A qualifying investor fund (QIF) is an increasingly popular structure for the holding of investment property assets in Ireland particularly for non resident investors. It confers considerable advantages both from the perspective of liquidity and tax efficiency.

QIFs are regulated by the Central Bank of Ireland and an approval process must be undergone prior to establishment.

Structure

A QIF may be open or closed ended and established as a company, a unit trust, an investment limited partnership (“ILP”) or a common contractual fund (“CCF”).  QIF structures may be in an umbrella form with segregated liability between each sub-fund of the umbrella.
Investor eligibility

A “qualifying investor” is an investor who:

• Is a “professional client” within the meeting of Annex II of the MiFID Directive (2004/39/EC); or
• Is an investor who receives an appraisal from an EU credit Institution, a MIFID firm or a UCITS management company that the investor has the appropriate expertise, experience and knowledge to adequately understand the investment in the fund or
• Certifies that they are an informed investor and provides certain written confirmations

(i) that the investor has such knowledge of and experience in financial and business matters as would enable the investor to properly evaluate the merits and risks of the prospective investment; or

(ii) that the investor’s business involves, whether for its own account or for the account of others, the acquisition or disposal of property of the same kind as the property of the fund.

There are limited exemptions from these eligibility requirements.

Minimum Subscriptions

The minimum initial subscription for an investor in a QIF must normally be the equivalent of €100,000.
Third party participation

QIFs must be (at least in theory) open to subscription by the public but this does not mean that shares/units in the QIF must be actively marketed to third parties. In reality, most QIF vehicles have a very small number of investors (sometimes only one person).  There is no real third party participation in a QIF in the way that there might be in retail funds.

Service Providers

A QIF must have the following service providers:-

• Promoter – the applicant for the establishment of the QIF. The promoter decides what legal structure a fund will take, the proposed investment policy of the fund, where it invests and in what jurisdictions it should be sold
• Investment Manager
• Custodian
• Administrator

The Central Bank’s requirement in relation to the capitalisation of a promoter is that it must maintain net shareholders’ funds equal to, or in excess of, €635,000 for the life of the fund.  A promoter must be regulated in its home jurisdiction in a manner that is acceptable to the Central Bank, although the Central Bank will allow an unregulated entity to act as promoter and investment manager of a property fund provided the fund does not invest in financial instruments (including, for example, interest rate swaps).  The promoter must satisfy the Central Bank that it has the appropriate experience in the promotion and organisation of property funds.

The QIF’s promoter, directors and relevant service providers (primarily the Investment Manager, administrator and custodian) must have their appropriate individual approval status from the Central Bank.  The functions of Custodian and Administrator are often carried out by companies within the same group.

Investment/Borrowing restrictions

There is no restriction on the amount of the QIF’s net assets which may be invested in any single property however a QIF investment company has a statutory obligation to spread investment risk.

There is no restriction on the amount of the net assets of the scheme which may be invested in Properties which are vacant, in the process of development or requiring development. However, the Central Bank tends not to look favourably on schemes where development land comprises more than 50% of the assets.

No borrowing limits apply to a QIF.  However, a QIF can only give security over its assets in respect of the QIF’s own borrowings; it cannot give security for an investor’s borrowings.

Valuations

All Property acquired by the QIF must first be valued, and then acquired within six months from the date of the valuation and at a price which is within 10 percent of the valuation price.

The management company of the QIF must appoint a qualified independent valuer selected on a basis approved by the Central Bank.  The criteria for their appointment must be set out in the prospectus for the scheme and in the periodic reports issued by the scheme.

The property assets of a QIF must be valued at market value at least twice yearly.

Tax

A QIF has a distinct tax treatment to that of other companies and individuals holding property.  A QIF is not subject to any tax on its rental income or on any gains on disposal of assets.  Instead the QIF must operate an exit tax on the happening of certain chargeable events.  These events arise when:

• A fund makes a payment to an investor, when
• There is a transfer of a unit,
• And on the 8th anniversary of the acquisition of a unit by a unitholder and on each 8 year interval thereafter. 

However, foreign resident unitholders and tax exempt Irish unitholders, such as pension funds, are entitled to an exemption from this exit tax subject to providing the appropriate declaration. 

Additionally there is no stamp duty payable on a transfer of units in a regulated fund.  There are certain other exemptions from VAT and capital acquisitions tax that will also make this an attractive investment vehicle. 

Contributed by Andrew Muckian, and Paul Murray.