Investment Funds 2020

Last Updated November 26, 2019

Papua New Guinea

Law and Practice

Authors



Leahy Lewin Lowing Sullivan Lawyers is an independent commercial law firm that advises the government and a wide range of investors and institutions in Papua New Guinea (PNG). The firm, which has its office in Port Moresby, commenced operations in 2003 and has agents and relationships with legal and accounting firms in various parts of the world. The firm's major areas of practice are aviation; banking and finance; competition and market regulation; construction and infrastructure projects; corporate and commercial advisory; employee relations; energy and resources; environment and planning; financial and commercial services, including superannuation; foreign investment in PNG; government law, including corporatisation and privatisation; insolvency and reconstruction; insurance, reinsurance and corporate risk; litigation and dispute resolution; property development, including hotels; shipping; and taxation, including stamp duty and goods and services tax.

To date, Papua New Guinea (PNG) has not been frequently used by advisers and managers for the formation of investment funds. 

There are few investment fund-type opportunities for investors in PNG, other than one open-ended investment fund (Pacific Balance Fund – PBF), and one closed-ended fund (Kina Asset Management Limited Fund – KAML). 

The absence of more funds in PNG is a significant gap in the investment landscape and means that most retail and corporate investors have access only to equities, term deposits and government bonds.

PBF is an open-ended unit trust with assets of about PGK530 million, currently managed by a private sector entity, Melanesian Trustees Services Limited (MTSL). PBF was set up in 1973 within the public sector, but its administration was passed to MTSL in 2002 in order to better safeguard the interests of unitholders. As of December 2016, PBF held PGK381 million in financial assets, almost all of which (PGK380 million) was held in unlisted equities of a wide range of well-known PNG businesses. PBF also held PGK57 million in cash and deposits, and loans to PNG corporates of PGK70 million. Currently, all trades in PBF units have been suspended pending the resolution of outstanding queries from the Securities Commission of PNG (the Commission) concerning dividend payments for prior years. PBF has stopped accepting contributions from new members, and will not resume doing so until those issues are resolved.

KAML is a listed investment company that administers assets of PGK61.4 million, including PGK52 million in financial investments, with a focus on equity investments (40% domestic/60% international as of December 2018). At the same date, KAML also held about PGK2 million in government inscribed stock (GIS) and PGK9 million in cash and term deposits. KAML is closed to new investors, who can only participate (or exit) through secondary market purchases on PNGX Markets (PNGX), the Papua New Guinea national stock exchange, formerly known as the Port Moresby Stock Exchange (POMSOX). 

The Capital Markets Act 2015 (CM Act) regulates all investment funds in PNG – both alternative investment funds and retail funds.

In this Chapter, the term “alternative investment fund” is intended to cover non-traditional private fund strategies such as private equity, hedge and real estate funds. By comparison, the term “retail fund” is intended to cover traditional mutual, authorised, regulated or registered funds that are commonly marketed to retail investors.

PNG law does not distinguish between alternative investment funds and retail funds, as such. Although there is no overt distinction between alternative investment funds and retail funds, the disclosure requirements (see 2.1.4 Disclosure Requirements and 3.1.4 Disclosure Requirements) recognise that certain issues of securities (“excluded offers”, “excluded invitations” and “excluded issues”) do not require a prospectus. These “exclusions” will be particularly relevant to many non-retail funds – ie, alternative investment funds.

Given that there are currently no alternative investment funds in PNG, it is difficult to talk in terms of common structures used for alternative investment funds.

If an investment fund (either an alternative investment fund or a retail fund) was to be set up in PNG, it would almost certainly be structured as a unit trust scheme or a managed investment scheme.

A "unit trust scheme" is defined in the CM Act to mean any arrangement made for the purpose of, or having the effect of, providing facilities for the participation by persons as beneficiaries under a trust in profits or income arising from the acquisition, holding, management or disposal of:

  • equities securities;
  • debt securities;
  • derivatives; or
  • any other property (see CM Act Section 2).

A "management investment scheme" is defined in the CM Act to mean a scheme to which each of the following applies:

  • the purpose or effect of the scheme is to enable persons taking part in the scheme to contribute money, or to have money contributed on their behalf, to the scheme as consideration to acquire interests in the scheme;
  • those interests are rights to participate in, or receive, financial benefits produced principally by the efforts of another person under the scheme, whether those rights are actual, prospective or contingent, and whether they are enforceable or not; and
  • the holders of those interests do not have day-to-day control over the operation of the scheme, regardless of whether or not they have the right to be consulted or to give directions, but this does not include the following:
    1. a scheme under which each participant takes part in the scheme only by holding one or more interests in property if, in respect of each interest;
      1. it is an interest in separately identifiable underlying property;
      2. either the participant holds both the legal and beneficial interest in the property or the legal interest in the property is held on a bare trust for the participant; or
      3. the value of the interest is not substantially dependent on contributions being made by other participants or the use of other participants' contributions;
    2. a scheme that would be a managed investment scheme only because it involves pure risk contracts of insurance; and
    3. a scheme that would be a managed investment scheme only because it involves life insurance policies under the Banking and Financial Institutions Act 2000; and
    4. a pure risk contract of insurance in Paragraph (b) means a contract of insurance that does not, and never will, have a value on its cancellation or surrender that is greater than the sum of premiums paid to the insurer (see CM Act Section 2).

A person must not establish or operate a unit trust or managed investment scheme in PNG unless:

  • they are a licensed trustee under the CM Act and appointed by the members or unit holders of a managed investment scheme or a unit trust scheme to act as trustee of the scheme; and
  • the unit trust or managed investment scheme is approved and registered by the Commission (CM Act Section 184(1)).

This requirement applies to both an alternative investment scheme and a retail scheme.

A person who contravenes the above requirement commits an offence and is liable to a fine not exceeding PGK10 million or imprisonment for a term not exceeding ten years, or both (see CM Act Section 184(2)).

To register a unit trust or managed investment scheme, a person must lodge an application with the Commission. The application must state the name and address of the registered office, the proposed trustee of the unit trust or the managed investment scheme.

The following documents must be lodged with the application:

  • a copy of the scheme's trust deed; and
  • a statement signed by the directors of the proposed trustee that the trust deed complies with Section 210 of the CM Act (see CM Act Section 185).

The Commission must register the scheme within 21 days of the application being lodged, unless it appears to the Commission that:

  • the application does not comply with Section 185 of the CM Act;
  • the proposed trustee does not meet the requirements of Section 189 of the CM Act; or
  • the scheme's trust deed does not meet the requirements of Section 210 of the CM Act (see CM Act Section 186).

The Commission is required to keep a record of the registration of the scheme.

A unit trust scheme or a managed investment scheme must be registered under Section 186 of the CM Act where:

  • it has more than 20 members;
  • it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting unit trust schemes or a managed investment scheme; or
  • a determination is in force in relation to the scheme, and the total number of members of all of the schemes to which the determination relates exceeds 20 (see CM Act Section 187).

Where a person operates a unit trust or a managed investment scheme in contravention of Section 184(1), the following may apply to the Court to have the scheme wound up:

  • the Commission;
  • the trustee of the scheme; and
  • a member of the scheme.

The Court may make any orders it considers appropriate for the winding up of the scheme.

Every promoter and each individual director, the chief executive officer, the chief financial officer and the company secretary are guilty of an offence and are subject to the penalty under Section 184(2) (see CM Act Section 188).

PNG law recognises limited liability in relation to companies. As a general rule, a shareholder is not liable for the debts of the company, and the shareholder’s only liability is to pay the issue price of the shares it holds. Accordingly, individuals who invest in a managed fund through a company will not be liable for the debts of that company, except to the extent that their shares are not fully paid.

There are particular disclosure and reporting requirements in PNG.

Subject to the exceptions noted below, the initial disclosure requirement for any investment fund (whether an alternative investment fund or a retail fund) is the requirement to have a prospectus approved by the Commission and lodged with the Registrar of Companies. The prospectus must contain all information which investors and their professional advisers would reasonably require and reasonably expect to find in the prospectus, for the purpose of making an informed assessment of:

  • the assets and liabilities, financial position, profits and losses and prospects of the issuer and, in the case of a unit trust scheme, of the scheme;
  • the rights attaching to the securities; and
  • the merits of investing in the securities and the extent of the risk involved in doing so (CM Act Section 132).

A supplementary prospectus must be submitted to the Commission for approval and registered with the Registrar of Companies where the issuer becomes aware of the following, after the prospectus has been approved but before the issue of securities:

  • a matter has arisen and information in respect of that matter would have been required to be disclosed at the time the prospectus was prepared;
  • there has been a significant change affecting a matter disclosed in the prospectus;
  • the prospectus contains a material statement or information that is false or misleading; and
  • the prospectus contains a statement or information from which there is a material omission (CM Act Section 134(1)).

A supplementary or replacement prospectus is regarded as replacing the prospectus previously registered under Section 129 of the CM Act. Where a supplementary prospectus has been approved by the Commission, every copy of the original prospectus issued after the registration of the supplementary prospectus must be accompanied by a copy of the supplementary prospectus.

There is no obligation to register a prospectus or a supplementary prospectus in respect of an offer or invitation to subscribe for or purchase securities (this term includes units in a unit trust scheme or prescribed investments, and includes any right, option or interest in respect of units in a unit trust scheme or prescribed investments, but does not include derivatives) where the offer or invitation qualifies as an “excluded offer” or “excluded invitation” (as described in the CM Act, Schedule 6), or for an issue of securities where the issue qualifies as an “excluded issue” (as described in the CM Act, Schedule 7) (CM Act, Section 127).

An alternative investment fund and even some retail funds could fairly easily be structured so that the issuing of units in the fund qualifies as an excluded offer or excluded invitation to subscribe for or purchase securities or an excluded issue of securities. In those circumstances, no prospectus is required.

An excluded offer and an excluded invitation include the following:

  • an issue made to an underwriter under an underwriting or sub-underwriting agreement;
  • an issue in respect of securities of a corporation that are not listed and are made to existing members or debenture holders of such corporation by means of a rights issue, which is not an issue or allotment to which Section 133 (Abridged Prospectus For Renounceable Rights Issue) of the CM Act applies;
  • an issue made to a unit trust scheme or managed investment scheme;
  • an issue made to a holder of a capital market licence who carries on the business of dealing in securities;
  • an issue made exclusively to persons outside PNG;
  • an issue made to a closed-ended fund approved by the Commission;
  • an issue made to a holder of a capital market licence who carries on the business of fund management;
  • an issue made to a person who acquires securities pursuant to an offer, as principal, if the aggregate consideration for the acquisition is not less than PGK250,000 or its equivalent in foreign currencies for each transaction, whether such amount is paid for in cash or otherwise;
  • an issue made with respect to any sale of a unit in a unit trust scheme or a prescribed investment scheme by a personal representative, liquidator, receiver or trustee in bankruptcy or liquidation, as the case may be, in the normal course of the realisation of assets;
  • all trades in securities effected on a stock market of a stock exchange that is approved by the Commission pursuant to Section 9(2) of the CM Act or such other exchange outside PNG that is recognised under the rules of the stock exchange;
  • an issue of securities made or guaranteed by the State or the Bank of PNG;
  • an issue in respect of securities of a private company;
  • an issue in respect of securities that are acquired pursuant to a takeover offer that complies with the relevant law applicable to such offers;
  • all trades in securities effected in the money market;
  • an issue in respect of securities that are acquired by employees or directors of a corporation or its related corporation, pursuant to an employee share or employee share option scheme;
  • an issue made to any creditor or holder of securities of a company undergoing a scheme of arrangement or compromise under Section 176 of the Companies Act;
  • an issue made to a licensed institution as defined in the Banks and Financial Institutions Act 2000;
  • an issue made to an insurance company registered under the Insurance Act 1995;
  • an issue made to a statutory body established by an Act of Parliament or an enactment of any State;
  • an issue of securities by a corporation pursuant to the exercise of an option, a warrant or a transferable subscription right, in respect of which a prospectus has been registered under this Act or in respect of which the securities to which the option, warrant or transferable subscription right converts into are listed securities;
  • an issue of shares by a corporation pursuant to a provision contained in a convertible note, whether the note was issued by that corporation or by another corporation, in respect of which a prospectus has been registered under this Act or in respect of which the securities to which the option, warrant or transferable subscription right converts into are listed securities;
  • an issue in respect of shares or units in a unit trust scheme or prescribed investment scheme that are issued in satisfaction of dividends payable by the issuer to the holders of existing shares or units that were issued pursuant to a prospectus;
  • a bonus issue of securities made by a corporation;
  • an issue in respect of securities of a foreign corporation whose securities have gained admission on such other exchange outside PNG that is recognised under the rules of a stock exchange, made to existing members or debenture holders of such foreign corporation by means of a rights issue; and
  • an issue of securities of a foreign corporation whose securities have gained admission on such other exchange outside PNG that is recognised under the rules of a stock exchange, made to existing members or debenture holders of such foreign corporation by means of a rights issue, provided that such issue has been accompanied by a prospectus or disclosure document approved by the foreign supervisory authority of such foreign corporation.

A similar, but not identical, list of exceptions defines an “excluded issue” as an issue made to a person who acquires securities pursuant to an offer, as principal, if the aggregate consideration for the acquisition is not less than PGK250,000 or its equivalent in foreign currencies for each transaction, whether such amount is paid for in cash or otherwise qualifies as an excluded offer, an excluded invitation and an excluded issue. This exception will be particularly relevant for most alternative investment funds.

Where an offer, invitation or issue is an excluded offer, excluded invitation or excluded issue, an information memorandum should still be issued in lieu of a prospectus. Currently, this information memorandum does not need to be approved by the Commission nor lodged with the Registrar of Companies.

There is definitely a market for both alternative investment funds and retail investment funds in PNG.

A growing middle class has relatively few options regarding investment of its surplus funds. Currently, that money is generally placed on fixed term deposit with the local banks or invested in housing or vacant land (real property). Most Papua New Guineans do not hold shares and, as a result, trades on PNGX only average about 50 per month. Managed investment funds would provide a much-needed investment alternative for middle class Papua New Guineans with surplus funds.

There is also a large expatriate work force in PNG that may also find local investment funds attractive.

Depending on the nature of the investment funds, PNG superannuation funds and corporations might also be persuaded to invest some of their funds, but middle class individuals are the most obvious potential investors.

Given the small number of investment funds in PNG currently, it is misleading to talk of legal structures that are “typically” used.

However, the unit trust is the legal structure most likely to be used when establishing any type of investment fund in PNG.

This is because the market, although relatively unsophisticated, is familiar with trust structures.

Currently there are no restrictions in PNG on the types of investors that may invest in an alternative investment fund, unless the particular fund wishes to avoid the need to register a prospectus in which the issuing of units will need to be structured so that it satisfies the requirements necessary to qualify as an “excluded offer” of or an “excluded invitation” to subscribe for securities, or as an “excluded issue” of securities; please see 2.1.4 Disclosure Requirements.

PNG is an under-regulated economy, and regulatory impediments to investment are relatively few.

In recent years, a weak local currency (ie, the PNG Kina or PGK), a country-wide shortage of foreign exchange and the imposition of strict foreign exchange controls have impeded investment outside PNG. Surplus funds must be invested locally, and this has helped underpin the local property market.

Remittance of monies from PNG is subject to PNG's foreign exchange control and may require a tax clearance certificate.

A tax clearance certificate issued by PNG's Internal Revenue Commission is required for the transfer of any money from PNG to any of the following countries: the Bahamas, Bermuda, the British Channel Islands, the British Virgin Islands, the Cook Islands, Gibraltar, Grenada, Hong Kong, the Isle of Man, Liberia, Liechtenstein, Luxembourg, Nauru, Netherlands Antilles, Norfolk Island, Panama, Switzerland, Tonga and Vanuatu.

Otherwise, a tax clearance certificate will only be required if a PNG resident wants to transfer more than PGK500,000 (approximately USD135,000) from PNG to another country in any calendar year.

PNG is currently facing a serious shortage of foreign currency and, as a result, there is a waiting period for the commercial banks to convert PGK to foreign currencies (particularly USD, GBP and AUD) and transfer those funds offshore. The larger the PGK amount involved, the more difficult it is to convert and transfer the proceeds offshore.

There is currently no capital gains tax in PNG, with the result that capital gains made on the sale of most investments (including units in a unit trust and shares) are income tax free.

The above restrictions make it difficult for PNG residents to invest in managed funds situated outside PNG, and may also make it difficult for fund managers to repatriate fees and profits offshore PNG. At the same time, these restrictions mean that a PNG resident who wants to invest in a managed fund is really limited to investing in a fund situated in PNG.

In PNG, investment funds are regulated under the general provisions of the CM Act dealing with capital markets regulations (CM Act, Part III), the issue of securities (CM Act, Part IV) and unit trusts and managed investment schemes (CM Act, Part V).

There is no specific legislation regulating the establishment or management of investment funds, nor advice provided in respect of them.

The CM Act came into force in January 2018 and replaces the Securities Act 1997.

Both alternative investment funds and retail funds are regulated under the CM Act, which makes no distinction between alternative investment funds and retail investment funds.

The CM Act is very poorly drafted and most of the regulations necessary to make the legislation work have not yet been promulgated.

Non-local service providers, including administrators, custodians, director services providers, etc, are subject to regulation/registration requirements in PNG. In particular, non-local service providers will generally need to be certified under the Investment Promotion Act 1992 (IP Act) to carry on business in PNG and, if operating through a foreign company, the foreign company will need to be registered under the Companies Act 1997 (Companies Act) as a foreign company carrying on business in PNG.

Currently, there is no prohibition on an investment fund established in PNG being managed from outside PNG.

However, a non-local manager will generally need to be certified under the IP Act to carry on business in PNG and, if operating through a foreign company, the foreign company will need to be registered under the Companies Act as a foreign company carrying on business in PNG.

The Commission is relatively unfamiliar with investment funds, and a minimum of three months should be allowed for discussions with the Commission before a fund is established in PNG. This lack of experience will make it difficult for the Commission to register a unit trust or managed investment scheme within the 21-day period fixed by the CM Act Section 186.

The CM Act regulates both advertising (Advertising Restrictions) and other marketing activities (Other Marketing Restrictions) in relation to the subscription for and the purchasing and offering of securities. Subject to the exceptions noted below, those restrictions will apply to all investment funds (alternative investment funds and retail funds)

However, the Advertising Restrictions do not apply to an “excluded offer” of nor an “excluded invitation” to subscribe for securities, nor to an “excluded issue of securities”. As noted above, it should be possible to structure many alternative investment funds and some retail funds so that they can take advantage of the “excluded offer”, “excluded invitation” and “excluded issue” exceptions; please see 2.1.4 Disclosure Requirements.

In the CM Act, as already noted, the term “securities” includes units in a unit trust scheme or prescribed investments, and includes any right, option or interest in respect of units in a unit trust scheme or prescribed investments, but does not include derivatives.

The Advertising Restrictions are not unduly onerous.

Subject to what is noted above and below, the Advertising Restrictions prohibit a person from publishing a “notice” (this term includes any notice published in a document, newspaper or periodical or on any medium or in any manner capable of suggesting words and ideas) which:

  • issues or offers securities for subscription or purchase, or makes invitations to subscribe for or purchase securities; and
  • refers either directly or indirectly to:
    1. a prospectus for securities of a corporation (including a corporation yet to be formed);
    2. in the case of a unit trust scheme or a managed investment scheme (including a unit trust scheme or a managed investment scheme yet to be formed), a prospectus for any unit of the unit trust scheme or a managed investment scheme, as the case may be;
    3. an issue, intended issue, offer, intended offer, invitation or intended invitation for securities; or
    4. another notice that refers to a prospectus in relation to an issue, intended issue, offer, intended offer, invitation or intended invitation for securities (CM Act, Section 137(1)).

The Advertising Restrictions do not apply to a notice that is issued or published before the approval of a prospectus:

  • with the consent of the Commission and subject to the terms and conditions it may impose; and
  • which does not contain any information or matter other than the following:
    1. the name of the issuer of securities;
    2. in the case of a unit trust scheme or a managed investment scheme, the name of the unit trust scheme or a managed investment scheme and the names of the trustee in relation to the unit trust scheme or a managed investment, as the case may be;
    3. a concise statement of the general nature of the main business or undertaking or proposed main business or undertaking of the issuer;
    4. the names, addresses and, where appropriate, occupations of the directors or proposed directors;
    5. the names and addresses of stockbrokers, underwriters and the principal advisers in relation to the proposed issue of securities, offer for subscription or purchase of securities, or invitation to subscribe for or purchase securities;
    6. in the case of debentures, the name and address of the trustee for debenture holders;
    7. a brief description of the listing status of the corporation, unit trust scheme or a managed investment on any stock exchange or other similar exchange outside PNG, or a statement that it is intended to apply for permission to list the corporation, unit trust scheme or a managed investment on any stock exchange or other similar exchange outside PNG but no assurance has been given that the corporation, unit trust scheme, or a managed investment will be listed;
    8. confirmation that a prospectus is in the course of preparation and that an issue of securities, offer for subscription or purchase of securities, or invitation to subscribe for or purchase securities is proposed, together with a brief indication of the nature and number of securities and of the possible timing of the issue of the prospectus;
    9. in the case of a unit trust scheme or a managed investment, a description of the persons from whom the units are available for purchase or subscription; and
    10. other information or matters which the Commission may specify in writing (CM Act, Section 137(4)).

Just as importantly, the Advertising Restrictions do not apply to a notice that is issued or published after the approval of a prospectus, which:

  • states that a prospectus in relation to any securities has been approved;
  • specifies the date of the prospectus;
  • specifies where a copy of the prospectus can be obtained;
  • states that any issue of securities to which the prospectus relates will only be made upon the receipt of a form of application referred to in and accompanying a copy of the prospectus; and
  • states the other information or matters which the Commission may specify in writing (CM Act, Section 137(5)).

The Advertising Restrictions do not apply to a preliminary prospectus where certain prescribed and fairly obvious conditions are satisfied.

Furthermore, the Advertising Restrictions do not apply to the issuing or publishing of any or all of the following reports:

  • a report that relates to the affairs of a corporation, unit trust scheme or a managed investment that is listed on a stock exchange which is or has been published only to that stock exchange by or on behalf of the corporation, unit trust scheme or a managed investment;
  • a report of the whole or part of the proceedings at a general meeting of a body corporate or at a meeting of unitholders of a unit trust scheme or a managed investment where the body corporate, unit trust scheme or a managed investment is included in the official list of a stock exchange and the report does not contain any matter other than the matters laid before the meeting; and
  • a report that is a news report or a genuine comment published by a person in a newspaper or periodical or by broadcasting or televising, relating to:
    1. a prospectus that has been approved or information that is contained in this prospectus; and
    2. either of the two reports at the start of this list, if none of the following persons receives or is entitled to receive any consideration or other benefit from a person who has an interest in the success of the issue of securities to which the report or comment relates as an inducement to publish, or as the result of the publication of the report or comment:
      1. the person making the report or comment;
      2. an agent or employee of the person making the report or comment;
      3. where the report or comment is published in a newspaper or periodical, the publisher of the newspaper or periodical; and
      4. where the report or comment is published by broadcasting or televising, the licensee of the broadcasting or television station by which it is published (CM Act, Section 137(7)).

Where it appears to the Commission that a notice, preliminary prospectus or report:

  • contravenes the Advertising Restrictions;
  • contains a statement or information that is false or misleading;
  • contains a statement or information from which there is a material omission; and
  • contains a material misrepresentation, the Commission may by written order served on the person who publishes or issues the notice, preliminary prospectus or report:
    1. direct the person to cease issuing or publishing the notice, preliminary prospectus or report; or
    2. direct the person to take other action as may be specified in the order (CM Act, Section 137(10)).

A person who issues or publishes a notice in contravention of the CM Act, Section 137(1), (4) or (5), issues a preliminary prospectus in contravention of the CM Act, Section 137(6), or issues or publishes a report in contravention of the CM Act, Section 137(7) commits an offence and is liable to a fine not exceeding PGK10 million or imprisonment for a term not exceeding ten years, or both (CM Act, Section 137(12)).

As noted above, the CM Act also imposes Other Marketing Restrictions. Except as otherwise expressly provided in the CM Act, a person must not make an unsolicited:

  • invitation to subscribe for or purchase any securities;
  • offer for subscription or purchase of any securities; or
  • recommendation of any securities (CM Act, Section 151(1)).

The Other Marketing Restrictions do not:

  • prohibit a licensed person or any other person allowed in writing by the Commission to do so from making invitations or offers or recommendations:
    1. in relation to any securities that are listed on a stock market of a stock exchange within PNG or on a stock market of a securities exchange outside PNG which is approved by the Commission; and
    2. to a person or a number of persons who each satisfy at least one of the following conditions:
      1. the person has acquired or sold the securities through the licensed person or any other person allowed in writing by the Commission, in the 12 months before the making of the invitation or offer or recommendation; or
      2. when the invitation or offer or recommendation is made, a written agreement is in force under which the licensed person or any other person allowed in writing by the Commission is to, or may (whether subject to conditions or otherwise), act on the person's behalf in connection with the acquisition or sale of any securities by the person, or advise the person about the acquisition or sale of any securities by the person;
  • prohibit a trustee from providing further information, notices or recommendations to existing unitholders in relation to the investments of these unitholders;
  • prohibit a person allowed in writing by the Commission to do so from issuing these notices or recommendations relating to units in a unit trust scheme or managed investment scheme containing the information as may be allowed by the Commission;
  • prohibit an invitation, offer or recommendation that is made in, or accompanied by, a prospectus that complies with the CM Act;
  • prohibit an invitation, offer or recommendation made in relation to an excluded invitation or excluded offer;
  • apply to an invitation or offer to which the provisions of the Companies Act apply; nor
  • apply to an invitation, offer or recommendation that is prescribed by the Commission by order published in the National Gazette.

A person who contravenes the Marketing Restrictions commits an offence and is liable to a fine not exceeding PGK10 million or imprisonment for a term not exceeding ten years, or both (CM Act, Section 151(6)).

Currently, there is no restriction on persons to whom alternative funds may be marketed in PNG.

Currently, except as noted below, there are no additional investor protection provisions such as restrictions relating to certain categories of investors in certain types of alternative investment funds.

The CM Act imposes criminal liability for false statements in prospectuses (see CM Act Section 142).

The CM Act also imposes civil liability for misleading or deceptive acts in connection with (among other things):

  • any prospectus issued;
  • the allotment of, issue of, offer for subscription or purchase of, or invitation to subscribe for or purchase securities; or
  • the carrying on of negotiations, the making of any arrangements or the doing of any other act preparatory to or in any other way related to any matter referred to in the points immediately above (see CM Act Section 145(1)).

Finally, a person who acquires, subscribes for or purchases securities (which term includes units in a unit trust) and suffers loss or damage as a result of any statement or information contained in a prospectus that is false or misleading, or any statement or information contained in a prospectus from which there is a material omission, may recover the amount of loss or damage from all or any of a variety of persons, including:

  • the issuer and each director of the issuer at the time of the issue of the prospectus, for any loss or damage;
  • a person who consented or caused himself to be named and is named in the prospectus as a director or as having agreed to become a director, either immediately or after an interval of time, for any loss or damage;
  • a promoter, for any loss or damage arising from the prospectus or any relevant portion of the prospectus in respect of which he was a party to the preparation thereof;
  • a principal adviser, for any loss or damage;
  • a person named in the prospectus with his consent as having made a statement that is included in the prospectus or on which a statement made in the prospectus is based, for any loss or damage caused by the inclusion of the statement in the prospectus;
  • a person named in the prospectus with his consent as a stockbroker, underwriter, auditor, banker or advocate of the issuer in relation to the issue of, offer for subscription or purchase of, or invitation to subscribe for or purchase securities, and who has made a statement that is included in the prospectus or on which a statement made in the prospectus is based, for any loss or damage caused by the inclusion of the statement in the prospectus; or
  • a person who authorised or caused the issue of a prospectus in contravention of Section 142 of the CM Act, for any loss or damage caused by such contravention (see CM Act Section 144(1)).

As noted in 2.3.4 Regulatory Approval Process, the Commission is relatively inexperienced and understaffed. Face-to-face meetings are possible and, indeed, essential when trying to obtain approval for a new capital markets product.

The main operational requirements for all investment funds are already detailed above. There are no additional requirements.

Traditionally, PNG has not been used for raising capital from international investors. Domestically, capital has been provided by “plain vanilla” lending by local banks. In addition, some capital has been raised in PNG through PNGX (there are 13 listed companies with an estimated market capitalisation of approximately PGK50 billion (USD15 billion).

The national government raises considerable capital through the use of treasury bills and GIS. PNG government domestic bonds of approximately PGK17 billion were in circulation as of December 2018, made up of short-term government treasury bills and longer-term GIS. The largest holders of these government securities are the commercial banks, superannuation funds and the central bank itself – Bank of Papua New Guinea (BPNG). There is no secondary market, and investors generally hold to maturity.

There are four licensed superannuation funds in PNG, holding assets as of December 2018 of PGK12.4 billion (USD3.6 billion). Saving for retirement is compulsory for employees of companies with more than 15 persons, with contributions from employees (6% of salary) and employers (8.4% of salary). Two funds dominate the industry – Nambawan Super and Nasfund – with combined assets of more than PGK11 billion, serving an aggregate 720,000 members. Each of the superannuation funds has its own strategic asset allocation policies, which are currently focused on government debt, unlisted domestic equities and property.

There is no significant corporate debt market in PNG. One ten-year convertible note was issued by a local PNG bank in 2009, and no further private sector listed bonds have been issued since then. There is also no private placement market for private sector bonds.

There is no active interbank money market in PNG.

A technical assistance team from International Finance Corporation (IFC) visited PNG in July 2018 and again in December 2018 to consider actions necessary to promote a corporate debt market.

IFC also recommended that PNG initiate a separate market consultation on unit trusts, including calling a workshop with market intermediaries and fund managers on actions necessary to offer open-ended funds or unit trusts.

There is no established pattern for the tax regime, given the small number of investment funds in PNG.

Apart from superannuation funds, which have their own rules derived in part from their role in providing income security for retirees, the main regime applied to investment funds is that applying to unit trusts and property unit trusts respectively. Essentially, the regime provides for the “unit trust” to be treated as if it were a company, albeit that the dividends are exempt in contrast to the position that applies to companies generally, which are subject to a further layer of tax under the classical system of company taxation that operates in PNG.

The main options from a taxation perspective when considering establishing an investment fund are as follows:

  • a traditional “common law” trust;
  • a “unit trust” as defined in the Income Tax Act 1959 (Tax Act); and
  • a “property unit trust” as defined in the Tax Act.

PNG has onerous rules applying to trusts, which explains why they are rarely used as a vehicle for carrying on business or investment activities. There are concessional taxation arrangements applying to certain unit trusts. Extreme care is required to ensure that any trust qualifies as a unit trust, and the definitions are very restrictive. The rules applying to ordinary trusts are outlined below, followed by the rules for qualifying unit trusts.

Taxation of Ordinary Trusts

PNG has specific rules dealing with the taxation of trust income, contained in Division 6 of the Tax Act. Under Section 130 of the Tax Act, the trustee of a PNG resident trust is liable to pay income tax on the net income of the trust. The current rate of income tax is 30% of the trust’s net income.

Resident beneficiaries of a resident trust estate are taxable on amounts derived by them from the trust, minus the amount of taxes paid by the trustee. Resident beneficiaries of a resident trust estate are also taxable on undistributed income of the trust to which they are presently entitled. This means, in effect, that the income of trusts in PNG is subject to a taxation system whereby the income is taxed at the trust level, even though the trustee has no beneficial interest in the income, and again when the income is distributed to the beneficiaries.

Where a beneficiary is taxed on income to which it is presently entitled, the Tax Act appears to contemplate that this income is not distributed, and Section 133 of the Tax Act potentially gives a tax credit in respect of the tax paid by the trustee. However, assuming there is a difference between present entitlement and distribution of the income, the credit does not completely eliminate this form of double taxation.

In the case of a resident beneficiary who is presently entitled to income, the trustee is taxed on the net income at 30%, and the beneficiary is taxed at their marginal rate on their share of the pre-tax income. The beneficiary is then also taxed on their share of the after-tax income of the trust. The credit for the trustee’s tax reflects the nil tax position that would apply if the trustee was assessed at the highest marginal rate, which is the basis upon which the provisions were originally drafted. The beneficiary is then taxed on the after-tax income at their marginal rate. Assuming a beneficiary is on the highest marginal rate, the potential tax cost is 79.9% (100 x 47% plus 70 x 47%).

This can be contrasted with the position where there is no beneficiary presently entitled to the income in one year and the income is distributed to a beneficiary in the following year. In this case, the trustee is assessed at the rate of 30% on the net income of the trust in the year the income is derived and the beneficiary is assessed on 70 in the following year. Assuming a beneficiary is on the highest marginal rate the potential tax cost is 59.4% (100x30% plus 70x42%).

Where beneficiaries are residents, it is more tax effective for all trust income to remain in the trust with no beneficiary presently entitled to it, and for the income to be distributed in a subsequent year. Nevertheless, it appears the overall tax cost on income distributed to a resident beneficiary who is on the top marginal rate will be at least 59.4%, which has made the use of a trust unattractive as a vehicle for income splitting in the context of resident beneficiaries.

The taxation of income distributed to a non-resident beneficiary is more favourable. Non-resident beneficiaries of a resident trust estate are also taxable on amounts distributed to them from the trust and undistributed income of the trust to which they are presently entitled. In both cases, the trustee is liable to pay tax at the rate of 10%. Where tax has been paid by the trustee at the time the beneficiary is presently entitled to a share of the net income of the trust, the trustee is not liable to any further taxation when the income is actually distributed to the beneficiary.

The position is unlikely to be assisted by establishing a trust offshore.

PNG law contains a presumption that all trusts are resident in PNG unless certain conditions are satisfied. These conditions are contained in Section 129(2) of the Tax Act, which provides that:

“A trust estate shall be deemed to be resident in the country unless evidence, to the satisfaction of the Commissioner General (Commissioner), is produced that:

    1. the general administration of the trust estate is ordinarily carried on outside the country;
    2. the trustees or a majority of them, during the whole of the year of income, are not resident or ordinarily resident in the country;
    3. the settlor was not, at the time of the creation of the trust, or where the trust arose by testamentary disposition or intestacy or partial intestacy, the person upon whose death the trust arose was not at the date of his death, domiciled or resident or ordinarily resident in the country;
    4. the beneficiaries or a majority of them are not domiciled or resident or ordinarily resident in the country; and
    5. in all years of income, more than 50% of the income of the trust estate was derived from sources outside the country.”

The effect of Section 129(2) of the Tax Act is that all trusts, wherever created, are deemed to be resident in PNG unless they satisfy all of the five conditions in the subsection. Although it would be possible to establish the trust outside PNG, it seems likely that the trust would be treated as a PNG resident. Thus, a trust established outside PNG – even if it could be argued that it was not a PNG resident trust at the time it was established – is likely at some time to become a PNG resident trust, and if the trust became a resident as a result of failing the income test, it would remain a PNG resident trust regardless of whether or not it subsequently complies with the five conditions. The rules outlined above would therefore apply to it.

Qualifying unit trusts are not subject to the onerous taxation that applies to ordinary trusts, as described above.

In summary, the income tax position of a “qualifying” unit trust is as follows:

  • a “qualifying” unit trust is essentially taxed in the same manner as a company;
  • the tax rate applying to the income of a “qualifying” unit trust is 30%;
  • interest income received by a “qualifying” unit trust is subject to interest withholding tax of 15%. As with dividend income, this withholding tax can be claimed as a credit against the 30% income tax payable by the trust;
  • where tax credits in respect of dividend or interest withholding tax are not fully utilised in a particular year, they can be carried forward for use in future years or can be refunded to the trust or offset against other liabilities;
  • where a “qualifying” unit trust acquires an asset as a long-term investment, any profits on the eventual sale of the asset will be free from tax;
  • where a “qualifying” unit trust acquires an investment with the intention of making a profit in the short term on the sale of the investment, any profit made on disposal will be subject to tax; and
  • losses incurred by a qualifying unit trust in one year can be carried forward and recouped against income derived in any of the following 20 years.

For a “qualifying” unit trust, the income is only subject to tax once at the rate of 30%, when earned by the trust. No further tax is payable upon distribution to the investor.

The above tax concession means that it would generally be advantageous for a unit trust established as an investment vehicle to satisfy the “qualifying” unit trust criteria.

For PNG income tax purposes, there are effectively two types of unit trust: a “qualifying” unit trust which is eligible for a concessional tax regime, and a “non-qualifying” unit trust which is not eligible for any tax concessions and is taxed in the same manner as a normal trust.

The criteria that must be satisfied before a unit trust can be classified as a “qualifying” unit trust relate to the investments the unit trust can hold, the dispersal of the ownership of units and the ability of unitholders to exit the trust.

What is a Qualifying Unit Trust?

A “qualifying” unit trust is defined (Qualifying Unit Trust Definition) in the Tax Act as follows: "unit trust" means an inter vivos trust where the interest of each beneficiary under which is described by reference to units of the trust, and issued units of the trust include:

  • units having conditions attached thereto that include conditions requiring the trust to accept, at the demand of the holder thereof and at prices determined and payable in accordance with the conditions, the surrender of the units, or fractions or parts thereof, that are fully paid; or
  • units qualified in accordance with the prescribed conditions relating to the redemption of units by the trust, and the fair market value of the units which have conditions attached thereto that include these conditions or are so qualified, as the case may be, is not less than 95% of the fair market value of all the issued units for the trust (determined without any regard to any voting rights attaching to units of the trust), and throughout the relevant year, the trust complied with the following conditions:
    1. it was resident in PNG;
    2. its only undertaking was the investing of funds of the trust;
    3. at no time in the year did more than 10% of its property consist of shares, bonds or securities of any one company or debtor other than the government of PNG; and
    4. any conditions relating to the number of its unitholders, the dispersal of ownership of its units or public trading of its units and all holdings of and transactions in its units were complied with.

The prescribed regulations referred to in the last point above with regard to the ownership of units in the trust (the Wide Ownership Test) are as follows.

A trust must be deemed not to be a “qualifying” unit trust if at any time during the year of income:

  • 25 or fewer persons held or had the right to acquire or become the holders of a unit or units in the unit trust that entitled the holders thereof to more than 75% of:
    1. the beneficial interests in the income of the unit trust; or
    2. the beneficial interests in the property of the unit trust;
  • any one person held or had the right to acquire or became the holder of a unit or units in the unit trust that entitled the holder thereof to more than 20% of:
    1. the beneficial interests in the income of the unit trust; or
    2. the beneficial interests in the property of the unit trust;
  • more than 75% of the total money paid or credited by the trustee of the unit trust during the year of income was paid or credited to 24 or fewer persons as unitholders;
  • more than 20% of the total money paid or credited by the trustee of the unit trust during the year of income was paid or credited to any one person as unit holder; or
  • there are provisions which prevent a unit trust from qualifying if the rules of the trust can be varied to circumvent the restrictions described above.

In addition to the above conditions, the trust must satisfy the following requirements:

  • units in the trust are held by at least 50 persons; and
  • the units of the trust were listed for quotation on the official list of a stock exchange; or
  • the units in the unit trust were offered to the public.

Units in the unit trust will be taken to be offered to the public only if:

  • the offer is made to the public in PNG to subscribe for or purchase the units; or
  • the invitation is issued to the public in PNG to make offers to subscribe for or purchase the units.

There are provisions to treat relatives as one person. The Commissioner has discretion to treat a unit trust as qualifying even if the above conditions (relating to diversity of investment and “wide ownership test”) are not satisfied. This discretion requires the Commissioner to have regard to:

  • the length of time – or the aggregate of the lengths of time – the trust failed to comply with the preceding conditions; or
  • any other matters the Chief Collector considers relevant.

The first point immediately above is intended to address short-term non-qualifying circumstances – for example, during the period following establishment while the trust builds its investor base or builds the required diversity in its investment portfolio.

There is little in the way of precedent or guidelines to assist in how the second point might be applied in practice.

There is another type of “qualifying” unit trust, termed a property unit trust. The criteria for a property unit trust are the same as those outlined above, except the condition that no more than 10% of property should consist of shares, bonds or securities of any one company or debtor other than the government of PNG is replaced by the following:

  • funds invested by the trust must be at least PGK10 million at any time; and
  • not less than 80% of funds should be invested in real property.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.1.1 Fund Structures, which applies to retail fund structures as well as alternative investment fund structures, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.1.2 Common Process for Setting up Investment Funds, which applies to retail fund structures as well as alternative investment fund structures, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.1.3 Limited Liability, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.1.4 Disclosure Requirements, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.2.1 Types of Investors in Alternative Funds, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.2.2 Legal Structures Used by Fund Managers, which answer applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.2.3 Restrictions on Investors, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.3.1 Regulatory Regime, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.3.2 Requirements for Non-local Service Providers, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.3.3 Local Regulatory Requirements for Non-local Managers, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.3.4 Regulatory Approval Process, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.3.5 Rules Concerning Marketing of Alternative Funds, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.3.6 Marketing of Alternative Funds, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.3.7 Investor Protection Rules, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.3.8 Approach of the Regulator, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.4 Operational Requirements, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.5 Fund Finance, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

As noted above, PNG law does not distinguish between retail funds and alternative investment funds.

Please see 2.6 Tax Regime, which applies to retail funds as well as alternative investment funds, except where stated otherwise.

The introduction of the CM Act was meant to facilitate the formation of additional investment funds in PNG, but this has not yet occurred. This is partly because the CM Act is poorly drafted, and also because almost none of the enabling regulations have yet been promulgated.

Amendment of the CM Act and promulgation of the necessary enabling regulations are required before any additional investment funds are formed.

Currently, there is no timetable for either of these things to occur.

Papua New Guineans are generally unfamiliar with investment funds, and a widespread investor education programme is required if they are to be persuaded away from traditional investments such as bank deposits, GIS and housing, towards investing in investment funds.

Leahy Lewin Lowing Sullivan Lawyers

P.O. Box 1173
Port Moresby NCD
Papua New Guinea

+675 320 3333

+675 321 3631

sullivan@llls.com.pg www.llls.com
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Law and Practice

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Leahy Lewin Lowing Sullivan Lawyers is an independent commercial law firm that advises the government and a wide range of investors and institutions in Papua New Guinea (PNG). The firm, which has its office in Port Moresby, commenced operations in 2003 and has agents and relationships with legal and accounting firms in various parts of the world. The firm's major areas of practice are aviation; banking and finance; competition and market regulation; construction and infrastructure projects; corporate and commercial advisory; employee relations; energy and resources; environment and planning; financial and commercial services, including superannuation; foreign investment in PNG; government law, including corporatisation and privatisation; insolvency and reconstruction; insurance, reinsurance and corporate risk; litigation and dispute resolution; property development, including hotels; shipping; and taxation, including stamp duty and goods and services tax.

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