A brief guide to Malta’s funds industry: legal structures

Fund managers in Malta may choose from a number of legal structures serving as vehicles for a variety of fund types. These may be corporate or non-corporate bodies, with each structure having specific characteristics which may make it more suitable for particular investment strategies.

Investment companies

The most common vehicles utilised for the formation and registration of Collective Investment Schemes (CIS) are investment companies with distinct juridical personality. These come in two forms: investment companies with variable share capital, known as SICAVs (the name is drawn from the tried-and-tested structure popular in Luxembourg); and investment companies with fixed share capital, known as an INVCOs.

Differences between SICAVs and INVCOs

Whereas INVCOs are limited to mainly investing in securities, SICAV funds may be used to invest in securities and in other movable and immovable property.

Therefore, when used by Professional Investment Funds (see p. 118), which are allowed a relatively free hand by the MFSA, SICAVs can prove to be highly flexible vehicles allowing for a wide variety of investment strategies.

INVCOs are more restrictive, being prohibited from holding more than 15 per cent of the value of their investments in any company other than an investment company with fixed share capital, from distribution of the company’s capital profits, and from retaining more than 15 per cent of their income.

Umbrella and multi-class investment companies

Both SICAVs and INVCOs may be constituted as umbrella or multi-fund companies including different sub-funds. Such umbrella funds can have their share capital divided into the different sub-funds, with their assets and liabilities ring-fenced as patrimony separate from those of other sub-funds within the company.

By employing this structure, shareholders in each of the different sub-funds will benefit from varying returns, depending on the performance of each particular sub-fund, irrespective of the performance of another.

Additionally, investment companies with multiple classes of shares with different characteristics but no separate patrimony are also provided for. This allows for the creation of highly flexible structures allowing a single entity to pursue a wide variety of investment objectives and business models.

For example, a fund can have one sub-fund following a high-risk strategy with two classes having different fee structures, and another sub-fund following a low-risk strategy with various classes having their NAVs calculated with different frequencies.

The flexibility afforded is such that different sub-funds could have different managers following very different strategies.

When such umbrella funds’ sub-funds are set up as PIFs, the minimum investment threshold may be applied on a per scheme instead of a per sub-fund basis. This means that an investor may hold less than the minimum in a particular sub-fund as long as their total holding in the scheme is at or above the threshold.

Limited partnerships

Another secure, flexible, and globally recognised structure attractive to fund promoters is the limited partnership, or partnership en commandite, where the majority of members are passive investors with limited liability – a set-up particularly popular with private equity and venture capital.

A limited partnership is considered (and needs to be licensed as) a collective vehicle when the nature of its business is limited to investment in securities and other assets.

Partners may be general or limited partners, with the latter’s liability limited to their investment. General partners are bound by certain fiduciary obligations, but do not need to be licensed in their own right unless they are providing management services to the partnership. Often, they delegate specific functions to fund managers and administrators.

Importantly, general partners are jointly and severally liable for the debts of the partnership without limitation. In practice, Malta-incorporated limited liability companies typically occupy this role, enhancing the fund’s local substance, although this is not a requirement.

Just like corporate structures, limited partnerships may be set up with variable or fixed share capital, which may or may not be divided into shares, and they may also have different classes of shares, issue fractional shares, and can include different sub-funds denominated, if required, into different currencies.

Sub-funds may also have their assets and liabilities segregated from those of other sub-funds within the limited partnership. Limited partnerships may also accept noncash contributions from investors. As is the case with other types of companies, the partnership must maintain a registered office in Malta, where it must keep a register of the limited partners.

Limited partnerships issuing shares are effectively subject to the same rules as SICAVs, with the main difference being the replacement of a board of directors with at least one general partner. They are also subject to the same tax rules as companies (see p. 64).

Where the capital is not divided into shares, the partnership is deemed to be tax transparent, with income and capital gains arising from the fund taxed according to investors’ tax status and residence.

For partners who are not resident and not domiciled in Malta, only the share of income attributable to Maltese sources is subject to tax, with foreign-source partnership income falling outside the scope of Maltese tax rules.

While tax transparency may be desirable in some cases, most of the attractions of the Maltese tax code, like the refund system, are limited to companies. Limited partnerships may therefore elect to be considered as companies, allowing shareholders to benefit from Malta’s advantageous tax regime.

Unit trusts

A unit trust is defined as the merger of resources of investors which have been entrusted to a third person, who has legal title over them, so that they may benefit from any profits or income arising from the acquisition, holding, management, or disposal of any type of property. The core purpose is the pooling of funds in order to access substantive investment opportunities which would otherwise be out of their reach.

A unit trust must have both a trust manager and a trustee, with the former tasked with securing a profit for the beneficiaries and the latter ensuring that the manager is adhering to the trust’s investment objectives and safeguarding its assets.

Unit trusts are regulated as collective investment schemes, and can be seen as commercial trusts which allow investors to obtain direct access to wealth creation and profits without having to abide by the more onerous obligations companies (such as SICAVs) must adhere to.

They can also be structured to be tax-transparent, which may be particularly attractive in certain cases, such as when underlying assets held by the unit trust are subject to high withholding taxes in the country of issue.

Contractual funds

Common contractual funds, or mutual funds, are another form of collective investment scheme licensed and regulated by the MFSA.

A mutual fund is set up by a deed of constitution, and can be structured as an open-ended or closed-ended scheme. Importantly, contractual funds do not have a separate legal personality, and therefore require a custodian in whose name the assets are to be held.

However, the liability of each unit holder is limited to the value of their investment, and the contractual fund’s assets are deemed to be separate and distinct from the property of its unit holders, manager, or custodian, shielding them from creditors’ claims.

Depending on the precise provisions laid down in the deed of constitution, Maltese mutual fund holders may opt to establish a company (typically a SICAV) to act as a special investment vehicle holding assets on behalf of the fund, and may also be constituted as multi-class or multi-fund schemes, with the possibility of denominating different classes of units in different currencies or allocating to each sub-fund its own assets and liabilities.

Incorporated Cell Companies

Initially designed for the insurance industry, the cell company structure was later extended to the fund sector. As the first EU jurisdiction to introduce Incorporated Cell Companies (ICCs), Malta now has years of experience working with the innovative legal structure, which offers fund promoters several distinct benefits.

These can be grouped in two, with the two types of ICCs reflecting the different uses.

First, a SICAV ICC enhances the segregation of assets and liabilities provided for in other vehicles through multi-fund set-ups by endowing each incorporated cell (IC) under the umbrella of the ICC with separate legal and juridical personality.

Thus, whereas a SICAV with multiple sub-funds is nonetheless a single legal entity, when established as an ICC, each sub-fund can transact in its own name.

The strong demand by fund promoters for a flexible structure that may be used as a vehicle to set up investment platforms led to the development of the second type of ICC, particularly popular among small managers and start-up funds – the Recognised Incorporated Cell Company (RICC).

This is a limited liability company providing purely administrative services to incorporated cells within the cluster. The RICC can therefore accommodate a platform model comprising an ICC providing, for example, contractual and start-up support to any number of ICs.

This relationship does not mean that ICs are subsidiaries of the RICC, and in fact each IC, having separate legal personality, needs to be duly licensed as a collective investment scheme in its own right.

The RICC itself does not require such licence, but is required to obtain a Recognition Certificate from the MFSA.

This feature was first carried in the Malta Invest 2023 edition. Malta Invest is the first-ever comprehensive international investment guide focusing on Malta as a destination. It is produced by Content House Group.