Various legal and regulatory developments in the Irish
financial services industry over the past 12 months have
attracted Japanese interest in domiciling and listing certain
types of investment products in Ireland.
As well as legislative changes to the country's investment
fund and securitization regimes, the regulatory structure for
investment funds in Ireland has been re-shaped, and further
streamlining of the fund authorization process has made Ireland
a very cost and time efficient domicile.
Hedge funds and funds of hedge funds
The year 2003 saw continued expansion of Japan's alternative
investment industry, and the need for a regulated product to
meet investor demand is unquestioned. Ireland has put itself
forward as a reputable and regulated environment, offering
greater opportunities to make hedge fund products available to
a wider array of investors, including those in Japan.
Using a prime broker
Because hedge funds are traditionally developed in
unregulated jurisdictions, a requirement to employ the services
of an independent custodian is not usually imposed. This
requirement does exist in Ireland, however the Irish regulator
has clarified its requirements for the appointment of prime
brokers, with the result that many hedge funds have been, and
continue to be, domiciled in Dublin.
The advantages of establishing a hedge fund in
Ireland, being a highly regulated jurisdiction, is
attracting hedge funds suitable in terms of their investment
strategies and investor base away from their traditional
jurisdictions. A benefit of setting up a hedge fund in Ireland
is the strict approval and supervision process compared with
that in less regulated jurisdictions. Accordingly, fund
promoters are attracted by the prospect of offering a regulated
hedge fund product.
Funds of hedge funds
As hedge funds move from the alternative to the
mainstream, there has also been significant growth in funds of
The Irish Financial Services Regulatory Authority (IFSRA)
has issued notices in this area setting out, among other
things, the rules for the acceptable types and levels of
investment for the various categories of fund available. These
have been further clarified in guidance notes, the latest
amendment being issued in September 2003. This regulatory
intervention has added certainty to this area without limiting
the product range.
In December 2002 IFSRA issued a new non-UCITS Notice (NU 25)
on Funds of Unregulated Fund Schemes, permitting the
authorization of so-called funds of hedge funds that can be
sold to retail investors. The first of these funds was
authorized in August 2003.
The relevant notice sets out the permitted levels of
investment in unregulated schemes and also specifies certain
suitability criteria applicable to such schemes. The Notice
also prescribes the level of prospectus and continuing
The year 2003 also saw the long-awaited updating of
Directive 85/611 on Undertakings for Collective Investment in
Transferable Securities (UCITS), as European Directives
2001/107/EC (Management Company Directive) and 2001/108/EC
(Product Directive), collectively known as UCITS III, came into
force on February 13 2003. Both directives were transposed into
Irish law during 2003.
Under the Product Directive, the number of asset classes in
which a UCITS can invest has increased to include money market
funds, funds of funds, cash deposits and financial derivative
instruments. Provisions have also been introduced to facilitate
the operation of index tracker funds.
The Management Company Directive authorizes the companies
managing UCITS to carry out additional activities and also
provides for a simplified prospectus to be issued by UCITS as
well as the full prospectus.
Under the changes, the expanded UCITS product should become
even more popular with Japanese promoters.
Listing funds on the Irish Stock
Many Japanese and other Asian fund promoters are
choosing to list their products on the Irish Stock Exchange
(ISE) for various reasons.
Firstly, a listing increases a fund's distribution capacity
by accessing a wider investor base, allowing promoters to
market the fund to investors prohibited from, or simply
reluctant to, invest in securities not listed on a recognized
exchange. Market authorities in numerous jurisdictions,
including Japan, have automatically recognized ISE
Secondly, an ISE listing carries with it an element of
prestige and visibility, particularly because Ireland is a
member of both the OECD and EU. This has proved a useful
marketing tool for Japanese fund promoters, particularly
start-up hedge funds keen to raise capital in Europe.
Thirdly, an ISE listing enables the security to be marked to
market and also provides other publicly available information
The listing process starts with the appointment of a
listing sponsor, who will assess the suitability of the fund
for listing and will prepare the listing particulars and other
ancillary documents. The sponsor liaises with the ISE and
addresses any comments raised by them. For example, some of the
things that the ISE will look at include: the suitability of
the investment manager and custodian/prime broker; the level of
risk-spreading; and the transferability of shares, as set out
in the ISE rules for investment funds.
Where the applicant fund has a trading history, audited
financial information must be included in the listing
The ISE has proved to be extremely efficient in terms of the
turnaround times for reviewing draft documentation and commits
to a maximum initial review time of one week, and two to three
days for subsequent drafts. This facilitates a listing
timetable of four to six weeks in most cases.
Japanese and Asian fund promoters and promoters managing
Japanese or Asian strategy funds have found an ISE listing to
be a time and cost effective exercise and there continues to be
strong demand in this area.
Securitization and structured finance
The year 2003 was also busy for securitization and
structured finance in Ireland. The Irish Finance Act 2003 (FA
2003) has further enhanced the attractiveness of Irish special
purpose vehicles (SPVs) in terms of structural flexibility and
tax efficiency. There has also been a lot of interest in
listing specialist debt securities on the ISE.
Section 45, FA2003 has refined the Irish securitization
rules in a few important areas and, given the ever-increasing
need for transparency and professionalism, as well as the trend
away from investing in so-called tax havens, it is expected
there will be a large increase in the number, and
sophistication, of transactions using Irish SPVs.
Definition of qualifying company
Irish SPVs are operated to fall within the definition
of a qualifying company under section 110 of the Taxes
Consolidation Act 1997. Once an SPV meets the qualifying
criteria set out in this section, trading company principles
will be applied in its tax computations. Although qualifying
companies are considered to be passive vehicles (liable to 25%
corporate income tax on net profits) the Irish Revenue does not
impose any minimum profit requirements and therefore the amount
of profit left in these vehicles is usually negligible, if
After the enactment of the provisions of section 45 of the
FA 2003, the revised definition of a qualifying company now
dispenses with the requirement to obtain certification from the
Irish Department of Finance. A simple notification to the Irish
Revenue Commissioners will suffice.
Minimum holding amount and minimum holding
Among other welcome changes, the requirement that an
initial acquisition of qualifying assets from any one
originator must exceed IR£10 million ($14.94 million) has
been removed. Further, the minimum holding amount has been
reduced to €10 million ($11.75 million) and this threshold
amount may now be acquired from any number of originators.
Also, once the threshold is exceeded on the initial acquisition
it is no longer of relevance for further acquisitions by that
Before the FA 2003 the relevant legislation required that
the qualifying assets be held for a minimum period of three
months from the day the assets are first acquired. Section
45(1) of the FA 2003 removes this requirement and provides that
the market value of the qualifying assets will be assessed only
on the day on which such assets are first acquired.
Acquisition of assets
Previously section 110 required that the qualifying
assets be purchased by the SPV from an originator (which was
not a trust). The revised provisions removed the absolute
requirement for the SPV to "acquire" assets, introducing new
provisions that allow the SPV to enter "arrangements"
constituting qualifying assets or as a result of which it holds
or manages qualifying assets.
Management of assets
Finally, the revised definition of a qualifying
company adds clarity in terms of the required role of the
qualifying company vis-à-vis the qualifying
assets. Before the amendments, section 110 referred to the
management of qualifying assets. It is arguable that this may
have implied an active role for the SPV in terms of the
qualifying assets. The revised definition removes doubt from
this area by clarifying that "holding, managing, or both
holding and management of, qualifying assets" is the
Expanded definition of qualifying assets
Section 45 of the FA 2003, has also broadened the
range of qualifying assets falling within the scope of section
110. The provisions of section 45(1) add "futures, options,
swaps, derivatives and similar instruments" to the list of
financial assets that come within the definition of qualifying
assets contained in section 110(1).
The expansion of the definition ensures that, for example,
credit default swaps will be considered to be financial assets
that fall within the definition of qualifying assets. This
ensures the usefulness of Irish SPVs for synthetic
The FA 2003 also introduced the following amendments
to the tax treatment of SPVs to ensure that recent, more
sophisticated, structures may avail of the benefits that have
attracted originators and arrangers previously.
Deductibility of profit-participating interest
It is common for originators to seek to vary interest
payments made in accordance with the results of the payer and
the performance of the underlying assets, particularly where
the performance of the assets is unpredictable. Previously,
where payments of this nature resembled a dividend payment,
they were typically re-classified as such. The result was that
such payments were not deductible for tax purposes.
The amended provisions, introduced through the enactment of
section 45(4) of the FA 2003, provide that such payments shall,
subject to subsection 5, no longer be re-characterized as a
distribution and shall therefore be deductible.
Extension of withholding tax exemptions
Previously it has been significant in the development
of the Irish securitization industry that interest payments to
and from the Irish SPV may in certain circumstances be paid
free of withholding tax. SPVs incorporated in Ireland benefit
from a network of double tax treaties with other countries. As
such, interest or other payments received by Irish SPVs may be
free from withholding tax, depending on the country from which
these payments are made.
In terms of payments by the Irish SPV these have, in the
past, been made free of withholding tax where the payment is
made to a corporate located in an EU member state, or in a
country with which Ireland has concluded a double tax treaty.
In the case of interest payments to individuals it has to date
generally been necessary to avail of the "quoted Eurobond
exemption" so that such payments can be made gross.
After the introduction of section 45 of the FA 2003,
interest payments may now also be made gross to non-corporates
(for example, individuals or trusts) resident in EU or treaty
countries. This will reduce the need to structure transactions
to qualify for the quoted Eurobond exemption and therefore
removes additional structural obstacles. Of course the latter
will continue to be relevant for non-EU, non-treaty country
A further Irish withholding tax exemption was also
introduced in 2003 and is available where the Irish SPV issues
notes with a maturity of less than two years and the notes are
held in a recognized clearing system.
As a result of these changes, it is expected that Ireland
will continue to see increasing levels of securitization and
Mark Thorne is a partner in the financial services
department. He has worked extensively in the area of financial
services with particular emphasis on investment funds, local
and cross-border securitization, asset backed finance and
Conor Houlihan has been based in the firm's Tokyo office
since September 2002. Before this he worked in the financial
services department of the Dublin office. He has practised
mainly in the areas of investment funds, cross-border
securitization and repackaging transactions.
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