WHAT ARE PROFESSIONAL INVESTMENT FUNDS (PIFS) ?
Local legislation contemplates a Professional Investor Fund (also known as a “PIF”) as a particular type of CIS that can be used for setups commonly referred to as “hedge funds” or “alternative investment funds”. A PIF is essentially a non-retail CIS which can be either private or public in nature. PIFs are specifically designed to attract high net worth investors with limited regulation and oversight. The underlying assets in which PIFs can invest range from transferable securities, private equity, immovable property and infrastructure, to the more complex asset classes such as derivatives.
PIFs typically enjoy the fast processing of licensing procedures, and the MFSA does not apply burdensome obligations to these types of CISs. The MFSA’s principle objective is to impose less onerous obligations regarding information and documentation, especially when service providers are appointed to carry out activities which require licensable activities.
There are three types of PIFs, each with their own characteristics and obligations:
1. PIFs promoted to Experienced Investors
- Entry level set at €10,000 / $10,000
- Direct borrowing and leverage via use of derivatives is limited to 100% of NAV
- A minimum set of investment restrictions must be adhered to
- Subject to the oversight of a custodian which is required to monitor the fund and ensure compliance with investment restrictions
2. PIFs promoted to Qualifying Investors
- Most common and practical approach seeking widest flexibility in terms of investment strategies
- Promoted to investors with a higher degree of financial sophistication
- Entry level to a Qualifying PIF is set at €75,000 / $75,000
- No monitoring/oversight responsibilities required from the custodian.
3. PIFs promoted to Extraordinary Investors
- Similar in nature to a Qualifying PIF
- A minimum investment of €750,000 / $750,000 with no investment restrictions
- Unlimited leverage
- Appointment of a custodian is not mandatory (provided assets are subject to adequate safekeeping arrangements)
- No need to publish Offering Memorandum – Marketing document would suffice
ONGOING REQUIREMENTS FOR PIFS IN MALTA
The rules applicable to PIFs are formulated as Standard License Conditions (SLCs) established by the MFSA and set out in the Investment Services Rules for Professional Investor Funds. The MFSA may agree to disapply or amend these SLCs (where the circumstances justify such treatment, as long as investors are adequately protected) and/or to impose supplementary conditions.
SELF MANAGED PIFS IN MALTA
It is possible for PIFs to be set up as self-managed funds. In this case, the PIF would be subject to a minimum capital requirement of €125,000 and certain other supplementary licensing conditions. Self-managed PIFs may establish an in-house Investment Committee, which is expected to hold the majority of its meetings in Malta. The Investment Committee may delegate the day-to-day investment management of the assets of the PIF to one or more Portfolio Manager/s, who will effect day-to-day transactions within the investment guidelines set by the Investment Committee and in accordance with the investment objectives, policy and restrictions described in the fund’s Offering Document/Marketing Document.
THE APPLICATION PROCESS FOR PIFS IN MALTA
The Preparatory Phase
- PIF promoters prepare a detailed proposal of their activities and discuss the terms at meetings with the MFSA.
- The MFSA will respond with guidance and clarifications as necessary.
- A draft application form together with all the required supporting evidence is submitted by the promoters.
- The documents will be reviewed by the MFSA and additional information may be requested.
The Pre-Licensing Phase
When all review points noted in the draft application are resolved, the MFSA will issue an ‘in principle’ approval for license. PIF promoters must:
- Finalise any outstanding issues.
- Submit a signed final application form together with all supporting document.
A license will be issued once all pre-licensing issues are resolved.
The MFSA may only license a PIF if it is satisfied that the PIF will comply in all respects with the relevant legislation, regulations and rules and that its directors and officers, or in the case of a unit trust or limited partnership, its trustee(s) or general partner(s) respectively, are fit and proper persons to carry out the functions required of them in connection with the scheme.
The Post-Licensing / Pre-Commencement of Business Phase
The MFSA will determine whether the applicant needs to satisfy any post-licensing matters before formal commencement of business can begin. The MFSA has the right to vary or revoke any service license conditions (SLC) or to impose new conditions.
The MFSA would ordinarily require the following documents in support of an application for a CIS license by a PIF:
- Application Form
- Application Fee
- A Near final draft of the offering document
- A copy of the appropriate approval of the Offering Document by the Board of Directors of the PIF
- A near final draft of the Memorandum and Articles of Association of the PIF, or other constitutive document if the PIF is not in corporate form
- Personal Questionnaires of each proposed director of the PIF
- Personal Questionnaires of the Directors and Qualifying Shareholders of external service-providers (i.e. those shareholders holding more than 10% of the shares in such entities) but only if such service providers are operating from non-Recognised Jurisdictions.
Details of the PIF’s proposed Local Representative (where applicable).
COLLECTIVE INVESTMENT SCHEME TAXATION
Malta offers a favourable tax regime for CISs (including PIFs and UCITS) and has a comprehensive Double Tax Treaty network.
For tax purposes, a distinction is made between prescribed and non-prescribed funds. Essentially, a fund in a locally based scheme that has assets situated in Malta constituting at least 85% of its total asset value is classified as a Prescribed Fund; other licensed funds, including funds in an overseas-based scheme, are Non-prescribed Funds.
In the case of Prescribed Funds, the CIS qualifies for exemption from tax on income “other than income from immovable property situated in Malta and investment income” earned by the Prescribed Fund. The withholding tax on local investment income is 15% for bank interest and 10% for other investment income.
There is no withholding tax on investment income received by Non-prescribed funds (including overseas based CISs), which are exempt from tax on income and capital gains realized on their investments and also enjoy a blanket stamp duty exemption on their transactions. There is also no Wealth or Net Asset Value Tax in Malta.
Foreign investors are not subject to Maltese tax on capital gains or income when they dispose of their investment (through redemption by the Fund or disposal to a third party) or when they receive dividend or other income from the Fund. These would be entitled to benefit from the stamp duty exemption obtained from the fund in connection with the acquisition or disposal of their units in the Fund.
MAIN ADVANTAGES OF PIFS IN MALTA
- The level of costs involved is relatively low and very competitive.
- Malta’s single regulator and supervisor, the MFSA, is approachable and seeks to provide a timely and efficient service.
- PIFs are licensed by the MFSA but are not subject to detailed regulatory requirements by the regulating authority.
- PIFs can be self-managed without the need to appoint a third party manager.
- A PIF can also appoint an external Investment Manager which is regulated in a country which is not a Recognised Jurisdiction. In this case, the MFSA would normally carry out an assessment on the regulatory requirements applicable to the Investment Manager.