This hedge fund structure should work - or not?

[bizwoman]

I have come across the question "how to set-up a hedge fund" on this forum multiple times, so it could be useful to share my own -hypothetical- best practice. I hope this helps.
Of course, if you spot a (potential) fault, don't hesitate to comment. I believe it could always be possible to further improve any structure.

- 'Investors': in Europe, but potentially globally.
- Type of business: for example an IBC in Belize. Undisclosed UBO and zero taxation, cheap. You set it up as a holding company. Not a hedge fund or financial institution or anything like that. Just a holding company, with only 1 shareholder and 1 director, yourself.
- Investment: Your 'investors' do not buy shares. Instead, you agree on selling stock options (=warrants), which are typically paid out as part of remuneration packages. These give the investor the right to become shareholder at a later point in time. The investor pays for this warrant the sum he/she would like to invest.
--> The investor thus does not become a shareholder yet. This means that you will remain the sole owner with 100% of the shares and the IBC continues as a holding company, trading (equities or whatever) for its own account. This would change when the investor exercises the options. Therefore, you stipulate in the contract that this can only be done after, let's say, 5 years. By then, the investor sells the holding back the options and buys back new ones, again with a term of five years.

Taxation
- The investor should not be taxed, as the profit is made on a financial derivative - which (at least in Europe, not sure about the rest of the world) is tax exempt.
- The holding's trading profits and fees will increase the book value of the company and thus the value of all warrants and your warrants specifically, respectively. Hence, your own investment increases in value. You can sell some of your own warrants back to the company to materialize these profits. Once again, you made profit with a financial derivative - which should be tax exempt in Europe.

 

[Martin Everson]

Ok so this is nothing you can bring near a retail investor in EU. Secondly what is the goal? To achieve a tax free investment vehicle for the investor and company? This sort of financial engineering will be challenged in any court as an unregulated fund or collective investment vehicle with its single purpose to facilitate tax evasion.

Why not stay out of trouble and setup for $20,000 a fully managed Cayman Island SPC or Irish ICAV and have a fully compliant and regulated Fund operational in 4 weeks.

 

[bizwoman]

Ok so this is nothing you can bring near a retail investor in EU. Secondly what is the goal? To achieve a tax free investment vehicle for the investor and company? This sort of financial engineering will be challenged in any court as an unregulated fund or collective investment vehicle with its single purpose to facilitate tax evasion.

Why not stay out of trouble and setup for $20,000 a fully managed Cayman Island SPC or Irish ICAV and have a fully compliant and regulated Fund operational in 4 weeks.

Oh wow. I thought that financial derivatives were exempt. But indeed, it might not be 'interpreted' as such by tax authorities.
The ICAV, in particular, is interesting when combined with an exisiting umbrella structure. Do you know any such service provider? I might dig deeper into this instead of executing my Belizean plans, then. Thank you for saving me litigation fees ;-).

 

[eoksfokilk]

You might have a look at vauban for Cayman structures.

 

[LoveMyLife]

Financial derivates profit is not tax exempt in the most of EU countries.

Such a setting is an exemplary abuse of rights. All legal acts intended to circumvent the law or abuse the law are null and void under the law and do not produce any legal effects.

Every tax authority in the EU will consider such a setting to be a clear abuse of rights. Investors will be prosecuted for tax fraud.

You will be prosecuted for circumventing the rules of financial market regulation in the European Union. Prepare for 12 years or more in prison.

 

[bizwoman]

Hey @LoveMyLife & @Martin Everson , thank you for letting me know the structure in Belize with option warrants is illegal! My apologies for the misinformation spread on my behalf!

To anyone with such a structure, is the following advisable?

Close the fund and deposit the investors' money (+profits) back on their European current accounts.

- In this European country, there is no tax on financial derivatives nor a capital gains tax. If the tax authorities would reclassify the warrant option as a stock, the investors still shouldn't have to pay any taxes. Hence, they have not committed tax fraud - they have just invested as a retail investor in something that is only for qualified investors. End the fund and transferring their investments back to their European current accounts, should be without any risk then, right?

- For the 'fund manager', the situation is different. A felony is committed by letting retail investors invest in this structure. But not for letting them commit tax fraud, as neither on financial derivatives, neither on a possibly 'reclassified' stock, there should be taxes paid. If the accrued management fees are declared to the European tax authority, taxed as corporate profits, while the fund is closed down - the risk of prosecution should be very small?

Thanks for the feedback. Let's keep anyone with such a structure out of trouble.

 

[Martin Everson]

The ICAV, in particular, is interesting when combined with an exisiting umbrella structure. Do you know any such service provider?

You can use Lawson Conner Discovery Platform:

https://lawsonconner.com/services/investment-manager-platform/
Do it properly first time around.

 

[knuk]

Hi @Martin Everson can I contact you via PM?

 

[Martin Everson]

Hi @Martin Everson can I contact you via PM?

No