Set up of a Hedge Fund in Malta
The process to set-up a Malta Fund
Background
Malta’s high standards of regulatory oversight and processes have been a key advantage for
reputable funds. The Maltese regulatory framework in the financial services sector is one of
the most comprehensive and attractive for the setting-up, licensing and marketing of credit
institutions, financial institutions, insurance companies, collective investment schemes and
institutional funds as well as for investment services providers.
Several important factors make Malta an ideal jurisdiction to domicile and operate such
financial services activities:
• Malta’s status as a full member of the European Union;
• Malta’s EU compliant legislation;
• Malta’ status as an onshore jurisdiction and member of onshore and global
consultative, regulatory and enforcement bodies, including the International
Monetary Fund (‘IMF’), the Council of Europe, International Organisation of
Securities Commission (‘IOSCO’), and the Committee of European Securities
Regulators (‘CESR’);
• The Malta Financial Services Authority (the ‘MFSA’), in its capacity as the Maltese
financial services single regulator, is flexible, accessible and proactive but at the
same time meticulous in considering and determining applications for the licensing
of funds;
• Malta’s comprehensive legislative framework for the taxation as well as Malta’s
extensive range of double taxation treaties include agreements with all EU member
states.
• The presence on the Island of international financial services providers and a skilled
work force with considerable experience and knowledge in the sector;
• Use of the English language in official communications, forms and documentation as
well as in drafting financial services legislation, regulations and guidelines.
When properly structured, such schemes would benefit from the following:
i. No income or company tax is imposed on hedge funds having more than 85% of their
underlying assets situated outside Malta;
ii. No tax on the Net Asset Value of the scheme;
iii. No withholding tax on dividends paid to non-residents;
iv. No taxation on capital gains on the sale of units by non-residents;
v. No stamp duty on issues or transfers of units;
vi. No taxation on capital gains on the sale of shares or units by residents provided such
shares/units are listed on the Malta Stock Exchange (MSE).
All this has contributed to Malta’s success in establishing and consolidating itself as an
onshore financial services centre which now enjoys the presence of an always increasing
number of international banks, insurers and fund managers.
Legal and Regulatory Framework
The Investment Services Act, Chapter 370 of the Laws of Malta (‘ISA’), establishes the
regulatory framework for the provision of investment services and setting up of funds. The
primary purpose of the ISA is to provide comprehensive investment services regulations to
regulate the provision of hedge funds and adequate investor protection. The ISA provides
for the appointment of a competent authority responsible to administer the provisions of
the ISA, particularly as regards licensing, regulation and supervision of investment/hedge
fund services.
The Malta Financial Services Authority (‘MFSA’) has been appointed as the competent
authority to supervise and regulate the investment services sector with inter alia powers
of granting hedge fund licences. The MFSA has also issued Investment Services Rules with
the purpose of inter alia transposing and implementing the MiFID Framework Directive and
MiFID Implementing Directive regulating the conduct of business by hedge fund licence
holders.
Maltese hedge funds or professional investors funds (“PIFs”) (references to “PIFs”, “Hedge
Funds”, “funds” and “schemes” below should be read and construed as interchangeable
terms) are a special class of collective investment schemes which fall within the provisions
of the Investment Services Act, 1994. These funds provide a “lighter” regulatory regime and
more flexibility than UCITS and other retail funds which are also licensed by the MFSA.
PIFS have been extensively used for investment in non-traditional investments and/or
specialist instruments including by way of example, private equity, derivatives, immovable
property / real estate, and traded endowment plans.
Malta continues to grow its hedge fund business as it offers a robust, comprehensive legal
framework for the establishment of your Malta Hedge Fund and various types of investment
funds.
Professional Investor Funds Categories
The regulatory regime for PIFs caters for three principal categories:
1. PIFs targeting to Experienced Investors;
2. PIFs targeting to Qualifying Investors; and
3. PIFs targeting to Extraordinary Investors.
PIFs targeting to Experienced Investors
An “Experienced Investor”, is a person having the expertise, experience and knowledge to
be in a position to make his own investment decisions and understand the risks involved. An
investor must state the basis on which he satisfies this definition, either
a. by confirming that he/ she is:
i. 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
ii. a person who has reasonable experience in the acquisition and/or disposal of funds of a
similar nature or risk profile, or property of the same kind as the property, or a substantial
part of the property, to which the PIF in question relates; or
iii. a person who has carried out investment transactions in significant size at a certain
frequency (for example a person who within the past 2 years carried out transactions
amounting to at least EUR 50,000 or USD 50,000 or equivalent currency at an average
frequency of 3 per quarter)
OR
b. by providing any other appropriate justification.
Persons who qualify as ̃Professional Clients' in terms of the MIFID, automatically qualify as
̃Experienced Investors'.
The minimum investment threshold is EUR 10,000 or USD 10,000 or equivalent in another
currency. The total amount invested may not fall below this threshold (or equivalent) unless
this is the result of a fall in the net asset value.
PIFs targeting Experienced Investors are subject to specific investment restrictions set out in
Maltese rules. Whilst borrowing on a temporary basis for liquidity purposes is permitted and
not restricted, borrowing for investment purposes or leverage via the use of derivatives is
restricted to 100% of NAV.
PIFs targeting to Qualifying Investors
A “Qualifying Investor”, is required to meet one or more of the following criteria:
1. a body corporate which has net assets in excess of EUR750,000 or USD750,000 (or
equivalent in another currency) or which is part of a group which has net assets in excess of
EUR750,000 or USD750,000 (or equivalent in another currency);
2. an unincorporated body of persons or association which has net assets in excess of
EUR750,000 or USD750,000 (or equivalent in another currency);
3. a trust where the net value of the trust's assets is in excess of EUR750,000 or USD750,000
(or equivalent in another currency);
4. an individual, or in the case of a body corporate, the majority of its Board of Directors
or in the case of a partnership its General Partner who has reasonable experience in the
acquisition and/or disposal of :-
i. funds of a similar nature or risk profile;
ii. property of the same kind as the property, or a substantial part of the property, to which
the PIF in question relates;
5. an individual whose net worth or joint net worth with that person's spouse, exceeds
EUR750,000 or USD750,000 (or equivalent in another currency);
6. a senior employee or Director of Service Providers to the PIF;
7. a relation or close friend of the promoters limited to a total of 10 persons per PIF;
8. an entity with (or which are part of a group with) EUR3.75 million or USD3.75 million (or
equivalent in another currency) or more under discretionary management, investing on its
own account;
9. the investor qualifies as a PIF promoted to Qualifying or Extraordinary Investors;
10. an entity (body corporate or partnership) wholly owned by persons or entities satisfying
any of the criteria listed above which is used as an investment vehicle by such persons or
entities.
Minimum initial investment is EUR 75,000 or USD 75,00, or equivalent in another currency.
The total amount invested may not fall below this threshold (or equivalent) unless this is the
result of a fall in the net asset value.
In principle, targeting Qualifying Investors are not subject to any investment or borrowing
(including leverage) restrictions other than those which may be specified in their Offering
Document.
PIFs targeting to Extraordinary Investors
An “Extraordinary Investor” is required to meet one or more of the following criteria:
1. a body corporate, which has net assets in excess of EUR7.5 million or USD7.5 million (or
equivalent in another currency) or which is part of a group which has net assets in excess of
EUR7.5 million or USD7.5 million (or equivalent in another currency);
2. an unincorporated body of persons or association which has net assets in excess of
EUR7.5 million or USD7.5 million (or equivalent in another currency);
3. a trust where the net value of the trust's assets is in excess of EUR7.5 million or USD7.5
million (or equivalent in another currency);
4. an individual whose net worth or joint net worth with that person's spouse, exceeds
EUR7.5 million or USD7.5 million (or equivalent in another currency);
5. a senior employee or Director of Service Providers to the PIF;
6. the investor qualifies as a PIF promoted to Extraordinary Investors;
7. an entity (body corporate or partnership) wholly owned by persons or entities satisfying
any of the criteria listed above which is used as an investment vehicle by such persons or
entities.
Minimum initial investment is EUR 750,000 or USD 750,000 or equivalent in another
currency. The total amount invested may not fall below this threshold (or equivalent) unless
this is the result of a fall in the net asset value.
In principle, PIFs targeting Extraordinary Investors are not subject to any investment or
borrowing (including leverage) restrictions other than those which may be specified in their
Offering Document/ Marketing Document.
Licence Application Process
The processing of a Collective Investment Scheme Licence generally takes between six and
twelve weeks from the date that an application complete in all respects is submitted to the
MFSA. In the case of Malta PIFs having a third party Manager and all service-providers based
and regulated in recognised jurisdictions, the MFSA is committed to respond to licence
applications within 7 business days, provided that all relevant documentation (including the
application form) has been properly completed and attached to the application form.
The application process may be summarised in the following three phases:
Phase One – Preparatory Phase
This phase involves inter alia the promoter meeting with representatives of the MFSA to
describe his proposal, the submission by the promoter to the MFSA of a draft application
form together with supporting documents, the review by the MFSA of such form and
documentation, and the MFSA’s decision as to which licence conditions should apply to the
promoter.
It is recommended a preliminary meeting with the MFSA is held in in advance of submitting
an application for a licence wherein the proposal is described. It is essential that the
Applicant provides a comprehensive description of the proposed activity at the beginning of
Phase One.
Submission of a draft Application Form, together with supporting documentation and
payment of the non-refundable application fee/s. The draft Application form and the
supporting documentation will be reviewed by the MFSA and comments provided to the
Applicant within 3 weeks from submission of the application documents
“Fit and proper” checks begin at this stage. This entails following up all the information
which has been provided in the Application documents submitted. This includes contacting
overseas regulators (where applicable) and referees.
The applicability of the relevant Standard Licensing Conditions is determined by the MFSA
depending on the nature of the proposed scheme. These licence conditions are very
important since they represent the ongoing requirements to which the Applicant will be
subject, once licensed.
Phase Two – Pre-Licensing Phase
This phase involves the issuance by the MFSA of its ‘in principle’ approval for the issue by
the MFSA of a licence, and the finalisation by the promoter of any outstanding matters, such
as incorporation of a company, submission of signed copies of the revised application form
together with supporting documents in their final format, and any other issues raised during
the application process.
Phase Three – Post-Licensing / Pre-Commencement of Business Phase
This phase involves the compliance by the promoter of any post-licensing matters prior to
formal commencement of business.
The regulatory process outlined above is typically expeditious. Once we would have all the
necessary information and documentation requested by us in order to proceed with the
said process, the relevant licence application and other ancillary documentation would be
drafted, prepared and compiled (as the case may be) and submitted to the MFSA within two
weeks. The MFSA typically provides its ‘in principle’ approval within six to eight weeks from
receipt of the abovementioned licence application.
Licence Fees
An application fee is payable on submission of an application for an investment services
licence and is not refundable. Investment services licence holders are also required to pay a
licence issue fee, and an annual supervisory fee. The applicable fees are currently as follows:
Licence Application Fee Annual Supervisory Fee
Collective Investment Schemes which fall 2,500 3,000
within the scope of article 4 of the Act; and
which are authorized as UCITS Schemes and
non-UCITS Retail Schemes:
Scheme sub-funds (per sub-fund) 450 500
Up to fifteen sub-funds
(per sub-fund) No annual
supervisory fee will be
payable from the 16th
Scheme sub fund upwards
Collective Investment Schemes which qualify 2,000 2,000
as Professional Investor Funds and Alternative
Investment Funds in terms of Investment
Services Rules issued for this purpose by the
competent authority:
Corporate Structure
A PIF may be generally established in Malta in any of the following ways:
i. an investment company constituted by Memorandum and Articles of Association (i.e.
SICAVs and INVCOs);
ii. a commercial partnership constituted by means of a partnership deed; or
iii. a unit trust constituted by a trust deed between a management company and a trustee
(regulated by the Trusts and Trustees Act);
iv. a mutual fund established by way of contract (otherwise referred to in civil law
jurisdictions as “fond commun de placement” );
v. (Recognised) Incorporated Cells Company/Incorporated Cells
Whilst the forms indicated in (i) an (ii) above represent the corporate forms, those in (iii)
and (iv) represents the non-corporate forms.