Alternative Investment Fund (AIF) in the European Union

Where it is profitable to establish an Alternative Investment Funds (AIFs) in the EU

The European Union (EU) is one of the largest regulators of investment funds in the world. The EU has strict regulatory requirements, but thanks to them, the EU provides investors and management companies with a wide range of options for setting up and managing AIFs, as well as for gaining access to global investors and capital markets. Different EU countries have their advantages and disadvantages as a place to register an AIF. The choice of country depends on many factors, such as tax policy, legal regulations, access to markets, etc.

Luxembourg

Luxembourg is one of the most popular jurisdictions for setting up alternative investment funds (AIFs) in Europe and worldwide. It is known for its long history in this field, as well as for its favorable legal environment for such funds.

By the end of 2017, 14,400 funds, including sub-funds, were registered in Luxembourg, with a total of €4 trillion in assets under management. The state provides a wide range of legal instruments to support private capital and venture capital investments, including SICAR, S.C.S., and S.C.Sp.

Before the new regime was introduced in 2013, Luxembourg Alternative Investment Funds were treated as unregulated funds, but since then they can be treated as limited partnerships, which allows them to avoid direct supervision by the CSSF (Commission de Surveillance du Secteur Financier). This is the financial regulator which supervises financial activities in Luxembourg, including financial institutions, investment funds, insurance companies, and other financial institutions.

The structure created in 2013 in the form of a special limited partnership (S.C.Sp.) makes it possible to use the best elements of the classical Anglo-Saxon limited liability partnership and apply them to both regulated and unregulated partnerships.

S.C.S. (Société en commandite simple) is also worth considering. It is a limited liability partnership in Luxembourg, based on the Companies Law of 1915. It allows the formation of partnerships where there are one or more limited partners who are liable only up to the amount of their contributions and one or more unlimited partners who are personally liable for the debts of the partnership.

Luxembourg generally provides a favorable legal and tax environment: AIFs are exempt from corporate tax and income tax as well as securities and other taxes on capital gains but have to pay an annual fixed contribution of 0.01% of the net assets of the fund. For the creation of alternative investment funds, and is one of the most attractive places to establish them in Europe.

Ireland

Ireland is an attractive jurisdiction for the creation of funds because of its innovative approach to taxation, its wide range of qualified financial and investment professionals, and its favorable political and economic climate.

One of the main advantages of Ireland is its tax system, in which investment income and capital gains are tax-free. This allows funds to retain a large portion of their income.

Irish funds can also be regulated or unregulated which gives flexibility in the choice of management strategy. What is more, Ireland has a wealth of specialist investment and financial expertise that enables funds to be created and managed to the highest standards of governance.

Ireland has a high level of legal and financial protection, which makes it attractive to investors. The country also has different types of funds, including open-end and closed-end investment funds, as well as real estate and venture capital funds.

In 2017, there were about 7,000 funds registered in the country, managing more than 2 trillion euros worth of capital. There are two main legal forms for investment businesses in Ireland: the public limited company (Plc) and the Irish asset management institution (ICAV).

The ICAV was introduced in March 2015 and has become a popular form of investment fund registration in recent years. The ICAV is private law, which means that Ireland's general company law does not apply to them. In addition, the ICAV is a "check-the-box" corporate entity, which makes it easy for investors taxed in the US to invest in funds registered in Ireland.

An ICAV has several basic features such as authorization and supervision by the Central Bank of Ireland, the ability to be established as a UCITS fund or an AIF fund, the ability to establish an umbrella type fund with split liability between sub-funds, multiple classes of shares, the need to deposit assets, the place of management must be from within Ireland, and the executive body must be a board of directors consisting of at least 2 directors.

The difference between an ICAV and a Plc is that if an ICAV fund manager wants to change the memorandum of association or articles of association, they do not need to hold a shareholder vote. They can also opt out of their annual meeting with 60 days' notice, and unlike Plc, there is no statutory risk-sharing requirement in an ICAV. Overall, the ICAV is an improvement on the Irish Plc model, especially in terms of marketing and taxes.

Malta

The jurisdiction of Malta is known as an attractive location for the incorporation of Alternative Investment Funds. Maltese legislation provides flexibility and adaptability for the management of different types of assets and investment strategies. This, combined with the tax advantages available, makes Malta a competitive jurisdiction for international investors and fund managers.

Malta's financial regulator, the MFSA, is renowned for its loyalty to start-up funds and for offering its assistance in servicing them. Various options are available for fund registration in Malta, including SICAV, limited partnerships, unit trusts, and funds on a contractual basis, as well as investment companies with permanent capital. However, the SICAV remains the most popular option for setting up an umbrella fund in Malta.

Another advantage of Malta is its tax system. Malta has one of the lowest corporate tax rates in Europe (if companies are owned by non-residents or residents without residence in Malta, the effective corporate tax rate is 5%) and provides several tax benefits to fund managers and investors. This includes no income tax for certain types of funds and tax treaties with more than 70 countries around the world.

The resilience of Malta's local economy and financial system, and its appeal to international investors, have also been a key benefit. Moreover, Maltese legislation offers a high degree of flexibility and adaptability, enabling the most efficient use of opportunities in the market.

Netherlands

One of the main advantages is the favorable investment climate, which contributes to the development of the financial sector and attracts foreign investors. In the Netherlands, there is a special regime AIFM, which facilitates the registration of funds and is especially attractive to startup projects located outside the country. For foreign management companies, the investment company must be registered in the Netherlands as a Dutch AIFM. It can be either a legal entity or a fund on a contractual basis without creating a legal entity.

The particularities of Dutch law for AIF include the availability of several types of funds for registration, such as Limited Liability Companies (BV), Open Preparatory Funds (OPF), and Mutual Investment Societies (VBI) or Public Limited Companies (NV). In the case of a contractual basis of operation, 2 options have long been available: a limited liability partnership (CV) and a co-investment fund (FGR). However, as of 2018, the Netherlands decided to abandon the CV form, making it undesirable to register new CVs. FGR, on the other hand, is a popular instrument and is used mainly for funds with active daily operations. The FGR can receive an exemption from taxation if the structure has no connection to Dutch investors.

The requirements for AIFs in the Netherlands are also by European regulations, such as the AIFMD. One of the main requirements is that proper risk management and appropriate fund management procedures are in place.

In addition, the Netherlands offers favorable tax conditions for AIF, including income tax, which is 25%.

Estonia

Alternative Investment Funds (AIFs) in Estonia are regulated by the Investment Funds Act and Managers (IFMA). This act was passed in 2014 and regulates AIFs and their managers in Estonia.

In Estonia, AIFs can be registered in various forms, including closed-end and open-end investment funds, including real estate investment trusts (REITs). They can be for both local and foreign investors.

To be registered in Estonia a management company must be registered as a legal entity in Estonia or have a representative office in Estonia. In addition, the management company must meet certain requirements, such as having a minimum share capital and a certain level of professional competence.

The advantage of registering an AIF in Estonia is the speed and availability of registration and the relatively low tax rates on investment income and dividends (corporate income tax rate from 14% to 20%; 0% corporate income tax on undistributed and reinvested profits). In addition, AIF management companies have access to a wide range of investment instruments, including financial instruments, securities, real estate, and other assets.

However, like any other jurisdiction, Estonia has certain restrictions and requirements. For example, AIFs must comply with certain rules regarding information disclosure, portfolio diversification, and risk management. In addition, the management company must have an AIF management license, which is issued by the regulatory authority - the Estonian Financial Supervision Authority.

Conclusion

In general, investment funds are an attractive tool for investors who want to earn income from investing without directly participating in asset management. AIFs in different jurisdictions have their characteristics, advantages, and requirements that may be attractive to certain categories of investors. The term AIF can encompass many different investment structures, including venture capital funds, hedge funds, real estate funds, private equity funds, etc. Each of these types of AIFs has its characteristics, limitations, and risks that must be taken into account when making an investment decision.

Each European state jurisdiction has its peculiarities and advantages, even though the local rules are based on the generally accepted EU directive. To select the appropriate jurisdiction, AIF founders need to conduct a preliminary analysis or obtain a full legal opinion that takes into account individual peculiarities. Golazin & Sherle assists in the analysis and selection of the optimal EU jurisdiction depending on your wishes, concept, and strategy of establishing an Alternative Fund, registration of the management company and the fund itself, as well as preparing the necessary documents for filing a license and interacting with the regulator until the tasks are completed. Please fill out the feedback form below for a free consultation.