Dillon Eustace: The Advantages of ICAVs

Feb 11 2016 | 8:51pm ET

Editor's Note: s the growth of alternative investment vehicles continues, global asset managers are increasingly interested in novel European-based structures such as ICAVs, UCITs and AIFs as a way to expand their reach in an investor-friendly manner. Ireland and Luxembourg, in particular, have become popular domiciles for these new structures. In this contributed article, Brian Dillon and Sean Murray, partners at Dublin-based financial services law firm Dillon Eustace, explain the key advantages of Ireland-domiciled ICAV structures. 

In March of 2015, the Irish Collective Asset-management Vehicle (“ICAV”) Act was enacted, and it has enabled the establishment of a new structure for regulated investment funds domiciled in Ireland.

The ICAV is a flexible corporate structure that can be used to establish both UCITs and Alternative Investment Funds (“AIFs”), and there are indications to suggest the ICAV will become the default choice of structure for asset managers seeking to establish regulated funds in Ireland. The ICAV will exist alongside existing Irish structures, further diversifying the range of Irish collective investment vehicles available to investors, and also maintains the competitiveness of the Irish funds industry. 

In particular, the ICAV addressed an issue that has made Irish-regulated investment funds more attractive to the U.S. market and especially U.S. taxable investors, which, as readers may be aware, was the initial and key driver of the new product.

Key Driver – The U.S. “Taxable Investors” Market

In a 2011 strategy paper, the Irish Government acknowledged that despite the ongoing success of the Irish funds industry, there were recent challenges that needed to be addressed. Among them was product competitiveness, particularly in light of AIFMD and UCITS IV implementation, which both the Irish Government and the Irish Funds Industry acknowledged risked excluding business from EU markets but also represented a huge opportunity for global players to use a European base for their international business. 

The combination of the above factors led to the consideration of a new fund offering, and significant attention was paid to developing a structure which, for fund promoters wishing to establish a European presence or bring offshore funds onshore to Europe, would accommodate U.S. investors without creating potential U.S. tax disadvantages.

Significance of U.S. Taxable Investors in Establishing the ICAV Blueprint

Prior to the introduction of the ICAV, Irish domiciled funds could be structured in many legal forms depending on whether they are structured as UCITS funds or non-UCITS funds. However, it was noticeable that Ireland, as a leading international fund domicile, did not offer a corporate fund structure similar to the SICAV available in other EU jurisdictions. An important consequence was that Irish corporate funds were not permitted to “check-the-box”, i.e. choose to be treated as a partnership or disregarded entity, thus treating existing corporate funds as a corporate entity for U.S. federal tax purposes by default. 

The significance of a corporate fund not being able to “check-the-box” is that it invariably makes such investment funds less attractive to U.S. taxable investors since that most offshore funds are considered “passive foreign investment companies” (PFIC) for U.S. federal income tax purposes, and while PFIC classification need not necessarily give rise to adverse tax consequences, it typically reduces the attractiveness of the offshore fund for many U.S. taxable investors. Accordingly, fund promoters will typically only distribute an offshore fund to U.S. taxable investors if such a fund can “check-the-box” and choose to be treated as a partnership or disregarded entity for tax purposes.

Relatedly, although Ireland introduced very favorable “re-domiciliation” legislation back in 2009 for investment fund companies established and operating in certain prescribed jurisdictions, there was little potential of Ireland being the jurisdiction of choice for offshore corporate funds (such as those domiciled in the Cayman Islands) that might seek to re-domicile onshore to Europe if they had “checked the box” since it would not be able to maintain existing U.S. federal tax status. Similarly, before the introduction of the ICAV, Ireland was not a relevant jurisdiction for fund promoters that specifically wanted to establish a corporate European investment fund attractive to U.S. taxable investors.

Therefore, at the very heart of the new product offering was the need for a structure attractive to such investors, and so the ICAV was born.

The ICAV

For these reasons, the ICAV was introduced as a corporate structure that has the ability to check-the-box, i.e. be treated as a partnership or a disregarded entity for U.S. federal tax purposes, or opt out of its default U.S. federal tax classification as a corporate entity. 

When combined with Ireland’s reputation as being one of the leading jurisdictions for the establishment and/or re-domiciliation of regulated investment funds, now makes Ireland the European jurisdiction of choice if the fund is going to be sold, in any great significance, to U.S. taxable investors.

More recently, discussions regarding “check-the-box” has centered on whether the classification can be achieved on a sub-fund basis where the ICAV is established as an umbrella fund with segregated liability between sub-funds. This has certainly thrown up some interesting discussions and debates with U.S. tax counterparts.

Furthermore, for fund promoters wishing to establish a master/feeder fund structure to accommodate both U.S. taxable and U.S. tax-exempt investors, the introduction of the ICAV provides the option for the master fund to be formed as an ICAV as opposed to a unit trust or investment limited partnership.The feeder fund (for U.S. tax-exempt investors and non-U.S. investors) will also be able to be formed as an ICAV, corporate fund PLC, unit trust or investment limited partnership, as all 4 types of legal entities should be able to be treated as a corporate entity for U.S. tax purposes.

U.S. Treaty Benefits

The ICAV, like the other three types of investment funds, can also qualify for the benefits of the U.S./Ireland double tax treaty, subject to satisfying its  “Limitation on Benefits” article. For the avoidance of doubt, an election to check-the-box to be treated as a partnership or disregarded entity should not generally impact an ICAV’s position with respect to the treaty between Ireland and the United States. The possibility of obtaining treaty benefits gives the ICAV (and Irish investment funds in general) a significant advantage over other domiciles such as Luxembourg.

Key Legal Benefits of the ICAV

While tax was the original driver of the ICAV, the industry also took the opportunity when drafting the ICAV legislation to introduce a structure that offers a number of distinct and welcoming advantages over other Irish fund structures.

  • The ICAV legislation is distinct from existing Irish company legislation governing other Irish companies, such as the PLCs, which may not be particularly relevant or appropriate for collective investment scheme. The ICAV structure protects investors and fund promoters from any inconveniences arising from changes in this Irish legislation.
  • The Central Bank of Ireland acts as both the registration and supervisory authority for the ICAV. The ICAV application process is administratively efficient for UCITs of AIFs.
  • In circumstances where amendments to the instrument of incorporation are required, prior approval of the investors will not be required provided that the depositary certifies in writing that the relevant amendments do not prejudice the interests of the shareholders of the ICAV, and the amendment does not require shareholder approval under central bank regulations.
  • The directors of an ICAV can dispense with the general requirement to hold an annual general meeting provided they give the ICAV’s shareholders 60 days notice. 10% of shareholders or the auditor, however, maintain the right to request such a meeting.
  • Irish company law requires that the accounts of all sub-funds of an umbrella type PLC be included in the consolidated annual financial statements of that company. Separate financial statements for individual sub-funds of an umbrella ICAV may be prepared, which ensures investors in a single sub-fund will only receive the information that is relevant to them. This reduces the cost and time spent by fund directors and their advisers in compiling and circulating financial statements.
  • The ICAV structure will not be subject to the principle of risk spreading rules, unlike other corporate vehicles offered in Ireland, and an AIF ICAV may be structured as a single asset fund under the AIFMD framework.

Conversion of a PLC to an ICAV

A fund incorporated as a PLC that wishes to avail of the benefits of the ICAV can do so under the conversion provisions of the ICAV Act through a straightforward process similar to the re-domiciliation mentioned earlier. It requires the approval of the existing company’s shareholders and the provision of certain statutory declarations from directors of the PLC. It is anticipated that the cost benefits of the additional flexibility afforded by the ICAV are likely to outweigh those from converting a PLC, and many funds have already converted to the ICAV structure.

Moreover, the conversion is considered a continuation, which allows the fund to continue to utilize prior performance data and any contracts that the fund may have entered into prior to the conversion process. It should also be noted that it will not be possible to employ the conversion procedure in respect of an existing UCITS or AIF established as a unit trust, investment limited partnership or common contractual fund.

Tax - It goes without saying that consideration should always be given to the tax impact such a conversion may have on existing investors, in particular U.S. tax implications.

Impact of the ICAV

More than 129 ICAV’s have been established since the legislation was enacted, further highlighting the Irish Government’s continued commitment to develop international financial services. Due to rising investor demand for more regulated vehicles and the migration of large funds from other less regulated domiciles, we believe the development of the ICAV is set to enhance Ireland’s reputation as a world-leading domicile for investment funds.


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