An investment fund is a vehicle to channel different people’s savings for the purchase of shares and debt issued in an official and regulated market.

This vehicle is virtually identical to a SICAV. The distinctive feature is that the share of diversity of people involved in is greater. It is defined as a collective vehicle because of that participation of people.

Investment funds are required to maintain a portion of the capital raised in cash in order to facilitate any partial or full withdrawals of their investors.

This investment vehicle is governed by the Regulations proposed by the promoting entity. This regulation refers to the mode of investment and divestment, the manager’s remuneration, the type of assets it invests in and the type of financial markets, among others.

Investing mutual fund allows you to enjoy several advantages:

1. Managing the savings of an individual through investment funds allows that person to operate as if he/she had his own SICAV. The reason is:

i)   Both types of entities have identical taxation (1% on profits);

ii) Qualified investment funds are those classified as UCIT 4. Unit holders in a qualified investment fund are not taxed when they disinvest provided the amount received is used to invest in another qualified investment fund. So, the saver can modify the investment profile as if he/she had a SICAV;

2. Regarding the professionalism of management, it should be noted that most savers do not have the means or time to make adequate decisions in the face of market developments. The investment through funds offers a professional management with the capacity and resources to face the investment decisions.

There is a mistaken belief that investing in shares is clearer than investing through investment funds. However, this perception is far from reality. Choosing between one or more shares is not even close to the saver’s ideal investment. The reason is the lack of risk perception: an individual does not have the quality and amount of information available to professional managers.

In addition, management allows the taking of protective decisions with derivatives or hedges. These mechanisms are beyond the reach of individuals both because of its specialization and the opportunity cost.

The remuneration of the fund manager is determined in the regulations of each fund and it is under the supervision and approval of the regulatory body, in this case, the CNMV. Sometimes managers ask the regulator for an improvement in their remuneration conditions, especially when the fund has a high success rate.

3. Thirdly, the key of investment funds is the possibility of diversifying investment. An investment fund can invest capital in different assets, regardless the country or sector in which it is invested.

In this way, an investment is more secure since the diversification has as a direct consequence: the risk minimization.

4.  Lastly, the most attractive aspect of funds is their tax advantages.

Investment funds are exempt from taxation until their repayment. In addition, funds are transferable in an unlimited way, and the investment can be transferred from one fund to another without taxation provided that the capital is not available to the investor. Taxes will only be paid when the investment is fully or partially refunded, giving rise to the corresponding effects on Personal Income Tax.

Each investor has his own specific objectives. Given the characteristics of the investment fund and the diversification of investments, it is very feasible to achieve the objectives set in each case.

Article 348 bis of Capital Companies Act (hereinafter CCA) regarding the right of separation in the event of lack of dividend distribution was recovered last January.

This article was approved on 2 October 2011 and suspended from 24 June 2012 until December 31, 2016.

How does the right of separation work in this case?

The minority partner of any unlisted company may claim this article to exercise the right of separation, extending its application to all capital companies.

The requirements are the following: 

(I) the member who wants the separation must have voted in favour of profit sharing,

(ii) the General Meeting has not agreed a minimum for the distribution of dividends of one-third of the profits resulting from the exercise of the company’s object during the previous year and 

(iii) the company must have been registered at the Companies House for at least more than 5 years (starting on the first year regardless it was incomplete).

In relation to benefits, they should not be no recurring and must be legally distributed, as per the company’s by-laws and the Law (article 273 LSC).

When the Company refuses to distribute the dividends arises the right of the minority partner to claim this provision and to demand the consideration of the right of separation. The Company is, therefore, obliged to acquire such shares.

This article may become a serious headache for many companies and family businesses, specifically for those with liquidity problems. They may face liquidity problems when paying both dividends and the liquidation fee in the event of the separation of the partner of the Company.

It is appropriate for companies to consider the possible effect of this regulation on their treasury. It is therefore necessary to study the consequences of the exercise of this right by the partners in each company, examining the value of the shares, as the case may be, as well as the clauses set forth in the bylaws for this assumption.

As a measure to alleviate this unexpected Company's insolvency, it is feasible to reduce distributable social benefits legally, thereby reducing the Company's liquidity impact.

However, the reduction of results should be supported by accounting regulations and ultimately by the criterion of prudence. In the event of taking such measure, the extra-taxable tax adjustments should be taken into consideration so that they do not exceed those allowed by the Corporate Tax Law.

The goal of this article is the defence of the right of the minority partner against the abuses of main shareholders, without considering a specific financial and equity status of the Company at that time.

I wonder what it is more unfair, either an agreement of the majority of the partners refusing the distribution of dividends or the right of the minority partner to demand the distribution of a third of the profits which may strike hard the company’s liquidity.

MiFID II stands for "Markets in Financial Instruments Directive". The aim of this European Directive is to increase transparency and optimize security in financial markets and, consequently, providing greater protection to the investor.

The aforementioned regulation includes the obligation to charge customers for financial advice. The fact is that financial institutions, far from being transparent, charge the cost of advice to the investor client through commissions called retrocessions. The retrocessions are intended for those agents who market and distribute the product, usually an investment fund.

| One of the specific purposes of MiFID II is to prohibit retrocessions, thus favouring independent advice |

From the date this Directive enters into force, which has been postponed to 2018, entities will have to break the cost of those commission for financial advice down by each of the parts involved in the contract, specifying each and every commission that is charged. It implies a significant change that acts against the opacity that has characterized these operations.

In addition, it is determined that those intermediaries receiving a commission for advice must prove the actual value of such advice in the specific operation. Once again, it is about accountability, being committed to clearness and transparency.

All this indicates that the costs by intermediary advisor will be reduced, favouring the Spanish investor, who has been paying one of the highest commissions to the financial institutions selling the investment products.

However, despite the implementation of transparency measures and the increase in the control, I wonder if they will be enough for private banking to offer the investor that investment fund that best suits him/her.

Now it’s a matter of waiting for results.  

Malta has a flexible financial regulation and a really interesting tax regime for investors. Thus, it has become one of the most attractive Mediterranean financial centres. Malta is a member of the European Union since 2004 and introduced the Euro as the official currency on January 1, 2008. Due to its excellent environment and lifestyle, this country encourages companies and professionals to settle in it and, therefore, to take advantage of its tax benefits.

Malta's investment fund industry has been restructured and internationalized in recent years, becoming the most important industrial sector. This island offers a very effective tax regime, which avoids double taxation on taxable business profits distributed as dividends.

Malta's tax system is developed in compliance with the EU’s non-discrimination principles. That is to say, Malta gives a similar tax treatment to (i) tax residents, regardless their nationality, (ii) permanent establishments and (iii) companies operating in a EU State, regardless the residency of their shareholders.

Malta offers investors an advantageous environment for the development of business activities, either for the establishment of a sole-member company, a partnership, a limited liability company, a branch of a foreign company, a trust company, a cooperative or an investment company with variable share capital (hereinafter SICAV).

SICAVs are established in Malta as investment companies whose purpose is to raise funds and manage and invest these funds in securities or other financial instruments. They have become the island’s financial vehicle par excellence. It is governed by the Maltese Companies Act 1995; every company registered in Malta must establish its registered office on the island. Documentation regarding the Company's articles of incorporation and by-laws must be provided.

In the event that an investor with a fund in another EU country wants to transfer it to Malta, the investor must reregistrer and change the nationality of the fund, and therefore submitting it to the Maltese legal system. 

Each Maltese investment fund has an ISIN Code, "International Securities Identification Numbering System", an identification number made up of 12 alphanumeric characters. This number identifies a transferable security internationally in a concrete and unique manner.  

Providing the ISIN to the Bank speeds up and makes the procedures easier.

The main advantages of the establishment of a SICAV in Malta include the existence of a competitive fiscal regulation that allows innovation. The tax system is attractive and has signed Conventions with more than 70 countries to avoid double taxation and tax evasion.

Funds can be created in a short period of time, speeding up the deadlines for market launch. Likewise, the incorporation costs of these companies are lower than in other European countries, sometimes up to 50% lower.

All in all, a framework of transparency, efficiency and integrity of the investments is established, providing security to the investors. In addition, SICAVs may be structured through sub-funds, allowing the issuance of their own compartments. Fully independent and separate compartments can be created.

Furthermore, it should be pointed out that the establishment of the funds will be authorized by the MFSA, the Malta Financial Services Authority. It is the entity in charge of regulating financial services in Malta through the supervision of financial institutions, credits and investments. This body reviews and authorizes the projects, which, if approved, are governed by an extremely competitive tax regime since they are tax exempted. 

Throughout this article, we will focus on the structure and functioning of Spanish SICAVs, which stands for Variable Capital Investment Company. 

As defined in article 9 of Law 35/2003, of November 4, on Collective Investment Institutions (hereinafter referred to as LIIC), it is a collective investment institution, that is to say, an institution under the form of a limited company whose social object is raising funds and managing and investing those funds in securities or other financial instruments, provided that the investor’s profits are based on collective results.

From a legal perspective, it is structured as a mercantile corporation and, consequently, it is incorporated before a notary and registered at the Companies’ House. In addition, it must be registered in the Registry of the Spanish Securities Market Commission (hereinafter CNMV) and accepted, if it were so decided, in the Alternative Stock Market.

According to Section four of Article 9 LIIC, an investment company must be made up of at least 100 investors or shareholders. This minimum is settled as a guarantee of the collectivity that might characterize this type of institutions.

The Spanish legislation on SICAVs allows the structuring of these institutions through compartments or sub-funds. Each one receives a specific denomination and issues its own shares. Thus, the part of the fund allocated to each sub-fund will be liable exclusively for the costs and obligations specifically attributed to that sub-fund. Nevertheless, those shares not attributed to a specific sub-fund may also be charged on a pro rata basis. The funds shall be financed by the contributions of the investors, who will be liable for any debt up to the limit of their contribution. Although the LIIC allows such structuring by compartments, it is worth mentioning that currently there are great difficulties in obtaining the approval of sub-funds by the CNMV. Consequently, in those cases, investment funds are chosen.

Regarding the initial share capital, Article 80.2 of Royal Decree 1082/2012 of 13 July, that approves the Regulation implementing Law 35/2003 of 4 November on collective investment, establishes a minimum of €2,400,000 that must be maintained as long as the SICAV remains enrolled in the registry. Likewise, it establishes a maximum statutory capital of up to ten times the initial capital. 

In case the institution has been structured into compartments, the minimum capital for each of them must be €480,000, always respecting the minimum of €2,400,000 for the total share capital. The value of the shares of the SICAV at the time of its incorporation should prevail; For that reason, it is incorporated with a minimum amount of €2,400,000 and, subsequently, a capital increase is completed. The number of shares is fixed and, in case their value as a whole is lower than the minimum fixed, a term of one year is established to return the value of the SICAV to its initial €2,400,000.

Pursuant to the provisions of Article 10.1 LIIC, the CNMV shall authorize the proposed incorporation of the companies, after the submission of the corresponding documentation to the CNMV. The request may be refused if any legal or statutory requirement is not met. 

In the case of SICAVs, the incorporation may be denied when:

(i) There is a lack of transparency in the structure of the group, 

(ii) A management entity is not designated, when maintaining close links with other entities, preventing the proper and effective exercise of supervisory functions by the CNMV, 

(iii) It is concluded that there may be serious difficulties to execute or to obtain the necessary information for the inspection 

(iv) Those supervision functions are obstructed by:

a. The laws, regulations or administrative provisions of a non-member state of the European Union that govern natural or legal persons with close links with the investment company, or 

b. The difficulties involved in the application of the aforementioned regulations.

In addition, the CNMV will record the SICAVs, classifying them as harmonized or non-harmonized type. It should be pointed out that up to 2005, the Tax Authorities were responsible for the tax control and supervision of the SICAVs. Later on, CNMV was appointed as responsible for that supervision, a nomination that disagreed Tax Inspectors assert that the current supervision is lighter. 

In practice, this change contributed to the creation of a greater number of SICAVs and provided greater legal certainty of this institution since the analysis criteria are concentrated in a single Institution, the CNMV.

Against the globalized idea that SICAVs are opaque, it can be clearly stated that in Spain these societies are characterized by their transparency. Through CNMV records, which are public, you can check who holds the positions in each of these societies and who owns significant shares, among other data. (The list of registered entities of collective investment institutions can be checked by clicking here)

SICAVs must be established through an excellent administrative and accounting organization, with managers or directors of good repute in the business or professional field, as well as a majority of directors with sufficient knowledge and experience in accordance to the complexity of these societies. The designation of a management company, other than the custodian, is optional. They perform essential tasks such as asset management, representation and administration of subscriptions and reimbursements.

Article 57 LIIC defines custodians as the entities entrusted with the deposit and custody of securities, cash and assets. Those custodians also monitor the management companies and administrators. Banks, savings banks, credit unions, companies and security agencies may be depositaries. They must have their registered office or, where appropriate, a branch in Spain (Article 58 LIIC).

In reference to taxation, the main reason for using this type of financial companies is that they are taxed in the same way as an investment fund, ie: 1% of nominal rate, as established in article 29.4 a) of Law 27/2014, of November 27, on Corporate Income Tax. Taxation is shifted to shareholders as they will be taxed at the time they sell the shares, provided that the sell price is higher than the purchase cost, just as it would be in case of selling units in investment funds.