I OVERVIEW OF RECENT ACTIVITY
Brexit continues to be the most significant development affecting the financial services sector in Ireland and across the EU. Uncertainty around Brexit dominated the early part of 2019, with the UK due to leave the EU on 29 March 2019. Following an initial agreement to extend the Article 50 deadline, a second extension was agreed on 11 April 2019 providing an extension until 31 October 2019 at the latest. Therefore, at the time of writing, the shape Brexit ultimately will take remains to be seen. However, throughout the early part of Q1 2019 a number of legal and regulatory arrangements had been made at EU, UK and Irish level in anticipation of a potential 'no-deal' Brexit scenario. Some of the key developments of relevance for investment funds and managers are set out in Section VI below. These arrangements originally anticipated a 29 March 2019 Brexit date but their importance will come back into focus later this year as we move closer to 31 October 2019.
Ireland has proven to be a popular destination for UK firms looking to relocate or establish fund management companies in advance of Brexit. In addition, the Irish government has continued to commit its strategic support to the financial services sector. On 26 April 2019, the Irish government unveiled its new 'Ireland for Finance' strategy (IFS 2025) for the further development of the financial services sector in Ireland to 2025 (building on its previous IFS 2020 strategy). The vision of the strategy is to continue the development of Ireland as a top-tier location of choice for specialist international financial services. IFS 2025 includes objectives across four pillars in relation to (1) operational environment (ensuring that policies, culture, and legislative conditions support growth); (2) technology and innovation (providing a collaborative approach to addressing emerging challenges and opportunities); (3) talent (ensuring a continued supply of skilled individuals to meet the demands of the growing sector); and (4) communications and promotion of the jurisdiction. The employment target for IFS 2025 is to reach 50,000 people in direct employment in the sector by 2025. IFS 2025 will be implemented through a series of annual action plans that set out key priorities and actions for each year until 2025.
Therefore, while Brexit has been challenging for the financial services sector, Ireland has been and continues to be well placed to offer solutions for UK based financial services firms and, with the strategic support of the Irish government the Irish financial sector is well positioned to continue its rapid development over the coming years.
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.iv, 'Recent developments – alternative investment funds and private equity').
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 had over €2.64 trillion in net assets in March 2019 (up 9 per cent from €2.4 trillion at the end of 2018). This means the industry has now quadrupled in size in the last decade. While the majority of assets under management are held in UCITS funds, Irish-domiciled AIFs had in excess of €671 billion in net assets in March 2019.10 The majority of the investment in these regulated investment funds comes from non-Irish institutional investors.
ii Insurance and reinsurance
As of 11 June 2019, there were 43 life insurers, 97 non-life insurers (including captives) and 61 reinsurers (including captives and special purpose reinsurance vehicles) with head offices in Ireland. There were a further 14 life insurers and 35 non-life insurers with branches in Ireland. In addition, 167 life insurers and 874 non-life insurers operate in Ireland on a freedom-of-services basis pursuant to the relevant EU directives.11 In its Fact File 2017 publication, Insurance Ireland indicated that life insurance policyholder funds managed by its members amounted to €114.811 billion in 2017. Of this, 58.1 per cent was invested in equities, 23.5 per cent in gilts, 4.3 per cent in property, 9.8 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 exceeds €147.6 billion (figure at the end of 2017), 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, however, published the results of its defined benefit scheme review of 2018 statistics (based on the annual actuarial data returns submitted to it by 31 March 2019). The asset allocation of the 582 active and frozen defined benefit schemes in Ireland (with assets of €65.6 billion) is as follows:
- 28.4 per cent in equities;
- 33.0 per cent in EU sovereign bonds;
- 9.0 per cent in other bonds;
- 4.8 per cent in property;
- 3.0 per cent in cash;
- 0.1 per cent in net current assets;
- 0.0 per cent in with profit insurance policies; and
- 21.7 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 matured into implemented in late 2018 and early 2019, for many investment firms in the UK and some global investment firms, Ireland 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.
The Irish Implementing Regulations,15 which transpose Directive (EU) 2016/97 on insurance distribution (Insurance Distribution Directive) (IDD) in Ireland came into effect on 1 October 2018. The IDD represents a noteworthy departure from the manner in which insurance and reinsurance distribution is regulated. In particular, 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 2018 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 domestic legislation transposing 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. The IORP standard will continue in force in Ireland until the introduction of domestic legislation to transpose the IORP II Directive,16 which is now overdue (transposition of the directive was required before 14 January 2019). Transposition has been delayed not least by judicial review proceedings relating to single member pension schemes. While the Irish government has indicated that it is working towards transposition as soon as possible, at the time of writing no definitive timeline has been confirmed. The main requirements of IORP were transposed in Ireland through the Investment Regulations,17 which also required trustees to invest in accordance with the prudent person rule in addition to their obligation 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),18 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, again, in February 2019 it was agreed that the exemption from the requirement would continue for another two years, with the possibility of two one-year extensions if insufficient progress is deemed to have been made on solutions to deal with outstanding issues regarding 'the cash collateral problem'.
New reporting requirements for pension schemes have been introduced by the European Insurance and Occupational Pensions Authority (EIOPA) and the European Central Bank, by regulation published in the Official Journal of the European Union on 26 January 2018. This regulation came into force on 15 February 2018 and the first annual reporting deadline is Q4 2019. This regulation requires certain pension funds to report, on a quarterly and annual basis, detailed data on assets, liabilities and members.
There are reduced reporting requirements for pension funds based on their assets or size of membership. The reporting requirements apply as of the third quarter of 2019 for quarterly reporting and as of 2019 for annual reporting, taking into account the transitional period and proportionate approach for smaller IORPS. The Central Bank of Ireland is responsible for the collection, compilation and transmission of this statistical data.
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 Directive19 and the Eligible Assets Directive20 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.21 The AIFMD Regulations implement the AIFMD into Irish law.22 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. 23
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 developments – alternative investment funds and private equity
Potential enhancements in investment limited partnership developments
In June 2019, the Irish government approved the publication of the Investment Limited Partnership (Amendment) Bill 2019 (ILP Bill). The Bill, which is on the government's priority legislation list and is also a key deliverable in the government's IFS 2025 Strategy (see Section I), is an important part of Ireland's strategy to develop its international financial services sector and to take advantage of the growth in non-banking finance in Europe. The aim of the ILP Bill is to enhance Ireland's attractiveness as domicile for private equity funds.
The existing legislation governing private equity funds in Ireland is now over 20 years old and the proposed amendments provide the opportunity to update the legislation to reflect the developments at a European level in investment funds regulation. Some of the enhancements proposed include: (1) alignment of ILP structures with other Irish fund structures, including provision for the establishment of umbrella ILPs with the possibility of having separate compartments or sub-funds with segregated liability; (2) extension of safe-harbour permissions for limited partners to act without affecting their limited liability; and (3) measures intended to ease administrative burdens around the operation of ILPs and clarification around rights and obligations of limited partners. While the publication of the ILP Bill is the first stage of the legislative process, the changes proposed in the ILP Bill are welcome and, if enacted, would enhance Ireland's position as a domicile of choice for investment managers particularly in the private equity, infrastructure, credit and private asset space.
Cross-border distribution of UCITS/AIFs
In March 2018, the European Commission proposed amendments to both the UCITS Directive and AIFMD aimed at removing identified regulatory barriers to the cross-border distribution of investment funds. On 5 February 2019, political agreement on these proposals was reached in the form of a draft Regulation and Directive. The proposals were adopted together at first reading at the European Parliament's April 2019 plenary session and were published in the Official Journal of the EU in May 2019 after which the Regulation will be directly applicable 24 months later and accordingly, Member States will have 24 months to transpose the requirements of the Directive. The proposed changes to the UCITS Directive and AIFMD will help reduce current frictions in marketing of funds within the EU. The key legislative changes also include a definition of 'pre-marketing' under AIFMD, which will permit alternative fund managers to more easily test the appetite of potential professional investors in new markets. The increased standardisation of marketing rules within the EU is a welcome development for Irish funds, which are sold extensively throughout the EU.
Brexit: preparations for a no-deal scenario
As discussed in Section I, some of the most significant developments in the regulatory landscape in Ireland during the year relate to measures adopted in early 2019 in anticipation of a potential no-deal Brexit. Some of the key measures adopted that are of relevance to Irish funds and management companies are set out below.
Both the UCITS Directive and AIFMD permit third-country delegation of investment management under specified criteria and many Irish funds and management companies delegate the investment function to portfolio managers based in the UK that are regulated by the Financial Conduct Authority (FCA). On 1 February, the European Securities and Markets Authority (ESMA) confirmed that it had agreed a Memorandum of Understanding, on behalf of the EU27 national regulators, with the FCA, which ensures that delegation of portfolio management from Irish funds/management companies to UK-based portfolio managers could continue post-Brexit even in the event of a hard Brexit.
CP86 location rule
On 4 February, the Central Bank released a Notice of Intention regarding the location requirement for directors and designated persons of Irish fund management companies. This rule requires that a minimum number of directors and 'designated persons' be EEA-resident (e.g., at least half of the managerial functions required to be discharged by firms should be performed by at least two EEA-resident designated persons). The Notice confirms that, in a hard-Brexit scenario, the Central Bank will not immediately move to treat the UK as a third country for the purposes of this requirement. This came as a welcome clarification for the Irish management companies of fund promoters whose UK-based staff serve as directors and designated persons for those Irish entities.
UK AIFMs of Irish funds
The Central Bank confirmed in an update to its AIFMD Q&A that an Irish authorised QIAIF will be permitted to designate a UK AIFM as its AIFM, provided that the QIAIF and its UK AIFM comply with the provisions of the AIF Rulebook that apply in the case of QIAIFs with 'registered' or sub-threshold AIFMs. However, as the AIFM will be a non-EU AIFM, marketing of the QIAIF by the AIFM into other EU Member States under the AIFMD passport will no longer be permitted and will instead be subject to Member States' national private placement regimes.
Marketing in the UK post-Brexit – temporary permissions regime
On 7 January, the notification period under the FCA's temporary permissions regime (TPR) for firms and funds opened. The TPR provided a backstop in the event that there was no transition period and the passporting regime falls away upon a hard Brexit. Accordingly, funds or fund managers could notify the FCA of their intention to continue marketing funds in the UK post-Brexit. The closing date for notifications was originally 28 March but ultimately extended to the end of October 2019 in light of the extended Brexit date.
Settlement – European Commission grants temporary equivalence to UK CSDs
The European Commission has adopted a temporary equivalence decision in respect of UK authorised central securities depositories (CSDs). This means that in the event of a hard Brexit, UK CSDs, such as CREST, can continue to provide their services within the EU for a specified period. This was a welcome move for Irish securities market participants in particular as most trades in Irish securities are settled in the UK via CREST. Therefore, the inability to use CREST post-Brexit would have caused significant disruption to the Irish securities market. ESMA has since confirmed that in the event of a 'no-deal' Brexit, that Euroclear UK and Ireland Limited is recognised to provide its services as a CSD in the EU.
While the above measures were adopted in anticipation of the original March 2019 Brexit date, they will become increasingly important as we move towards the 31 October Brexit deadline.
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.24 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 Section VII.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.25 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.26
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 relocate some or all of their business here in order to ensure continued access to European markets post-Brexit. However, while Brexit may likely be challenging for the Irish economy as a whole, the regulatory measures adopted in Ireland, the EU and UK as discussed in this chapter should help shield the Irish financial services sector from some of the worst effects of the potential disruption caused by Brexit and with the continued support of the Irish government, Ireland can be optimistic with regard to the continued development of the sector.
1 Kevin Murphy, Elizabeth Bothwell and David Kilty are partners, David O'Shea is of counsel and Michael Shovlin 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 – 2019.
11 Central Bank of Ireland industry Registers.
12 Insurance Ireland Fact File 2018.
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 European Union (Insurance Distribution) Regulations 2018.
16 Directive 2016/2341/EU.
17 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).
18 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.
19 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.
20 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.
21 AIF Rulebook (March 2018).
22 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
23 Recent enhancements in the LO-QIAIF regime allowing managers of AIFs more flexibility to manage broader credit strategies within a LO-QIAIF structure are discussed in the Irish chapter of the seventh edition of this publication.
24 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.
25 Section 739I of the TCA.
26 Section 1035A of the TCA.