Professional Investor funds (PIFs)

PIFs Malta – Setting up a professional investor fund in Malta.

Setting up a PIF  (Professional investor fund) in Malta is efficient and cost effective. Here you will find the most important information about setting up PIFs.

Investment services background

The Investment Services Act 1994 (ISA) is the principal regulatory framework governing investment services license holders and Collective Investment Schemes (CISs). The Act provides for the authorisation and on-going supervision of investment services license holders and CISs operating in and from Malta.

The ISA stipulates that a license is required whenever an investment services business is to be undertaken in or from Malta and lays down the broad criteria to be applied by the MFSA when considering applications.

The ISA enforces any Investment Services Rules (ISRs) issued by the MFSA from time to time. These rules are issued and amended in order to reflect the transposition of EU directives as well as best practices of the industry.

Collective Investment Schemes in Malta

The ISA states that a CIS is any scheme which has as its object, or one of its objects, the collective investment of capital acquired by means of an offer of units for subscription, sale or exchange and which has the following characteristics:

 The CIS operates according to the principle of risk spreading; and either

 The contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or

 At the request of the holders, units are repurchased or redeemed out of the asset of the CIS, continuously or in blocks at short intervals; or

√ Units are or have been or will be issued continuously or in blocks at short intervals.

In terms of Maltese law, a CIS domiciled in Malta is not permitted to issue any units or carry on an activity in or from Malta unless it has a valid CIS license.

CISs can be established as follows:

 

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. They are considered to be too risky for the public at large, thus only certain investors will qualify to invest in PIFs. PIFs are regulated through the ISA under a separate framework which is particularly suited for CISs following alternative investment strategies and are sold internationally on a private placement basis.

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:

PIFs promoted to Experienced Investors – Experienced Investor Fund

 Available to investors who can meet criteria of an experienced investor

√ 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

PIFs promoted to Qualifying Investors – Qualifying Investor Fund

√ 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.

PIFs promoted to Extraordinary Investors – Extraordinary Investor Fund

 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

The three different types of PIFs described target different types of investors, namely experienced investors, qualifying investors and extraordinary investors.

PIF Structures in Malta

CISs, including PIFs, require a collective investment scheme license in terms of the Investment Services Act to issue or create any units or carry on any activity in or from within Malta.

A PIF may be set up as an investment company with variable share capital (SICAV), an investment company with fixed share capital (INVCO), a limited partnership, a unit trust or a common contractual fund.

A collective investment scheme may be structured as a multi-fund (umbrella) scheme, with a number of sub funds thereunder, constituted by one or more different share classes (which could be denominated in different currencies), with each sub-fund having its own investment objectives, policies and restrictions.

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.

Eligibility of investors for PIFs in Malta

Experienced Investor

‘Experienced Investors’ in PIFs must be able to demonstrate that they possess the required expertise, experience and knowledge to make investment decisions and assess the risks involved. An investor must state the basis on which s/he satisfies this definition, either:

√ By confirming that s/he is:

  • A person who has relevant work experience having at least worked in the financial sector for one year in a professional position or a person who has been active in these type of investments ; or
  • A person who has reasonable experience in the acquisition and/or disposal of funds of a similar nature or risk profile to that of the proposed PIF; or
  • A person who has carried out investment transactions in significant size at a certain frequency (for example a person who within the past two years carried out transactions amounting to at least €50,000 at an average frequency of 3 per quarter),

or

√ By providing any other appropriate justification.

Note: “Professional Clients” in terms of MiFID automatically qualify as Experienced Investors.

Qualifying Investor

A qualifying investor must satisfy at least one of the following conditions:

√ The person (or entity) has net assets in excess of €750,000. If the PIF is established as a trust, this condition applies to the net value of the trust’s net assets. Individuals must meet this threshold either on their own, or jointly with their spouse. This is a mandatory condition.

√ The person has reasonable experience in investment decisions on funds with a similar risk profile and in instruments of the proposed PIF.

√ The person is a senior employee or director of service providers to the PIF.

√ A relation or close friend of the promoters limited to ten persons per PIF.

√ An entity with at least €3.75 million under discretionary management investing on its own account.

√ The investor is a PIF promoted to qualifying or extra-ordinary investors.

√ A body corporate or partnership wholly owned by persons or entities satisfying any of these criteria that is used as an investment vehicle by such persons or entities.

Extraordinary Investor

An extraordinary investor must satisfy at least one of the following conditions:

√ The person (or entity) must have net assets in excess of €7.5 million. If the PIF is established as a trust, this condition applies to the net value of the trust’s assets. Individuals must meet this threshold either on their own, or jointly with their spouse. This is a mandatory condition.

√ The person is a senior employee or director of service providers to the PIF.

√ The investor is a PIF promoted to extraordinary investors.

√ A body corporate or partnership wholly owned by persons or entities satisfying any of these criteria that is used as an investment vehicle by such persons or entity.

Investment restrictions for PIFs in Malta

The investment and borrowing restrictions for PIFs targeting Experienced Investors as set out in Part B I of the Investment Services Rules for Professional Investor Funds (the “Rules”), which became applicable on 1st January 2010, can be summarized as follows:

√ The PIF shall comply with the investment restrictions within six months from the launch of the Scheme or upon reaching a value equivalent to €2,500,000.

√ A PIF may only enter into repurchase/reverse repurchase and stock lending or borrowing arrangements if entering into such agreements by the PIF is appropriate and in the interest of investors in the PIF, and entails an acceptable level of risk; and in accordance with good market practice, which involves the provision of adequate collateral in accordance with good market practice.

√ Investment by the PIF in Financial Derivative Instruments as part of its investment policy in order to obtain exposure to underlying assets shall be without prejudice to the limits set out in the Rules which apply in the case of direct investments in such underlying assets.

√ Direct borrowing for investment purposes and leverage via the use of derivatives is restricted to 100% of NAV. The PIF’s exposure relating to derivative instruments is calculated taking into account: the current value of the underlying asset; the counterparty risk; future market movements; and the time available to liquidate positions.

√ The PIF must be managed according to the risk spreading principle, and the following diversification requirements must be adhered to:

  • The PIF may invest up to 20% of its total assets in securities issued by the same body and up to 30% of its assets in money market instruments issued by the same body provided that:

i. The 20% / 30% limit set out above may be increased to a maximum of 100% in the case of securities and money market instruments issued or guaranteed by an OECD or EU / EEA Member State, its local authorities or public international bodies of which one or more such States are members;

ii. The 20% / 30% limit set out above may be increased to a maximum of 35% in the case of securities and money market instruments guaranteed by a credit institution authorized in the EEA or which is subject to equivalent prudential requirements;

iii. The 20% limit set out above may be increased up to a maximum of 30% in the case of transferable securities traded in or dealt on a regulated market which operates regularly, is recognised and is open to the public.

  • The PIF may invest up to a maximum of 35% of its total assets in deposits held with a single body.
  • The PIF is not subject to any investment restrictions with respect to investments in a single collective investment scheme provided that the underlying scheme is a UCITS or other open ended collective investment scheme subject to risk spreading requirements which are at least comparable to those applicable to the PIF itself. The PIF may invest up to a maximum of 30% of its total assets in any single collective investment scheme which does not satisfy the aforesaid conditions.
  • Where the PIF is a fund of hedge funds it shall invest in at least five hedge funds.
  • Where the PIF enters into OTC derivative transactions, it shall ensure that its exposure to a single counterparty is limited to 20% of its total assets. The exposure to one counterparty in an OTC derivative transaction may be reduced where the counterparty provides the PIF with acceptable collateral in accordance with good market practice to the satisfaction of the Scheme or its manager.
  • The PIF shall limit its aggregate maximum exposure (through securities, money market instrument, deposits and OTC derivatives transactions) to a single issuer / counterparty to 40% of its total assets.

√ Where the PIF has been set up as a Feeder Fund, the underlying fund shall satisfy the leverage restrictions applicable to the PIF.

√ Supplementary conditions apply to PIFs investing directly or indirectly in immovable property.

No prescribed investment and leverage restrictions are applicable for PIFs targeting Qualifying and Extraordinary Investors subject that the said PIF clearly provides relevant information and specific details on how the risk diversification will be implemented, which information should be disclosed in the offering documents.

Service Providers for PIFS in Malta

A PIF may appoint any Service Provider as it deems necessary. PIFs promoted to Experienced Investors are required to appoint a Custodian responsible for the safe custody of assets of the PIF and for monitoring compliance by the Investment Manager with the investment policies and restrictions of the PIF. The external service providers appointed by a PIF do not have to be established in Malta.

The MFSA’s rules provide that all Service Providers appointed directly by a PIF should be established and regulated in a Recognised Jurisdiction.

None of the Service Providers appointed by a PIF are required to be based in Malta.

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 license application process generally involves three distinct phases, namely the ‘Preparatory Phase’, the ‘Pre-Licensing Phase’ and the ‘Post-Licensing /Pre-Commencement of Business Phase’.

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).

 

Listing of PIFs in Malta

A PIF (other than a private investment company) which has been granted or has applied for a collective investment scheme license may apply for admissibility to listing with the Listing Authority (the MFSA). The application for admissibility to listing may be made concurrently with the application for the collective investment scheme license.

Redomicile Funds to Malta

Foreign funds established as a company in jurisdictions permitting redomicilation, may apply to be registered as being continued in Malta under the Companies Act without the need to wind-up the company and create a new entity.

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.

Taxation on Individuals

The incidence of tax will depend on the type of transfer whether the Fund is prescribed or non-prescribed, and the tax residence of the investor. Since the withholding tax on prescribed funds is charged at fund level, any capital gains made by investors from the redemption, cancellation or liquidation of securities in a listed fund are not subject to further tax in the hands of the investor.

Taxation of Highly “Qualified Individuals”

A scheme was recently launched for non-Malta domiciled or ordinarily resident “Highly Qualified Persons’ in receipt of employment income of a minimum of €75,000 (excluding the annual value of fringe benefits) with companies licensed and/or recognised by the MFSA. These are subject to tax at a flat rate of 15% on their employment income which is subject to tax in Malta (rather than the usual progressive rates which can go up to 35%). This incentive applies for five years for European Economic Area and Swiss nationals and four years for third country nationals.

Main advantages of PIFs in Malta

√ The level of costs involved (in particular in terms of professional fees) 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 which are available to ‘Qualifying Investors’ or ‘Extraordinary Investors’ are not subject to any restrictions on their investment or borrowing powers. Limited gearing or leverage (up to 100% of NAV) is permissible if a PIF is made available to ‘Experienced Investors’. PIFs which are promoted to ‘Experienced Investors’ are also subject to certain investment limits.

√ Low minimum investment threshold of €10,000/ $10,000 if a PIF is made available to ‘Experienced Investors’

√ PIFs can be self-managed and are not required to appoint service Providers that are located in Malta or are licensed by the MFSA.

√ PIFs can also opt not to appoint an external Investment Manager. In this case, the Directors of the PIF would have to assume responsibility for the PIF’s investment decisions.

√ Where a PIF appoints an external Investment Manager and such Investment Manager is regulated and based in a Recognised Jurisdiction, the MFSA would place extensive reliance on the regulatory status of the Investment 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.

√ A PIF which is promoted to ‘Qualifying Investors’ or ‘Extraordinary Investors’ is not required to appoint a custodian/Prime Broker.

√ A PIF is not required to seek a listing on an investment exchange. Notwithstanding, the PIF may apply for a listing either on the Malta Stock Exchange or any other exchange outside Malta (provided that the PIF is constituted as a Maltese public company).

√ A PIF is not subject to any ‘own funds’ requirements and is able to commence business with a capital of €2,000. The only exception to this general rule arises when the PIF has not appointed an external manager (i.e. it is self-managed). In this case, it must have an initial capital of €125,000.

√ Maltese law allows for a PIF to be set up as an open-ended or close-ended fund which may take the form of a SICAV, any other corporate entity, a unit trust or a limited partnership.

√ The Companies Act, 1995 allows SICAVs to issue fractional shares and provides for full flexibility in relation to the redemption of units by investors.

√ Regulations under the Companies Act, 1995 allows SICAVs established as a multi-fund/umbrella companies to have the assets and liabilities of their sub-funds to be treated as a patrimony separate from the assets and liabilities of each other sub-fund of the same SICAV thereby providing for segregation of assets and liabilities within the umbrella structure.

√ SICAVs may be incorporated in the form of umbrella/multi-fund companies where each sub-fund is represented by a distinct class or classes of shares in the company. Each class may also be designated in a different currency.

√ Different rights may be attached to each class of shares.

√ If the PIF is in corporate form it would be bound to submit (i) an annual return to the Registry of Companies in Malta indicating the Directors and Shareholders of the PIF and (ii) annual audited accounts and financial statements to both the Registry of Companies and the MFSA.

√ PIFs are fully exempt from Maltese tax on income and capital gains. Capital gains made by non-Maltese investors when redeeming or transferring their units in a PIF are not subject to any withholding tax and are automatically exempt from tax. PIFs are not subject to any duty on issues of shares. Similarly, share transfers are not subject to any duty.

√ The MFSA is committed to reply to a license application within 7 days in the case of PIFs targeting experienced or Qualifying Investors and within 3 days in the case of PIFs targeting Extraordinary Investors from the submission of all required documentation and information to the authority.

Comparative Tables of PIFs in Malta

 Type of PIF Experienced Investor Fund  Qualifying Investor Fund  Extraordinary Investor Fund 
Minimum Investment €10,000 / $10,000 €75,000 / $75,000 €750,000 / $750,000
Investment Limits  Yes  No No
Eligibility Criteria for Investors Must satisfy definition of experienced investor Must satisfy definition of Qualifying Investor Must satisfy definition of Extraordinary investo
Investment Restrictions Certain investment restrictions apply to property funds None (Except for certain restrictions that may apply to open-ended property funds) None
Leverage  100% of NAV as per UCITS Funds No restrictions unless fund invests in immovable property No restrictions
MFSA response on proposed Fund Structure  7 business days 7 business days  3 business days
Fit and Proper Test Compulsory Compulsory Compulsory
Offering Memorandum Minimum Requirements Prescribed Minimum Requirements Prescribed Optional but if adopted minimum requirements prescribed Marketing Document
Marketing Document Not Required Not Required Required if Offering Memorandum not issued
Financial Statements & Statutory Reporting  Annual Annual  Annual
Compliance Report Semi-annual Semi-annual Semi-annual
Statistical Returns Report  Quarterly Quarterly Quarterly
Investment Manager Optional if there is competence within the Board of Fund. Self-managed PIF allowed. Manager may also act as administrator Optional if there is competence within the Board of Fund. Self-managed PIF allowed. Manager may also act as administrator Optional if there is competence within the Board of Fund. Self-managed PIF allowed. Manager may also act as administrator
Advisor Optional Optional Optional
Administrator  Optional  Optional Optional
Compliance Officer  Required. May also act as Money Laundering Reporting Officer Required. May also act as Money Laundering Reporting Officer Required. May also act as Money Laundering Reporting Officer
MLRO Required if the PIF will be marketing its units Required if the PIF will be marketing its units Required if the PIF will be marketing its units
Custodian/Prime Broker Compulsory, assuming a monitoring role. Need not be based in Malta Optional, merely required to implement proper safe custody arrangements Optional, merely required to implement proper safe custody arrangements
Local Representative Required where all service providers are based outside Malta Required where all service providers are based outside Malta Required where all service providers are based outside Malta
Independent director from manager and custodian Mandatory  Mandatory  Mandatory
Self Managed Funds Possible Possible Possible
Auditor  Required Required Required
Listing  Optional Optional Optional
Declaration Investor to declare in writing that it qualifies as an Experienced Investor  Investor to declare in writing that it qualifies as a Qualifying Investor Investor to declare in writing that it qualifies as an Extraordinary Investor
AML Requirements 3rd AML Directive Compliant 3rd AML Directive Compliant 3rd AML Directive Compliant
Taxation – Fund No Tax in Malta at the level of PIF  No Tax in Malta at the level of PIF No Tax in Malta at the level of PIF
Taxation – Investors  No Capital Gains tax for non-resident investors. No withholding tax on distributions   No Capital Gains tax for non-resident investors. No withholding tax on distributions  No Capital Gains tax for non-resident investors. No withholding tax on distributions
Promoter Requirement Not Required Not Required Not Required
 Pledge of units in the fund  Possible by notice to the Administrator Possible by notice to the Administrator  Possible by notice to the Administrator
Side Pockets Possible Possible Possible
 Acquisition of Units by a Sub-Fund in another sub-fund of the same umbrella Not Possible Not Possible  Not Possible

 

FEES for PIFS in Malta

 APPLICATION FEES

MFSA “In Principle” Approval (if applicable)¹ €600
MFSA’s Application Fee²
Scheme €1,500
Sub-funds €1,000 per sub fund
One off Registration Fee payable to the Registry of Companies €1,750 (approx.)

These MFSA fees are cumulative. An in-principle approval fee will not be charged if an “In Principle” Approval is not requested.

ANNUAL FEES

MFSA’s Supervisory Fee:
Scheme €1,500
Sub-Funds €500 per sub fund
Fee payable to the Registry of Companies for filing of Annual Return €1,000 (approx.)
Fee payable to the PIF’s Local Representative in Malta €2,400³
Company Secretary Fees €2,000³

 

Annual audit fees are to be agreed upon directly with the Maltese audit firm

Additional fees will be payable to the Malta Stock Exchange if the PIF’s promoters intend obtaining a primary or secondary listing on the Malta Stock Exchange.
¹An “In Principle” Approval should be requested if any of the functionaries of the fund operate from a country which is not Recognised Jurisdiction
²This fee is first payable in advance on the day a license is issued and on each subsequent anniversary thereafter
³This is an approximate figure assuming 20 hours of work.

The scope of this page is to highlight the main issues relating to Professional Investment Funds. Detailed information relating to ‘Private and Retail CISs’ may be found in other documentation prepared by Calamatta Cuschieri. Calamatta Cuschieri Fund Services is a leading fund administrator based in Malta

Find out more information contact Mr. Michael Galea – Head of Calamatta Cuschieri Fund Services.