Background
Malta’s investment services legislation was enacted back in 1994 as part of the jurisdiction’s initiative to bolster its legal and regulatory framework in anticipation of its application for EU membership. Indeed the island’s accession to the European Union in May, 2004 proved to be the primary catalyst for the exponential growth of its financial services industry, particularly investment funds, thrusting the jurisdiction onto the world map by coupling an ‘onshore’ robust and comprehensive regulatory framework which inspires confidence with a Europe-wide ‘passporting’ system and effectively crystallising Malta’s role as a European hub for financial services.
The Investment Services Act (Chapter 370 of the laws of Malta) establishes the principal legislative framework governing investment services and Collective Investment Schemes and is supplemented by a comprehensive rulebook issued by the MFSA under the said Act.
Any collective investment scheme operating in or from Malta is required to procure the corresponding licence from the MFSA. The current architecture of the MFSA Investment Services Rulebook provides a regulatory framework for the following types of investment funds:
- retail investment funds (including Maltese non-UCITS and UCITS schemes and retail AIFs);
- non-retail investment funds including Alternative Investor Funds (AIFs) and Professional Investor Funds (PIFs); and
- Private Collective Investment Schemes – in order to operate as such these are required to be ‘recognised’ by the MFSA, as opposed to being licensed like the other forms of schemes. In order to be recognised as ‘Private’ a collective investment scheme must satisfy certain conditions including, inter alia, that the total number of participants is limited to fifteen persons who are close friends or relatives of the promoter/s.
Non-retail Alternative Investor Funds and Professional Investor Funds effectively provide a ‘light-touch’ regulatory regime and more flexibility than UCITS and other retail funds.
In order to be eligible for licensing, AIFs and PIFs are required to fall within the scope of the Maltese-law definition of a collective investment scheme. Accordingly, the investment fund (whether being set up as an AIF or PIF) must be established as a scheme or arrangement which has as its object the collective investment of capital acquired by means of an offer of units for subscription, sale or exchange and which, additionally, also possesses any one of the following characteristics:
- the scheme or arrangement operates according to the principle of risk spreading; and either:
- the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or
- at the request of the holders, units are repurchased or redeemed out of the assets of the scheme or arrangement, continuously or in blocks at short intervals; or
- units are, or have been, or will be issued continuously or in blocks at short intervals.
This notwithstanding, the aforementioned risk spreading requirement has ceased to be applicable to investment funds licensed as PIFs and targeting Qualifying and Extraordinary Investors (as defined hereunder) and is not applicable to AIFs. Risk spreading continues to be mandatory for UCITS, Non-UCITS Retail Schemes and to PIFs targeting Experienced Investors (as defined hereunder) owing to the quasi retail nature inherent in these investment funds.
Moreover, the MFSA is permitted to issue an investment fund licence to any scheme or arrangement not satisfying the principle of risk spreading, where the units in such scheme or arrangement are to be offered for subscription, sale or exchange to (i) holders of investment services licences; or (ii) persons whose ordinary business involves the acquisition and disposal of instruments or property of the same kind as those in which the scheme or arrangement invests; or (iii) persons who are exempt by regulation from the requirement of an investment services licence provided that the scheme or arrangement invests in instruments or property in respect of which such persons are exempt.
Alternative Investment Funds
Investment funds intended to be targeted to professional investors and (i) managed by an AIFM; or (ii) which, in the case of self-managed funds, surpass the de minimis threshold; or (iii) opts-in to full AIFMD compliance in order to benefit from the passporting procedure, would be required to apply for an AIF licence rather than its PIF counterpart.
Units or shares of AIFs may be marketed to professional investors in any other EU Member State/s or EEA State/s by means of the various AIFM Directive provisions implementing the passporting procedure as duly transposed into the relative MFSA Rules.
Moreover, investment funds structured as AIFs are required to appoint a custodian/ depositary which is either (i) the holder of a Category 4 Investment Services Licence issued by the MFSA; or (ii) until July 2017, a credit institution having its registered office in the EU and authorised in accordance with Directive 2006/48/EC.
Professional Investor Funds
Whilst full AIFMD compliance could certainly benefit larger operators, start-ups and ‘smaller’ funds may indeed be overwhelmed by the regulatory load inherent in AIFMD compliance. Consistent with its forward-looking and pragmatic approach to regulation, the MFSA has maintained the popular PIF framework alongside the AIF regime and, in so doing, has created niche market which it is well-positioned to service.
PIFs are subject to a considerably lighter regulatory regime compared to regular investment schemes provided that their only activity comprises operation as a PIF.
The PIF regime provides a lighter regulatory touch on the basis of the participating investors’ wealth and experience.
Accordingly, PIFs may only be promoted to Qualifying Investors with a minimum investment threshold of EUR 100,000 or equivalent in any other currency.
The total amount invested by each investor may not fall below this threshold at any time during the operation of the fund unless this is the result of a fall in the net asset value. The minimum investment threshold applies to each individual investor. In the case of an umbrella fund comprising a number of sub-funds the threshold is applied on a “per scheme” basis rather than on a “per sub-fund basis”, thereby enabling the investor to spread the investment requirement across the various sub-funds. Where the fund’s base currency is not denominated in Euro, exchange rate fluctuations do not affect the minimum investment threshold provided that, at the time the investment is placed, the threshold was satisfied on the basis of the exchange rate prevalent on the date of such investment.
PIFs are not subject to investment or borrowing (leverage) restrictions, unlike retail funds.
Appropriate mechanisms are in place to facilitate the change from de minimis status to full AIFMD compliance once the operators feel that the expense and resource inherent in AIFMD compliance can be justified by the fund’s growth.
‘Notified AIF’ Regime
The ‘Notified AIF’ represents an innovative breed of investment fund regime for Alternative Investment Funds with an inherently light regulatory touch and extremely efficient approval mechanism. The Notified AIF regime is rooted in the provisions of the AIFM Directive and is available to AIFs promoted to qualifying investors which are externally managed by a Maltese or EEA passported full-scope AIFM (Alternative Investment Fund Manager).
Accordingly, the key feature of the structure is the reliance on the AIFM’s regulatory status whereby the investment manager assumes full responsibility for the Notified AIF as well as for the fulfilment of its ongoing obligations, meaning that the Notified AIF itself is not actually subject to ongoing prudential regulation.
Following an internal approval process undertaken by the AIFM, the latter will submit a formal notification request to the MFSA within 30 days, which request must be supported by:
- A compliant prospectus prepared on the basis of a ‘proforma’ document made available by the MFSA;
- A resolution of the AIF’s governing body certifying the AIF’s prospectus as compliant;
- AIFM self-certification confirming that it has the necessary competence and experience to manage and monitor the AIF;
- A joint declaration from the governing bodies of the AIFM and the AIF respectively undertaking responsibility for the AIF and its continuing compliance with the AIFM Directive; and
- A declaration by the AIFM confirming that it has carried out the necessary due diligence in respect of the AIF’s governing body and service providers.
Within 10 business days from the date of submission of the relative notification pack, the MFSA will proceed to include the AIF in the publicly available list of Notified AIFs in good standing on its website.
Consistent with the regulatory innovation with which Malta’s funds industry has come to be synonymous, the Notified AIF regime was rolled out in parallel with a regulatory exercise to consolidate and streamline the entire suite of fund regimes comprising Malta’s fund offering, with a view towards improving the overall competitiveness of the Maltese funds market and enhancing the efficiency of the authorisation process by simplifying the supervisory process.
The efficiency and ‘speed to market’ inherent in the Notified AIF regime coupled with the safety of the underpinning AIFMD provisions, has attracted considerable global interest from fund operators and has contributed to bolstering Malta’s position as a centre of excellence for the asset management industry.
Investment Fund Structures
The Maltese legislative framework accommodates the following legal forms of investment fund vehicles:
- investment companies constituted by Memorandum and Articles of Association (SICAVs and INVCOs);
- commercial partnerships constituted by means of a partnership deed;
- unit trusts constituted by a trust deed between a management company and an authorised trustee, in terms of the Trusts and Trustees Act; and
- mutual funds established by way of contract (the equivalent of the civil law jurisdiction “fond commun de placement”).
The most popular of the above-mentioned vehicles is by far the SICAV or open ended investment company, primarily due to its inherent structural and operational flexibility when compared with the INVCO or closed ended investment company which tends to be somewhat more restrictive insofar as choice of investments and dividend distribution considerations are concerned.
Moreover, when structured as a SICAV, the AIF or PIF may be constituted as an “umbrella” type structure, whereby the assets and liabilities of each sub-fund are treated as a patrimony separate from the assets and liabilities of each other sub-fund of the same investment fund, thereby providing an effective risk mitigation tool by containing risks associated with each investment made by the class of shares within that respective class/ sub-fund.
Effective shareholder control over the structuring and general operation of the investment fund is generally achieved by the issue of ‘Founder Shares’ or ‘Voting Shares’ issued to the investment fund’s promoters.
Management of the Fund
An investment fund established in Malta may be managed in one of the following two ways:
- By an external fund manager, duly licensed to act as such; or
- By an investment committee, duly composed in accordance with the applicable rules, when the fund is structured as ‘self-managed’.
Insofar as self-managed funds are concerned, the NAV of the scheme should not be less than EUR125,000 for PIFs and EUR300,000 for AIFs, or the equivalent in any other currency, on an on-going basis.
Tax Efficiency
Malta’s investment fund legislative regime is complemented by various other incentives to set up business in the jurisdiction including a corporate tax system whereby shareholders in Malta-based fund management companies could benefit from a net effective Malta tax rate of 5%, subject to proper tax structuring, and the highly qualified persons scheme whereby top-level personnel relocating to Malta and employed by the fund management company may benefit from a favourable personal income tax rate of 15% subject to the satisfaction of certain requirements.
Moreover, Malta-registered investment funds are generally not subject to Malta tax. When properly structured, such schemes would benefit from:
- No income or company tax is imposed on hedge funds having more than 85% of their underlying assets situated outside Malta;
- No tax on the Net Asset Value of the scheme;
- No withholding tax on dividends paid to non-residents;
- No taxation on capital gains on the sale of units by non-residents; and
- No stamp duty on issues or transfers of units.
