Gib boom

To date the majority of managers have chosen to structure EIFs as limited or protected cell companies, but there is increasing interest in using Gibraltar’s limited partnerships as the preferred vehicles, given their commercial flexibility and tax advantages.

The Gibraltar limited partnership is ­comparable to the English version, but there are some key differences. A Gibraltar ­limited partnership has perpetual succession and separate legal personality, the two key ­common law ingredients for body ­corporate status. This means the Gibraltar version is free of the marketing restrictions imposed by the unregulated collective investment scheme regime in the UK, provided it is not openended. Separate legal personality means the Gibraltar limited partnership is also suitable as funds of funds.

The EIF regime is Gibraltar’s fund ­offering specifically for high-net-worth or sophisticated investors. This enables ­marketing to an unlimited number of ­potential investors, although placement restrictions in relevant jurisdictions should be respected. EIFs have a rapid and ­inexpensive post-launch registration ­procedure, have no investment restrictions and are regulated relatively lightly by ­Gibraltar’s Financial Services Commission.

Gibraltar limited partnerships are ­confirmed as tax-transparent by HM ­Revenue & Customs in the UK. Gibraltar has a territorial system of taxation and only taxes income, not capital gains. A typical EIF limited partnership and its partners would therefore not suffer Gibraltar ­taxation, although a fund may seek a specific exemption from tax for its investors.

Unusually, despite being in the EU, Gibraltar is outside the VAT area. Therefore the services a UK investment adviser ­provides to a Gibraltar private equity fund are outside the scope of UK VAT and there is no irrecoverable VAT cost for the fund in Gibraltar.

Consideration must be given to whether investments are made directly from ­Gibraltar or through another jurisdiction. A ­locally incorporated holding company can expect to obtain, at least from certain ­jurisdictions such as Luxembourg, the benefit of the EU’s Parent Subsidiary Directive and its Interest and Royalties Directive, which together eliminate many withholding taxes on returns from overseas European investments.

Since the parent fund and the general partner directors would be Gibraltar-based, this makes it easier to establish substance in Gibraltar. Gibraltar has a wealth of EIF-licensed directors who specialise in differing sectors of industry and commerce, with experience gained in Gibraltar, the UK and elsewhere.

A trend has developed recently with regard to the number of individuals redomiciling to Gibraltar to establish licensed investment managers. This can be attributed to Gibraltar’s 10 per cent corporation tax rate, a ­separate low-tax regime for ­individuals with specialist skills and the fact that a Gibraltar-licensed investment ­manager can passport services throughout the EU under the Markets in Financial Instruments Directive.

Gibraltar has signed 18 tax information exchange agreements, which means it has been removed from many jurisdictions’ lists of tax havens.

For Gibraltar corporate funds it is usual for the majority of voting rights of a fund to be vested in the ordinary shares, which can be owned by the promoter or investment adviser, subject to any tax concerns. The economic rights rest with the holders of participation shares, owned by investors.

Where a corporate investment adviser holds the ordinary shares, the adviser and the fund may be grouped for the purposes of the exemption under the Financial Services and Markets Act (2000) (FSMA). A licence under the FSMA to conduct certain ­activities for group members is not ­necessary. The same may be true where services are provided to a corporate ­general partner, owned by the investment adviser, of a limited partnership. The group exemption is not straightforward and needs to be analysed on a case-by-case basis.

Gibraltar’s position in the EU means that any manager considering Gibraltar as a jurisdiction to domicile a fund or establish a licensed investment manager must ­consider the impact of the Alternative Investment Fund Managers Directive (AIFMD) on their business.

The requirements imposed by the AIFMD on managers who choose not to, or are unable to, opt out of it include enhanced disclosure levels, remuneration rules, ­leverage limitations and capital requirements. However, generally, as a bonus for complying with AIFMD, a passport will be conferred on the manager enabling
EU-wide marketing of the alternative investment funds it manages.

The Level 2 implementing measures are in the course of consultation by the ­European Securities and Markets ­Authority (ESMA) and are expected to be published in early 2012. There is still some uncertainty about how onerous the requirements will be, and it is not always possible at the outset of establishment to assess just how beneficial the marketing passport might be for a ­manager.

In this case a manager may want to ­consider a Gibraltar EIF as a vehicle to allow the decision to opt in or out of the AIFMD to be delayed until a later stage. Where ­commonly the investment adviser is based in the UK but the adviser is of the view that it is not a manager within the scope of the AIFMD, there is nothing to stop a private equity fund setting up its central management and control in Gibraltar. This could be effected by incorporating a general partner of an overseas limited partnership in ­Gibraltar, with a view to moving the general partner out of Gibraltar if the AIFMD turns out to be disadvantageous. This is easier than redomiciling the whole fund.

James Lasry is a partner and Peter Young and Anthony Jimenez are associates at Hassans. Eve Ellis, a partner at Charles Russell, also contributed to the article