Both the laws of Luxemburg as well as the laws of Gibraltar admit the establishment of modern (hedge-)fund structures for sophisticated investors, which meet all requirements in respect of fast launching, high flexibility and the necessary freedom for realization of their investment policy. Gibraltar enacted its Experienced Investor Fund"-Regime in August 2005, Luxemburg followed with its "Law about specialised funds" in February 2007. The following comparison shall make it possible to compare Luxembourg domiciled Special Investment Funds (SIF) with the Gibraltarian Experienced Investor Fund (EIF) and shall demonstrate that both countries are a real alternative to a fund domicile based in the Caribbean.
Most important legal basis
SIF: Law of 13th February, 2007 relating to Specialised Investment Funds.
EIF: Financial Services (Experienced Investor Funds) Regulations 2005.
Conditions for subscription
SIF: SIF are aimed to "well-informed investors". The SIF-law determines as a well-informed investor, beside institutional and professional investors, any other investor who meets the following conditions:
a) he has confirmed in writing that he adheres to the status of well-informed investor, and
b) (i) he invests a minimum of 125,000 Euro in the specialised investment fund, or
(ii) he has been the subject of an assessment made by a credit institution, by an investment firm or by a management company certifying his expertise, his experience and his knowledge in adequately apprising an investment in the specialised investment fund.
EIF: An experienced investor is a person or body who, at the time of the investment falls into one of the following categories:
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 Euro 1 Mio or which is part of a group which has net assets in excess of Euro1 Mio;
c) an unincorporated association which has net assets in excess of Euro1 Mio;
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 Euro1 Mio;
e) an individual whose net worth, or joint net worth with that person's spouse, is greater than Euro1 Mio, excluding that person's principal place of residence; or
f) a participant who invests a minimum of Euro 100,000 in the fund.
Each investor has to provide a written confirmation that he is an "experienced investor" and a written acknowledgement that he has received and accepted the investment warning required to be contained in the offer document.
SIF: SIF may be constituted in contractual form or in corporate form.
Furthermore, SIF may be constituted as Umbrella-fund with multiple compartments, each compartment corresponding to a distinct part of the assets and liabilities of the SIF. The assets of a compartment are exclusively available to satisfy the rights of investors in relation to that compartment and the rights of creditors whose claims have arisen in connection with the creation, the operation or the liquidation of that compartment, unless a clause included in the constitutive documents provides otherwise (§ 71 (5) SIF-Law); each compartment will be deemed to be a separate entity.
EIF: In practice EIF are primary established as investment companies but Unit Trusts or partnerships are also possible.
An EIF may also be constituted as a Protected Cell Company (PCC); this special type correlates with an Umbrella-fund; with a PCC-structure any assets attributable to that cell (sub funds) are – save to the extent that the company may have agreed so - isolated from other cells and therefore protected; thus, in no case cellular assets not attributable to the relevant cell shall be used to satisfy the liability of that other cell (§ 13 (1) lit. c Protected Cell Companies Ordinance 2001).
Alternatively, an existing EIF, established as a "normal" company, may be converted into a PCC.
SIF: A redomiciliation of an existing hedge domiciled in a relevant state outside from Luxembourg would be thinkable, but in practice fiscal and legal problems occur (legal basis: company law dated as of 10th August 1915).
EIF: A Hedge fund formed as company originally domiciled elsewhere is able to move to Gibraltar without having to liquidate and re-incorporate, if "redomiciliation" is provided for in its constitutional documents and if permitted to do so by the applicable law in the jurisdiction of its incorporation. Redomiciling a hedge fund to Gibraltar is a quick and painless process, largely the same as establishing an EIF there. The principal regulations are the Companies (Re-Domiciliation) Regulations 1996, Circular No. 20, 2008 of Companies House and the Financial Services (Experienced Investor Funds) Regulations 2005. Through redomiciliation, existing hedge funds domiciled in a third country can not only transfer into the European Union - as Gibraltar is part of it by virtue of Article 299 (4) of the Treaty establishing the European Community - but can also use the opportunity to change administrators. It was for these reasons coupled with the flexibility afforded by the EIF regulations that the first hedge funds moved to Gibraltar from the Caribbean in January 2006, just four months after the EIF-regime had been launched. The largest fund administrators, such as Capita Financial Administrators (Gibraltar) Ltd., which is part of Capita Group PLC, a FTSE 100 listed company, have the know how to pull of a redomiciliation without problems.
Minimum net assets
SIF: A SIF must have minimum assets of an amount equal to Euro 1,250,000 within 12 months of its establishment.
EIF: An EIF dies not have to meet any requirements in respect of minimum net assets.
SIF: With respect to risk diversification the only requirement is that the principle of risk spreading must be observed.
EIF: There are no investment restrictions for an EIF.
SIF are subject to authorisation and supervision by the Commission de Surveillance du Secteur Financier (CSSF, www.cssf.lu; legal basis for CSSF: Law of 23 December 1998 establishing a financial sector supervisory commission).
EIF are subject to authorisation and supervision by the Financial Services Commission (FSC, www.fsc.gi/fsc/home.htm; legal basis for FSC: Financial Services Commission Act 2007).
There are fast track authorisation processes for both, SIF and EIF, which make it possible to establish the fund within a short time.
SIF: Applications for authorisation of a SIF must be filed with the CSSF within the month following their constitution or formation. Authorised specialised investment funds shall be entered by the CSSF on a list. Such entry shall be tantamount to authorisation and shall be notified by the CSSF to the SIF concerned. A SIF shall be authorised only if the CSSF has approved its constitutive documents and the choice of the depository. The entering of the list shall be subject to observance of all legislative, regulatory or contractual provisions relating to the organisation and operation of the SIF and the distribution, placing or sale of their securities.
EIF: Once the EIF is established the administrator has 14 days to notify the Regulator of the establishment of the fund and file with them a copy of the offering documents and an opinion of a lawyer of at least 5 years professional standing and who is also a Barrister or Solicitor of the Supreme Court of Gibraltar, that the fund complies with the relevant provisions. The EIF is allowed to start investment activities before filing the notification with the FSC namely as soon as the board of directors approves and issues the offering memorandum and launches the fund.
SIF: The directors of the SIF must be of sufficiently good repute and have sufficient experience, also in relation to the type of the SIF concerned. Directors need not to have their residence in Luxembourg.
EIF: There have been at least two approved Gibraltar resident directors in the board of directors (in practise, these requirements do not matter as there is a range of highly qualified administrators in Gibraltar which are able to provide for the EIF fund directors authorised by the Regulator).
SIF: The depository of a SIF must either have its registered office in Luxembourg or be established in Luxembourg if its registered office is in another Member State of the European Union. The depository must be a credit institution within the meaning of the amended law of 5th April, 1993 concerning the financial sector.
EIF: An EIF is not required to have a depositary where the fund is a closed end fund or a hedge fund and an approved prime broker is appointed. Where an EIF has a depositary, whether or not pursuant to a requirement, the depositary shall be such person as the FSC may authorise to act as depositary; in practise usually a credit institute based in Gibraltar will be appointed (many first class international banks have established subsidiaries in Gibraltar), however a registered office in Gibraltar is not required. Funds that would like to maintain their foreign custodian shall ascertain that the FSC has not any objections.
SIF: Administrator of a SIF must be domiciled in Luxembourg.
EIF: Administrator of an EIF must be domiciled in Gibraltar.
SIF: A SIF has to launch an offering document. The offering document must include the information necessary for investors to be able to make an informed judgment of the investment proposed to them and, in particular, of the risks attached thereto.
EIF: An EIF has to issue an offer document that complies with the provisions of the Financial Services (Experienced Investor Funds) Regulations 2005. It must contain such information as would reasonably be required and expected by participants, and potential participants, and their professional advisers for the purposes of making an informed judgment about the merits of participating in the experienced investor fund and the extent of the risks of participating in the fund.
SIF: According to SIF-Law an annual report has to be established for each financial year. The accounting information given in their annual report has to be audited by an authorised external auditor. It is not necessary to establish semi-annual reports or other report (e.g. long form reports). The annual reports must be sent to the CSSF and must be available to investors within six months from the end of the period to which it relates.
EIF: An EIF shall have an annual audit of its financial statements performed by an auditor registered under the Gibraltar Audit Registration Board. The audited financial statements shall be deposited at the Fund Administrator's Gibraltar office within 6 months of the financial statement period end. These shall be made available to the Authority at the same time. There is no commitment to establish semi-annual reports or other kinds of reports.
Publication of NAV
Neither for a SIF nor for an EIF there is an obligation to publish the NAV.
Neither for a SIF nor for an EIF is a need to have an official promoter.
Funds for a single investor
Both SIF and EIF can be established for one single investor. There is no limitation in respect of the number of investors.
SIF: Apart from the capital duty levied on the contribution of capital to civil and commercial companies (Droit d´apport) and the subscription tax in the amount of 0,01 %, (Taxe d´abonnement), no other tax shall be payable by the SIF; there are exemptions according to § 68 (2) SIF-Law.
EIF: Income from EIFs is exempted from tax under the Income Tax (Allowances, Deductions and Exemptions) Rules 1992.
There is no interest payment for Gibraltar and Luxembourg domiciled hedge funds according to the European Savings Directive (Directive 2003/48/EC) and they are therefore classified as "out of scope".
Parent Subsidiary Directive
SIF as well as EIF can benefit from the Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States ("Parent Subsidiary Directive"). This Directive was designed to eliminate tax obstacles in the area of profit distributions between groups of companies in the EU by abolishing withholding taxes on payments of dividends between associated companies of different member states and preventing double taxation of parent companies on the profits of their subsidiaries.
Luxembourg offers funds the possibility to be listed in its own country with the Luxembourg Stock Exchange. In Gibraltar the Gibraltar Stock Exchange (GibEX) may be operational sometime in 2009; EIF can be quoted, e.g., with the Irish Stock Exchange.
Luxembourg is a Member State of the EU.
Gibraltar joined the European Union in 1973 by virtue of the UK's accession to the EU under the provisions of Article 299 Section 4 (ex-Section 227) of the Treaty establishing the European Community; the cited rule extends the provisions of the Treaty to those "European territories for whose external relations a Member State is responsible." As Gibraltar is part of the EU via the UK's membership EU-Directives on financial services and other matters such as money laundering must be implemented. Due to the EU-status Gibraltar politically distinguishes from Guernsey, Jersey or the Isle of Man, for which, by virtue of Article 299 Section 6 lit c) of the Treaty, that status of EU-membership does not apply.
About the author
Rolf Majcen studied law at an Austrian university and is Managing Director of FTC Capital GmbH in Vienna ( www.ftc.at/). FTC is specialised in systems development for Managed Futures with a track record stretching back to 1994. All FTC´s trading systems are proprietary systems. FTC´s product portfolio includes both highly diversified managed futures funds as well as those that are specialised in certain markets (e.g. commodities). FTC funds are regular winners in international performance rankings. The hub of all FTC communication is its website, which provides a comprehensive platform and an extensive archive for all matters related to system trading and alternative investments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.