Investment Funds 2020

Last Updated November 26, 2019

Guernsey

Law and Practice

Authors



Carey Olsen has one of the largest investment fund practices in the offshore world, advising clients on the laws of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey and Jersey. The funds team comprises 22 partners and a total complement of 80 lawyers. Carey Olsen advises on all types of private, public, retail and listed funds, including open and closed-end funds, limited partnerships, unit trusts and companies. The firm has substantial experience in advising on the full spectrum of fund strategies and asset classes, including credit and debt funds, cleantech funds, real estate funds, private equity funds, venture capital funds, hedge funds, green funds, crypto funds and infrastructure funds. Carey Olsen's credentials include: advising on the SoftBank Vision Fund, the world's largest ever investment fund; being the legal adviser to over 1,400 funds across the Channel Islands, more than any other offshore law firm; and representing 10/10 of the world's top private equity firms.

Guernsey is frequently used by advisers and managers globally for the formation/domicile of investment funds. Guernsey is one of the world’s largest offshore finance centres, with a thriving funds industry. Almost 1,000 investment funds, and well over 2,000 sub-funds, are currently domiciled and/or administered in the island. The current value of funds under management and administration in Guernsey is over GBP285 billion, of which just over GBP48 million is invested in Guernsey open-end funds and just over GBP180 billion in closed-end Guernsey funds, with the remainder in non-Guernsey schemes.

Guernsey attracts all types of fund sponsors/managers; ie, sponsors/managers of private funds, hedge funds, listed funds and quasi retail funds (although there is no UCITS equivalent offering in Guernsey). Additionally, within the fund "types" are included the full span of asset classes and strategies, such as alternatives (including private equity, buyout, debt, infrastructure, real estate, venture capital, tech, etc) and open-end funds (again with the range of asset classes). Closed-end alternative/private funds are the most common fund type attracted to Guernsey as a fund domicile.

The majority of open-end funds established in Guernsey are structured as limited companies, protected cell companies or incorporated cell companies.

The majority of closed-end funds established in Guernsey are structured as limited partnerships.

Unit trusts are also used for both open and closed-end Guernsey funds.

All types of company offer limited liability to investors, are managed by a board of directors and are non-tax transparent and are deemed Guernsey resident for Guernsey tax purposes. A cellular company (ie, a protected cell company or an incorporated cell company) provides by way of statute for the creation, within the single legal entity of that company, of separate pools of assets segregated from the other assets and liabilities of the company and its other cells, with creditors having recourse limited to the assets of a particular cell. An incorporated cell company takes this statutory segregation one step further such that each cell is a separately registered legal entity with its own memorandum and articles of incorporation, its own registration number and its own board of directors (albeit that the board composition of each incorporated cell must be identical to each other and the company as a whole). In a protected cell company, the cells are not separately registered legal entities and the protected cell company has a single board of directors and memorandum and articles of incorporation.

A limited partnership is comprised of one or more general partners who are jointly and severally liable for all debts of the limited partnership without limitation; and one or more limited partners who contribute (or agree to contribute) a specified sum to the capital of the limited partnership, and who are not liable for any debts of the limited partnership beyond the amounts contributed (or agreed to be contributed). The property of the limited partnership is held on trust by the general partners jointly as assets of the limited partnership in accordance with the terms of the limited partnership agreement. Limited partnerships are tax transparent for Guernsey tax.

A unit trust is not a separate legal entity but is a fiduciary relationship between a trustee and one or more beneficiaries in relation to particular assets, which relationship is constituted by an agreement in writing, commonly known as a “trust instrument”. In the context of a unit trust that is a fund, often the trust instrument will contain (in addition to elements/provisions relating to the relevant trust law) contractual provisions that will exist as between a manager (appointed by the trustee to manage the assets) and the trustee. The assets of a unit trust are held by its trustee on trust for the benefit of the beneficiaries – the unit-holders (investors) –  and are managed by the manager, who may appoint one or more investment managers or advisers to assist it. Contracts in relation to the management and administration of the trust will be entered into by the manager, whereas the trustee will enter into contracts in relation to the assets themselves, such as bank deposits, borrowings and security agreements.

Participants' interest in companies is called shares, while for limited partnerships, it is called limited partnership interests and for unit trusts, it is called units.

Guernsey investment managers and/or investment advisers of alternative investment funds are principally established as companies or limited liability partnerships.

Every “collective investment scheme” (a “fund”) domiciled in Guernsey will be subject to the provisions of Guernsey’s principal funds legislation – The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended (the “POI Law”) – and regulated by Guernsey’s regulatory body for the finance sector – the Guernsey Financial Services Commission (GFSC). The POI Law splits Guernsey funds into two categories:

  • “registered funds”, which are registered with the GFSC; and
  • “authorised funds”, which are authorised by the GFSC.

The difference between authorised funds and registered funds is essentially that authorised funds receive their authorisation following a substantive review of their suitability by the GFSC, whereas registered funds receive their registration following a representation of suitability from a Guernsey body holding a POI Law licence (the administrator, who scrutinises the fund and its promoter in lieu of the GFSC and takes on the ongoing responsibility for monitoring the fund), effectively a form of "self-certification" by a Guernsey-licensed administrator.

The rules governing the different classes of Guernsey funds also distinguish between whether they are open-ended or closed-ended (or can choose from either). A Guernsey fund is open-ended if the investors are entitled to have their units redeemed or repurchased by the fund at a price related to the value of the property to which they relate (ie, the net asset value).

The POI Law grants the GFSC the ability to develop different classes of authorised and registered funds and determine the rules applicable to such classes. The following types of authorised and registered funds are currently available.

  • Authorised funds.
    1. Class A – retail funds offering. Class A Funds have largely been superseded by the AIFMD regime. Open-ended only.
    2. Class B – can be structured as retail products marketed to the public, or established as strictly private or institutional funds. Open-ended only.
    3. Class Q – not retail funds as they can only be beneficially owned by qualifying professional investors (essentially, government bodies or high net worth individuals or entities, with a minimum investment of USD100,000). Open-ended only.
    4. ACIS – authorised closed-end investment schemes. Closed-end funds that are subject to the GFSC's permanent and continuing supervision.
  • Registered funds.
    1. RCIS funds – registered closed-end investment schemes, commonly referred to as “registered funds” (as they were the only type of registered fund until the introduction of private investment funds). RCIS funds may be open or closed-ended.
    2. Private Investment Funds (PIFs) – intended for funds with a small number of investors where there exists a close relationship between the manager of the PIF and the investors. In recognition of this close relationship, the PIF rules do not require an offering document. The PIF must contain 50 or fewer investors and can add no more than 30 investors per year after the first year. The manager of the PIF is responsible for making certain representations and warranties to the GFSC on the ability of investors to suffer losses. Other than this, the PIF rules are not prescriptive concerning the features of the fund (for instance, in relation to investment powers) but require ongoing notification of specific events. There are no restrictions on who can invest in a PIF. They are not suitable to be used as retail funds.
    3. Qualifying Investor Funds (QIFs) – an authorised or registered fund may apply to the GFSC to be approved as a QIF, following which, the QIF Guidance Notes will apply to it but it must continue to comply with the rules relevant to the type of authorised or registered fund that it is. QIFs may only admit investors that are professional investors, experienced investors or knowledgeable employees. The QIF must have a promoter (ie, the party ultimately responsible for the fund's success) that is fit and proper; there must be effective procedures in place to ensure that only qualifying investors are admitted; and the economic rationale for the fund and any attendant risks must be clearly disclosed. QIFs may be open or closed-ended.
    4. Manager-Led Products (MLPs) – consistent with the approach taken by the EU in the AIFM Directive, the MLP regime regulates only the primary alternative investment fund manager (AIFM) in respect of one or more alternative investment funds (AIFs). The MLP regime is intended to be used by AIFMs seeking to market an AIF into an EU member state under its national private placement regime. AIFMs wishing to access the MLP regime must comply with Guernsey's AIFMD Rules, which mirror the rules of the AIFMD.

The GFSC's standard application procedure for authorised funds (ie, Class A Funds, Class B Funds, Class Q Funds and ACIS Funds) is a three-stage process.

  • Stage one – outline authorisation.
  • Stage two – interim authorisation.
  • Stage three – formal authorisation once all issues have been resolved and final documentation has been received.

Core documents:

  • constitutional documents of the fund vehicle;
  • information particulars/offering memorandum;
  • application form/subscription agreement; and
  • material contracts; eg, investment management agreement, administration agreement, custody agreement as applicable.

The GFSC provides the following indicative timeframes:

  • outline authorisation within 28 business days;
  • interim authorisation within 10 business days; and
  • formal authorisation within 7 business days.

The GFSC offers fast-track applications in respect of:

  • RCIS funds and QIFs (3 business days);
  • fast-track licence applications in respect of RCIS funds and QIFs (10 business days, which may run concurrently with the relevant fund application); and
  • PIFs (including the manager's licence) (1 business day).

Core documents for registered funds.

  • RCIS funds:
    1. constitutional documents of the fund vehicle;
    2. information particulars/offering memorandum;
    3. subscription agreement; and
    4. material contracts; eg, investment management agreement, administration agreement.
  • PIFs:
    1. constitutional documents of the fund vehicle;
    2. subscription agreement; and
    3. material contracts; eg, investment management agreement, administration agreement.

NB: PIFs are not required to produce information particulars/an offering memorandum.

Investor limited liability is provided by the fund vehicle. The most commonly used fund vehicles – limited companies, limited partnerships and unit trusts – all offer limited liability to investors. The limits or restrictions on benefiting from limited liability are in general terms typically related to whether investors participate in the "management" of the fund; eg, a limited partner in a fund that is a limited partnership may lose his limited liability status if he participates in the management of the limited partnership.

An offering document (made up of one or more documents, which may include the core documents of the fund, as set out above), containing the requisite disclosures, must be produced for all types of authorised funds and for registered funds other than PIFs. In each case, the specific disclosure requirements for each fund type must be met.

Class A Fund

The fund's prospectus must state/contain:

  • a description of the fund;
  • its investment objective and policy;
  • reporting, distributions and accounting dates;
  • characteristics of the units;
  • particulars of the manager;
  • particulars of the directors where the fund is a company;
  • particulars of the trustee;
  • particulars of any investment adviser;
  • the name of the auditor;
  • material contract summaries;
  • details of the name and address of the registrar;
  • details of payments to be made out of fund property;
  • disclosure of any decision to treat income expense payments as a capital expense;
  • an estimate of the expenses to be incurred by a company fund in respect of its movable and immovable property;
  • details of the valuation policy and procedures;
  • details of the dealing policy and procedures;
  • in respect of a single-priced fund, disclosures in respect of dilution;
  • the manager's normal basis of pricing (forward and historic);
  • details of any preliminary charge;
  • details of any redemption charge;
  • information on the umbrella fund, if relevant;
  • application of the prospectus contents to an umbrella fund;
  • details of any marketing arrangements into the EEA; and
  • any other material information reasonably required by an investor to make an informed investment decision.

Class B Fund

The fund's information particulars must state/contain:

  • the name and structure of the fund;
  • the names and addresses of key service providers to the fund;
  • the investment objectives and restrictions;
  • the hedging powers and restrictions (or an appropriate negative statement);
  • the borrowing powers and restrictions (or an appropriate negative statement);
  • certain accounting and reporting matters;
  • the issue and redemption procedure;
  • the valuation procedure;
  • holders' rights;
  • the distribution policy;
  • directors' and other material interests;
  • fees and expenses;
  • sufficient risk warnings;
  • the fund's tax status and tax treatments in jurisdictions where it will be marketed; and
  • any other material information reasonably required by an investor to make an informed investment decision.

Class Q Fund

The fund's offering documents must state:

  • the name and status of the fund as a Class Q fund;
  • the names and addresses of key service providers to the fund;
  • a definition of qualifying professional investors and a statement that only qualifying professional investors are eligible to invest;
  • the constitution and objectives of the fund;
  • the characteristics of units in the fund;
  • disclosures in respect of the valuation of the property, charges and distributions;
  • the sale and redemption procedure;
  • when annual accounts will be published;
  • sufficient risk warnings; and
  • any other material information reasonably required by an investor to make an informed investment decision.

ACIS Fund

The fund's information particulars must state/contain:

  • the name and structure of the fund;
  • the names and addresses of key service providers to the fund;
  • the investment objectives and policy;
  • the duration of the fund;
  • details of the accounting and reporting policies and procedures;
  • the subscription procedures;
  • the valuation procedures (if any);
  • shareholders' rights;
  • the distribution policy;
  • details of the fees and expenses;
  • the fund's tax status and tax treatments in jurisdictions where it will be marketed; and
  • any other material information reasonably required by an investor to make an informed investment decision.

RCIS Fund

The fund's information particulars must state/contain:

  • details relating to the offer;
  • particulars of the share capital, etc;
  • a statement of the value of any goodwill and preliminary expenses;
  • a material contract summary;
  • directors' and other material interests;
  • any options and prior interests;
  • details of all borrowings and borrowing powers;
  • details of the accounting and reporting policies and procedures;
  • registered office details;
  • principal establishments;
  • details of the designated administrator and custodian (if any);
  • details of the directors and secretary of the fund company, corporate general partner or corporate trustee;
  • details of the general partner or trustee (if any);
  • details of the auditor, legal advisers and principal bankers;
  • details of significant beneficial ownership;
  • voting and other rights; and
  • any other material information reasonably required by an investor to make an informed investment decision.

Institutional investors represent the largest single category of investors located in Guernsey-domiciled funds, although sovereign wealth funds, high net worth individuals and family offices are also very active in the investment fund market here.

Guernsey investment managers and/or investment advisers of alternative investment funds are principally established as companies or limited liability partnerships.

Restrictions on ownership of fund interests only apply in relation to funds regulated under the following regulatory regimes in Guernsey.

Class Q Funds

Admission is limited to qualifying professional investors, defined as:

  • governments, local authorities or public authorities (in the Bailiwick or elsewhere); or
  • trustees of trusts that, at the time of investment, have net assets in excess of GBP2,000,000 (or currency equivalent); or
  • a body corporate or limited partnership, if it or any holding company or subsidiary of it has, at the time of investment, net assets in excess of GBP2,000,000 (or currency equivalent); or
  • an individual who has, together with any spouse, at the time of investment, a minimum net worth (which excludes that individual’s main residence and household goods) of GBP500,000 (or currency equivalent).

QIFs

Admission is limited to qualifying investors, which are defined as professional investors, experienced investors and knowledgeable employees.

  • A Professional Investor is:
    1. a government, local authority, public authority or supra-national body (in the Bailiwick or elsewhere); or
    2. a person, partnership or other unincorporated association or body corporate (whether incorporated, listed or regulated in an OECD country or otherwise) whose ordinary business or professional activity includes, or it is reasonable to expect that it includes, acquiring, underwriting, managing, holding or disposing of investments whether as principal or agent, or the giving of advice on investments; or
    3. an affiliate of the Qualifying Investor Fund or an associate of an affiliate of the Qualifying Investor Fund (the terms “affiliate” and “associate of an affiliate” are intended to refer to financial services businesses or financial services professionals associated, directly or indirectly, with the operation of the fund in question); or
    4. an individual investor who makes an initial investment of not less than USD100,000 or equivalent in the fund in question. Provided the initial test has been met, subsequent investments by the same investor may be of lower amounts.
  • An Experienced Investor is:
    1. a person, partnership, or other unincorporated association or body corporate that has in any period of 12 months (whether on his own behalf or in the course of his employment by another person) so frequently entered into transactions of a particular type in connection with:
      1. open-end and closed-end collective investment schemes; and/or
      2. general securities and derivatives as defined in Schedule 1 of the POI Law (in summary, that definition includes equities, bonds, warrants, options, futures, contracts for differences and rights on any of those investments);
      3. being transactions of substantial size entered into with, or through the agency of, reputable persons who carry on investment business, that he can reasonably be expected to understand the nature of, and the risks involved in, transactions of that description; or who provides a certificate from an appropriately qualified investment adviser confirming that the investor has obtained independent advice.
  • A Knowledgeable Employee is:
    1. a person who is (or has been within a period of three years up to the date of application for investment in the Qualifying Investor Fund) an employee, director, general partner, consultant or shareholder of, or to, an affiliate appointed by the Qualifying Investor Fund to advise, manage or administer the investment activities of the Qualifying Investor Fund, who is acquiring an investment in the Qualifying Investor Fund as part of his remuneration or an incentive arrangement or by way of co-investment, either directly or indirectly through a personal investment vehicle, such as a trust, for, or substantially for, that person; or
    2. any employee, director, partner or consultant or any person referred to in (b) under "Professional Investor" above or anyone who has fulfilled such a role in respect of any person referred to in (b) under "Professional Investor" above within a period of three years up to the date of application for investment in the Qualifying Investor Fund. The term “employee” would only cover persons who are, or have been, employed in a relevant role and would not extend to clerical, secretarial or administrative roles.

PIFs

Only investors able to sustain any losses incurred on their investment at the time they make their investment may be admitted to a PIF.

Investment business in Guernsey is regulated by the GFSC, and the principal legislation that governs the conduct of investment business (including funds and associated entities) is the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (POI Law). Each type of collective investment scheme is subject to particular rules issued by the GFSC; for example, in respect of RCIS funds, the Registered Collective Investment Scheme Rules, 2018.

Only Class A funds, which have been largely superseded by the AIFMD regime, are subject to regulatory limitations on their investments.

The requirement to have a Guernsey-based manager depends on the particular regulatory regime chosen to regulate the fund. For the most part, the regulatory regimes do not require a Guernsey-based manager (save for PIFs, as described below). However, as indicated in 1.1 State of the Market, the most common fund type is the closed-end private fund, which is generally structured as a limited partnership or corporate. Consequently, in the context of the limited partnership structure, the Guernsey-based general partner of these funds is generally the "manager" of the fund, which is then advised by a non-Guernsey adviser (generally UK-based). In the corporate structure the manager is usually non-Guernsey (again, generally UK or US-based).

All Guernsey funds must appoint a local designated administrator, which must be licensed by the GFSC. The designated administrator conducts the day-to-day administration of the fund and has certain oversight responsibilities to ensure that the fund is operated in accordance with its constitutional and offering documents, and Guernsey law and regulation.

All open-end funds must appoint a Guernsey custodian, licensed by the GFSC. Institutional or expert investor hedge funds can be permitted to appoint a foreign prime broker rather than a local custodian or trustee, who is not required to offer physical segregation of fund assets from its own, so long as the fund prospectus makes clear the risks of such arrangement. Retail or less sophisticated investor hedge funds can be permitted to appoint a foreign prime broker to take control of the fund’s property, but will normally be expected to appoint a local custodian or trustee to oversee the prime broker.

All PIFs must appoint a Guernsey-based manager, licensed by the GFSC, which is responsible for making certain representations and warranties to the GFSC on the ability of investors to suffer losses.

As you would expect from a jurisdiction with over GBP280 billion of funds under management and administration, Guernsey has a wealth of first-class fund service providers, including administrators, lawyers, auditors and custodians. This creates a virtuous circle – as funds under management increase, so does the depth of expertise, which in turn attracts further funds under management.

Guernsey also benefits from a number of experienced independent non-executive directors to provide additional investment management experience and also guidance and oversight to funds and to ensure that the highest standards of corporate governance are observed.

The Guernsey regulator, the GFSC, (as is the case with regulators of most other jurisdictions) has direct authority only over those entities that it has licensed or authorised and that conduct business in or from within Guernsey, and conversely those entities are answerable to the GFSC. The POI Law makes it a criminal offence, subject to certain exceptions, for any person to carry on or hold himself out as carrying on any "controlled investment business" in or from within Guernsey without a POI Licence issued by the GFSC. Additionally, it is an offence for a Guernsey body to carry on or hold itself out as carrying on any controlled investment business in or from within a territory outside Guernsey unless that body is licensed to carry on that business in Guernsey and the business would be lawfully carried on if it were carried on in Guernsey.

As such, in terms of services (eg, investment management or advisory) being provided by non-Guernsey entities from outside Guernsey, the GFSC does not have direct authority over those providers, which authority rightly sits with the regulator in their home jurisdiction. However, in regulating the relevant fund, the GFSC will consider (as one of the elements in authorising the fund) the quality of the proposed service providers. The home jurisdiction, home regulatory body and the size and reputation of the provider are all considered by the GFSC. Funds domiciled in Guernsey are, therefore, free to contract the services of any provider in another jurisdiction, subject always to both a determination by the relevant fund of the fit and properness of the service provider and the oversight of the GFSC over the relevant fund.

The time required to obtain regulatory approval depends on the type of fund registration/authorisation being sought. More detail is provided in respect of each fund type in 2.1.2 Common Process for Setting up Investment Funds.

Pursuant to the POI Law, the promotion of collective investment schemes is a restricted activity and requires a licence under the POI Law (a POI Licence) if carried on in or from within the Bailiwick of Guernsey (Bailiwick), unless one of the statutory exemptions applies.

If certain conditions are met, including registration with the GFSC, EEA AIFs, certain United Kingdom unit trusts, certain Jersey collective investment schemes and certain Isle of Man and Republic of Ireland authorised schemes may be promoted by an overseas promoter without a POI Licence in the Bailiwick.

In addition, neither a POI Licence nor a notification to the GFSC would be required by an overseas promoter if the marketing was carried out on a non-solicitation basis and the GFSC would not normally consider marketing campaigns by an overseas promoter that do not originate from within the Bailiwick and do not specifically target Bailiwick residents (but might include the Bailiwick as part of a wider population) to constitute a restricted activity or to require a POI Licence.

Subject to the regulatory requirements summarised in 2.3.5 Rules Concerning Marketing of Alternative Funds and the restrictions specific to certain types of funds summarised in 2.1.2 Common Process for Setting up Investment Funds, there are no restrictions on the types of investors in Guernsey to whom alternative funds may be marketed.

With regard to investor protection provisions, see 2.2.3 Restrictions on Investors.

Regulatory reporting requirements depend on the relevant fund type and may be summarised as follows.

  • (i) Class A Funds, Class B Funds, Class Q Funds – the manager must provide to the GFSC:
    1. reports issued to investors; and
    2. either an annual notification of any changes to the information contained in the application form, or a confirmation that there are no changes.
  • (ii) RCIS Funds and PIFs – the manager must provide to the GFSC:
    1. either an annual notification of any changes to the information contained in the application form, or a confirmation that there are no changes;
    2. audited annual report and accounts within six months of the year end; and
    3. a quarterly statistical return.
  • (iii) Audited financial statements must be submitted annually to the GFSC.
  • (iv) Statistical returns must be filed quarterly with the GFSC.
  • (v) Proposals for material changes to Guernsey funds must be notified to the GFSC.
  • (vi) Companies, limited partnerships and partnerships are subject to annual return filing requirements with the Registrar of Companies.
  • (vii) Annual tax filings must be made by all companies.

Of the above, only (vi), the Guernsey Registry annual return, is publicly available.

Guernsey maintains a robust yet proportionate, flexible and competitive funds regulatory regime, adopting a risk-based approach to ensure that appropriate levels of investor protection are maintained, whilst at the same time avoiding unnecessarily complex or burdensome regulation (or granting waivers of certain regulatory requirements where considered appropriate).

The attitude of the regulator has through the years been one of fostering constructive approachability by it toward industry. This is built firmly on the basis of a transparent, open and co-operative approach. The GFSC's view has always been to understand at an early stage where there are potential issues and to identify, with the relevant part of industry, solutions to those issues that will ultimately produce the best outcome for all stakeholders and thereby protect the reputation of Guernsey. As such, the regulator is always open to discussions on regulatory questions, opens issues to consultation and publishes guidance on regulatory matters where such guidance would be helpful to practitioners or the industry as a whole.

The GFSC works closely with the funds industry to ensure that the regulatory regime continues to evolve and provide the kinds of structures required by today’s investors, but with the protection of those investors (commensurate with their sophistication) at the forefront. There is ongoing engagement between the GFSC and industry experts to further the island’s interests.

This engagement has given Guernsey a strong track record in innovation, having created the protected cell company over 20 years ago (now copied globally). More recently, the PIF regime was launched, providing a fund class specifically designed to reflect the often close relationship between fund managers and their investors.

The close relationship between the GFSC and Guernsey’s funds industry also ensures a high level of responsiveness. Fund vehicles can be established on a same-day basis and regulatory approval times can be as little as one day. The GFSC by and large adheres to stated timeframes.

The regulator approaches enforcement on a proportionality basis. This means that "enforcement" spans a range of actions from remediation of breaches through to sanctions and criminal proceedings.

Restrictions on types of activity or types of investment and asset protection requirements depend on the relevant fund type and are summarised in 2.2.1 Types of Investors in Alternative Funds.

Subject to certain restrictions in respect of Class A Funds (see below), Guernsey alternative funds may access fund finance for subscription financing and/or leveraging, provided the appropriate borrowing powers and limits are set out in the fund's offering documents and constitutional documents.

A Class A Fund may borrow up to 10% of the value of the fund's property on a temporary basis, subject to any restriction in its constitutional or offering documents, from an eligible institution or an approved bank. Any period of borrowing that exceeds three months must be approved by the fund's trustee/custodian.

Other than the above, there are no statutory or regulatory limits in relation to borrowing, and any such limitations would be a matter for the powers/constitution of the relevant fund.

Finance has traditionally been obtained from banks and/or banking institutions. However, borrowing by Guernsey funds is influenced by the trends in the finance market as a whole and, as such, Guernsey-domiciled funds have access to finance from banks and other alternative institutional or personal lenders, including other funds and specialist debt providers, domiciled both in Guernsey and elsewhere.

No common issues are experienced in relation to fund finance.

If the fund is structured as a company, it will be subject to income tax at 0% unless it obtains tax-exempt status (where no tax will be applicable) for an annual fee of currently GBP1,200. Funds structured as limited partnerships or unit trusts are not themselves subject to Guernsey tax.

Distributions made by a Guernsey fund to Guernsey-resident shareholders may be taxed on the shareholder at the standard income tax rate of 20% for individuals and 0% for corporations irrespective of whether the corporation is itself taxable in Guernsey on sources of income at a rate other than 0%. Distributions made by a fund to non-Guernsey resident investors, whether made during the life of the fund or by distribution on liquidation, will not be subject to Guernsey tax provided such payments are not taken into account in computing the profits of any permanent establishment situate in Guernsey through which such investor carries on a business in Guernsey.

A Guernsey fund that is structured as a company and that has not obtained tax-exempt status at the time a distribution is made would be required to withhold tax at the applicable rate in respect of any distributions made (or deemed to have been made) to shareholders who are Guernsey-resident individuals. Under Guernsey tax law, no withholding of tax should be required in respect of distributions to Guernsey-resident unit-holders of Guernsey funds that are not structured as companies or if, at the time a distribution is made, the Guernsey fund structured as a company has tax-exempt status.

There is no stamp duty or equivalent tax payable in Guernsey on the issue, transfer or redemption of units in Guernsey funds. In addition, Guernsey no longer charges document duty on the creation or increase of authorised share capital.

The States of Guernsey has passed enabling legislation for the introduction of a system of goods and services tax (GST); however, no decision as to the introduction of GST has been made.

Under current Guernsey tax law, there is no liability to capital gains tax, wealth tax, capital transfer tax or estate or inheritance tax on the issue, transfer or realisation of units in Guernsey funds (save for registration fees and ad valorem duty for a Guernsey grant of representation when the deceased dies leaving assets in Guernsey that required presentation of such a grant).

Guernsey has a wide-ranging anti-avoidance provision, which targets transactions where the effect of the transaction or series of transactions is the avoidance, reduction or deferral of a tax liability. At his discretion, the Director of the Revenue Service will make such adjustments to the tax liability to counteract the effect of the avoidance, reduction or deferral of the tax liability.

Guernsey is committed to adopting the base erosion and profit shifting (BEPS) minimum standards. Guernsey has implemented country-by-country reporting in respect of accounting periods commencing on or after 1 January 2016 and has also adopted the spontaneous exchange of tax rulings with other jurisdictions. On 7 June 2017, Guernsey, along with over 60 other jurisdictions, signed the OECD's Multilateral Instrument to implement tax treaty-related measures to combat BEPS and treaty abuse.

Like other offshore jurisdictions, Guernsey has recently implemented legislative economic substance requirements, effective from 1 January 2019, to address concerns raised by the EU Code of Conduct Group on Business Taxation that Guernsey’s corporate tax system could facilitate offshore structures aimed at attracting profits that do not reflect real economic substance. A Guernsey tax resident company (Resident Company) will be subject to substance requirements where and to the extent that it carries on a relevant activity. For the funds industry, the authors expect that the most relevant of the above activities for In-Scope Companies will be fund management, financing, headquartering, and distribution and services centres. However, collective investment schemes are not in-scope and neither are non-company entities such as limited partnerships, limited liability partnerships and trusts, although a corporate general partner or corporate trustee may be.

Guernsey does not offer specifically retail funds other than Class A Funds, which have largely been superseded by the AIFMD regime. Otherwise, all fund types are open to retail investors, subject to the relevant rules specific to each fund type, other than Class Q Funds, QIFs and PIFs, which would not be suitable to retail investors. Subject to those considerations, the responses in respect of alternative investment funds apply equally to retail funds.

See 2.1.2 Common Process for Setting up Investment Funds.

See 2.1.3 Limited Liability.

See 2.1.4 Disclosure Requirements.

See 2.2.1 Types of Investors in Retail Funds.

See 2.2.2 Legal Structures Used by Fund Managers.

See 2.2.3 Restrictions on Investors.

See 2.3.1 Regulatory Regime.

See 2.3.2 Requirements for Non-local Service Providers.

See 2.3.3 Local Regulatory Requirements for Non-local Managers.

See 2.3.4 Regulatory Approval Process.

See 2.3.5 Rules Concerning Marketing of Alternative Funds.

See 2.3.6 Marketing of Retail Funds.

See 2.3.7 Investor Protection Rules.

See 2.3.8 Approach of the Regulator.

See 2.4 Operational Requirements.

See 2.5 Fund Finance.

See 2.6 Tax Regime.

See 2.4 Operational Requirements.

Carey Olsen (Guernsey) LLP

PO Box 98, Carey House
Les Banques
St Peter Port
Guernsey GY1 4BZ
Channel Islands

+44 (0)148 172 7272

+44 (0)148 171 1052

guernsey@careyolsen.com www.careyolsen.com
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Law and Practice

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Carey Olsen has one of the largest investment fund practices in the offshore world, advising clients on the laws of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey and Jersey. The funds team comprises 22 partners and a total complement of 80 lawyers. Carey Olsen advises on all types of private, public, retail and listed funds, including open and closed-end funds, limited partnerships, unit trusts and companies. The firm has substantial experience in advising on the full spectrum of fund strategies and asset classes, including credit and debt funds, cleantech funds, real estate funds, private equity funds, venture capital funds, hedge funds, green funds, crypto funds and infrastructure funds. Carey Olsen's credentials include: advising on the SoftBank Vision Fund, the world's largest ever investment fund; being the legal adviser to over 1,400 funds across the Channel Islands, more than any other offshore law firm; and representing 10/10 of the world's top private equity firms.

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