Taxation Of Collective Investment Funds And Availability Of Treaty Benefits

Author:Mr David Lawless and Sean Murray
Profession:Dillon Eustace


Ireland has long been recognised as a destination of choice for investment funds. As an international fund domicile, Ireland ranks amongst the most flexible and advantageous in the onshore world due, in no small part, to the wide variety of investment fund vehicles that may be established under the Irish regulatory system. Ireland has in its favour: a developed national infrastructure, a highly competent and skilled workforce, political stability, a favourable regulatory system and, most importantly, a willingness on the part of the Irish regulatory and tax authorities, specifically the Central Bank of Ireland, the Irish Stock Exchange and the Irish Revenue Commissioners (IRC), to adapt and develop regulations to keep pace with international developments.

Between 2001 and 2009, Ireland increased its proportion of European cross-border assets by 367%, accounting for over 30% of the European cross-border market.1 Undertakings for Collective Investment in Transferable Securities (commonly referred to as UCITS) account for 80% of Irish domiciled assets and Irish UCITS are distributed in over 60 countries worldwide.2 As of October 2010, 4,763 Irish domiciled funds were in existence with an estimated net asset value of EUR 906,401 million. It is the fund domicile of choice for over 388 different fund promoters.

As such, the Irish funds industry plays an important role in the global investment funds market and supports initiatives to increase tax treaty access for collective investment vehicles (CIVs).

Type of Taxation of Irish Funds

Investment Fund Types

Ireland's regulatory regime provides for the establishment of a wide variety of investment fund types (referred to herein as "fund" or "funds"). Fund categories can be broadly split between UCITS and non-UCITS funds.

UCITS are the most common vehicle, as they can be sold in other Member States without a requirement for additional authorisation (the "European passport"). Ireland, however, also has non-UCITS funds, which include retail schemes, professional investor funds (PIFs) and qualifying investor funds (QIFs). The QIF regime is, by far, the most popular type of non- UCITS fund established in Ireland. QIFs are subject to a minimum subscription of EUR 100,000 and are only available to (1) an investor who is a professional client within the meaning of Annex II of Directive 2004/39/EC (Markets in Financial Instruments Directive, MiFID); (2) an investor who receives an appraisal from an EU credit institution, a MiFID firm or a UCITS management company that the investor has the appropriate expertise, experience and knowledge to adequately understand the investment in the QIF; or (3) an investor who certifies that s/he is an informed investor by providing confirmation regarding knowledge, expertise and understanding. The quid pro quo for these sales restrictions is that QIFs have no borrowing or leverage restrictions, virtually no investment restrictions and benefit from lighter touch regulation than other Irish regulated funds.

A QIF can be authorised by the Central Bank on a filing only basis. In practical terms, this means that once the QIF meets certain agreed parameters, including the requirement that the parties involved in the operation of the QIF meet certain criteria, the Central Bank does not review the fund's application. Provided the Central Bank receives a completed application for the authorisation of the QIF before 3:00 p.m. Irish time on a particular business day, the QIF will be authorised the following business day.

The Irish Central Bank requires that the QIF (or the Irish management company in respect of a unit trust) issue a prospectus (it may issue separate prospectuses in respect of cells or individual classes), which, together with the constitutional document and signed material contracts, must be submitted to the Central Bank by the QIF's legal advisers on the business day prior to the proposed authorisation date of the QIF. The QIF's legal advisers will also complete the Central Bank's application form. The application form requires certification from the QIF or its management company, as appropriate, in relation to the contents of the form and the documentation. The custodian of the QIF is required to provide confirmation in relation to the custody agreement.

Fund legal structures

In General There are various structures that funds may take, from unit trusts to corporate funds, from investment limited partnerships to common contractual funds (CCFs). Although, from an administrative point of view, each vehicle functions in a similar way, with the value of its shares/units/participations fluctuating in line with the value of its underlying assets, each vehicle is subject to different legislative provisions. The following provides a summary of each form.

Corporate Funds

A fund that is structured as a variable capital investment company may be established pursuant to (1) the UCITS Regulations or (2) the provisions of Part XIII of the Companies Act, 1990 (for non-UCITS vehicles). A fund that is structured as a variable capital investment company must be incorporated as a public limited company. Such corporate funds are incorporated entities with separate legal personality. They have the capacity to enter into contracts and to sue and be sued. Their day-to-day management and control is provided by a board of directors, with ultimate control resting with shareholders.

Unit Trusts

A unit trust may be established in Ireland pursuant to the Unit Trusts Act, 1990 (for non- UCITS vehicles) or pursuant to the UCITS Regulations. A unit trust is a fund vehicle created by written agreement between a manager and a trustee known as a trust deed. A unit trust does not have a separate legal existence, does not have the capacity to contract and cannot sue or be sued in its own name.

The assets of a unit trust are held by its trustee (in its capacity as custodian) and are managed by its manager who may appoint one or more investment managers/advisers. Contracts in relation to the management and administration of the trust fund are entered into by the manager, whereas the trustee enters into contracts in relation to the assets themselves, such as bank deposits, security agreements, etc.

Investment Limited Partnership

An investment limited partnership is a partnership between one or more general partners and one or more limited partners. The principal business of an investment limited partnership is expressed in the partnership agreement. It should be noted, however, that this type of structure is rarely used and can only be established as a non-UCITS fund.


Another example of Ireland's innovative fund industry is the introduction of the CCF in 2003 to enable pension funds and trustees or custodians of pension funds to pool their investments (asset pooling) in a tax efficient manner. Originally devised as a UCITS structure limited to pension funds (or trustees or custodians of such pension funds), the CCF was further enhanced in 2005 by the Investment Funds, Companies and Miscellaneous Provisions Act, 2005, which provided for the establishment of a non-UCITS CCF and allowed for the investor base to be expanded (essentially to include all pension funds, institutional investors and corporate entities).

A CCF is constituted under contract law by means of a deed of constitution executed under seal by a management company. The deed provides for the safekeeping of assets of the CCF by a custodian, who is also a party to the deed, and specifies the fiduciary responsibilities of the custodian that...

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