Author: Tomáš Plhoň
Source: Ekonom, 5.3.2009, č. 9, str. 58
Zero tax in the future, high profits even now. Qualified Investor Funds are not for everyone, though.
Mutual funds suffer from a decline in credibility. Following the financial crisis, their assets have fallen by more than 23 percent in the last year alone, and the largest decline is expected this year. And the Czech Republic may become a very important market in terms of investment funds management.
The point is that mainly „open mutual funds“, founded by large financial institutions for small clients, are falling into the negative line. Notably different funds exist in the background though, and they offer very interesting possibilities. Among them are so-called Qualified Investor Funds.
Magical Zero
Is this the first time you have heard this peculiar term? Qualified Investor Funds represent an opportunity for the more experienced and self-confident players on the market. The main difference from standard mutual funds is their lighter regulation and lower tax rate.
Legal entities pay only five percent income tax in this case, as compared to the usual ninety percent. And this is not some old tax exemption that the current minister of finance plans to cancel as soon as possible.
„There is a plan, approved by the ministry of finance, that by 2012 – if the current state of affairs proves stable – the taxing of these funds should drop to zero,“ explains Jan Ingeduld from Apogeo consulting company, which deals with Qualified Investor Funds. And that is not a minor temptation.
„Within the framework of preparation of the new income tax law is a plan to set the tax duty of subjects of collective investment to a minimal level, different from corporate tax. There is a possibility of a lowered taxation rate from the current five percent to one percent, perhaps even zero taxation for these subjects,“ confirms spokesperson of the ministry of finance Ondrej Jakob.
As it seems from his statement, zero taxation for the funds is not decided yet. An expert committee operates at the ministry and it will evaluate whether a tax exception of this scale may be profitable or not. So far it seems the numbers look good.
„Lowering the taxation rate for subjects of collective investments to five percent definitely improved the favourable conditions for collective investment in the Czech Republic, and we want to continue this trend and its improvement in the new law as well,“ Jakob explains.
For big players
Qualified Investor Funds are absolutely not intended for everyone. If you’ve been investing a few thousand out of your salary and now you are looking forward to a new opportunity, it‘s too soon to celebrate. Funds are intended primarily for big players. Entrance is restricted by law to a minimal sum of one million crowns. Individual persons can purchase a share as well. All it takes is signing a statement that one is a sufficiently qualified investor.
This may seem a measure that can be evaded easily. However, investors not proficient in fund operation should be discouraged by the major difference from mutual funds. In the case of mutual funds, the interests of the investors are strictly protected by a number of regulations. With qualified investments, most of the risk stands on the shoulders of the investor.
Qualified Investor Funds are relatively new here. „For a long time, only funds for small investors, almost retail in nature, could be created in the Czech Republic. Furthermore, after voucher privatisation, there was no demand for creating funds outside of banks,“ Ingeduld says.
An important impulse for change was the amendment of the collective investment law in 2006. It provided a brand new, lightly regulated way to valuate finances.
No limitations
In practice it looks like this – several larger companies come together and they create a corporation with a clear Investment plan. Then they submit a request to the central bank for registration as a Qualified Investor Fund.
What do these funds invest in? Thanks to the mentioned light regulation, there is virtually no area of the economy in which they couldn’t do business. But not every sector is profitable. One of the more preferred sectors is real estate. „We focus on the retail sector. We think that, thanks to the real estate business, the advantage of these funds manifests easily,“ Jan Ingeduld states.
It can’t be said with accuracy exactly what the Czech market will look like with these funds. No one really knows how it was, or will be, affected by the financial crisis. According to data from the Association for the Capital Market, Czech financial institutions managed to bring their total assets to almost 22 billion crowns by the end of 2008. “By a rough estimate there are seventeen investment companies in the Czech Republic, and approximately 50 Qualified Investor Funds belong under them,“ Ingeduld says.
First movers
One of them is the well known development company FINEP, which prepares a Prague project called West Town. It also manages three funds, and offers entry into them to standard investors too.
„Our funds are focused on investments in real estate, specifically in residential and non-residential companies of Avand Fund Management, the sole shareholder of which is FINEP. He can’t complain about lack of investor interest.
„We are delighted by their high interest in our business strategy. Now is not the time for some kind of self-appreciation though. The economic situation is not stable and investors throughout the world are very cautious at this point,“ says Martynek, who can only recommend this build up of investments to other developers.
Qualified Investor Funds are utilized by other companies as well. Arca Capital, for instance, which among other things purchased shares from former prime minister Stanislav Gross. Its fund Arca Capital CEE offers an opportunity to standard investors as well, under the condition that they are willing to provide at least five million crowns. The fund itself focuses on private equity investments.
When banks start to sell debt to larger companies, this will present an opportunity to gain shares in firms for a lower price. Therefore we can expect higher number of hostile takeovers among companies with strong growth potential this year,“ Pavel Makovec, chairman of the board of directors of Arca Capital CEE Fund says about opportunities in private equity.
Can the Czech Republic become a new Luxembourg? Jan Ingeduld presumes it can. „If we are able to establish this trend here, in that case it is really possible. But so far there is no experience, nor required judicature,“ he says.
Jakob restrains his enthusiasm on behalf of the Ministry of Finance: „We have no intention to compare ourselves to Luxembourg. However, we want to become a country with an attractive tax environment, which would attract this kind of investments. It is a sector with high added value,“ he says.
0 percent
This tax may apply to Qualified Investor Funds in just a few years.
What are Qualified Investor Funds?
