This article was sponsored by EisnerAmper. It appeared in the pfm Yearbook 2018 with the December/January 2019 issue of pfm.
There are any number of reasons that investors have sought to domicile funds in Ireland for years. The country has long made an effort to attract investment funds, with plenty of long-standing local expertise across all asset classes, zero tax on funds, and a low 12.5 percent tax on fund service providers. In the wake of Brexit, UK players are looking for an EU haven, and Ireland has plenty to offer, even before recent legislation passed in certain countries makes Luxembourg a less desirable destination.
Back in 2015, Ireland created its most favorable structure for alternative assets yet, with the passing of the Irish Collective Asset Management Vehicles Act (ICAV), which created a new structure exclusively for investment funds. Naturally, it offers attractive tax treatment, but it also has a streamlined set up and administration process, even allowing current Variable Capital Companies (VCC) in Ireland to convert into an ICAV structure.
The new structure has already proven quite popular. As of July 2018, there have been 271 ICAVs registered with the Central Bank of Ireland, and 80 percent of all funds registered with the Central Bank since that law passed are ICAVs, according to the law firm Maples and Calder. The ICAV is flexible enough to handle all the needs of alternative asset managers, from capital commitments and drawdowns, to the “excuse and exclude” allocation of assets, although this option remains relatively unknown to global fund managers.
We spoke with Patterson Chiweshe, an audit principal, and Harold Adrion, a consultant on international tax, from EisnerAmper, to discuss the details of a structure that is poised to grow more popular in the years to come.
Let’s start with the economic incentives of ICAV. What does it offer investors in terms of tax treatment?
Harold Adrion: The beauty of the ICAV is that it’s not subject to Irish tax, either on its profits or on distributions. And while recent legislation in some European countries makes Luxembourg vehicles liable for taxation there, the ICAV isn’t. But honestly, its biggest appeal is the mix of flexibility, simplicity and the option for transparency in the case of US investors. If taxable US investors are important constituents for a particular fund, the ICAV is a great structure to offer them.
How does it improve on what was previously available using VCCs? Those structures were fairly popular.
HA: The ICAV allows access to tax treaties. It also allows users to elect to ‘check the box’ for transparency under US tax rules, so that it can be treated as a flow-through entity by US tax authorities. So any US-based investor gets the same treatment as if they invested in the underlying investments of the ICAV. VCCs were treated as ‘per se’ corporations for US tax purposes, which left some US investors in the position of being taxed under the US’s CFC or PFIC rules. Fortunately, Ireland allows a VCC to be converted quite easily into an ICAV.
Managers contemplating these changes should do so with the advice of informed US tax professionals. GPs should also be aware that the ‘check the box’ option may trigger adverse tax consequences for US investors who choose to treat the investment as opaque. And there may be foreign tax reporting considerations to take into account, so ICAVs need to be coordinated with any relevant tax counsel.
How flexible is the ICAV? Can it handle the needs of various alternative asset classes?
HA: ICAVs are enormously flexible, and can be used for both traditional and alternative asset strategies. ICAVs can be formed as part of global master feeders, co-investment or joint venture vehicles. They can use any range of special purpose vehicles and subsidiaries to hold investments, whether they be hedge funds, real estate, infrastructure, credit or traditional private equity.
How is the ICAV simpler to manage than previous structures?
Patterson Chiweshe: They are easier to set up, and there are fewer requirements over the life of the fund. They have streamlined the incorporation and authorization processes which now happens concurrently through the Central Bank of Ireland. Before the ICAV, the registration of VCCs took place at the country’s Company Registration Office before being passed along to be authorized by the Central Bank.
Going forward, the Board of Directors of the ICAV can elect not to hold an annual general meeting, with 60 days’ notice, barring the vote of 10 percent or more of shareholders to still hold one. Should the ICAV need to amend its constitutional documents, it does not need shareholder approval if a depositor rules that the changes do not prejudice the interests of the investors. The governance process is much simpler than other alternatives and without increasing agency costs.
The ICAV has its own legislative code, structured outside of the country’s Companies Act, so even if Ireland or other European company law changes, it will not impact these vehicles. And in terms of the standards of compliance, the ICAV need only inform the Central Bank of any material changes, even changes to directors, rather than informing the Companies Registration Office as well, which is the case for VCCs. This set of straightforward and stable rules means lower administration and operating costs.
Another benefit is that umbrella ICAVs may choose to prepare separate financial statements for each sub fund, rather than be required to produce a single combined set of financials for the entire umbrella structure. This could be useful for platforms with multiple sub-investment managers, as it would allow separate financial year-ends for the various sub-funds.
But we should stress that this structure doesn’t deviate from VCCs all that much. It should be seen as merely an improvement on these, with better treatment for taxable US investors with simpler and lower compliance requirements and costs. LPs should understand this is not some untested experiment, but an evolution in Irish fund structures. The ICAV aims to offer the same benefits of similar vehicles in Luxembourg or the Cayman Islands. Recent tax legislation changes in the United States have altered the return profile of certain hybrid vehicles in certain European jurisdictions, improving the comparative appeal of ICAVs.
Do those legislative changes mean ICAVs will grow in popularity for alternative asset managers?
PC: ICAVs are still a relatively unknown option, but I do think that’s bound to change. As Luxembourg proves less attractive, people are shopping around for alternatives, and they’re discovering ICAVs have a lot to offer. Right now, there’s interest from the bigger managers, so it could be some time before the middle market starts using them.