I OVERVIEW OF RECENT ACTIVITY
Brexit continues to be the most significant development impacting the financial services sector in Ireland and across the EU. Although the UK triggered Article 50 to exit the EU in March 2017, there continues to be much uncertainty as to what form Brexit will take – whether there will be a hard Brexit (with no passporting rights for UK financial service providers across the EU) or a soft Brexit (with some form of third-country equivalency rights), or some variation of these outcomes. In July 2018, the UK government published its long-awaited White Paper on the future relationship between the UK and the EU reflecting a shift from its original 'mutual recognition' position, which would have allowed UK financial service providers to operate largely as they do at present, to proposing an equivalency position based on the EU's 'equivalency' approach to non-EU members, which in effect could allow UK financial service providers only limited access to the EU market to the extent that the EU considers the relevant UK rules to be equivalent to the relevant EU rules. As we approach October 2018 with no visibility on the type of Brexit that will be agreed, if any, the risk of a harder Brexit has increased, with many financial service providers who expected a softer Brexit to be agreed now having to put in place contingency plans by establishing firms in the EU to be able to continue to service clients across the EU post Brexit. For some, such as banks, these decisions had to be made much sooner because of the time it takes to establish a bank in any EU Member State. Ireland, being well positioned to offer an EU solution for UK-based financial services firms, has seen its share of applications from UK firms seeking to establish operations here with a noticeable increase of interest from UK firms as we get closer to March 2019.
II GENERAL INTRODUCTION TO the REGULATORY FRAMEWORK
The Central Bank of Ireland (Central Bank) is responsible for the authorisation and supervision of regulated financial service providers in Ireland, including regulated investment funds, investment managers, and insurance and reinsurance undertakings. The powers delegated to the Central Bank are set out in the laws and regulations applicable to the relevant financial services sector. In addition, the Central Bank issues guidance in relation to various aspects of the authorisation and ongoing requirements applicable to financial service providers. In general terms, the Central Bank expects that best practice be adopted by an authorised entity, and requires that financial services providers have systems, procedures and policies in place to ensure that regulatory requirements are met and to mitigate risk.
The regulation of pension schemes is a matter for the Pensions Authority, the statutory body for the pensions industry in Ireland.2
III COMMON ASSET MANAGEMENT STRUCTURES
Ireland as a domicile provides a variety of potential asset management structures (structures), which can be broadly categorised as regulated by the Central Bank or unregulated.
i Regulated structures
There are four main types of regulated fund structure in Ireland: Irish collective asset management vehicles, variable capital investment companies, unit trusts and common contractual funds. Each of these regulated fund structures may be established as UCITS pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended (UCITS Regulations)3 or as an alternative investment fund (AIF) pursuant to the EU (Alternative Investment Fund Managers) Regulations 2013 (AIFM Regulations).4
A regulated investment limited partnership (established pursuant to the Investment Limited Partnership Act 1994) is also available as a structure for AIFs (see Section VI.iii).
These structures may be organised in the form of umbrella schemes with segregated liability between compartments (sub-funds).
Irish collective asset management vehicle
An Irish collective asset management vehicle (ICAV) is an Irish corporate investment fund vehicle that has been specifically tailored to the needs of the global funds industry. The Irish Collective Asset-management Vehicle (ICAV) Act 2015 came into effect in 2015, and since that date the ICAV has proven to be the most popular structure for new funds established in Ireland. One of the main reasons for the popularity of the ICAV is that, unlike investment companies established in Ireland as public limited companies, an ICAV that is structured as an umbrella fund is only required to produce financial accounts at a sub-fund level while a public limited company must produce financial accounts at the umbrella level (resulting in investors in a sub-fund receiving financial accounts for all of the sub-funds in the umbrella). In addition, there is no requirement for an ICAV to hold an annual general meeting of shareholders, and non-material changes can be made to the ICAV's by-laws without shareholder approval. The ICAV may also be eligible to elect to be treated as a transparent entity for US federal income tax purposes, unlike an investment company established as a public limited company, which is not eligible to make such an election.5
Variable capital investment companies
A variable capital investment company must be incorporated as a public limited company pursuant to the Irish Companies Act 2014. The day-to-day management and control of the investment company are undertaken by a board of directors (although this can be delegated to a management company), with ultimate control resting with the shareholders. Provided that this day-to-day management and control of the investment company take place in Ireland, an investment company can obtain a certificate of Irish tax residency from the Irish tax authorities and is not liable for Irish tax on its income or gains.
A unit trust is a contractual arrangement constituted by a trust deed entered into between an Irish management company and a trustee. The assets of the trust are held by the trustee, but the beneficial ownership of the assets remains with the unit trust's unitholders. Unlike an investment company or ICAV, a unit trust does not have a separate legal personality, and contracts in relation to the trust are entered into by the management company on behalf of the trust, or a particular sub-fund of the trust, as provided for in the trust deed.
Common contractual funds
The common contractual fund (CCF) is a tax-transparent structure first established in Ireland in 2003. It was specifically developed to facilitate the pooling of pension fund assets in a tax-efficient manner so that the investing pension funds would be treated from a tax perspective in the same way as if they made the underlying investments directly rather than through the CCF.
The CCF is an unincorporated body established by an Irish management company pursuant to which investors participate and share in the property of the CCF as co-owners. As a co-owner, each investor in a CCF is deemed to hold an undivided co-ownership interest as a tenant in common with other investors. CCFs are constituted under contract law by the execution of a deed of constitution between a management company and a depositary. As an unincorporated body, a CCF does not have separate legal personality.
ii Unregulated structures – limited partnerships
The limited partnership established pursuant to the Limited Partnership Act 1907 is the most favoured structure for unregulated investment funds in Ireland.
A limited partnership is a partnership between one or more general partners and one or more limited partners, and is constituted by a partnership agreement. To have the benefit of limited liability, the limited partners are not permitted to engage in the management of the business of the partnership or to contractually bind the partnership: these functions are carried out by the general partner. There is a general limit of 20 partners in a limited partnership, although this limit can be raised to 50 where the limited partnership is formed 'for the purpose of, and whose main business consists of, the provision of investment and loan finance and ancillary facilities and services to persons engaged in industrial or commercial activities'.6
Fund structures regulated by the Central Bank may be open-ended with liquidity, closed-ended with no liquidity or have limited liquidity, which means they are open to redemption at least one or more times during the life of the fund. One exception is where the regulated structure is authorised by the Central Bank pursuant to the UCITS Regulations, in which case the structure is required to be open-ended with at least two redemption dates per month.
Closed-ended schemes are generally subject to the Prospectus Directive7 unless otherwise exempted (qualifying investor AIFs are generally able to avail of an exemption). In addition, closed-ended schemes may, in certain circumstances, be subject to other European regulations (e.g., the Transparency Directive8 and Takeovers Directive9).
IV MAIN SOURCES OF INVESTMENT
i Regulated investment funds
Ireland's success as an onshore domicile for investment funds is well known, and the development of Ireland's funds industry continues to be an area of strategic importance for the Irish economy.
Statistics show that Irish-domiciled investment funds has over €2.5 trillion in net assets in 2018 (up from €2.08 trillion at the end of 2016), This means the industry has now quadrupled in size in the 10 years since 2008. While the majority of assets under management are held in UCITS funds, Irish-domiciled AIFs had in excess of €600 billion in net assets at the end of 2017.10 The majority of the investment in these regulated investment funds comes from non-Irish institutional investors.
ii Insurance and reinsurance
As of 8 June 2018, there were 45 life insurers, 91 non-life insurers (including captives) and 60 reinsurers (including captives and special purpose reinsurance vehicles) with head offices in Ireland. There were a further 12 life insurers and 30 non-life insurers with branches in Ireland. In addition, 173 life insurers and 815 non-life insurers operate in Ireland on a freedom-of-services basis pursuant to the relevant EU directives.11 In its Fact File 2016 publication, Insurance Ireland indicated that life insurance policyholder funds managed by its members amounted to €107.28 billion in 2016. Of this, 56.5 per cent was invested in equities, 25.1 per cent in gilts, 5.4 per cent in property, 9.7 per cent in cash and 4.3 per cent in other asset classes.12
iii Pension schemes
The Irish Association of Pension Funds estimates the total assets of Irish pension funds now exceeds €115 billion (figure at the end of 2016), but no precise details are available on how these assets are invested or what proportion of assets are under the management of Irish authorised investment managers. The Pensions Authority has not yet published the results of its defined benefit scheme review for 2018, but based on the annual actuarial data return submitted to the Authority by 31 March 2018, the asset allocation of the 611 active and frozen defined benefit schemes in Ireland (with assets of €64.1 billion) is as follows:
- 32.4 per cent in equities;
- 32.4 per cent in EU sovereign bonds;
- 8.2 per cent in other bonds;
- 4.5 per cent in property;
- 2.9 per cent in cash;
- 0.1 per cent in net current assets;
- 0.03 per cent in with profit insurance policies; and
h 18.9 per cent in 'other' (which includes absolute return funds, alternative assets, hedge funds, commodities, derivatives, global absolute return strategies and annuities).
V KEY TRENDS
In terms of insurance and reinsurance, there are significant international and domestic insurance and reinsurance undertakings headquartered in Ireland. The Solvency II Directive has forced insurers and reinsurers established outside the EU to assess whether to redomicile their global operations in a European centre such as Ireland, which continues to be one of the most sought-after European countries for insurers and reinsurers looking to redomicile.
With regard to asset management and investment funds, as Brexit plans mature, for many investment firms in the UK and some global investment firms, Ireland is emerging as a favoured EU hub because of the relative advantages it has over a number of other EU countries across a number of metrics including tax, legal system, labour laws and regulation.
VI SECTORAL REGULATION
Ireland has a long-established legal framework for insurance and reinsurance business, primarily composed of the Insurance Acts 1909 to 2015, various European directives and the Solvency II Directive.13
Insurers and reinsurers must limit their activities to those for which they are specifically authorised, to the exclusion of all other business activity. The Central Bank imposes strict rules on insurers and reinsurers to formalise appropriate internal policies and procedures to ensure that investment risks relating to assets used for regulated capital purposes are adequately managed. The rules in relation to asset management activity by insurance undertakings are governed by the rules set out in the Solvency II Directive, which was implemented in Ireland by the Irish Implementing Regulations14 and came into force on 1 January 2016.
Solvency II has codified and harmonised EU insurance regulation, and sets new standards for the amount of capital that insurance and reinsurance firms must hold based on their risk profile, as well as new standards for governance, risk management and supervision, and reporting and transparency. Under Solvency II, asset managers need to provide insurance clients with greater levels of detail in relation to the assets underlying their investments than previously required. The implementation of Solvency II has been the most substantial regulatory change affecting Irish and European insurers and reinsurers in many years, as it provided for a new risk-based capital adequacy regime.
The introduction of Solvency II has involved significant changes for asset management by insurers and reinsurers. Solvency II has introduced across European Economic Area (EEA) Member States, for the first time, a solvency calculation based on an economic and prospective approach to the risks inherent to the business conducted by insurers and reinsurers. As a result, one of the key factors in the calculation of an insurer's regulatory capital requirements is market risk. Under Solvency II, insurers and reinsurers are able to invest in any asset (in the interests of policyholders and beneficiaries), including high-risk and volatile assets, provided they are willing to hold the necessary extra capital for such risk.
Provisions in relation to asset allocation affect which funds insurers can choose to invest in because of the prescribed methods for the valuation of assets and liabilities. Solvency II requires that insurers diversify their asset portfolios, which will affect an insurer's choices in investment funds. Asset managers should be aware of the different capital charges that are applied to assets and liabilities. Of particular interest is the market risk module, which is split into the following sub-modules: interest rate risk, equity risk, property risk, spread risk, market risk concentrations and currency risk. Different categories of assets and liabilities will be subject to different rules depending on how they are classified. For example, structure debt and equity investments are subject to favourable capital charges.
Insurers must have processes in place to ensure the appropriateness, accuracy and completeness of the data that they use to calculate their capital requirements. To comply with this requirement, insurers are likely to demand assurances from asset managers that the data they have received meets these standards, and that there are appropriate governance and control procedures in place to ensure these standards are met. Under Solvency II, there must be a higher level of transparency in the funds in which insurers invest. This includes complying with the 'look-through' approach, which states that insurers must base their risk assessment of a fund on the assets that underlie the fund. Asset managers of funds will be obliged to provide details of these underlying assets to insurers or risk losing insurers' business.
Under Solvency II, insurers must have close relationships with their asset managers owing to the increased pressure to provide detailed data within tight time frames. Asset managers must ensure they have product strategies that reflect the requirements of Solvency II in relation to asset allocation to ensure that their portfolios remain attractive to insurers.
Recent developments in the insurance sector
Regulation (EU) No. 1286/2014 on key information documents for packaged retail investment and insurance-based investment products (PRIIPs Regulation) introduced, on a pan-European level, a standardised pre-contractual disclosure document (key information document (KID)) for the benefit of retail investors purchasing certain packaged retail investment products or insurance-based products that, following the postponement of the initial application date, came into effect from 1 January 2018. Products within the scope of the PRIIPs Regulation, include:
- life assurance-based investment products;
- investment funds;
- structured term deposits; and
There are a number of products explicitly excluded from the PRIIPs Regulation, including notably non-life insurance products, pension products and annuities not recognised in national law. However, any product that falls under the definition of PRIIPs must also be sold to retail investors to fall within the scope of the PRIIPs Regulation.
The KID is required to include information under certain prescribed headings, including:
- information on the product manufacturer;
- a description of the main features of the product as well as costs borne by the investor;
- the risk–reward profile of the product;
- performance information, including future performance scenarios and expected returns;
- a comprehension alert highlighting that the product may be difficult to understand;
- how complaints can be made; and
- certain other relevant information that may be necessary for understanding the features of the product.
Directive (EU) 2016/97 on insurance distribution (Insurance Distribution Directive) (IDD) was transposed in Ireland on 1 July 2018 and will take effect 1 October 2018. The IDD aims to enhance EU regulation of the insurance market by ensuring a level playing field for all participants involved in the sale of insurance products to strengthen policyholder protection, promote cross-sectoral consistency and make it easier for firms to trade on a cross-border basis. One of the most significant changes introduced by the IDD involves additional requirements that apply to insurers and insurance intermediaries when they carry on insurance distribution relating to the sale of investment-based insurance products.
The trustees of a pension scheme are constrained in the investment choices they may make by the governing documents of the scheme (or, if no investment powers are contained in the pensions scheme, by the Trustee Act, 1893 and the associated Trustee (Authorised Investment) Orders, and by statute). The Pensions Acts 1990 to 2015 impose a duty on the trustees of pension schemes to provide for the proper investment of the resources of the scheme.
In general, the trustees of a pension scheme will be given the power to appoint one or more investment managers under the scheme's governing documents. An investment manager appointed to pension scheme assets will be bound by any restrictions on investment in the scheme's governing documents and by the relevant statutory restrictions. These restrictions will generally be referred to in the investment management agreement. Ultimately, trustees cannot delegate their primary responsibility to invest, and trustees remain under a continuing obligation to supervise the investment manager.
Irish pension schemes must comply with Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision (IORP), which established a common basis for the operation and supervision of pension funds in EU Member States. IORP will continue in force in Ireland until the introduction of domestic legislation to implement the IORP II Directive15 (the implementation of which must occur before 14 January 2019). The main requirements of IORP have been reproduced in the Investment Regulations.16 IORP also requires trustees to invest in accordance with the prudent person rule and to invest assets in the interests of beneficiaries.
The Investment Regulations require that the assets of the scheme must:
- be invested in a manner designed to ensure 'the security, quality, liquidity and profitability of the portfolio as a whole so far as is appropriate having regard to the nature and duration of the expected liabilities of the scheme';
- be invested predominantly on regulated markets as defined in the Investment Regulations;
- be properly diversified to avoid excessive reliance on any particular asset, issuer or group of undertakings, and as to avoid accumulations of risk in the portfolio as a whole; and
- not be invested in derivative instruments except insofar as they contribute to a reduction of investment risks or facilitate efficient portfolio management.
The Investment Regulations also state that:
- the trustees of a scheme (other than a one-person scheme) may not borrow money except for liquidity purposes and on a temporary basis; and
- investment in the sponsoring employer of the pension scheme (which is viewed as self-investment) shall not exceed 5 per cent, while total self-investment in the sponsoring employer group shall not exceed 10 per cent of the resources of the scheme. An exception is provided in respect of small member-controlled schemes where the investment restriction is raised to 20 per cent.
IORP II requires that trustees take account of environmental, social and governance factors when investing scheme assets. Disclosure of these factors will be required where they are considered in investment management decisions. The Directive notes that IORPs are long-term investors with low-liquidity risks, and as such are in a position to invest in non-liquid assets and other instruments that have a long-term economic profile. IORP II encourages cross-border activity by permitting IORPs to invest in other Member States in accordance with certain legislative requirements of the home Member State.
Recent developments in pensions asset management
The European Market Infrastructure Regulation (EMIR),17 which entered into force on 16 August 2012, seeks to ensure greater transparency in the financial system by, inter alia, regulating transactions in over-the-counter derivatives (OTCs) in the EU. Pension schemes that use OTCs fall within the scope of EMIR, albeit with some exemptions from the full force of the Regulation, and the trustees of a pension scheme are responsible for compliance with EMIR. Under EMIR, pension schemes are classified as 'financial counterparties' along with financial institutions (such as banks, hedge funds and custodians), but pension funds have been exempted from compliance with some aspects of EMIR for a period of time.
Since 12 February 2014, financial counterparties, including trustees of pension funds, have to report any new OTCs that they enter into with the trade repository within one business day of entering the contract. Any amendments to the terms of OTC transactions and any early terminations of OTC transactions must also be reported from 12 February 2014 onwards. Any OTC transactions that were entered into on or after 16 August 2012 and that remained outstanding on 12 February 2014 also had to be reported on 12 February 2014. All counterparties to a transaction, including the trustees of pension funds, must maintain a record of concluded or modified OTC transactions for at least five years after they have been concluded or modified. Pension funds were granted an exemption from the EMIR clearing requirements for certain OTC trades. In June 2015, the European Council agreed to extend the pension fund exemption until 15 August 2017. In April 2017, the pension fund exemption was extended for a further period of one year to 16 August 2018, and it has been indicated that this exemption may be further extended by three years.
Over the course of 2016, the Pensions Authority issued codes of governance to assist trustees in meeting the standards of practice required of them. The codes are not statements of law, but are intended to supplement the Pension Authority's Trustee Handbook. The codes are applicable to trustees of defined contribution schemes; however, many of the same principles will apply to trustees of defined benefit schemes. The fifth code issued is specifically in relation to trustees' investment of scheme assets. It sets out that trustees:
- are required to implement and oversee a default investment strategy;
- are required to ensure the proper investment of scheme assets and appoint an investment manager where required; and
- should seek to keep the costs of investment management as low as practicable.
Specifically in relation to the investment of the assets of defined benefit schemes, the Pensions Authority has published guidance on establishing the investment strategy of the scheme. The Pensions Authority acknowledges that the ultimate challenge for trustees in setting the investment strategy of a scheme will be to balance the need for adequate returns with the ability of that scheme to tolerate risk.
iii Alternative investment funds
Regulated investment fund structures in Ireland may be established as UCITS (authorised by the Central Bank pursuant to the UCITS Regulations) or AIFs (authorised by the Central Bank pursuant to the AIFM Regulations that implement the Alternative Investment Funds Managers Directive (AIFMD)).
UCITS are subject to various liquidity requirements, investment restrictions (both in terms of permitted investments and required diversification), and borrowing and leverage limits. The UCITS III Product Directive18 and the Eligible Assets Directive19 significantly increased the range of permissible investments for UCITS, which enabled alternative investment fund managers to adapt their investment approach to the UCITS model, giving the market access to liquid alternative UCITS funds. However, because of the various leverage and counterparty exposure restrictions that apply to UCITS and the fact that a UCITS may not appoint prime brokers to rehypothecate fund assets, there are limits on the type of alternative or hedge fund strategies that can be used by a UCITS. The limits on a UCITS being able to pursue an alternative fund strategy needs to be balanced against the fact that some institutional investors and pension funds are able to invest a higher percentage of their assets in a UCITS than into unregulated funds or even regulated non-UCITS funds. However, if the strategy does not fit within a UCITS framework, managers will establish the product as an AIF.
AIFs are regulated by the Central Bank pursuant to the AIFMD Regulations, which are supplemented by the Central Bank's AIF Rulebook.20 The AIFMD Regulations implement the AIFMD into Irish law.21 AIFs encompass all non-UCITS or alternative funds, not just hedge funds. Whether a particular AIFM is within the scope of the AIFMD depends on its location and that of the AIFs it manages, as well as the countries into which the AIFs are marketed. In summary, the AIFMD applies to all EU AIFMs that manage one or more EU or non-EU AIFs; all non-EU AIFMs that manage one or more EU AIFs; and all non-EU AIFMs that market one or more EU or non-EU AIFs in the EU.
The AIFM can be either an external manager of the AIF or the AIF itself, where the legal form of the AIF permits internal management (e.g., the Irish variable capital investment company and ICAV) and the AIF chooses not to appoint an external AIFM (an internally managed AIF). If an internally managed AIF is authorised as an AIFM and is permitted to delegate this function to a non-EU manager, that manager does not have to be authorised as an AIFM under the AIFMD. This point is of particular importance as it allows non-EU managers to access European markets without having to become authorised as AIFMs.
Irish AIFs may be established as retail investor AIFs (RIAIFs) or qualifying investor AIFs (QIAIFs) under the rules as set out in the AIF Rulebook. The AIF Rulebook also specifically provides for the establishment of particular AIF structures: for example, real estate and private equity RIAIFs and QIAIFs (see Section VI. iv) and loan origination QIAIFs (LO-QIAIFS), the latter representing the first dedicated regulatory regime in the EU for loan origination funds. AIFMs that meet the additional conditions relating to LO-QIAIFs will be able to manage the LO-QIAIF and market it within the EU using the AIFMD passport.
iv Private equity and real property
As stated above, the AIF Rulebook specifically provides for the establishment of real estate and private equity RIAIFs and QIAIFs.
A key element in the development of private equity funds and real estate funds as QIAIFs has been the use of special purpose vehicles to gain access to Ireland's extensive double taxation treaty network. QIAIFs are permitted to establish multilayered special purpose vehicles, typically wholly owned subsidiaries established pursuant to Section 110 of the Taxes Consolidation Act 1997. The Section 110 subsidiary can therefore be used as the investment vehicle for the QIAIF, which in turn effectively allows the QIAIF to gain access to Ireland's double taxation treaty network.
The Finance Act 2013 provides for the establishment of real estate investment trusts (REITs) in Ireland. Irish REITs must be incorporated under the Irish Companies Act 2014, be resident in Ireland, have their shares listed on the main market of a recognised stock exchange, and meet a number of conditions and restrictions in terms of borrowing, permitted investments, sources of income and risk spreading. Although the Central Bank has not determined that all REITs established in Ireland are AIFs for the purpose of the AIFMD, it has indicated that the onus would be on a REIT to demonstrate otherwise. Furthermore, it has advised that REITs that are structured as unauthorised AIFs must comply with the Central Bank AIF Rulebook for retail AIFs.
Recent private equity and real property developments
Loan origination funds
As noted in Section VI. iii, Ireland introduced the first dedicated regulatory regime in the EU for loan origination funds. Loan origination QIAIFs (LO-QIAIFs) can be established subject to compliance with additional conditions and AIFMs that meet these additional conditions can manage the LO-QIAIF and market it within the EU using the AIFMD passport. The rules regarding LO-QIAIFs are set out in a dedicated chapter of the Central Bank's AIF Rulebook and include additional conditions, such as the following, which require that the LO-QIAIF:
- be closed-ended;
- must not have gross assets of more than 200 per cent of its net asset value;
- must achieve a diversification of its exposures such that the exposure to any one issuer or group shall be limited to 25 per cent of its assets within a time frame specified in its prospectus; and
- does not lend to certain categories of borrower.
Certain investment restrictions were also initially imposed, which meant that LO-QIAIFs were prohibited from engaging in activities other than lending and related operations. However, following industry engagement, enhancements were made in January 2017 that permitted investment in debt and equity securities of entities or groups to which the LO-QIAIF lends or that are held for treasury, cash management or hedging purposes. These changes were followed up in early 2018 with further enhancements intended to permit lending within a broader credit-focused strategy. As such, LO-QIAIFs are now permitted to invest directly in debt or credit instruments (i.e., without the constraint that these debt or credit instruments be tied to the LO-QIAIF's lending operations). These amendments have been a welcome relaxation of the investment restrictions originally imposed on LO-QIAIFs, and will allow investment managers more flexibility to manage broader credit strategies within a LO-QIAIF.
Money market funds
Several years after the European Commission's initial proposal for new rules regulating money market funds, the Money Market Fund Regulations22 came into force in 2017 and will apply to all money market funds established after 21 July 2018 with a transition period of up to 21 January 2019 for existing money market funds.
The Money Market Fund Regulations will permit four types of money market funds going forward:
- public debt constant NAV money market fund (public debt CNAV);
- low volatility NAV money market fund (LVNAV);
- short-term variable NAV money market fund; and
- standard variable NAV money market fund.
In effect, this means that existing constant NAV money market funds established prior to July 2018 will have until 21 January 2019 to convert into one of the new types of constant NAV money market funds (i.e., public debt CNAVs or LVNAVs).
Ireland is the largest domicile in the EU for money market funds, with money market funds representing almost 30 per cent of the assets under management of the Irish funds industry. As constant NAV money market funds represent a very significant portion of those money market funds in Ireland, the retention of a viable constant NAV money market fund product under the new Money Market Fund Regulations is very positive for Ireland.
Changes to the management and operational arrangements of fund management companies
On 1 July 2018, the Central Bank's guidance for fund management companies on managerial functions, operational issues and procedural matters (Fund Management Guidance) took effect. The Fund Management Guidance introduces certain changes to the Central Bank's existing rules and guidance relating to the management and operational arrangements for 'fund management companies' in Ireland that are authorised by the Central Bank, namely:
- UCITS management companies;
- self-managed UCITS investment companies;
- AIFMs; and
- internally managed AIFs.
In particular, the Fund Management Guidance streamlines existing managerial functions to six key functions:
- capital and financial management;
- operational risk management;
- fund risk management;
- investment management;
- distribution; and
- regulatory compliance.
The Fund Management Guidance continues to require fund management companies to identify an individual (a designated person) who is responsible for monitoring and overseeing the managerial function assigned to him or her. However, certain changes relating to how the Central Bank expects a designated person to carry out their role have now been introduced.
Further, the Fund Management Guidance introduces a new 'effective supervision requirement'. As a result, a fund management company with a low-risk impact rating will be required to have at least two Irish-resident directors; half of its directors must be resident in the EEA or such other country as the Central Bank may determine (each an 'eligible country'); and half (i.e., three) of its managerial functions must be performed by at least two designated persons resident in the eligible country (which can include two directors resident in the eligible country). A fund management company with higher than low-risk impact rating will be required to have at least three Irish-resident directors or at least two Irish-resident directors and one designated person based in Ireland; half of its directors must be resident in the eligible country; and half of its managerial functions must be performed by at least two designated persons resident in the eligible country (which can include two directors resident in the eligible country). It is expected that the Central Bank will designate the UK as an eligible country once the UK leaves the EEA, although this decision has yet to be made by the Central Bank.
VII TAX LAW
i Irish investment undertakings and non-Irish resident investors
Where an Irish authorised fund qualifies as an investment undertaking for Irish tax purposes, it is generally not chargeable to Irish tax on its income and gains.23 However, the fund may be required to account for Irish tax (known as investment undertaking tax or exit tax) on the occurrence of a chargeable event in respect of its investors. In practice, this charge is limited to payments in respect of certain Irish-resident taxable investors. Separate rules apply to Irish real estate funds (IREFs) (see subsection vii).
A chargeable event includes payments of any form made by a fund to an investor and on the transfer or sale of units in a fund. An investor is also deemed for Irish tax purposes to dispose of its holding in an Irish fund every eight years (deemed a chargeable event), giving rise to a rolling eight-year tax charge until such time as the holding is disposed of. If the fund becomes liable to account for exit tax on a chargeable event, it is entitled to deduct an amount equal to the appropriate tax (currently 41 per cent) from the relevant payment and, where applicable, to repurchase and cancel such number of units held by the investor as is required to satisfy the amount of tax. Importantly, however, no Irish tax arises in respect of a chargeable event where the investor is neither resident nor ordinarily resident in Ireland, or an exempt Irish resident such as another Irish authorised fund, a Section 110 company, a pension fund or a charity. In each case, the fund must be in possession of an appropriate declaration confirming the status of the investor, although the requirement for declarations in respect of non-resident investors may be relaxed on application by a fund to the Irish Revenue where certain conditions are met.
Non-Irish resident investors are thus generally not liable to Irish exit tax by deduction by the fund or on assessment in respect of their investment in Irish authorised funds. The one exception is where a non-resident investor has a branch or agency in Ireland, and invests in an Irish fund through or in connection with the branch or agency. Although no Irish tax will be accounted for by the fund, the investor will be liable to Irish corporation tax in respect of income and capital distributions it receives from the fund.
ii Investment limited partnerships
Investment limited partnerships authorised by the Central Bank after 13 February 2013 are no longer deemed investment undertakings under Irish tax law, and are not therefore subject to the exit tax rules that apply under the investment undertaking tax regime. Subject to certain reporting requirements, investment limited partnerships authorised after 13 February 2013 are tax-transparent, consistent with the tax treatment of investment limited partnerships internationally.
A separate regime applies to Irish authorised CCFs, being funds that permit pension assets to be pooled in a tax-transparent structure.24 A CCF is treated as tax-transparent for Irish tax purposes provided the unitholders are institutional investors and certain reporting requirements are met. As a consequence, a CCF can facilitate pooling while ensuring that the double taxation treaty benefits normally enjoyed by pension funds are not affected by investing through a CCF.
iv Taxation of investment managers
An Irish resident investment manager would normally be taxed on its trading profits at the corporation tax trading rate of 12.5 per cent. Ireland's low corporation tax rate on trading profits compares favourably with corporation tax rates in other EU and OECD countries. Management services provided by an investment manager to an authorised fund are generally exempt from VAT. In addition, the use of an Irish investment manager by a foreign UCITS will not of itself bring the foreign UCITS within the charge to Irish tax where certain conditions are met.25
v Private equity
Private equity investors that choose not to invest through an Irish authorised fund could invest through a standard Irish company, in which case profits would be taxed at either 12.5 or 25 per cent. Tax-neutrality at the entity level could be achieved, if appropriately structured, by the use of a company qualifying for the Irish Section 110 regime, or a tax-transparent partnership or limited partnership, to invest.
REITs offer a modern collective ownership structure for Irish and international investors in real property. Provided that various conditions as to diversification, leverage restrictions and income distributions are met, an Irish REIT is exempt from Irish corporation tax on income and gains arising from its property rental business. Investors in a REIT are liable to Irish tax on distributions from the REIT. In the case of non-Irish resident investors, income distributions from the REIT are subject to dividend withholding tax (currently 20 per cent), although certain non-residents may be entitled to recover some of the tax withheld or otherwise should be entitled to claim credit against taxes in their home jurisdictions. Non-resident pension funds may also be eligible for exemption.
With effect from 1 January 2017 a new tax regime apples to regulated funds that invest in Irish real estate and related assets. Where a regulated fund derives at least 25 per cent of its value from assets that are Irish real estate, shares in unquoted real estate companies, Irish REITs and certain debt securities issued by Irish securitisation companies, then the fund will be considered to be an IREF. An IREF may be required to impose a 20 per cent withholding tax on a percentage of the amount paid on events such as the making of a distribution to investors or the redemption of its units. There are certain classes of investors that are exempt from the withholding tax, primarily Irish-taxable investors.
viii Recent developments
The introduction of a new regulated vehicle in Ireland, the ICAV, has proven to be a welcome development to expand the attractiveness of Ireland's authorised fund offering. Unlike the preceding Irish corporate regulated fund, the variable capital investment company, the ICAV as a private limited company allows US-taxable investors to treat the fund as a 'check-the-box' vehicle for US tax purposes. In so doing, the ICAV may avoid certain adverse tax consequences for US-taxable investors who invest in structures that may be deemed as a passive foreign investment company for US federal income tax purposes.
Ireland was one of the first countries to enter into an intergovernmental agreement (IGA) with the United States with respect to the Foreign Account Tax Compliance Act (FATCA) provisions of the US Hiring Incentives to Restore Employment Act 2010 in December 2012. Under the IGA, FATCA compliance will be enforced under Irish tax legislation, including the Financial Accounts Reporting (United States of America) Regulations 2014, and reporting rules and practices. Subject to certain exceptions, Irish authorised funds are generally reporting financial institutions for FATCA purposes, and are subject to FATCA due diligence and reporting requirements. Irish financial institutions that are within its scope are required to register and obtain a global intermediary identification number to avoid a 30 per cent withholding on their US-sourced income and proceeds from the sale of certain US income-producing assets. The Irish Revenue Commissioners will receive similar information from the Internal Revenue Service regarding Irish taxpayers. Ireland has also adopted the common reporting standard (CRS), which is the new global standard on the automatic exchange of information designed to combat tax evasion. The CRS regime requires certain investment entities (including Irish investment funds) to report certain information relating to investors to their local tax authority.
In terms of the financial services industry in Ireland, Ireland has seen a significant amount of UK-based investment banks, insurance companies and investment firms put into effect plans to relocate some or all of their business here in order to ensure continued access to European markets post-Brexit. However, while Brexit may be a positive for the Irish financial services sector, it is expected this will be more than offset by adverse consequences for large parts of the Irish economy. As we move ever closer to Brexit, Ireland remains very focused on ensuring it is prepared for whatever form of Brexit that emerges.
1 Kevin Murphy and Elizabeth Bothwell are partners, David O'Shea and Sarah McCague are of counsel and David Kilty is a senior associate at Arthur Cox.
2 Established under the Pensions Act 1990 (as amended).
3 The UCITS Regulations implement the UCITS Directive in Ireland.
4 The AIFM Regulations implement the Alternative Investment Fund Managers Directive in Ireland.
5 For further information on this point, see Section VII.vii.
6 Companies (Amendment) Act 1982 (Section 13(2)) Order 2004.
7 Directive 2003/71/EC of the European Parliament and the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC.
8 Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, as amended by Directive 2013/50/EU.
9 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids.
10 Irish Funds Statistics – 2018.
11 Central Bank of Ireland industry Registers.
12 Insurance Ireland Fact File 2016.
13 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and the Reinsurance (Solvency II).
14 European Union (Insurance and Reinsurance) Regulations 2015.
15 Directive 2016/2341/EU.
16 The Investment Occupational Pension Schemes (Investment) Regulations 2006 (as amended by Occupational Pension Schemes (Investment) (Amendment) Regulations, 2007, Occupational Pension Schemes (Investment) (Amendment) Regulations 2010 and European Union (Occupational Pension Schemes Investment) (Amendment) Regulations 2016).
17 Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.
18 Directive 2001/108/EC of the European Parliament and of the Council of 21 January 2002 amending Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to UCITS, with regard to investment in UCITS.
19 Commission Directive 2007/110/EC of 19 March 2007 implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to UCITS as regards clarification of certain definitions.
20 AIF Rulebook (current edition).
21 The AIFMD is the European legislation that governs managers of AIFs (AIFMs), and in the first instance requires that all AIFMs be appropriately authorised to manage AIFs that are established or marketed in
22 Regulation (EU) 2017/1131 of the European Parliament and of their Council of 14 June 2017 on Money Market Funds.
23 Section 739B of the Taxes Consolidation Act 1997 (TCA) applying in respect of Irish authorised funds established on or after 1 April 2000, and certain pre-31 March 2000 International Financial Services Centre funds.
24 Section 739I of the TCA.
25 Section 1035A of the TCA.