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.