New Opportunities for Investment Funds in the AIFC

New Opportunities for Investment Funds in the AIFC

Erbol Nazhmidenov

Legal Adviser, AIFC Legal Services Board

Lawyer and Partner Law Council Group

Introduction

Asset management has become an integral part of financial strategies for successful private investors worldwide. In a time of global economic instability, effective asset management not only preserves capital but also enhances it by efficiently distributing investments across various financial instruments. Countries like the USA and the UK have long adopted asset management as a standard tool for private individuals, prioritizing portfolio diversification and risk minimization. This approach's popularity is due to its tailored solutions for each investor, considering their financial goals, risk levels, and other personal circumstances. Given the success of international asset management practices, these methods are becoming increasingly relevant for investors in CIS countries, where attention to capital management is gaining importance.

Recently, the AIFC Financial Services Regulatory Committee (AFSA) released a new consultation paper proposing improvements to the AIFC asset management structure. This was done to discuss their proposals and receive feedback from all interested parties.

Since 2018, AFSA has gradually improved the legislative framework for investment funds and asset managers in the AIFC. Initially, the AIFC Collective Investment Scheme (CIS) Rules were established to regulate investment funds, complementing existing regulations. In 2019, these rules were significantly expanded to include Listed Funds and Specialist Funds, such as Venture Capital and Private Equity Funds.

In 2023, based on participant feedback and the desire to enhance AIFC's attractiveness, additional improvements were made. Among the most significant are the authorization of Limited Partnerships as Collective Investment Schemes and the ability for Real Estate Investment Trusts to invest in real estate under construction. Furthermore, the rules were amended to clarify requirements for foreign managers, Umbrella Funds, and Protected Cell Companies. New investment structures were also introduced, including Fund of Funds, Master Funds, and Feeder Funds.

According to AFSA, as of April 2024, the number of funds registered in the AIFC reached 47, compared to 40 at the beginning of the year, and the number of fund administrators increased to 44. This growth reflects the increasing diversity of investment funds in the AIFC, including 26 hedge funds, 11 private equity funds, 4 venture capital funds, 2 real estate investment funds, and one fund in the commodities, credit, cryptocurrency, and fixed income categories.

Legal Regulation

In Kazakhstan, the activities of investment funds are regulated by the legislative act on investment and venture funds. The legislation of the Republic of Kazakhstan on investment and venture funds is based on the Constitution of the Republic of Kazakhstan and consists of the Civil Code of the Republic of Kazakhstan, the law on investment and venture funds, and other normative legal acts of the Republic of Kazakhstan. Investment funds are also subject to the legislation of the Republic of Kazakhstan on the securities market and joint-stock companies, unless otherwise provided by the law on investment and venture funds.

Regarding the AIFC legal regime, the applicable law is based on the Constitution of the Republic of Kazakhstan, the Constitutional Law on the Astana International Financial Centre, and AIFC Acts, which do not contradict the Constitutional Law and may be based on the principles, legislation, and precedents of the law of England and Wales and the standards of leading global financial centers adopted by AIFC bodies in exercising the powers granted by the Constitutional Law; and the existing law of the Republic of Kazakhstan, which applies to issues not regulated by the Constitutional Law and AIFC Acts.

Investment funds within the AIFC jurisdiction operate as Collective Investment Schemes (CIS). The CIS Rules contain provisions concerning the fund's charter, management, and operation; investment and borrowing powers; registration procedures; operational duties and responsibilities of fund managers; registration of offering materials and reporting requirements; as well as suspension and termination of operations in a CIS.

Structures and Functionality of Investment Funds in the AIFC

Investment funds in the AIFC operate within the framework of capital raising through collective investment schemes (CIS). CIS is a mechanism where professional fund managers pool investors' funds and invest them according to predetermined investment objectives and parameters. To establish a fund, one must obtain an AIFC license for Managing Collective Investment Scheme activities.

A fund can be established in the AIFC in the form of an investment company, a limited partnership (LP), and a protected cell company (PCC).

1. An investment company must be either open-ended or closed-ended. The structure of open-ended investment companies provides for the management of traditional funds with regular subscriptions and redemptions, while closed-ended investment companies are suitable for creating an exchange-traded fund structure.

2. An LP consists of a general partner and limited partners, where the fund manager is the general partner, and the fund's clients are limited partners.

3. A PCC is a unique financial instrument created to provide certain financial services. The AIFC allows funds and umbrella funds to be structured using PCC. This enables fund managers to legally separate the assets and liabilities of each cell while operating under a common management.

<pFurthermore, for narrowly targeted purposes, an investment fund can be formed as a specialized fund with specific business characteristics and investment objectives. The AIFC permits the following types of specialized funds:

• ● Islamic Investment Fund;
• ● Private Equity Fund;
• ● Venture Capital Fund;
• ● Real Estate Investment Trust;
• ● Umbrella Fund;
• ● Fund of Funds;
• ● Master-Feeder Fund.

AIFC Regime Features for Fund Activities

When discussing the AIFC, it is important to mention the preferential tax regime in the Centre, determined by the Tax Code, with exceptions established by the Constitutional Law on the Astana International Financial Centre. Participants of the Centre, except for the digital asset exchange, are exempt from paying corporate income tax on income derived from providing a range of services in the Centre, including asset management of investment funds, their accounting and custody, as well as ensuring the issuance, placement, circulation, redemption, and repayment of investment fund securities until January 1, 2066.

In addition, individuals and legal entities are exempt from paying individual and corporate income taxes on income:

1. from capital gains from the sale of securities listed on the stock exchange at the time of sale;
2. from capital gains from the sale of shares of legal entity participants registered under the applicable law of the Centre, or shares in the authorized capital of legal entity participants registered under the applicable law of the Centre;
3. in the form of dividends and remuneration on securities listed on the stock exchange at the time of dividend or remuneration accrual;
4. in the form of dividends on shares of legal entity participants registered under the applicable law of the Centre, or shares in the authorized capital of legal entity participants registered under the applicable law of the Centre.

AFSA is currently considering expanding the list of specialized funds in the AIFC to include the following categories:

• ● Credit Funds — funds specializing in investments in debt obligations such as loans and bonds.
• ● Digital Asset Funds — funds investing in digital assets, including cryptocurrencies and other blockchain-based assets.
• ● Exchange-Traded Funds (ETF) — funds whose shares are traded on an exchange and that track a specific index or basket of assets.
• ● Money Market Funds — funds that invest in short-term and highly liquid money market instruments such as treasury bills and commercial paper.

Expanding the list of specialized funds will enhance market diversification and liquidity, attract new investors, promote innovation development, improve investment and risk management, contributing to the overall stability and transparency of the financial market.

Conclusion

Thus, the AIFC continues to actively develop and improve its legal and regulatory framework, making it an attractive jurisdiction for creating and managing investment funds. The introduction of various forms of collective investment schemes, specialized funds, and preferential tax regimes creates favorable conditions for attracting both local and international participants. These measures not only contribute to the growth of funds and managers in the Centre but also strengthen its position as a leading financial center in the region, offering a wide range of flexible financial instruments for asset management.

Disclaimer:

All conclusions and recommendations presented in this article are of a purely advisory nature and do not obligate third parties to any specific actions. If you have any questions, please contact us (WhatsApp: +7 (707) 384 83 52, email: info@lcg.kz).

Resources:

1. AFSA Consultation Papers. https://orderly.myafsa.com/articles/open.
2. Consultation Paper AFSA-P-CE-2024-0009 from 2 August 2024 on Proposed Enhancements to the AIFC Asset Management Framework.
3. Law of the Republic of Kazakhstan of July 7, 2004 No. 576-II On Investment and Venture Funds (as amended on 01.07.2023).
4. Civil Code of the Republic of Kazakhstan (General Part) (as amended on 22.07.2024).
5. Law of the Republic of Kazakhstan of July 7, 2004 No. 576-II On Investment and Venture Funds (as amended on 01.07.2023).
6. Law of the Republic of Kazakhstan of July 2, 2003 No. 461-II On the Securities Market (as amended on 20.08.2024).
7. Law of the Republic of Kazakhstan of May 13, 2003 No. 415-II On Joint-Stock Companies (as amended on 01.01.2023).
8. 8Constitutional Law of the Republic of Kazakhstan On the Astana International Financial Centre (as amended on 01.04.2023).
9. CIS Legal Framework.
10. AIFC FINANCIAL SERVICES FRAMEWORK REGULATIONS (with amendments as of 13 December 2023, which commence on 1 January 2024).
11. FUND MANAGEMENT GUIDE.
12. GUIDANCE FOR FUND MANAGEMENT ACTIVITY AND FUNDS IN THE AIFC.