Investment funds in the Czech Republic – new developments
August 2013 | PROFESSIONAL INSIGHT | INVESTMENT FUNDS
Financier Worldwide Magazine
The Czech Republic is currently an insignificant player on the EU investment fund market – only about 0.08 percent of the total assets managed by investment funds based in the EU is managed by funds seated in the Czech Republic. The Czech government wishes to change this and is contemplating ways in which to make the Czech Republic an important fund centre for Europe. Central and Eastern Europe, in particular, seem particularly well suited to providing such opportunities.
In relation to alternative investment funds (non-UCITS funds), the fairly recent introduction of the EU directive on alternative investment fund managers (AIFMD) seems to herald an ideal time for achieving such an aim. The AIFMD regulates alternative investment funds that have so far operated outside the application of EU law. Non-EU based alternative investment funds offering investments to EU investors will now be obliged to comply with the regulations of the AIFMD. Many such alternative investment funds will likely be forced to move their seats to an EU-member state or to refrain from offering investments to EU investors altogether. Given the large number of such funds, the AIFMD is expected to have a significant impact on the development of fund centres in the EU.
There are currently bills before the Czech Parliament that aim to make the Czech Republic more attractive in the eyes of management companies, investment funds and foreign investors. On 3 July 2013, the Czech Parliament approved a bill providing for the new regulation of collective investment in the Czech Republic – a bill on management companies and investment funds (the ‘Bill’). To become law this Bill now only needs the approval of the President. It replaces the current regulation under the Act on Collective Investment. As a tax incentive, an accompanying bill (in the same stage of the legislative process) keeps the current 5 percent income tax for all types of investment funds (in contrast to the 19 percent income tax on corporations).
The Bill implements EU directives (AIFMD, UCITS IV and some provisions of UCITS V) and strives to provide a modern, flexible legal framework for providing collective investment services. It aims to incorporate European standards for investment fund regulation into Czech law and, at the same time, to ensure continuity with the current regulation. Inspiration has been taken from the legal frameworks of states with highly developed fund markets, such as Luxembourg, Germany, the UK and Ireland. The Bill, in particular, incorporates European standards for management and administration of investment funds, provides for new legal forms of investment funds and for diverse levels of regulation and supervision by the regulator, depending on the fund type.
The Bill introduces the following three European standard forms of investment fund into Czech law: (i) a joint stock company with variable registered capital (SICAV); (ii) a limited partnership with investment certificates (providing the advantages of an English limited liability partnership and the Luxembourg SICAR); and (iii) a trust fund.
Tax legislation accompanying the recodification of civil law in the Czech Republic (in the wording currently discussed in Parliament) also supports the development of the fund business in the Czech Republic – by keeping the current 5 percent income tax for all types of investment funds and by exempting from income tax profit from investment funds paid to investors.
Qualified Investor Funds – will they save the future of funds in the Czech Republic
Qualified Investor Funds (QIFs), as a type of alternative investment fund, were introduced into Czech law in 2007. QIFs provide investment opportunities to qualified investors (such as banks and other credit institutions or other persons sufficiently experienced in securities investment) and are, therefore, subject to much less regulation than standard investment funds. This looser regulation provides QIFs with more flexibility to decide on their investment strategy and their limits. But it is not only the autonomy of QIFs’ investment strategies that is appealing. Since QIFs may be established for an indefinite period of time, shares in QIFs may be subscribed for by contributions in-kind, the control function of the QIFs’ depository may be limited and, most importantly, QIFs may merge with entities other than collective investment funds. Therefore, QIFs may serve as a viable alternative to holding structures used in the Czech Republic for investment into real estate and other assets, and also as an alternative to various private equity funds. Moreover, in a time of mounting state deficits and insufficient state funds for public infrastructure projects, QIFs may also be appealing to the public sector and provide a much needed alternative to public-private partnerships.
As statistics show, the advantages that QIFs offer are recognised by the market. The amount of assets managed by standard investment funds was on the rise until 2007; however, since then QIFs have taken over. In the beginning of 2008, there were only about 20 QIFs in the Czech Republic, managing assets worth approximately €706m. As of 31 March 2013, there were over 100 QIFs managing assets valued at approximately €2.43bn. This growth trend is expected to continue and accelerate substantially over the coming years, provided that appropriate legislation is adopted – legislation providing for both a modern, stable and flexible framework that reflects European standards and, most importantly, the necessary tax incentives as both the legal framework and tax incentives are indispensable for the substantial future growth of the fund business in the Czech Republic.
Considering the recent legislative initiatives currently under discussion in the Czech Parliament, the funds industry in the Czech Republic may have a bright future. The new legislation not only incorporates the European standards together with more flexibility into Czech law but also adds a 5 percent income tax for investment funds (as opposed to the regular 19 percent income tax on corporations) and a 0 percent income tax on profit from investment funds paid to investors in the Czech Republic, which should likely increase their attractiveness to investors.This could be a good step to eventually making the Czech Republic a European fund centre.
Jan Kotous is a senior associate and Kateřina Pechanová Babická is an associate at Wolf Theiss. Mr Kotous can be contacted on +420 234 765 214 or by email: firstname.lastname@example.org. Ms Babická can be contacted on +420 234 765226 or by email: email@example.com.
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Jan Kotous and Kateřina Pechanová Babická