For the wealthy and experienced

Auhtor: Martina Martinovičová
Source: Ekonóm, 6.8.2009, č.58

SUPERIOR TITLE: INVESTMENTS

Earnings virtually tax-free and the possibility to buy almost anything. This is made possible by qualified investor funds.

Less regulated and tax of only one percent. Those are the advantages for qualified investor funds that they will get thanks to changes in two laws.

A big investment opportunity was brought by the amendment to the law on the conduct of business on the capital markets, which is in effect from August. It simplified the establishment as well as functioning of these funds, so there are now fewer restrictions on what to invest in and how.

In addition, from the beginning of next year will be in effect the amendment to the income tax act, thanks to which the tax that will be paid on earnings by legal entities will decline to a mere one percent.

A mere five percent tax on profit and zero tax on dividends already applies today if legal entities direct their investments into one of these funds. And for natural persons, the exemption from tax applies for investments longer than six months.

Qualified investor funds are not restricted by law in any regarding what they can or cannot invest in. They are suitable for investments into real estate and they can be established as a hedge fund or private equity fund. They have been operating in the Czech Republic since 2006.

“The amendment to the law on the conduct of business on capital markets as well as the expected amendment to the income tax act should have positive impact on qualified investor funds. The relaxing of the regulatory conditions could bring about increased interest of potential investors,” hopes
Pavel Makovec, Chairman of the Board of Directors of Arca Capital CEE, one of the qualified investor funds active on the Czech market.

“The decreasing of the tax burden for funds will certainly be beneficial and will contribute to their attractiveness,” says attorney Jan Topinka from the law firm of Havel & Holásek.

The low taxation is considered to be a big attraction also by Pavel Pokorný, Director of the Department of Securities Trading LBBW Bank. “The amendment means the relaxation of regulatory requirements and most probably will lead to the expansion of this investment form,” he said.

How it works
In practice, one of the ways a fund can be established is that several larger companies simply get together, establish a joint-stock company and designate a clear focus of the investment. Then they submit a request to the central bank for registration as a qualified investor fund.

According to the experience of Conseq investment company, which currently manages four such funds, it is good to make allowance for the fact that the handling of all requirements, including approval by the central bank, will require roughly five months.

In the Czech Republic, there are a total of eighteen investment and 23 shares funds functioning in the qualified investor fund regimen. Together these funds manage six billion Crowns worth of assets.

How do these funds of “experts” work on the market?

As the name itself suggests, the securities of these funds are designated only for so called qualified investors. These are people that already have experience with investing on the capital market, which they must confirm in writing in a declaration.

The fund can have at most one hundred of them by law, and the lower limit for the investment of each one of them is one million Crowns. This, however, is just the minimum amount required by law, which each fund can increase in its statutes however it pleases.

The registered capital of each fund must reach the value of at least fifty million Crowns within one year from the date of the license acquisition.

For people as well as companies

The law makes it possible for these funds to function either as share or investment funds.

A share fund can only be established by a licensed investment company, which manages the fund’s assets and sells investment certificates to the investors. This fund is designed mainly for investments by natural persons.

A share fund can be established in both an open or closed form. An open fund has no restriction on the number of investment certificates it can issue, and the open fund’s investment certificates feature the right to their repurchase by the investment company based on the certificate owner’s request.

For closed funds, the investment company does not repurchase the investment certificates. Their investment is settled only within the scope of the liquidation of the share fund.

Investment funds function only as closed funds. They are always established as joint-stock companies that receive finances thanks to the subscription of the shares and these finances are then invested further. They are thus designed for legal entity investors.

Investors that decide to invest their money into an investment fund purchase shares from the fund’s founder, investment company, and become the fund’s shareholders.

Qualified investor funds cannot operate on the public market, for example on the stock exchange.

A depositary is necessary in order for a fund to be active. This depositary supervises the fund’s activities in the extent stipulated by law.

The fund depositary is the Czech National Bank. It controls compliance with the fund’s statute, processes information about its transactions, executes the purchases of properties or settlement of securities transactions. In extreme cases, the CNB can also prevent the fund from handling its assets.

It is also thanks to this that the fund can get easier access to loan money because the bank knows it.

Opportunity for developers

The changes in the law will be beneficial mainly for developers because it will now be simpler for developers to gain investors for their projects through qualified investor funds. They can entice them with more advantageous taxation as well decreased regulation.

Moreover the amendment will make it easier for the funds to acquire real estate properties because it will make it possible to invest not only money into a fund, but non-monetary contributions as well. This was not possible until now. And that’s a big opportunity for them.

The norm will also relax the conditions for the acquisition of shares in funds. A large number of documents as well as approval by the Czech National Bank have been required up until now for the acquisition of a share in a qualified investor fund. These requirements should now be greatly simplified.

The amendment also cancels the mandatory approval by the central bank if the investor acquires a qualified ownership interest in the fund, i.e., a share equal to or greater than ten percent. The funds will also be free to name anyone to the management of the fund.

Pension funds without a chance

The amendment to the law on the conduct of business on capital markets also includes an amendment to the pension insurance act. This amendment partially relaxes the regulation of pension funds. However, a question still remains whether this relaxing is sufficient.

Pension funds, which have long-term financial resources, are among the world’s largest investors in private equity funds. But the Czech legislation practically prohibits this possibility.

The act on collective investing does also include pension funds among qualified investors, but according to the act on supplementary pension insurance a pension fund can only invest in securities that are traded on public markets, i.e., on stock exchanges.

And exactly this is not the case of qualified investors.

Pension funds can only invest into those securities for which it is possible to find out the exact price every day. But the shares of qualified investor funds cannot be offered publicly. Moreover, they are valued only twice per year.

When a pension fund experiences losses, its administrator must make-up the losses from its own resources. But qualified investor funds frequently invest into projects that generate profit only after several years. The investor in this case therefore has an accounting loss in the first years.

Rather than placing restrictions on what pension funds can and cannot invest in, Pavel Makovec recommends introducing an obligation for pension funds to publish the pension fund’s complete portfolio once or twice a year. The funds currently do not have this obligation.

Types of funds

Investment fund – is established on the same principles as a joint-stock company, has legal capacity. It acquires financial resources by issuing shares and it invests the acquired capital on the market.

Share fund – does not have legal capacity. It is established by an investment company that also manages it. The investor is an owner of investment certificates. They work like money market, stock, debt or mixed funds.

Both types of funds can work as open or closed.

An open fund has an unlimited possibility of issuing new shares or investment certificates. The number of shareholders is not limited. New shares, resp. investment certificates, are issued based on the investor demand and the fund’s strategy.

A closed fund has a designated number of shares, respectively investment certificates, at the time of establishment. As a rule, there is no possibility of repurchase with closed funds.

Investment and share funds can also be differentiated based on what they invest in (e.g., real estate funds, private equity funds), or who they are designated for (qualified investor funds), to what degree they are regulated (hedge funds have the lowest degree of regulation).

6 billion crowns
is the amount of assets currently managed by qualified investor funds.

Developers can attract investors more easily for their projects via qualified investor funds.