No trespassers

Source name: Ekonom
Publication date: 05.03.2009
Page: 58
Author: Tomáš Plhoň
Issue: 9

Investments

Zero tax in the future, high profits now. However, qualified investor funds are not for everyone.

Mutual funds suffer from a lower level of confidence caused by the financial crisis – their assets dropped by 23 percent during the last year alone and the highest decline is yet to come this year. The Czech Republic could become an important market from the perspective of investment fund management.
The negativistic trend mainly applies to “open-end mutual funds”, which are set up by large institutions for small / retail clients. However, slightly in seclusion there are types of funds, which offer interesting opportunities. One type is represented by the so-called qualified investor funds.

Magical zero

Is it the first you hear this strange name? The qualified investor funds present an opportunity for more experienced and hardened market players. Lower level of regulation and lower tax rates distinguish the funds from standard mutual funds.
In comparison with the usual nineteen-percent income tax, legal entities only pay five percent. At the same time, this is not an old tax exception, which the existing Minister of Finance would be looking to annul as soon as possible.
“There is a plan approved by the Ministry of Finance, according to which the taxation of these funds could drop all the way to zero, provided the current situation proves to be suitable,” explains Jan Ingeduld of the consulting firm Apogeo, which has been dealing with qualified investor funds on a long term basis. And this is no small incentive.
“The preliminary works on the new income tax act consider a taxation of collective investments undertakings in the minimum amount, differently from the legal entity income tax. The tax burden may be reduced from the existing five percent to a one-percent tax rate or even a zero tax for applicable to these undertakings,” Ondřej Jakob, spokesperson of the Ministry of Finance, confirms the plans.
As apparent from his statement, the zero tax of the funds has not been decided yet. An expert committee is currently working at the Ministry with a view to assess whether such exception would in fact play off. It seems that the figures have been positive so far.
“The reduction of taxation applicable to collective investments undertakings to five percent has definitely contributed to the promotion of a hospitable environment for collective investments in the Czech Republic, and we would like to continue in the trend and its improvement in the new act as well,” explains Jakob.

Big players only

The qualified investor funds are not intended for everyone. In case you have been investing several thousand each month and you think this is a new investment opportunity for you, think again. These funds are mainly intended for large investors. By law, an entry in the funds is subject to a minimum investment of one million Czech crowns. Shares may be purchased by physical entities as well. Such person must sign a statement that he/she is a sufficiently qualified investor.
At first glance, this seems like a measure, which would be easy to get around. However, investors, who do not understand fund’s operation too much, should be warned by an important difference from mutual funds. Whereas the government strictly protects investors’ interests by a number of regulations in the first case, the risks associated with qualified investments are borne by investors themselves.
The qualified investor funds are relatively new to us. “Funds for small investors only, with almost a retail character, could be established in the Czech Republic for a long time. In addition to this, there was no will to establish any funds outside of banks after the coupon privatization,” says Ingeduld.
An important impulse for a change was the amendment of the Collective Investments Act of 2006. This amendment enabled a new, less regulated way of investments valuations.

No limits

In practice, several large companies come together and they found a joint-stock company with a clear intention to invest. They subsequently submit apply to the central bank for a registration as a qualified investor fund.
What do these funds invest in? Due to the already mentioned lower level of regulation, there is practically no sector of the economy, these funds could not operate in. However, not every sector pays off. One of the more lucrative sectors is the real-estate. “We actually focus on the real-estate sector. We believe that real-estate business will profit from the advantages of these funds the best,” states Jan Ingeduld.
It is not possible to say exactly how the Czech qualified investor fund market looks. Nobody knows what the financial crisis might do or might have already done to them. Based on the data of the Capital Market Association, their assets under management of Czech financial institutions amounted to almost 22 billion Czech crowns at the end of 2008. “A rough estimate would be that there are approximately seventeen investment companies in the Czech Republic, which manage around 50 qualified investor funds,” says Ingeduld.

First pioneers

One of the first pioneers on the market is the well-known development company FINEP, which is preparing the Prague-based project “Západní město”. In addition to this, it manages three funds, offering shares to standard investors as well.
“Our funds focus on real-estate investments, namely on residential and non-residential projects, due to rent yields as well as their valuations,” explains Andrzej Martynek, Investment Manager of the company Avant Fund Management, 100% subsidiary of FINEP. They supposedly cannot complain about interest on the part of investors.
“We are pleased with the enormous interest in our business strategy. However, this is not the time to make any assessments. Economic situation is uneasy, and investors are very prudent all over the world,” says Martynek, who would recommend the generation of investments using these funds to other developers as well.
The qualified investor funds are also used by other companies. We could mention the company Arca Capital, which became infamous by a transaction, during which it purchased shares from the former Prime Minister Stanislav Gross. The fund of the company, Arca Capital CEE, offers opportunities to standard outside investors, provided they are willing to invest more than five million Czech crowns. The fund targets private equity investments.
“When banks start to sell receivables from larger companies, it will present an opportunity to acquire shares in the companies at a lower price. That is why we may expect a growing number of hostile takeovers with regard to companies with a strong growth potential,” says Pavel Makovec, Chairman of the Board of Directors of the fund Arca Capital CEE, on private equity opportunities.
Can the Czech Republic become the new Luxemburg? Jan Ingeduld believes it can. “If we succeed in introducing the trend here, then it is really possible. However, we have not acquired sufficient experience or judicature,” he says.
Jakob, on behalf of the Ministry of Finance, would like to reduce any excessive enthusiasm: “We are not going to compare with Luxemburg in this regard, but we would like to become a country with attractive tax environment, which would draw these types of investments, as this is a high value-added sector,” he says.

0 percent

This tax rate may apply to qualified investor funds in several years.

What are the qualified investor funds?

• Lower degree of regulation on the part of authorities brings more freedom as well as more risk for investors.
• Lower tax rates apply. At present, these funds pay five percent; however, this tax may be reduced to one or even zero percent in the future.
• Entry in the funds is limited as they are intended for bigger players. This namely concerns legal entities.
• Physical entities may enter these funds, provided they invest at least one million Czech crowns and declare they are “qualified investors”.