Brexit and the Norwegian Regulatory Landscape for UK Funds and Managers
Currently, the United Kingdom benefits from an extension of the original Brexit deadline. The extension, which expires on 31 October 2019, was a compromise between the other EU member states.
On 24 July 2019, Boris Johnson became the new Prime Minister in the United Kingdom. This marks the start of a new chapter in the Brexit process as Mr Johnson campaigned on completing Brexit by 31 October 2019.
As a hard Brexit may seem increasingly likely, we will in this newsletter look at what the Norwegian regulatory landscape will look like for UK funds and managers. We will focus on the asset management industry, but we will also touch upon consequences for investment firms, insurance companies and credit institutions in the event of a hard Brexit, as well as certain tax consequences.
UK funds and fund managers
Termination of passports and authorisations on exit day
On 4 April 2019, the Financial Supervisory Authority of Norway (the FSAN) published a statement with respect to marketing of UK funds in Norway in the event of a “no-deal Brexit”. The statement confirms that, on exit day, the UK will be regarded as a third country in relation to the relevant EU-rules. This means that the following funds will lose their current legal basis for marketing in Norway:
- UK UCITS funds;
- UCITS funds established in another EEA jurisdiction than the UK, but managed by a UK manager.
- UK AIFs managed by a UK AIFM;
- UK AIFs managed by an EEA AIFM (non-UK);
- EEA AIFs (non-UK) managed by a UK AIFM; and
- Non-EEA AIFs managed by a UK AIFM with authorisation under AIFMD Article 36.
FSAN will deregister relevant funds and the marketing of them will have to cease on exit day unless marketing can be continued under available national private placement regimes (see immediately below).
National private placement regimes
The Norwegian regulatory regime allows for the marketing of non-EEA funds and EEA funds managed by non-EEA managers subject to specific authorisations.
UK funds which qualify as “securities funds” in the Norwegian Securities Funds Act may apply for authorisation to market to non-professional investors in Norway pursuant to the Norwegian Securities Funds Act Section 9-4, which is a comparable regime to AIFMD Article 42.
Marketing to professional investors in Norway (for securities funds and other funds) however, requires authorisation pursuant to the Norwegian Alternative Investment Fund Managers Act (incorporating AIFMD Articles 36 and 42).
Simplified application procedure for conversion of Article 36 authorisations
A UK AIFM currently holding a marketing authorisation under AIFMD Article 36 for marketing of a non-EEA AIF may apply to the FSAN for a conversion of this authorisation into an AIFMD Article 42 authorisation. A simplified application procedure will be established for this conversion.
When converting an AIFMD Article 36 authorisation into an AIFMD Article 42 authorisation, the UK AIFM will become subject to reporting requirements to the FSAN, including Annex IV reporting.
Simplified application procedure for UK UCITS
A UK UCITS which currently may be marketed in Norway pursuant to the notification regime in the UCITS Directive may apply for a marketing license under the Norwegian Securities Funds Act Section 9-4 with respect to non-professional investors. A simplified application procedure will be established for this. In order to be able to continue to market a UK UCITS to professional investors in Norway however, a marketing authorisation under AIFMD Article 42 must also be applied for. Currently, there are no indications that a simplified application procedure will be established for this.
The FSAN has stated that it will not start processing applications until it is certain that the UK leaves the EU without an agreement. As relevant funds will be deregistered for marketing in Norway on exit day, we expect the FSAN to provide further details in due course, giving fund managers time to prepare and submit the necessary applications to avoid being denied market access during the relevant handling period for the various applications.
UK investment firms, insurance companies and credit institutions
The Norwegian Ministry of Finance has adopted a temporary licensing relief for UK investment firms, which aims to ensure that such firms may continue to provide investment services on a cross-border basis to professional clients and eligible counterparties in Norway following a hard Brexit. Only firms holding valid passporting rights in Norway as of 12 April 2019 are eligible, and the regulation does not extend to investment services provided to retail clients.
As of yet, no registration or reporting requirements have been introduced, but this may be done at a later stage.
The Norwegian Ministry of Finance has also adopted a temporary licensing relief for UK insurance companies holding valid passporting rights for cross border activities into Norway and UK insurance companies carrying out their activities in Norway through a local branch, on exit day.
Such insurance companies may continue servicing policies underwritten at that time without permission from the local regulator.
Policies covering mandatory insurances that have been underwritten by a UK insurance company shall be considered as underwritten by an EU insurance company until the termination of the policy or as subsequently decided by the Ministry of Finance.
Lending and deposit taking
No licensing relief has so far been proposed for credit institutions or other financing undertakings. UK credit institutions must therefore cease their licensable activities into Norway as of exit day. Under Norwegian law, both deposit taking and lending requires a license.
Norwegian investors’ access to products
As Brexit inevitably will mean an increased cost to access the Norwegian market for UK funds and fund managers, there is a risk that fewer products will be marketed to Norwegian investors.
Institutional investors may be less affected by this, as they typically will continue to seek investment opportunities proactively. UK funds and fund managers may accept such investors on a reverse solicitation basis. UK managers should adopt appropriate procedures to document instances of reverse solicitation and should also note that the FSAN holds that reverse solicitation will only apply in situations where every step during the investment process is initiated by the investor.
The FSAN has previously indicated that it does not believe that reverse solicitation can be relied upon with respect to non-professional investors since these as a general rule will not be able to source their own investments on a genuinely unsolicited basis.
Norwegian investors investing in the UK
Norwegian corporate investors (limited liability companies and similar) benefit from a participation exemption on dividend and capital gains on qualifying investments. The participation exemption implies that only 3% of divided from a qualifying investment is taxed at the general rate of 22%, giving an efficient tax rate of 0.66%. Capital gains are fully tax exempt (while a corresponding loss is not tax deductible).
As qualifying investments are limited liability companies and similar established:
- – Within the EEA (if in a low tax jurisdiction, provided that the relevant entity etc. is deemed genuinely established and carries out genuine economic activity within the EEA); or
- – Outside the EEA but not in a low tax jurisdiction and provided that the Norwegian investor holds at least 10% of the capital and votes for at least 2 years.
When the UK leaves the EU, the application of the participation exemption will depend on the outcome of the Brexit negotiations. In the event of a hard Brexit, tax exemption will be conditioned upon that UK is not deemed a low tax jurisdiction for Norwegian tax purposes, and further that each Norwegian investor fulfils the ownership requirements. We do not expect that the Norwegian tax authorities will implement a transitional rule if/when the Norwegian tax status of the UK is changed. Hence, smaller ownership stakes in UK investments currently qualifying as EEA investments, will be fully subject to tax if disposed of after Brexit (also on the part of the gain derived from the period prior to Brexit).
UK investors investing in Norwegian companies etc.
Norway levies a 25 % withholding tax on dividend paid from a Norwegian limited liability company etc. to non-Norwegian investors. The participation exemption implies, however, a full domestic withholding tax exemption on dividend paid to corporate investors resident in the EEA (provided that the investor is deemed genuinely established and carries on genuine economic activity within the EEA). In case of a hard Brexit, the withholding tax exemption will no longer apply for UK corporate investors in Norwegian entities. Hence, a UK investor must look to the UK/Norwegian tax treaty for reduced rates of withholding tax.
2 Funds offering redemption rights regularly (at the outset twice a month, but allowing for annual redemption rights for so-called “special funds”, a sub-category of securities funds) and investing in financial instruments and/or bank deposits
3 Norway does not levy withholding tax on capital gains. Further, Norway does not have withholding tax on interest and royalties, but this is expected to be implemented (as from 2020 at the earliest).