Setting up Fund Investment Companies within member states of the European Union has one salient advantage – tax. That’s where the money is. Tax, tax and more tax. There are two types of tax that greatly affect a person’s or company’s choice in where to settle: Income Tax, which relates to the tax that we all pay, such as that taken out of our remunerations, and which is now 50% for those earning £150,000.00 and over, and Corporation Tax, which starts at 21% and can be as high as 28% for big corporations. Avoiding tax can therefore be beneficial for both the person and the company, and one way to do this is by setting up Offshore accounts.

Malta is still a good mediatory country for investments to take place in…

What do we mean by Offshore, Onshore? Onshore, in relation to European Union member states, means that you can set up a company’s holding within a member state. That holding can be the fund investments branch of a company. Funds would involve anything of economic value. Therefore the country through which these investments are taking place has the possibility of attracting more companies to set up shop. One of the last superstars was Malta; it had started gathering interest while it was still an accession state and, according to HFMWeek (Hedge Fund Managers Week), Malta is still a good mediatory country for investments to take place in.

Moreover, there are different kinds of investments that can be made. One such kind is Alternative Investments. These are any investments that are not in stock, shares or property, but in things such as Hedge Funds. A simple of way of explaining Hedge Funds is that they are a bets: for example, I can place a certain amount of money on stocks of bread, making the bet that stocks in bread will rise by 1% in the next few days; if they do, I make money, if they don’t, I lose money.

The move to regulate these investments is through the Alternative Investment Fund Managers (AIFM) Directive. These is yet to fully come into power as the vote on it has been postponed once again; the vote was meant to take place on October 18th but has now been moved to November. In order to regulate these investments, the Directive is enforceable on the fund managers and not the funds themselves. The reason for it being postponed again and again is that all investment managers want the Directive to not set limits on investments in countries outside of the EU, which it will do, as well as setting the regulation of the managers under EU regulatory bodies. The managers would also be liable to produce fiscal reports which must be available to shareholders, investors and the general public.

Corporation Tax can be avoided along with the rigidity enforced by fiscal trading…

The alternative to this, no pun intended, are the Specialised Investment Funds (SIF). This is a law set up by Luxembourg, which is quite gentle in terms of its regulations: the only tax charged on investment companies is a subscription tax which charges 0.01% per annum based on net assets. It is, however, only open to established private traders or established companies with a healthy portfolio giving evidence to money made and investment in the trade business. The reasons for setting up offshore holdings in exotic destinations such as the British Virgin Islands, and the infamous Cayman Islands, are that by doing so Corporation Tax can be avoided along with the rigidity enforced by fiscal trading, regulation and reports, which can differ from jurisdiction to jurisdiction.

What does this all mean for trading and future business? One of the main problems cited by all economical experts has been the lack of control over the Banking Sector. Introducing the Directive, and making the managers and not the asset owners directly answerable to EU regulatory bodies, puts some strict controls or at least a stern eye over movements within trade, which has not been internationally present before. SIF is one law which is making Luxembourg the choice destination for Hedge Fund Managers, and the like, due to its more relaxed approach, especially compared to the AIFM regulations.

This might then lead to other EU countries creating relaxed investment laws in order to attract alternative investors. But this does not mean that as soon as the AIFM becomes legally bound, each member state creates its own laws contradicting it or finding loopholes in it. The EU as a regulatory body is very good at keeping a tight control over compliance and once the vote goes ahead and the AIFM Directive is set, it will seek to not repeat mistakes leading up to the 2008 meltdown.

Sources used were the online edition of the evening standard, the European Union website and SIF articles by KPMG, PWC LLP and Ernest & Young.


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