Guernsey investment structures
16 April 2018
Guernsey is, for many, the jurisdiction of choice for the establishment and/or administration of all types of investment structure and collective investment vehicle, including private equity, hedge and property funds, across a wide range of asset classes.
So why do so many promoters, investment managers and investors choose Guernsey?
– proven track record as a leading fund and financial services jurisdiction over many years;
– a critical mass of world quality and experienced fund professionals;
– numerous options in terms of structuring and authorisation / registration of vehicles;
– speed of formation of vehicles;
– fast-track regulatory registrations;
– pragmatic, independent regulator: the Guernsey Financial Services Commission ("GFSC");
– robust corporate governance;
– high quality pool of non-executive directors;
– independent local exchange, The International Stock Exchange, for listing Guernsey and other vehicles;
– ability to adapt and innovate; and
– proximity to the UK and also to Europe, but positioned outside the European Union.
If a vehicle established in Guernsey satisfies the criteria for a "collective investment scheme" (see below) or "fund", it must either be registered or authorised by the GFSC and no Guernsey-licensed entity can provide services to such a vehicle without it being so registered or authorised.
Generally, all Guernsey-domiciled funds must be administered by a locally licensed administrator and open-ended funds must also have a locally licensed custodian. Fund promoters new to Guernsey will have to demonstrate a proven track record.
What is a collective investment scheme or fund?
The GFSC applies the following criteria in determining whether or not an entity is a collective investment scheme or fund:
– pooling of contributions of investors;
– third party management of the portfolio assets; and
– spread of risk.
If any of these features is lacking, the structure will not be regarded as a fund. For example, the GFSC may be prepared to regard a structure as not requiring to be regulated as a fund where there is only one investment asset.
Difference between open- and closed- ended funds
Guernsey makes a fundamental distinction between open-ended funds and closed-ended funds.
An open-ended fund is one in which the investors are entitled under the terms of the scheme to have their units redeemed or repurchased by the fund or to sell their units on an investment exchange at a price related to the value of the property to which they relate. In a closed-ended structure, there is no right to have one's shares redeemed although, usually, the fund will have a predetermined life.
A Guernsey closed-ended fund is not required to appoint a local custodian or a local manager or adviser. Unlike a closed-ended fund, every open-ended fund generally must appoint a Guernsey licensed custodian to hold its assets on trust. Both open-ended and closed-ended funds are required to appoint a locally licensed administrator (referred to as a "designated administrator" in this briefing). Previously, every open-ended fund also had to appoint a Guernsey licensed principal manager. This requirement was removed at the beginning of 2007 but, nonetheless, some promoters are continuing to use principal managers within their structures.
Distinction between authorised and registered funds
The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended (the "POI Law") creates two categories of Guernsey fund:
– authorised collective investment schemes; and
– registered collective investment schemes.
Both open-ended and closed-ended funds may be either authorised or registered schemes under the POI Law and funds may take the form of companies, limited partnerships, unit trusts or other entities.
Categories of open-ended fund
Open-ended funds may be:
– class A: eligible for marketing to the general public in the UK and certain other jurisdictions. There are comprehensive rules which regulate the documents by which a class A scheme is established, the content of the relevant scheme particulars, the general administration of the scheme and the investment parameters;
– class B: not usually for sale to the general public and typically established for marketing to institutions and high net worth/sophisticated investors. The rules applying to class B scheme documents and administration are less comprehensive than those applying to class A schemes; or
– class Q: restricted to qualifying professional investors. The rules governing such schemes are less prescriptive than those for class A and class B schemes and a fast track approval process should be available; or
Categories of closed-ended fund
Closed-ended funds may be:
– authorised; or
The rules applying to Guernsey funds
The following rules apply to Guernsey funds, depending on the type of fund:
– Registered Collective Scheme Rules 2015 (the "2015 Rules"): apply to open-ended and closed-ended registered funds other than those to which the Private Investment Fund Rules 2016 apply;
– Private Investment Fund Rules 2016 (the "PIF Rules"): apply to open-ended and closed-ended registered funds that have a closer relationship to investors than those governed by the 2015 Rules;
– Authorised Closed-Ended Investment Schemes Rules 2008: apply to authorised closed-ended funds;
– Authorised Collective Investment Schemes (Class A) Rules 2008: apply to authorised class A open-ended funds;
– Authorised Collective Investment Schemes (Class B) Rules 2013: apply to authorised class B open-ended funds;
– Collective Investment Schemes (Qualifying Professional Investor Funds) (Class Q) Rules, 1998: apply to authorised class Q open-ended funds;
– The AIFMD (Marketing) Rules, 2013: apply to any Guernsey alternative investment fund managers ("AIFMs") who propose to market alternative investment funds ("AIFs") to professional or retail investors in one or more EEA member states; and
– The AIFMD Rules, 2013: govern an opt in regime for the purpose of the Alternative Investment Fund Managers Directive ("AIFMD") for Guernsey fund managers and depositories.
Regulatory process for authorised funds
For authorised funds (save in relation to qualifying investor funds ("QIFs") (see below)), a traditional three stage approval process must be followed:
– outline consent: this involves providing detailed information in connection with the promoter and some general information in relation to the proposed fund; followed by
– interim consent: once the promoter has obtained outline consent, draft documentation relating to the fund structure itself is submitted to the GFSC for review. If successful, this application will result in notification that the GFSC will be minded to grant final approval upon receipt of final certified documentation; and
– final consent: final signed/certified documentation is lodged and the GFSC's consent is issued within two business days.
The overall timing for this process is usually in the region of six weeks.
Regulatory process in common for registered funds under the 2015 Rules and the PIF Rules
Under the 2015 Rules and the PIF Rules, responsibility for ensuring that the promoter of the fund is fit and proper and that the fund documentation complies with the relevant regulatory requirements lies with the designated administrator of the fund. The designated administrator must provide warranties to the GFSC verifying those matters and in reliance upon those warranties, the GFSC will issue the necessary registration within three business days for a fund registered under the 2015 Rules and one business day for a fund registered under the PIF Rules. This process has moved responsibility for compliance on to the designated administrators and leaves the GFSC free to inspect, investigate and audit those designated administrators to ensure that the warranties being provided to it and upon which it will rely in granting registration are accurate and backed up by the necessary documentation.
Previously, the one restriction on registered funds was that they could not be marketed directly to the public in Guernsey. However, the GFSC has monitored the standard of due diligence collected by designated administrators as part of the registered fund application process and determined that the certification process by designated administrators has been a success. Accordingly, the GFSC has now lifted the prohibition on direct offerings in Guernsey pursuant to the 2015 Rules and there is no such prohibition in the PIF Rules.
The most significant advantage that registered schemes have over authorised schemes is the fast-track three day approval process for the fund under the 2015 Rules and a fast-track ten day approval process for service providers, reduced to one day in respect of an application to register a private investment fund and its manager under the PIF Rules (see below). Authorised funds, on the other hand, are generally subject to a lengthier approval process (save in the case of QIFs).
Requirements for registered funds under the PIF Rules
A private investment fund will be a registered fund and the PIF Rules dispense with the requirement for the preparation of information particulars in circumstances where the manager has a close relationship with investors. The fund must have within its structure a licensee domiciled in Guernsey, which is responsible for the management of the fund and, as part of the application process, that manager will give certain warranties to the GFSC as to the ability of the investors to assume loss. The fund is not required to appoint a custodian, although if it is open-ended it must have a designated custodian, which can be the designated administrator.
The fund must be a collective investment scheme and should have no more than 50 legal or natural persons holding an ultimate economic interest (save where an investment manager makes an investment as agent for a wider group of stakeholders). Except for the period of one year from the date of first subscription, a rolling test is applied whereby in the previous 12 months the fund can add no more than 30 new ultimate investors. There is no limit on the number of investors to whom the fund can be marketed.
Private investment funds may be open- or closed- ended and may be established as unit trusts, limited partnerships or companies, including protected cell companies or incorporated cell companies (although there cannot be separate investment advisers acting in relation to individual cells). The funds will be subject to the PIF Rules, which set out the mandatory requirements for a private investment fund and provisions relating to the management of conflicts of interest, submission of an annual notification and quarterly statistical information.
The application process (which will require an application to be made at the same time for a licence for the manager and for registration of the fund) should take one business day once a complete application has been made to the GFSC.
An existing registered collective investment scheme may elect prior to 16 November 2017 to be treated as a private investment fund.
Qualifying investor funds
A faster approval route is available to certain authorised funds, known as the qualifying investor fund or "QIF" process. This enables approval to be obtained within three business days.
The QIF approval process is only available to funds limited to qualified investors, who are professional investors, experienced investors and/or knowledgeable employees. An individual investor investing US$100,000 or more is a qualified investor. QIFs can only be marketed to qualified investors and warranties must be given by the fund's Guernsey administrator that the requirements have been complied with.
Authorised or registered?
The policy of the GFSC is to subject authorised schemes to closer supervision than registered schemes. In the case of closed-ended schemes, there is little of substance to distinguish between the two categories, other than the fast-track approval process for registered funds. However, in relation to open-ended funds, the registered regime provides a lighter touch than the authorised category which, until the end of 2001, was the only form of regulation available to an open-ended fund in Guernsey.
A person who provides services in Guernsey to an open- or closed-ended fund must hold a licence under the POI Law (a "POI Licence"). This applies to fund administrators, who must be licensed under the POI Law to provide administration services to fund entities. It also means that, for example, an investment adviser providing services in Guernsey to a Guernsey fund or the general partner of a Guernsey limited partnership which is a fund must also be licensed under the POI Law.
Notably, real property is not a controlled investment under the POI Law. Accordingly, the provision of services in connection with real property is not caught by the POI Law and does not require a POI Licence.
Often, the investment adviser to a fund will be a UK regulated entity. Provided that no activities are being conducted by that adviser in Guernsey, then there should be no Guernsey regulatory obstacles to this.
It is important to note that the fund approval processes described above do not encompass the obtaining of a POI Licence for any adviser, manager, administrator or general partner. Traditionally, the obtaining of a POI Licence could take around four to six weeks.
However, a fast-track process exists under which the GFSC will consider an application for a POI Licence within ten business days of the receipt by it of a fully completed application (shortened to one day under an application to register a private investment fund and its manager under the PIF Rules), together with warranties from the designated administrator that it has conducted due diligence on the beneficial owners of the applicant and that the application is complete in all respects.
Notably, the fast-track process only applies to applicants who are seeking to provide services to QIFs or registered closed-ended investment funds.
Prospectus Rules 2008
The Prospectus Rules 2008 prescribe the information that must be contained in:
– a prospectus issued by a Guernsey registered fund (open-ended or closed-ended);
– a prospectus issued by any other Guernsey entity; and
– a prospectus in respect of any offer of securities made to the public in Guernsey by a Guernsey or non-Guernsey entity. The public is defined as 50 or more people in Guernsey.
For registered closed-ended funds, the Prospectus Rules 2008 replaced the old minimum disclosure guidelines issued by the GFSC.
There is an exemption in respect of a prospectus offering shares which are to be listed on a stock exchange in an International Organisation of Securities Commissions ("IOSCO") member country. The GFSC considers AIM listings to fall within this exemption, provided that the UK's prospectus rules have been complied with.
It is possible for the holder of a POI Licence, such as a fund administrator, to outsource certain of its functions to an entity outside Guernsey. However, such delegation of activities must be done in compliance with outsourcing guidelines issued by the GFSC. In particular, it is worth noting that the licensee must retain sufficient expertise to oversee any such delegated functions.
With effect from 1 January 2012, the GFSC's Code of Corporate Governance for the Finance Sector (the "Code") came into effect. The Code applies to all companies which hold a licence from the GFSC under Guernsey's regulatory laws or which are registered or authorised as collective investment schemes under the POI Law. It does not apply to Guernsey branches of foreign domiciled companies or to partnerships. The Code sets out eight principles and guidance on how to meet the principles. Each company's approach to the Code should reflect its legal and operating structure, as well as the nature, scale and complexity of the business. Non-compliance with the principles set out in the Code does not automatically make a company subject to the Code liable to any sanction or proceedings, but the GFSC will require an assurance statement from companies confirming that the directors have considered the effectiveness of their corporate governance practices and are satisfied with their degree of compliance in the context of the nature, scale and complexity of their business. Companies should prepare a self- assessment in order to assist the board in its consideration of the Code. The Code should be considered periodically at a board meeting and the discussion minuted.
Guernsey has long been recognised as a premier jurisdiction for private equity funds, but is also a domicile of choice for many hedge funds. To address the fact that in some respects hedge funds require a different regulatory approach, the GFSC has adopted a flexible approach to hedge fund authorisation in certain key areas:
– custodians and prime brokers:
– for institutional and expert investor hedge funds, the GFSC will be prepared to waive the requirement for a locally licensed custodian and will be prepared to designate as a custodian a prime broker regulated in an acceptable jurisdiction and having substantial net worth. In addition, the GFSC would not require a prime broker to offer physical segregation of fund assets from its own assets; and
– for hedge funds targeted at retail and less sophisticated investors, the GFSC would normally require a traditional custodian, although it will be prepared to waive the requirement that the custodian takes control of the fund's property provided that the property is held by a prime broker regulated in an acceptable jurisdiction and having substantial net worth. The GFSC would normally expect a custodian to be a licensed Guernsey institution but will be prepared to consider requests to designate custodians from another jurisdiction, provided it can be satisfied that the custodian's role in overseeing the fund manager will be subject to monitoring by the custodian's regulatory authority. For funds of this type the prime broker would be expected to provide clear segregation from its own assets of all fund assets exceeding the amount required for collateral against credit extended by the prime broker;
– net asset value and share price estimation:
– for the broad spectrum of funds, the GFSC will be prepared to permit arrangements which allow preliminary estimation of net asset value, provided such arrangements are fully disclosed in fund documentation and the risks to investors are fully set out; and
– for those funds aimed at retail and less sophisticated investors, the GFSC would not accept arrangements under which the fund itself bore any risk of loss through overpayment on redemption; and
– client money rules: the GFSC is prepared to consider waivers from the operation of client money rules, provided it is satisfied as to the robustness of estimation procedures to be used.
The Directive on Alternative Investment Fund Managers ("AIFMD") entered into force on 21 July 2011 and had to be implemented by EU member states by 22 July 2013. A transitional period ended on 22 July 2014. Although not strictly required to do so certain EEA member states have also implemented the directive and its application is therefore wider than just EU member states.
AIFMD affects AIFMs and also AIFs themselves. It has introduced a harmonised regulatory framework for EEA established AIFs including requirements relating to authorisation, administration, remuneration, marketing and depositaries. AIFMD also applies to non-EEA AIFMs that manage or market AIFs in the EEA, subject to a number of conditions.
Guernsey has embraced AIFMD by introducing a dual regime so that Guernsey AIFMs can distribute into both EEA states and non-EEA states. The two regimes are:
– the existing regime which will remain for those investors and managers not requiring an AIFMD fund including:
– those using EEA national private placement regimes; and
– those marketing to non-EEA investors.
– an opt-in regime under the Guernsey AIFMD Rules, 2013 which is fully AIFMD compliant and can be used where there is a particular commercial reason to do so, e.g. for investor relations.
With regard to marketing in EEA states, AIFMs can continue to use existing national private placement regimes for as long as they exist and Guernsey will look to transition to full passporting as and when that regime is implemented for third countries.
The AIFMD (Marketing Rules), 2013 ensure that any Guernsey AIFM and Guernsey AIF to whom they apply shall take all reasonable steps with a view to ensuring that any form of marketing in a country or territory within the EEA is effected in accordance with the laws and regulations in force in the relevant state and that the GFSC is notified of that marketing within 14 calendar days of commencement. The AIFMD (Marketing) Rules, 2013 do not apply to AIFMs managing AIFs with assets under management which in total do not exceed one of the following limits:
– EUR500 million, provided the AIFs are not leveraged and investors have no redemption rights for the first five years; and
– EUR100 million (including assets acquired through leverage).
Manager Led Product
The Guernsey Manager Led Product regime follows the approach of AIFMD in regulating a manager rather than the underlying fund structure. It enables an AIFM which is licensed under the POI Law to register an unlimited number of either open-ended or closed-ended AIFs with the GFSC. Neither the AIFs nor any associated management entities are then subject to any rules and only the AIFM is regulated by the usual legislation and rules applicable to managers. The AIFM must opt into AIFMD Rules, 2013 although the GFSC has indicated that derogations are available.
The Manager Led Product regime is intended to be used by AIFMs marketing into EEA member states either under the existing national private placement regimes or under any future third country passport that may be available to non EEA AIFMs in the future.
From 1 January 2008, Guernsey moved to its "Zero 10" taxation regime. Under this regime, all Guernsey registered companies (other than exempt companies) are taxed at zero percent on their profits except for:
– income from banking business and lending activities (taxed at 10%);
– income from activities regulated by the Office of Utility Regulation (taxed at 20%); and
– income from ownership of land and buildings in Guernsey (taxed at 20%).
In addition, from 1 January 2013, an income tax rate of 10% was extended to the activities of licensed fiduciaries (in respect of regulated activities); licensed insurers (in respect of domestic business); licensed insurance intermediaries; and licensed insurance managers.
The ability for Guernsey companies to be exempt from Guernsey income tax on their non-Guernsey sourced income and to be non-resident in Guernsey for taxation purposes was abolished except in relation to funds. Accordingly, it is still possible for an open-ended or closed-ended fund to be exempt from Guernsey taxation in respect of its non-Guernsey sourced income. This exemption is also available to funds established as unit trusts. Guernsey limited partnerships do not constitute separate taxable entities under current law and practice in Guernsey and therefore are not liable to tax in Guernsey. Income and gains arising in respect of the limited partnership fund would only be taxed (if at all), in accordance with the particular circumstances of each partner of the fund.
Guernsey does not levy any taxes in respect of capital gains, nor does it levy VAT or any goods and services tax.
In most circumstances, a Guernsey fund will make dividend payments to non-Guernsey residents free of any withholding tax.
No Guernsey stamp duty will be payable upon the issue of shares. In the event of the death of a sole holder of shares, a Guernsey grant of probate or administration may be required in respect of which certain fees will be payable to the Ecclesiastical Registrar in Guernsey.