Further to our earlier briefings, this Focusing on Funds is to assist fund managers and others on the management of their fund vehicles. This briefing will include practical insights relating to the followin:
- overseas board meetings;
- virtual meetings;
- the increasing use of electronic signatures;
- an update on fund reporting;
- Luxembourg market update; and
- Asia market update.
Overseas board meetings
At the date of this briefing, global travel restrictions are in place and are likely to remain so for the foreseeable future. Fund managers should consider the impact that such restrictions will have on the entities in their structure. In particular, companies could cease to be treated as resident, for tax purposes, in the jurisdiction in which they are incorporated. That could happen to the extent that strategic decisions are taken in another country during this period.
Companies incorporated outside of the UK will be treated as UK tax resident where they are centrally managed and controlled in the UK. This is a question of fact in each case, but usually the articles of association of a company will vest control in the board of directors. If the board habitually meets in a particular country to discuss the high-level strategic decisions of the company (as opposed to day-to-day management) and applies its mind to such decisions, the company would normally be treated as residing in that country. However, the test looks at where decisions are actually made, and the location of meetings may not be determinative if the evidence suggests that decisions are taken elsewhere.
A UK fund manager may travel to the jurisdiction in which its offshore company is incorporated to physically attend board meetings and would, alongside the offshore directors, take high-level strategic decisions in that jurisdiction. In those circumstances, care needs to be taken not to take high-level strategic decisions in the UK, while global travel restrictions are in place due to novel coronavirus outbreak.
Virtual meetings?
In response to the outbreak, certain jurisdictions such as Jersey, Ireland and Luxembourg have taken measures to allow companies to hold board and shareholder meetings without directors having to be physically present. Directors who join board meetings by telephone or video conference are deemed to be physically present during this temporary Covid-19 period. This allows companies to take corporate decisions without being in breach of their articles of association. This may ease compliance with the relevant offshore corporate laws but fund managers should be aware that this could, nevertheless, cut across the UK tax residency rules.
In a recent publication, HMRC stated that while it is “very sympathetic” to disruption caused by the outbreak, it will not be implementing any special rules for assessing corporate tax residence since existing legislation and guidance already provides sufficient flexibility. In line with the UK Government’s general position that the outbreak is a temporary disruption, HMRC has stated that it will not consider that a company will “necessarily become resident in the UK because a few board meetings are held here, or because some decisions are taken in the UK over a short period of time”. Board minutes for non-UK tax resident companies relating to meetings held in the UK as a result of the outbreak should clearly record the bona fide reason for holding the meeting outside of the jurisdiction in which the company is resident.
If there may be a concern regarding corporate tax residence, due to pre-COVID-19 board meetings also having been occasionally held in the UK, some mitigating steps that may need to be considered include:
- delaying board decisions until after travel restrictions are eased;
- UK board members not participating or delegating powers to non-UK board members; and
- additional non-UK board members being appointed.
Increasing use of electronic signatures
In light of UK Government advice on Covid-19 including social distancing measures and working from home arrangements, businesses (including fund managers) are increasingly entering into agreements by electronic means. The validity of electronic signatures on agreements cannot necessarily be assumed, and local advice should be sought to ensure compliance with relevant local rules. In England and Wales for example, the Law Commission confirmed in its 2019 Electronic Execution of Documents report that electronic signatures are capable in law of being used to execute documents, including when there is a statutory requirement for a signature, save for certain documents, including registered dispositions under the Land Registration Act 2002 requiring registration at HM Land Registry.
In Luxembourg, local advice should be sought to ensure that documents are signed as qualified electronic signatures in accordance with the EU e-IDAS Regulation. Only such qualified electronic signatures are legally valid for private deeds. There are additional formalities for certain documents, for example formal notarisation or presence before a public officer is required for the finalisation of articles of incorporation of a company or any deed amending these articles. For employment contracts, a handwritten signature is required.
Singapore’s Electronic Transactions Act lays the groundwork for the electronic signature of documents under Singapore law, but importantly does not permit powers of attorney, certain declarations of trust or the contract for sale or other conveyance of immovable property or an interest in immovable property, from being executed electronically, all of which may be relevant for fund managers and other real estate investors.
Update on UK Fund Reporting
ESMA has clarified that national competent authorities should extend the deadlines for publishing AIF, UCITS, EuVECA and EuSEF annual reports by two months for funds with financial years that ended between 31 December 2019 and 31 March 2020, and by one month for financial years ending after 1 April 2020 and before 1 May 2020. Further information is available here. This extends the usual requirement to file the annual return within four months (for UCITS) or six months (for an AIF, EuVECA or EuSEF) of the end of the fund’s financial year. ESMA still requires firms to use best efforts to meet the filing deadline, but encourages national competent authorities to use a risk-based approach and act in a proportionate manner in enforcing regulatory deadlines for producing fund reports.
To take advantage of a two month extension to file fund annual reports, the UK Financial Conduct Authority (“FCA”) requires an AIFM to:
- promptly inform the fund’s depositary (where one is required) and auditors;
- email [email protected] with details of the funds for which it intends to make use of the relief, and the intended new date of publication; and
- publish a prominent statement on their website, no later than the original publishing date of the annual report, explaining the reasons for their decision and giving the revised publication date.
Further information is available here.
The FCA has introduced a temporary extension for a significant proportion of FCA authorised firms’ reporting obligations by either one or two months. It has also waived the normal administration fee for late filing for all returns until 30 June 2020 for small or medium sized firms (that pay less than £10,000 in fees and levies to the FCA in 2020/21). Further information is available here.
The FCA has a useful COVID portal available here.
Luxembourg market update
Since 18 March 2020, Luxembourg has been in a state of emergency. Empowered to adopt measures outside the ordinary legislative process, the Luxembourg government has enacted a series of temporary measures to alleviate the financing and liquidity needs of companies in order to mitigate the impact of the COVID-19 pandemic on their businesses and to ease business continuity.
The main Luxembourg measures relevant to investment funds to date are the following:
- Tax relief measures - Corporate taxpayers may request (i) a waiver of the 2020 tax advances for corporate income tax (“CIT”) and municipal business tax (“MBT”) due for the first two quarters of 2020 and (ii) a deferral of other payments on account of CIT, MBT and net wealth tax (“NWT”) subject to filing of specific forms. The filing deadline for 2019 tax returns has been delayed to 30 June 2020 for both corporate taxpayers and individual taxpayers.
- The Ministry of Finance has announced that the Luxembourg tax authorities will reimburse all VAT credit balances below € 10,000.
- Remote attendance of company meetings - New rules allow all Luxembourg companies, including investment funds in corporate form, to hold their shareholder and management meetings remotely, without any participant attending in person. Where the participants are participating from the UK, please note the Virtual Meetings section above;
- Facilitating measures - in light of the current exceptional market conditions, the Commission de Surveillance du Secteur Financier (“CSSF”) now allows for swing pricing/dilution levy factors to be applied at a percentage exceeding the maximum percentage set out in the prospectus of UCITS, Part II funds and SIFs, on a temporary basis. No prior CSSF authorisation or notification is required. More details can be found on the CSSF website.
- On 21 March 2020, the CSSF urged regulated entities to review their organisational set-ups in order to enable their employees to work remotely from home. Working from the business or backup sites of such entities should be limited to vital functions which cannot be performed remotely.
- Continuing compliance and vigilance - the CSSF has specified that supervised entities are required to comply with their regulatory reporting requirements when they are due. Duly justified delays may be accepted by the CSSF provided the latter has been informed of foreseen difficulties as soon as possible and ahead of reporting deadlines.
- In line with the ESMA recommendations, the CSSF has reminded supervised entities to “remain vigilant with respect to risks relating to fraud and IT security”.
- CSSF remains operational - the CSSF remains available for meetings either by way of teleconference or videoconference and has created an email address dedicated to receipt of complaints (mailto:[email protected]). A COVID-19 FAQ webpage is available here.
Asia market update
The Asia region was the first to be hit by Covid-19, particularly China, Hong Kong, Japan, Korea and Singapore. The overarching issues faced by fund managers and investors in Europe are no different from those faced by their peers in Asia, with government action taking many different forms throughout the region.
In terms of the outbreak, the Asia region is widely considered to be between 6 to 10 weeks further along compared to Europe. In some jurisdictions this has led to a slowdown in new cases and easing of some of the restrictions that had been put in place.
With Asian capital having been such a major player in global markets over recent years, we should expect Asian investors to be the first out of the blocks once the situation (hopefully) stabilises. We are already seeing a number of investor clients taking steps to ensure that they can deploy capital effectively and purposefully when the time comes. Given the turmoil on global currency markets there is also an FX play to make with many Asian currencies faring well against Sterling, for example.
Further updates
This is a fast changing topic and we will be publishing further updates and briefings which can be found on Law-Now and on our additional dedicated Covid-19 Insight page. We are also available to discuss any queries you may have.
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