This year has been yet another busy one for the Irish funds industry, with several significant changes being effected through the enactment of various pieces of legislation.
The search for cost and administrative efficiencies in pension funds and other asset management activities has continued to fuel the demand for efficient pooling products. The funds industry in Ireland has always been conscious of the need for the jurisdiction to be seen as an attractive location for domiciling pooling vehicles for pension funds and other assets. As a result, the industry has recommended changes to tax laws and regulations affecting pooling vehicles in order to create a tax-transparent pooling vehicle to reflect the needs of a wide variety of potential users.
One such pooling product, the common contractual fund (CCF), has been available in Ireland since 2003, with the enactment of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2003 (the UCITS Regulations) and the Finance Act 2003.
A CCF is a pooling vehicle established under the law of contract by a deed of constitution to which the management company and the custodian of the CCF are parties. The CCF is not a legal entity, it is not a body corporate and it has no legal personality. It cannot assume any liabilities and it acts through its manager and custodian. These features are designed to ensure that the CCF is viewed as a tax-transparent vehicle in other jurisdictions.
The Finance Act 2003 provided that CCFs would not be chargeable to tax where its units were beneficially owned by a pension fund or held by a custodian or trustee for the benefit of a pension fund. It further provided that CCFs were tax-transparent, in that the income and gains of such entities were treated as arising or accruing to the unitholders or investors and not to the CCF itself.
Therefore, the position on CCFs in Ireland at the commencement of 2005 was that they were available to pension funds only and could only be established as a UCITS. The funds industry was aware of the limitations of this and lobbied the government on both issues with a view to making available non-UCITS CCFs and to extend the investor profile of CCFs beyond pension funds.
Experiences had shown, since the enactment of the Finance Act 2003, that not all potential pension fund investors in a CCF were structured in such a manner that the assets were held by a custodian or trustee, and other institutional investors which were not pension funds had also expressed an interest in using the CCF.
UCITS are subject to defined investment rules and restrictions, including rules to ensure diversification of risk and restrictions relating to the use of borrowing. These place quantitative and qualitative restrictions on the underlying securities that the UCITS CCF may hold, and any pooling arrangement proposed must be permissible within the parameters of those investment rules and restrictions. The funds industry lobbied the government aggressively on this point, because it was obvious that it would not always be appropriate for CCFs to be constrained in their investment parameters by the UCITS regime. This change required primary legislation.
As a result of this lobbying, Section 44 of the Finance Act 2005 was enacted. This extends the taxation exemption and tax-transparency to contractual pooling vehicles where the units are beneficially owed by persons other than individuals. This change opens up the potential for further marketing the pooling vehicle beyond mere pension funds to include, for example, other investment funds. This has addressed the concerns of non-pension fund institutional investors, which were interested in utilising the CCF, and also the concerns of certain types of pension fund which, for technical reasons, may not have come within the definition of a pension fund used in the 2003 act.
On 30 June this year, the Investment Fund, Companies and Miscellaneous Provisions Act 2005 was enacted in Ireland, providing, among other things, for the establishment of a non-UCITS CCF structure. Under this legislation, a non-UCITS CCF may be authorised by the Irish regulator as a retail fund, a professional investor fund (PIF) or a qualifying investor fund (QIF). In reality, either the PIF or QIF category will be of most interest to promoters of CCFs. This is because, for a PIF fund, the regulator has discretion to grant derogations from its standard investment and borrowing restrictions on a case-by-case basis, and in the case of a QIF there are no investment or borrowing restrictions imposed by the regulator.
Prior to the enactment of the Investment Fund, Companies and Miscellaneous Provisions Act 2005, it was not possible to segregate the assets and liabilities of sub-funds within an umbrella corporate fund structure, which contrasted with umbrella unit fund structures, where such segregation was possible. In line with the approach taken in a number of other fund domiciles, it is now possible, under the act, to establish umbrella corporate funds, the sub-funds of which are subject only to the investment risks and liabilities incurred in pursuing their respective investment strategies. The act provides that any liability incurred on behalf of, or attributable to, any sub-fund of an umbrella fund shall be discharged solely out of the assets of that sub-fund and no recourse can be had to the assets of any of the other sub-funds of the umbrella.
It has long been argued by the funds industry in Ireland that the limitations imposed by the Companies Act 1990 on segregated liability and cross-investment for investment funds were damaging Ireland’s competitive position. This has now been addressed, as the act also permits cross-investment by umbrella investment companies by removing the company law impediment to such investments. This will facilitate investment by one sub-fund of an umbrella fund in another sub-fund of the same umbrella.
Ireland has long been known for its ability to continue to develop new structures and products to meet market demand and to effect changes to legislation, where necessary, to accommodate these structures and products.
With recent amendments to Irish legislation expanding the investor profile and the range of products that can be constituted as a CCF, Ireland is now in an excellent position to service the ever-increasing demand for efficient pooling products. The introduction of cross-investment and segregated liability for investment companies has strengthened Ireland’s competitive advantage and has expanded the product opportunities available in this jurisdiction. This will help to cement Ireland’s status as the domicile of choice for all types of European investment funds.
Briam McDermott is head of the investment funds group and Darima O’Connor is a solicitor, both at A&L Goodbody