Gibraltar is a relatively young jurisdiction in terms of fund servicing, but one that many agree has a very promising future.
Gibraltar is a relatively young jurisdiction in terms of fund servicing, but one that many agree has a very promising future. At the heart of this promise is the fact that its regulatory regime is, as Joanne Sené, Director of VFS says, stringent yet flexible. ‘The first advantage of Gibraltar is the regulator,’ says Sené. ‘Gibraltar is very well regulated. We comply with all the EU directives and we have very tight standards,’ she adds.
James Lasry, a partner with Hassans Funds Department agrees: ‘Our regulatory regime is very good, it’s very flexible. Primarily, it allows you to set up without any regulatory downtime,’ he says.
Third party opinion backs up these views. The IMF’s report on Gibraltar, published in 2002, states that Gibraltar ‘is at the forefront of the development of good practices.’ In a second report, published in May 2007, which followed an extensive review of the Financial Services Commission’s regulatory and supervisory practices, the IMF concluded that ‘the Gibraltar authorities are concerned with protecting the reputation and integrity of Gibraltar as a financial centre, and are cognizant of the importance of adopting and applying international regulatory standards and best supervisory practices.’
Gibraltar was classified as a co-operative jurisdiction by the Financial Action Task Force (FATF) in 2000, and the FATF report concluded that Gibraltar ‘has in place a robust arsenal of legislation, regulations and administrative practices to counter money laundering. Gibraltar is close to complete adherence with the FAFT 40 Recommendations.’
The recent change in Gibraltar’s regulatory regime that has opened the door to potential growth has been the legislation introduced in August 2005 allowing for the set up of Experienced Investor Funds (EIFs). Under Gibraltar’s Financial Services (Experienced Investor Funds) Regulations, 2005, EIFs are funds designed for professional, high net worth or experienced investors. Investors in must either have a net worth in excess of EUR 1,000,000 or must invest a minimum of EUR100,000 in an EIF.
EIFs offer many advantages in terms of the ease and speed of fund set up as well as a great degree of flexibility for investors in terms of the mix of asset classes they can include. ‘We can use Gibraltar’s EIF legislation to set up hedge funds or funds that use hedge strategies in an easier and cheaper way for our private clients and for external asset managers,’ says Florian Nolte, legal and compliance officer of Swiss Best Invest Asset Management.
To license a new EIF, the fund’s administrator must notify Gibraltar’s FSC within 14 days of its launch and supply the fund’s offering documents and an opinion from counsel stating that the fund complies with the EIF Regulations. The effect of this is that an EIF can be set up in a matter of days. An EIF must have two Gibraltar-resident directors who have been pre-approved by the FSC, a Gibraltar-based administrator and auditor, and a custodian or prime broker, which does not have to be based in Gibraltar.
‘The government felt that it was enough to allow the promoters to set up the fund, launch it and then notify the FSC,’ says Lasry. ‘The FSC has the power to ask questions, and if they see that there’s something wrong, they have all the enforcement powers they need, but on the basis that the investors for the EIF regime are experienced, and they are people who have the ability and the capacity to take informed investment decisions, and also on the basis that the counter-parties are licensed, you can set a fund up and fly with it,’ he adds.
‘The government knows the needs of the market place,’ says Nolte. For Lasry, the speed and flexibility that the advent of the EIF legislation permits is a huge advantage. ‘What this means is that, if you have a strategy that absolutely, positively has to be in place by next week, you can do it,’ he says.
Lasry believes that this makes Gibraltar almost unique amongst European jurisdictions. ‘Theoretically, you can do it to an extent in Luxembourg,’ he says, ‘but only with counter-parties who are all established in Luxembourg. Gibraltar gives you a little bit of flexibility with the counter-parties as well – not with the administrator or the auditor but with the custodian and any brokers you want to use.’
There is no doubt that the EIF legislation has made a difference to the jurisdiction. ‘It is just over two years ago that the Experienced Investor legislation was introduced,’ says David Wahnon, Managing Director of Capita Financial Group, Gibraltar. ‘Since then, things started to gather momentum and in 2007 we have seen a substantial increase in the volume of business,’ he says.
The number of funds domiciled in Gibraltar is growing and investment services now comes second only to insurance as the fastest growing area within the jurisdiction’s financial services sector. The total number of investment firms licensed in Gibraltar has risen from 11 at the end of March 1998, to 33 at the end of 2007.
Fund administration is also a growing area in the jurisdiction. A number of funds registered in other jurisdictions, such as Cayman and Bermuda, and for which the fund promoter requires administration to be carried out in Europe, are now administered in Gibraltar.
‘Fund administration here took off about two years ago,’ says Sené. ‘It takes time for word to get out there,’ she cautions, ‘but in the last couple of months it has started to happen.’ Raymond Joubaud, Director of VFS points to the massive growth in the number of fund administrators in the last few years. ‘The first fund administration company was set up, I think, 10 years ago,’ he says. ‘The second one was set up five years ago, and now we have seven licensed fund administrators in Gibraltar.’ Despite the fact that the overall number is still relatively small, this equates to a massive 250% increase in the last five years.
The introduction of the EIF regulations has given a particular boost to the setting up of alternative investment funds in the Gibraltar. Hedge funds, real estate funds, private equity and fund of funds form a significant number of the funds administered in the jurisdiction. ‘Most of the investment managers that bring business to Gibraltar are indeed hedge fund managers,’ says Wahnon. He adds that this business comes, in the main, from European managers. Indeed, Gibraltar’s location and status as a member of the European Union offer significant advantages.
‘Many people don’t know that Gibraltar is part of the EU” says Sené, ‘and because of this, Gibraltar can passport services across Europe.’ Passporting allows financial services firms to offer their services and products throughout Europe, based on their Gibraltar license. ‘This is what makes us unique compared to other offshore jurisdictions in Europe,’ adds Sené.
‘Because Gibraltar is European, unlike the Channel Islands or the Caribbean jurisdictions, it can benefit from the European Parent-Subsidiary Directive,’ says Lasry. The European Parent-Subsidiary Directive was designed to eliminate tax obstacles in the area of profit distributions between groups of companies in the EU by abolishing withholding taxes on payments of dividends between associated companies of different member states and preventing double taxation of parent companies on the profits of their subsidiaries.
‘Fiscal nirvana for a fund,’ says Lasry, ‘is that the fund vehicle should cause no added taxation ultimately for the investors, meaning that the fund will pay tax where it does business; the investors will probably pay tax where they live; and the fund itself should be completely tax transparent.’ The European Parent-Subsidiary Directive enables European fund vehicles with a Gibraltar-domiciled parent to get close to that fiscal nirvana.
Jurisdictions such as Cayman and Jersey have found their own solutions to this problem, but these solutions are often either complex, expensive or sometimes both. ‘Let’s say, for example, that you want to set up a fund investing into German property,’ says Lasry. ‘You usually set up a German company which will buy the property, receive rent and will eventually sell the property. The company will hopefully make profits, whether through rental income or through capital gains. It will pay tax in Germany on those profits, then the question is, how does it get those profits back to its investors without suffering additional tax?’
A Gibraltar parent company of a Luxembourg company which holds the shares of the German property fund potentially enables the fund to benefit from the European Parent-Subsidiary Directive, and, in addition, to distribute dividends to non-Gibraltar investors with no withholding tax.
Gibraltar’s membership of the EU also brings other benefits. As Robert Koller, a lawyer with Hassans, points out, under UCITS III regulations, 130/30 funds can be set up and structured as UCITS in Gibraltar and marketed all over Europe, as well as in some Latin American and Asian countries.
And last, but not least, is that, although Gibraltar is a member of the EU, it is not subject to VAT. Given the proposals within the EU to impose VAT on fund services, Gibraltar could become the only jurisdiction in the EU where fund services would be exempt from VAT.
High regulatory standards combined with the flexibility of a small jurisdiction, the EIF legislation, membership of the EU and the many benefits this brings, particularly in terms of the European Parent-Subsidiary Directive, and the availability of a quality infrastructure which boasts the full range of accounting and audit services, fund custody and other fund support services all combine to make Gibraltar an increasingly attractive jurisdiction.