Collective Investment Schemes and Hedge Funds

Malta offers a robust and comprehensive legal framework for the establishment of various types of investment funds within the European Union, with the following main attractions:

• A choice of Professional Investor Funds (or “PIFs”), Private Collective Investment Schemes (limited to 15 individuals who are close friends or relatives), Collective Investment Schemes (“CIS”) and UCITS, which offer varying levels of regulatory requirements according to the nature of the targeted investors.
• Possibility of re-domiciling or migrating existing hedge funds from other financial centres to Malta, thereby ensuring a seamless continuity of the fund and its investments.
• Availability of multi-class protected cell companies within the same investment company, enabling the creation of separate sub-funds with varying investment objectives.
• Possibility of having various service providers (such as its manager, investment advisor, prime broker, administrator or custodian) based outside Malta, subject to consideration and approval of the regulator.
• Time-sensitive handling of all applications by the regulator. Target time-frames are of 7 days for issue of licence for Malta PIFs and of 3 months for CIS or UCITS schemes, subject to the submission of a complete application form.
• Investment schemes may be established as open-ended (SICAVs), close-ended (INVCO), mutual funds or unit trusts.
• UCITS funds satisfying the legal and regulatory requirements set out in the UCITS Directive 85/611/EC may avail themselves of a larger market for the sale of their units by “passporting” their units into any EEA or EU member state without the requirement of a fresh license in each member state.
• Cost-effective regulatory and professional fee structures.
• High level of professional services and presence of all major audit firms.
• All business is conducted in the English language, providing international clients with a more comfortable working environment.

Taxation of Collective Investment Schemes in Malta

Malta-registered Collective Investment Schemes are generally not subject to Malta tax. When properly structured, such schemes would benefit from the following:

• No income or company tax is imposed on hedge funds having more than 85% of their underlying assets situated outside Malta;
• No tax on the Net Asset Value of the scheme;
• No withholding tax on dividends paid to non-residents;
• No taxation on capital gains on the sale of units by nonresidents;
• No stamp duty on issues or transfers of units;
• No taxation on capital gains on the sale of shares or units by residents provided such shares/units are listed on the Malta Stock Exchange (MSE);

The Regulation of Collective Investment Schemes in Malta

What constitutes a Collective Investment Scheme?

Types of Schemes

Whilst the nature, structure and operation of each fund will depend on the purpose and objectives of that fund, you can read more about the general features of the most common types of collective investment schemes availed of in terms of Maltese law by clicking on the links below:

1. Professional Investor Fund (PIF)
2. UCITS compliant funds

Licensing

The Licensing of CISs is carried out under the authority of the MFSA. The appropriate CIS licence must be obtained before the scheme may begin issuing or creating any units or carrying on any activity, whether in or from within Malta or any other territory outside Malta, although initial steps may be taken towards establishing the fund.

Thus, any foreign fund intending to carry on any activity in Malta and any Maltese fund intending to carry on any activity outside Malta must, before carrying on any such activities, obtain a suitable license. Each fund and, in the case of umbrella companies, each sub-fund requires separate licensing.

Any breach of the provisions of the Investment Services Act is a criminal offence.

The Application Process

Obtaining a licence requires the completion of the relevant application form which essentially serves the purpose of identifying the objects of the scheme, the identity and competence of each of its directors and officers, the kind of investors to whom the fund is expected to be marketed, and other information relating to the structuring and operation of the scheme.

In considering applications for CIS licences, the MFSA is principally required to give due regard to the following in considering a licence application:

1. the degree of protection afforded to the investors;
2. the degree of protection to the reputation of Malta taking into account Malta’s international commitments;
3. the promotion of competition and choice; and
4. the reputation and suitability of the applicant and all other parties connected with the scheme.

The MFSA will only grant a Collective Investment Scheme Licence if it is satisfied that the fund will comply in all respects with the relevant regulations and that its directors or and officers, or in the case of a unit trust or limited partnership, its trustees or General Partner respectively, are fit and proper persons to carry out the functions required of them in connection with the PIF- the “Fit and Proper Test”.

This is a fundamental regulatory concept which requires that qualifying shareholders (i.e. founding shareholders holding 10% or more in the fund), directors, officers, Trustees and/or General Partners (as the case may be) and senior staff of the fund must demonstrate solvency, competence and integrity in all their dealings, both at licensing stage and on an on-going basis. In the course of its considerations the MFSA will consider the experience, standing, competence and track record of all parties who will be involved in the fund and will require substantial disclosure in the form of detailed Personal Questionnaires which must be duly completed by each relevant person.

Each application is assessed on its own merits and on the basis of relevant circumstances and considerations. In the case of schemes available to the public, the standard license conditions would usually apply, whilst in the case of schemes which are only made available to restricted classes of knowledgeable investors, such as Professional Investor Funds, such conditions would apply only insofar as they are not derogated or altered by the MFSA.

The processing of a Collective Investment Scheme Licence generally takes between six and twelve weeks from the date that an application complete in all respects is submitted to the MFSA. In the case of Malta PIFs having a third party Manager and all service-providers based and regulated in reputable jurisdictions, the MFSA is committed to respond to licence applications within 7 business days, provided that all relevant documentation (including the application form) has been properly completed and attached to the application form

The application process can be broken down into three distinct phases as follows

Phase One – Preparatory

• Submission of preliminary outline of proposal by promoters to the MFSA;
• Submission of a draft Application Form, together with supporting documentation and payment of the non-refundable application fee/s. The draft Application form and the supporting documentation will be reviewed by the MFSA and comments provided to the Applicant within 3 weeks from submission of the application documents
• “Fit and proper” checks begin at this stage. This entails following up all the information which has been provided in the Application documents submitted. This includes contacting overseas regulators (where applicable) and referees.
• The applicability of the relevant Standard Licensing Conditions is determined by the MFSA depending on the nature of the proposed scheme. These licence conditions are very important since they represent the ongoing requirements to which the Applicant will be subject, once licensed.

Phase Two – Pre-Licensing

• Authority issues its “in principle” approval for the issue of a licence;
• Submission of signed copies of the revised application form together with supporting documentation in their final format;
• Finalisation of any outstanding matters, and resolution of any other issues raised during the application process.

A licence will be issued as soon as all pre-licensing issues are resolved.

Phase Three – Post Licensing/ Pre-Commencement of Business

The Applicant may be required to satisfy a number of specific post-licensing matters prior to formal commencement of business.

For further information about how Zammit & Associates – Advocates can help you with your financial services requirements kindly contact us on finance [at] zammit-law [dot] com.