemes, the Central Bank has also issued guidelines which impose restrictions on the form and spread of investments which can be made by Schemes established in Ireland. The investment restrictions imposed depend on whether the Scheme is a UCITS or a non-UCITS Scheme. The latter category itself can be split into different types of Schemes.

Further details of the investment restrictions mentioned below are contained in the copy Central Bank guidelines set out in Appendix A and Appendix B hereto.

The restrictions on the investment policies of UCITS are set out in the UCITS Regulations and repeated in the Central Bank guidelines (See Appendix A). A UCITS may, subject to the approval of the Central Bank, derogate from the investment restrictions for six months following the date of launch provided it observes the principle of risk spreading. The principal restrictions are as follows:

• the investments of a UCITS must consist of transferable securities admitted to listing on or dealt in on a stock exchange or another regulated market in an EU member state, or transferable securities admitted to listing on or dealt in on a stock exchange or other regulated market in a non-member state which operates regularly and is open to the public, provided that in the latter case the choice of stock exchange or market has been approved by the Central Bank and/or is provided for in the Trust Deed or in the Articles of Association of the UCITS;
• A UCITS may invest no more than 10% of its net assets in unlisted securities;
• A UCITS may invest no more than 10% of its net assets in transferable securities issued by the same body provided that the total value of the transferable securities held in the issuing bodies in each of which it invests more than 5% of its assets does not exceed 40% of the value of its net assets;
• A UCITS may invest up to 35% of its net assets and in certain circumstances up to 100% of its assets in transferable securities issued or guaranteed by any EU member state, its local authorities, non-member state or public international bodies of which one or more member states are members;
• A UCITS may not acquire any units carrying voting rights which would enable it to exercise a significant influence over the management of an issuing body;
• A UCITS may hold ancillary liquid assets, employ techniques and instruments relating to transferable securities for the purposes of efficient portfolio management (within the limits laid down by the Central Bank) and employ techniques and instruments intended to provide protection against exchange risk in the context of the management of its assets and liabilities;
• A UCITS may not acquire precious metals or certificates representing them.

The restrictions on the investment policies of a non-UCITS Scheme are set out in the Central Bank's non-UCITS guidelines and apply generally to non-UCITS Schemes (See Appendix B). The Central Bank has, in addition, issued separate guidelines for certain types of Schemes with specific investment and/or marketing objectives which are summarised below. The general guidelines are disapplied where there is any conflict between them and the specific guidelines. A Scheme may derogate from the investment restrictions for six months following the date of launch provided it observes the principle of risk-spreading.

• A Scheme may not invest more than 10% of its net assets in securities which are not traded in or dealt on a market which is provided for in its Trust Deed or Memorandum and Articles of Association;
• A Scheme may invest no more than 10% of its net assets in securities issued by the same institution and it may not hold more than 10% of any class of security issued by any single issuer (this latter requirement does not apply to investments in other collective investment schemes of the open-ended type);
• A Scheme may not keep more than 10% of its net assets on deposit with any one body except where assets are maintained with an EU credit institution, a bank authorised in a member state of the European Economic Area, a bank authorised by a signatory state to the Basle Capital Convergence Agreement, the Scheme’s trustee/custodian or a bank associated or related to the trustee/custodian, in which case this limit is increased to 30%;
• A Scheme may not acquire any units carrying voting rights which would enable it to exercise a significant influence over the management of an issuing body;
• A Scheme may, subject to Central Bank approval, invest up to 100% of its assets in different transferable securities issued or guaranteed by any state, its constituent states, its local authorities or public international bodies of which one or more states are members;
• A Scheme may not invest more than 20% of its net assets in the units of other open-ended collective investment undertakings;
• A Scheme may employ techniques and instruments relating to transferable securities for efficient portfolio management purposes and a Scheme may employ techniques and instruments intended to provide protection against exchange risks in the context of the management of its assets and liabilities, in each case only under the conditions laid down by the Central Bank.
• A Scheme may not carry out sales of transferable securities when such securities are not in the ownership of the Scheme;
• A Scheme may invest in warrants on transferable securities which warrants are traded in or dealt on a market which is provided for in the Trust Deed or Memorandum and Articles of Association of the Scheme. Generally, a Scheme may not invest more than 5 per cent of its net assets in warrants on transferable securities.

The Central Bank has laid down general guidelines on the use of techniques and instruments relating to transferable securities such as futures and options, repurchase and stock lending agreements for the purposes of efficient portfolio management.

The conditions and restrictions set out in the Central Bank's non-UCITS guidelines, in particular those related to investment and borrowing, may be disapplied in the case of Schemes marketing their units to professional investors only. To qualify for derogation, such Schemes must have a minimum subscription requirement of at least Euro 125,000 or its foreign currency equivalent.

The Central Bank introduced a new category of scheme in May 1996. The conditions and restrictions relating to investment objective, policies and leverage set out in the Central Bank's non-UCITS guidelines are disapplied in full in respect of Schemes which are marketed solely to qualifying investors. In addition, derogation may be sought from the other provisions of the Central Bank's non-UCITS guidelines. A minimum subscription amount of Euro 250,000 or its equivalent in other currencies applies to such Schemes. A qualifying investor is defined as any natural person with a minimum net worth (which excludes main residence and household goods) in excess of Euro 1,250,000 or an institution which owns or invests on a discretionary basis at least Euro 25,000,000 or its equivalent in other currencies or the beneficial owners of which are qualifying investors in their own right. Qualifying investors must certify to the Scheme that they meet such minimum criteria.

The following are the other types of Schemes for which specific Central Bank guidelines have been issued and the key investment restrictions imposed thereunder if the relevant Scheme is not structured as a professional or a qualifying investor Scheme.

A fund of funds is a Scheme the sole object of which is investment in units of other collective investment schemes.

• A fund of funds may not invest more than 20% of its net assets in the units of any one scheme although this limit may be raised to 30% for one of the schemes in which it invests;
• A fund of funds may not invest in units of another fund of funds;
• A fund of funds may invest up to 10% of its net assets directly in transferable securities other than units of other collective investment schemes.

A feeder fund is a Scheme the sole object of which is investment in a single collective investment scheme ("the underlying scheme").

• The underlying scheme must be authorised in Ireland or authorised or established in a jurisdiction which, in the opinion of the Central Bank, provides an equivalent level of investor protection to that provided under Irish law;
• The manager of the underlying scheme must waive initial charges in relation to acquisition of units by the feeder fund;
• Commission received by a manager of a feeder fund from investment in units of the underlying scheme must be paid into the feeder fund.

A venture capital scheme is a Scheme, the sole object of which is investment in venture or development capital.

• A venture capital scheme may not invest more than 20% of that proportion of its net assets which is intended to be invested in venture or development capital investments in any one company or group of companies. The venture capital scheme may derogate from this restriction for one year following the date of its launch provided it observes the principle of risk-spreading;
• A venture capital scheme must have a minimum subscription requirement of Euro 12,500;
• A venture capital scheme may issue partly paid units or shares.

A money market scheme is a Scheme, the sole object of which is investment in money market instruments. The prospectus of the Scheme must contain a risk warning, drawing attention to the difference between the nature of a deposit and the nature of an investment in a money market scheme with particular reference to the risk that the principal invested in a money market Scheme is capable of fluctuation.

• A money market Scheme may invest no more than 5% of its net assets in the debt securities of companies, other than banks, with a credit rating of less than A1/P1;
• At least 80% of the assets of a money market scheme must consist of securities or deposits having a maturity at date of acquisition of not greater than 1 year.

A property scheme is a Scheme, the sole object of which is investment in property or property related assets. Property is defined as a freehold or leasehold interest in any land or building with a minimum unexpired lease of seventy years. Property related assets refers to securities issued by a body corporate whose main activity is investing in, dealing in, developing or redeveloping property.

• No more than 20% of a property scheme's net assets may be invested in any single property. This restriction is effective from the date of acquisition. The property scheme may derogate from this restriction for two years following the date of its launch provided it observes the principle of risk-spreading;
• Not more than 25% of a property scheme's net assets may be invested in properties which are subject to a mortgage;
• Not more than 25% of a property scheme's net assets may be invested in properties which are vacant, in the process of development or requiring development;
• A property scheme must have reached a minimum viable size within a specified period after launch. The minimum viable size and specified period must be defined in the prospectus.

A capital protected futures and options scheme is a Scheme, the primary object of which is investment in futures, options and other derivative instruments disclosed in the prospectus and which provides for the protection of capital invested in the Scheme over a given period of time not exceeding 7 years.

A leveraged futures and options scheme is a Scheme the primary object of which is investment in futures and options and other derivative instruments, which does not provide for the protection of capital invested in the scheme and does not fall within the terms of the Central Bank's guidelines on the use of such instruments for efficient portfolio management purposes.

- Similar restrictions to those applicable to capital protected futures and options schemes apply but, in addition, the property of a leveraged futures and options scheme must include liquid assets which have a total minimum value, at all times, at least equal to the amount of the sum of all margin deposited and all premiums paid in respect of transactions which have not been closed out by the scheme.

A closed-ended scheme is a Scheme whose duration is finite. Such a scheme must state the closed ended period in its Memorandum and Articles of Association/Trust Deed. The prospectus of a closed-ended scheme must make appropriate reference to the fact that the scheme will not redeem its units and to the availability or otherwise of other mechanisms through which shareholders can dispose of units during the closed period. In certain circumstances, the Central Bank may permit the scheme to provide for the issue of units other than at net asset value. The scheme must demonstrate that shareholders will not be prejudiced by such a provision.

8. MARKETING OF FOREIGN COLLECTIVE INVESTMENT SCHEMES

Non-UCITS foreign public Schemes which, if incorporated in the State would constitute "designated companies" for the purposes of Part XIII of the Companies Act, 1990, may not advertise or market their units in any way in Ireland without the prior approval of the Central Bank. Similarly, the Unit Trusts Act, 1990 provides that the management company or trustee of an "unauthorised unit trust scheme" may not sell, purchase or market units of the scheme in Ireland without the approval of the Central Bank.

The Central Bank has issued guidelines for obtaining such approvals. Written application must be made to the Central Bank providing information about the Schemes including the location where unitholders can obtain payment of dividends and repurchase proceeds and can inspect and obtain copies of documentation relating to the Scheme. The essential documentation relating to the Scheme must also be furnished. The Central Bank must be satisfied that the Scheme is authorised by a supervisory authority set up to ensure the protection of unitholders which provides a similar level of investor protection to that under Irish laws governing Schemes or that the constitution, investment objectives, management and custodial arrangements of the Scheme provide for such a similar level of protection.

Subject to certain exceptions, non-UCITS foreign public Schemes which are constituted as companies may not issue or distribute any prospectus or document offering for subscription or purchase shares or debentures unless the prospectus document complies with the Third Schedule to the Irish Companies Act, 1963 and such prospectus is filed with the Registrar of Companies in Dublin.

Non-UCITS foreign public Schemes marketing their units or shares in Ireland or marketing their units in jurisdictions with no statutory regulation of marketing must comply with the relevant Central Bank advertising guidelines which are set out in Appendix C.

9. TAXATION OF COLLECTIVE INVESTMENT SCHEMES

The Taxes Consolidation Act, 1997 (as amended) ("TCA") sets out the Irish taxation treatment of Schemes.

It is possible to form Schemes operating in the IFSC which are exempt from corporation tax, capital gains tax, income tax, withholding taxes, stamp duties, levies and other taxes.

In analysing the treatment of Schemes operating in the IFSC it is necessary to look at three definitions contained in the TCA.

Firstly, "collective investment undertakings" includes: (a) an authorised unit trust scheme within the meaning of the Unit Trusts Act, 1990; (b) designated companies under Part XIII of the Companies Act, 1990; and (c) any other undertaking which has been approved as a UCITS.

Secondly, "specified collective investment undertaking" means a Scheme which does not (with certain exceptions) allow Irish resident shareholders or unitholders and most of the business of which (to the extent that it is carried on in Ireland) is carried on in the IFSC or Shannon Airport or is carried on by a qualifying management company located in the IFSC or Shannon Airport.

Thirdly, a "qualifying management company" means a fund management or administration company which is licensed to carry out business in the IFSC. Such qualifying management companies are subject to corporation tax at the rate of 10% on their trade income.

A specified collective investment undertaking enjoys the following tax regime:

• an exemption from all taxes on income;
• an exemption from capital gains tax;
• no withholding taxes on distributions.

UCITS and non-UCITS public Schemes are exempted from capital duty on the allotment of shares or units and the transfer of shares or units in collective investment undertakings is exempt from stamp duty.

The TCA provides that corporate collective investment undertakings which are not specified collective investment undertakings (ie: primarily domestic Schemes) are subject to corporation tax on profits (being income and capital gains) at the standard rate of income tax and non-corporate collective investment undertakings are subject to tax on income and capital gains at the standard rate.

The TCA permits collective investment undertakings to avail of relief under Ireland's double tax treaties though whether treaty benefits will be granted by counterparty countries will depend on each country’s interpretation and application of the relevant treaty.

A management company has always been entitled to the benefit of the Irish double tax treaties (even though it is a qualifying management company and paying tax at only 10%). This is of benefit in repatriating profits from the management company to a foreign parent if the relevant treaty has the effect of preserving the benefit of the low rate of Irish tax in the hands of the parent, and may also be of benefit in ensuring that the management company is not subject to tax in a foreign jurisdiction (which has a relevant double tax treaty) unless it carries on business in that jurisdiction through a permanent establishment.

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.