Relocation of funds

There are several reasons for a fund relocation. One of the most popular is because of tax and/or regulatory considerations. Some jurisdictions offer very attractive tax regimes and regulatory requirements, especially for venture capital and private equity funds. Furthermore, some jurisdictions allow various corporate structures for funds that are not available in other jurisdictions.

Another reason is cost efficiency. Jurisdictions may vary in relation to regulatory fees and moving to a particular jurisdiction may decrease such costs. Furthermore, for those who have several funds under management, consolidating all of them in one particular jurisdiction may also decrease costs associated with service providers and in-house resource allocations.

Finally, fund relocation may be used to gain access to new investment opportunities and investors and increase attractiveness in the eyes of investors, since some jurisdictions are more investor-friendly than others.

Types of relocations:

There are two main options for how a fund may be relocated. They include the transfer of the registered office (re-domiciliation / continuation) and the transfer of assets to a new fund.

Transfer of a registered office (re-domiciliation / continuation):

The first is a transfer of a registered address. This option is the most straightforward, but quite burdensome. To put it simply, a fund re-registers in a new jurisdiction, and after that, it de-registers in a former jurisdiction. In that case, legal personality of a fund is maintained and it retains all its property, rights, and liabilities, and remains bound by contracts entered into before the relocation.

However, this option is only suitable when both the current jurisdiction and the target jurisdiction allow such relocation. Not all jurisdictions allow it and some of those that do may have limits on a fund’s previous domicile (i.e. a fund should be from a list of approved countries).

The process of relocation through the transfer of a registered office starts at the fund level. A general partner (or a board) of a fund should pass a resolution by which they authorize the relocation of the fund. Such decision-making processes are mostly regulated by a fund’s constitutive documents and may require the consent of its investors.

Then, a director or a general partner of a fund should make an application to a competent authority of a proposed jurisdiction. The exact procedure, cost, and necessary documents will depend on the rules of a particular jurisdiction. Concerning documents, they may include a certified copy of a fund’s certificate of incorporation, a declaration of solvency, a draft of new corporate documents (that should be in compliance with the law of a proposed jurisdiction), and others.

Furthermore, depending on the jurisdictions and the type of fund there might be a need to register (or license) a fund and pay relevant fees.

After the application is assessed by an authority it will issue a certificate of registration (continuation). This will result in a fund being treated as a legal entity of this jurisdiction.

At the same time or before a certificate of registration (continuation) is issued by a target jurisdiction, a director or a general partner of a fund should apply for a de-registration (discontinuation) in its original jurisdiction. This process may also require the submission of necessary documents and payment of the fees. Furthermore, in most cases, the original jurisdiction and new jurisdiction should be notified about registration (de-registration).

To summarise, this option requires dealing with regulators of both states and paying relevant fees for registration and de-registration. However, if such an option is chosen, it will relieve a fund and its management bodies from the need to create new entities and conclude agreements with investors and third parties, since under this option a fund and its existing obligations are not affected.

Transfer of assets to a newly established fund:

In case continuation is not an option, for example, because one of the jurisdictions does not allow continuation, a fund may relocate by transfer of its assets to another entity.

In this case, a fund contributes all its assets and liabilities to an entity formed in a proposed jurisdiction against shares in that entity. Then the original fund winds up and the shares of a new entity are distributed to the investors. As a result, investors of the original fund become investors of the new entity established in the desired jurisdiction.

This is a less straightforward option than the continuation since this process involves not one entity (as in continuation) but two separate entities. This leads to a need to establish and register a new fund in a target jurisdiction and draft necessary constituent documents that will be associated with additional costs.

Furthermore, all corporate decisions, approval, and other action will need to be taken at the level of both companies which will lead to higher legal and administrative costs.

Another thing that should be paid attention to is that this process involves the dissolution of the former fund. This will lead to a need for investors’ approval since such material issues usually cannot be decided by a fund manager alone. Moreover, a dissolution of a fund will require an assignment of all contracts to the new fund or a conclusion of a new agreement that leads to additional time and cost.

Therefore, this option is less preferable than continuation, since it requires more time and work to be done in order to relocate a fund.

Taxes:

Relocation by way of continuation usually does not have a negative tax effect. Regulations of most jurisdictions provide that such relocation does not amount to a transfer, or change in beneficial ownership. This is why it is a preferable option for fund relocation.

In case of relocation by transfer of assets, it may be considered as a disposal for tax purposes in the hands of many investors.

Fund Manager and Service Providers:

Most jurisdictions require that a fund is managed by a licensed (or approved) fund manager. Therefore, if a fund changes its domicile, it might have to relocate its fund manager or establish a new one and get necessary licenses or approvals. The same may apply to a fund administrator and other service providers. Furthermore, some jurisdictions prescribe that directors of a fund or a fund manager should reside in a country of a fund’s domicile which may lead to a need to hire such professionals.

Summary:

There are two main options for a fund relocation – re-domiciliation (continuation) and transfer of assets to a new fund. The difference is that in the first case, a fund just changes its nationality and other aspects are almost not affected, while in the second case, an original fund is dissolved and its rights and obligations are transferred to a new fund. Furthermore, in case of continuation, the tax consequences for a fund and investors are usually mitigated and no adverse effect will occur, while in case of transfer of assets negative tax consequences may take place.

Fundstarter is ready to provide you with high qualified service during the establishment of an investment fund in these jurisdictions, for all questions, please contact us by email hello@fundstarter.vc