A brief guide to Malta’s funds industry: types of funds

The Malta Investment Services Act provides for a number of Collective Investment Schemes (CIS). When taken in combination with the variety of legal structures, the result is a vast array of options that can be designed to target any kind of investor.

Although regulated to different degrees, all are monitored by the Malta Financial Services Authority, which is responsible for their licensing and ongoing supervision.

Collective investment schemes may be open to the general public (retail) or restricted to companies, financial institutions, or qualified investors (non-retail). Retirement schemes (pension funds) are also provided for in the legislation.

Undertakings for the Collective Investment in Transferable Securities (UCITS)

UCITS schemes are a form of mutual fund licensed in accordance with the EU’s UCITS Directive. Such schemes benefit from passporting rights within the bloc, and can therefore be freely marketed across Europe and their units distributed cross-border under a harmonised regulatory regime.

Their global reputation as a high-quality and well-regulated investment product with significant levels of investor protection has also seen them become the investment vehicle of choice for extra-EU fund managers looking to tap European capital markets, since European investors prefer to invest in EU-domiciled funds regulated by trusted institutions, like the MFSA.

UCITS can also be marketed globally, further reducing the regulatory and cost burden, making them popular among fund managers from all over the world. For example, a fund manager opting to set up a UCITS investing in Asian securities in Malta gains access to the entire European market while being simultaneously able to market the fund in Asia itself, without the need to create a new investment vehicle for each country.

Externally managed funds require a minimum initial capital of €125,000, rising to €300,000 for self-managed ones (which must have at least one Maltese person involved). Malta-based UCITS schemes can be very tax-efficient, being exempt from Maltese income tax as long as more than 85 per cent of their underlying assets are situated outside the country, from any tax on their net asset value, from withholding tax on dividends paid to non-Maltese residents or capital gains tax on sale of units by the same, and from stamp duty on the issue or transfer of units.

Alternative Investment Funds (AIF)

Investment funds that do not qualify as a UCITS fall under the EU’s Alternative Investment Fund Manager Directive (AIFMD), which lays down provisions such as requirements for leverage limits, fund risk profiles, and portfolio liquidity. These funds must appoint a Maltese custodian and at least one Maltese director, and can be used for all kinds of investment strategies covering all asset classes.

They have been used to set up hedge funds, venture capital, private equity funds, and real estate funds. AIFs also benefit from passporting rights, allowing them to be managed and marketed across the EU, either directly or via a local branch.

When targeted towards retail investors (Retail AIFs, or RAIFs), the AIFMD imposes additional investment and borrowing provisions. Initial capital requirements are the same as for UCITS.

A relatively recent addition to Malta’s portfolio of fund types is the Notified AIF (NAIF). Introduced in 2016, the NAIF regime is designed to fast-track market access by allowing AIF managers to assume full responsibility, thereby exempting such funds from authorisation or approval by the MFSA as well as from ongoing supervision. This means that NAIFs can start operations as little as 10 days from submission of their notification to the regulator.

Notified AIFs cannot be self-managed, and can only offer their units to professional or qualifying investors, for a minimum investment of €100,000 (or its currency equivalent).

Despite the brief period they have been available for, NAIFs today account for more than one in 10 of all funds registered in Malta, being recognised as a compelling route to market for smaller and emerging fund managers.

Professional Investor Funds (PIF)

PIFs are investment funds for particular categories of high-net-worth investors bound by a lighter and more flexible regulatory regime.

The PIF licence is the fund type most widely adopted in Malta, being used extensively for investment in non-traditional instruments as well as complex asset classes, such as private equity, derivatives, real estate, traded endowment plans, and virtual currencies.

These funds may be self-managed, and are particularly suited for funds sold internationally on a private placement basis (they do not benefit from EU passporting rights).

Fund managers that may find this set-up especially attractive include those with less than €100 million, or €500 million if leveraged, in assets under management, and therefore falling under the AIF de minimis rules, managers based outside the EU, and self-managed funds that fall below the threshold of the AIFMD.

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.