Introduction to Alternative Investment Funds (AIFs)

AIFs in the EU are various types of investments not included under the All Funds for Investment Companies in the European Community directive. AIFs can invest in a vast range of resources such as real property, avails, cryptocurrencies, hedge funds, managed future, commoditized products, private equity funds, and other institutional funds, which makes it a versatile instrument for internationalization of business. The rules of AIF are rather country-specific; however, they all conform to AIF Directive 2011/61/EU that prescribes certain rules for risk management and monitoring, proper registration, and paperwork.

Selecting the Right Jurisdiction for AIFs

Location for incorporation of AIF is one very important determinable or decidable factor. Possible locations in which AIF registration may be lodged are Malta, Luxembourg, Netherlands, Estonia and Ireland.

EU Alternative Investment Fund Managers Directive (AIFMD)

The Directive of the European Union on alternative investment fund managers (2011/ catapults managers the proper platform for launching and marketing investment products. AIFMD refers to another directive that has provisions for private equity funds, hedge funds, real estate, and other institutional investors. It prescribes several reporting, risk and liquidity requirements for AIF management companies and lays down rules regarding the marketing of AIF management companies across EU member states without necessitating similar filings.

After entering into force in July 2011, AIFMD has had two objectives: to provide for the creation of a single market for AIFs and to introduce a sound and comprehensive regulatory and supervisory system for AIFMs in the EU. Amendments to AIFMD sought by legislation introduced in the capital markets union (CMU) on November 25, 2021, is aimed to provide for improvements to the functionality of AIFMD in areas of investor protection, financial stability, and efficiency of the markets.

Key Requirements for Registering AIFs in the EU

To register an alternative investment fund (AIF) in the EU, the following requirements set out in the AIFMD Directive (Directive 2011/61/EU) must be met:

  • Fund Management Company (AIFM): Must be registered and licensed in an EU Member State.
  • Comprehensive Information: The management company must provide detailed information about the fund, including investment strategy, risk assessment, procedures, and asset valuation.
  • Activity Notification: Planned activities in each member state where the fund intends to invest must be notified, along with supervision details.
  • Risk Management: Proper risk management and control systems must be in place, along with sufficient capital for fund stability.
  • Reporting and Compliance: Regular reporting on fund activities and compliance with AIFMD obligations is required.
  • Capital Requirements: Internal AIFMs must have an initial capital of at least €300,000, and external AIFMs must have at least €125,000.
  • Professional Competence: Persons managing the AIFM must have a good reputation and experience in the investment strategies conducted by the AIFM.
  • Registered Office: AIFM must have a registered office in one Member State.

Steps to Establish an AIF

Step 1: Company Registration
Register a legal entity that will manage the fund’s cash flow and activities. At least two committee members are required for registration.

Step 2: Document Preparation
Prepare necessary documents such as the fund’s charter, investment strategy description, management rules, and risk information to obtain permission to manage an AIF.

Step 3: Obtaining Approval
Apply for registration with the competent authority in the state where the management company is located. The review process typically takes around two months.

Step 4: Licensing
Apply for an anti-money laundering permit for the financial institution along with the application for statutory registration.

Step 5: Entry in the Register
After approval, the foundation must be entered into the Registry of Companies of the country of operation to start its activities in compliance with EU legislation.

Step 6: Supervision and Reporting
Comply with Directive 2011/61/EC requirements, including reporting and accounting of the fund’s operations. Competent authorities oversee the activities of the AIF and its management company.

Profitable Jurisdictions for Establishing AIFs in the EU

Luxembourg
Luxembourg is a leading jurisdiction for setting up AIFs due to its favorable legal environment and extensive range of legal instruments supporting private and venture capital investments. Key structures include SICAR, S.C.S., and S.C.Sp., which offer flexibility and tax advantages. By the end of 2017, Luxembourg registered 14,400 funds with a total of €4 trillion in assets under management. AIFs in Luxembourg are exempt from corporate and income taxes, making it an attractive option.

Ireland
Ireland has been acclaimed to be one of the beautiful nations in the world of attractive professional competencies, superior political and economical environment, and creative system of taxation. Irish funds like Section 103 funds may be either regulated or unregulated depending on the investors needs. Thus, the setup of ICAV is famous due to the advantages offer to investment and regulation. There were approximately 7000 funds recorded in Ireland in the year showing that the country managed over €2tn capital. Another factor is the relatively advantageous taxation schemes: investments in ICAV can be easily promoted among the US investors.

Malta
Malta provides certain advantages such as: May provide AIF, flexible regulations and relatively low corporation tax. Today the start-up funds are supported by the MFSA while SICAV remains after all the change to the most frequently used fund structure in Malta. In fact, Malta’s corporate tax rate more or less stands at as low as 5 percent for specific forms of business and the country has tax Treaties with over 70 jurisdictions making it even more conducive for foreign investment.

Netherlands
It has a good investment environment for various fund types and some of them are: Limited Liability Companies (BV), Open Preparatory Funds (OPF), Mutual Investment Societies (VBI). As a result, the Dutch AIFMs are having relatively advantageous tax regulations, in addition to relatively low barriers to entries related to registration which are further eased on foreign management companies. Its standard corporate income taxes are at 25% of the overall assessed income.

Estonia
For example, the registration and tax options of Estonia are relatively fast, but the rates remain low for AIFs. Managers The investment Funds Act and Managers (IFMA) assists in the compliance of AIFs with the EU Standards. The usual corporate income is between 14 and 20 percent with the exception of undistributed and reinvested profits which are tax free in Estonia. The jurisdiction also offers a vast array of investment products for its investors.

Conclusion

Hedge funds and mutual funds are examples of AIFs that bring assorted investment choices to those who want passive returns without engaging in active fund management. Registration of AIFs mandates different advantages and requisites depending on the European Union jurisdiction. It is a matter of either making a careful assessment or doing research for a full legal opinion depending on the circumstances. If you require professional advice on choosing which EU member state is most favorable for your AIF and how to register it, please do not hesitate to contact us for consultation services at no charge.

Contact us today if you are planning to create an AIF in 2024: our team will be glad to provide you with individual consultation and assist you in the registration of your fund, as well as in further management.