PRC insurance companies are being encouraged to invest offshore in a number of countries including Australia. This presents a potential source of capital for qualifying investment funds and others. There are also opportunities to manage direct investment. With the world’s 4th largest pool of investment fund assets, Australia is well placed to manage some of these assets.
There are 3 types of qualifying funds, which are eligible to receive and manage the investments of PRC insurance companies. These are securities investment funds, equity investment funds and real estate trusts which meet the prescribed criteria.
Securities investment funds
Australian registered managed investment schemes are likely to be eligible as securities investment funds. The fund must have at least 3 years’ past performance and must invest in certain types of money market instruments, fixed yield instruments and equity instruments.
The manager must also meet certain criteria including experience and US$30 million in net assets and US$30 billion in assets under management.
Equity investment funds
This category is likely to be of most interest to private equity funds and other funds that are not associated with banks and other financial institutions. The subscribed capital of the fund must be at least US$300 million. The manager must also meet certain criteria including US$15 million in net assets and US$1 billion in assets under management.
Importantly “financial institutions” must not substantially control the funds or hold interests in the manager. There is no specific definition of “financial institutions” under PRC law but generally it is understood to have a broad meaning to cover all entities which are under the regulation of the China Insurance Regulatory Committee, the China Securities Regulatory Committee or the China Banking Regulatory Committee. Our expectation is that the CIRC is likely to apply that definition to equivalently regulated offshore entities (e.g. banks, insurance companies and securities firms).
The real estate investment trust must be listed and trading on an exchange in Australia or another specified country.
Managing direct investments
In addition to being able to invest in qualifying funds, insurance companies may also invest directly in certain types of money market instruments, fixed yield instruments, equity instruments and commercial and office real estate. There are opportunities for offshore managers to act as the insurance companies’ overseas agent in relation to those assets.
Australia tax changes make Australia more attractive
There are a number of recent changes to the Australian tax rules that make Chinese investment in Australian managed funds and other investments more attractive.
Chief among these is the managed investment trust (MIT) regime. Under this regime, foreign investors in certain jurisdictions – including China – are able to access a concessional rate of taxation (15% or, in some cases, 10%) on distributions of rent and capital gains on real property from qualifying “MITs”. MITs also obtain the benefit of a number of current and proposed tax concessions that provide certainty regarding the tax treatment of MITs. Many Australiandomiciled REITs and securities and equity investment funds which Chinese investors may seek to invest in are likely to qualify for concessional MIT treatment.
Another, more recent, development is the investment manager regime (IMR). Under this regime, qualifying foreign funds may be exempt from Australian tax on gains and losses that arise from dealings in certain securities. This means that it is possible for Australian managers to establish or manage foreign domiciled funds for the benefit of Chinese investors without creating a risk of the fund being subject to Australian tax. Such funds may be more attractive to Chinese investors than Australian-domiciled funds. These may be in legal forms with which Chinese investors are more familiar and comfortable (such as Cayman Islands based vehicles).
In our experience the Chinese Insurance Regulatory Authority is willing to flexibly apply the rules described above and in practice will consider and respect the different types and structures of investment instruments in different financial markets. It is also making efforts to relax the regulatory procedure for making investment in offshore markets by insurance companies.