Gibraltar has a high quality infrastructure in that it has major international banks, accountancy firms and skilled financial services professionals and lawyers who are able to service the funds industry. Gibraltar offers very high standards, and being a small jurisdiction, it is able to provide such services at competitive rates.
The regulatory regime and tax benefits enjoyed by funds in Gibraltar place it in a unique position to service the funds industry, particularly regarding the efficient and cost-effective way in which funds can be set up in Gibraltar.
All of the above has made Gibraltar an increasingly attractive funds location.
Legislation enabling the establishment of Funds in Gibraltar
The Financial Services (Collective Investment Schemes) Act 2005 (the “CIS Act”) regulates and sets out the basic framework for the promotion, establishment and operation of all funds (referred to in the legislation as collective investment schemes) in Gibraltar.
The Financial Services (Collective Investment Schemes) Regulations 2006 (the “CIS Regulations”) deals with the detail of the regulatory regime.
The Financial Services (Experienced Investor Funds) Regulations 2012 (the “EIF Regulations”) allows and regulates Experienced Investor Funds.
The Protected Cell Companies Act 2001 allows funds to be set up so that there is a segregation of assets and liabilities in different cells in an umbrella structure with a number of sub-funds.
Private funds have proved to be very popular in Gibraltar. These are permitted under section 6(3)(c) of the CIS Act provided that the scheme is promoted in accordance with, and is permitted by, the CIS Regulations. The CIS Act refers to private funds as “private schemes” and, in essence, these are collective investment schemes that are not listed on a stock exchange and are limited to no more than 50 participants.
The main advantages of a private scheme are: (i) they are very fast to set up; (ii) they do not need to apply for authorisation to the FSC to commence its investment activities and (iii) they do not require a custodian/depositary, an FSC authorised Gibraltar resident directors/trustees or an FSC authorised administrator. This allows private schemes to be set up cost-effectively and quickly.
The main disadvantages of Private Schemes are: (i) that the extra level of comfort provided to investors by an FSC authorised administrator, FSC authorised Gibraltar resident directors/trustees and custodian/depositary is not there and (ii) there are restrictions on the marketing of such schemes. Many funds start off as private schemes and, as they become more successful, they convert to Experienced Investor Funds which do require the above.
Private Schemes also enjoy significant fiscal benefits which are set out in a section below specifically dealing with the tax position in Gibraltar.
The restriction on the promotion of a collective investment scheme does not apply to EIFs established and promoted in accordance with the EIF Regulations.
The EIF Regulations are, in effect, a self-contained piece of secondary legislation dedicated to EIFs which establishes a streamlined process for authorising and establishing open-ended or closed-ended funds where the investor is an experienced investor based on a system of
self-certification by the investor, the fund’s Administrator and its lawyers.
The EIF Regulations are permissive in defining an experienced investor based on either his/her or its experience, minimum investment, the minimum value of the assets of a trust or company or self certification by the investor that he has a net worth of a minimum amount. This makes Gibraltar attractive, for instance, to independent asset managers who manage assets of a small or medium sized investor base of high net worth individuals.
An experienced investor is defined as:
(a) a person or partnership whose ordinary business or professional activity includes, or it is reasonable to expect that it includes, acquiring, underwriting, managing, holding or disposing of investments, whether as principal or agent, or the giving of advice concerning investments;
(b) a body corporate which has net assets in excess of €1,000,000 or which is part of a group which has net assets in excess of €1,000,000;
(c) an unincorporated association which has net assets in excess of €1,000,000;
(d) the trustee of a trust where the aggregate value of the cash and investments which form part of the trust’s assets is in excess of €1,000,000;
an individual whose net worth, or joint net worth with that person’s spouse, is greater than €1,000,000, excluding that person’s principal place of residence;
(g) a participant who has a current aggregate of €100,000 invested in one or more EIFs;
(h) a participant who invests a minimum of EUR 50,000 in an EIF and who has been advised by a professional adviser to invest in that EIF and its fund administrator has received confirmation of such advice;
(i) a participant who is a professional client, as defined under the Financial Services (Markets in Financial Instruments) Act 2006; or
(j) a participant in a fund that has re-domiciled to Gibraltar where the Authority has permitted the inclusion of such participant either in respect of a specific fund or generally in respect of funds or a category of funds from a certain jurisdiction.
The EIF Regulations also seek to ensure that those establishing funds can use a wide range of vehicles. As well as the traditional vehicles for establishing funds such as a company or unit trust, a fund can also be established as a limited liability partnership or a protected cell company under the Protected Cell Companies Act 2001.
Gibraltar EIF companies enjoy a significant advantage in that they can have more than 50 participants without having to be incorporated as a plc. The usual restriction to remain as a private company to having no more than 50 members, does not apply. Therefore, EIFs can conduct business with a large number of investors without having to take on the extra administrative burdens of a plc.
EIFs established as protected cell companies allow for the creation of one master fund with a number of sub-funds protected in their own cell.
In addition, funds can be established in any other form recognised under the laws of Gibraltar that is approved by the FSC either generally or in relation to a particular fund.
Authorisation under the EIF Regulations is based on a system of self-certification by the investor, the Fund Administrator and the Fund’s lawyer. The EIF Regulations provide that no person shall be accepted as a participant of an experienced investor fund unless he has provided:
(a) written confirmation that he/she/it is an experienced investor within the meaning specified in the EIF Regulations; and
(b) a written acknowledgement that he/she/it has received and accepted the investment warning required by the EIF Regulations to be contained in the offer document.
The controller, administrator, manager or trustee of the fund is not required to verify the factual accuracy of a confirmation provided by a participant or potential participant.
Within 14 days of establishment of the EIF the fund administrator will then provide the FSC with:
(a) written notification of the establishment of the Fund as an experienced investor fund;
(b) a copy of the offer document;
(c) an opinion from an approved Gibraltar lawyer that the fund complies with the EIF Regulations;
(d) any other document required by the FSC.
Where these conditions have been complied with, the fund is deemed to be authorised by the FSC to commence its investment activities and the fund does not have to wait for prior approval. This will provide investors with a tremendous amount of certainty in an area where uncertainty costs money.
This normally takes the form of a private placement memorandum. The main requirement as to the content of the offer document is contained in the EIF Regulations. This specifies that it shall contain such information as would reasonably be required and expected by participants and their professional advisers to make an informed judgment of the merits of and risks of investing in the fund.
It must also contain a specific investment warning stating, inter alia, that the fund is only suitable for those who fall within the definition of an “experienced investor” as defined in the EIF Regulations.
There are certain requirements all EIFs must comply with.
(a) All EIFs must have an FSC authorised fund administrator. There are several financial services firms which provide these services. They would also be responsible for maintaining the share register and compiling and maintaining all due diligence and anti-money laundering documentation on investors.
(b) All EIFs set up as corporate vehicles, must have two resident directors authorised by the FSC. Approved Gibraltar lawyers and the same financial services firms who provide fund administration services can provide authorised directors as well.
(c) All EIFs set up as a Unit Trust must have at least one trustee resident in Gibraltar authorised by the FSC. Authorised trustees can be provided by Gibraltar lawyers and financial services firms as above.
(d) EIFs must produce annual audited accounts prepared by a Gibraltar registered auditor. These must be deposited with the fund administrator and copies made available to the FSC.
(e) An annual return in the specified form must be filed.
As referred to above, there must be at least two FSC authorised resident Gibraltar directors if the fund is set up as a corporate vehicle. If the vehicle is a trust, at least one of the trustees must be an FSC authorised resident in Gibraltar.
This does not mean that there cannot be other non-resident trustees or directors. However, the majority of the management and control has to be resident in Gibraltar, which will, in any event, be necessary if the vehicle is to take advantage of the tax regime for funds.
It should be noted that nothing prevents an experienced investor fund from delegating its functions of investment management to an approved third party in another jurisdiction. A typical structure may involve a company in Gibraltar with two resident Gibraltar directors and a third director resident in another jurisdiction exercising the functions of investment manager. Indeed, the Gibraltar directors can delegate the investment management functions to entities outside Gibraltar which are not themselves directors of the company.
Funds are exempt from tax under Rule 3(17) of the Income Tax (Allowances, Deductions and Exemptions) Rules. This includes an exemption from investment and derivative premiums, interest income, securities trading income, financial instruments and property of any class, including real property and capital gains achieved from the trading of any of these. In addition, funds will not be subject to tax if their income does not accrue in and does not derive from Gibraltar.