The reform of the investment limited partnership

Apr 01, 2019
Long-overdue reforms to the Irish investment limited partnership could help Ireland remain at the forefront of the continuously evolving international funds sector.

There has been a renewed focus in recent months on the importance to Ireland of a suitable regulated fund platform through which private equity investors can invest. The lack of a suitable investment limited partnership structure is possibly the biggest gap in Ireland’s financial services offering and getting it right is critical. There is a feeling that we are close to that point now.

Under current rules, Irish investment funds can be established as an investment company, a unit trust, an investment limited partnership, a common contractual fund or an Irish collective asset-management vehicle. However, the private equity sector has traditionally utilised investment limited partnership structures for their investments.

What is a limited partnership?

A limited partnership is a partnership with a minimum of two persons (a person can be an individual or a corporate body) conducting business with a view to making a profit. The limited partnership does not have a separate legal personality to the partners.
An Irish limited partnership, created under the Limited Partnership Act 1907, consists of no more than 20 persons (in the case of a limited partnership carrying on the business of banking, no more than 10 persons) and must consist of one or more persons referred to as general partners, who shall be liable for all debts and obligations of the firm, and one or more persons to be referred to as limited partners. The liability of the limited partners is limited to the extent of their contribution to the partnership.

A limited partnership is generally deemed to be a “tax transparent” entity for tax purposes, preventing double taxation and ensuring that the fund or its investors will not be in a worse-off position after investing through the fund than they would have been if they invested in the underlying company/asset directly. The assets and liabilities are deemed to be held directly by the investors in proportion to their individual investment and the investors are generally subject to the tax rules in their home jurisdiction in respect of any tax charge, relief or allowances available as they would arise.

The limited liability is also attractive, particularly to passive investors, and limited partnerships are generally not subject to investment restrictions. Furthermore, a limited partnership does not benefit from the tax treaty network of the fund jurisdiction. One would therefore typically seek to rely on the tax treaty between the investor location and the jurisdiction of the underlying investment.

Uses of a limited partnership

Due to the advantages noted above, limited partnerships are widely used in the alternative investments sector and are particularly attractive to the private equity sector. The US private equity market has a long-established history of investing through Delaware and Cayman limited partnership structures and in more recent times, it has moved to set up regulated structures in the European Union to secure access to the European market.

What is an Irish investment limited partnership?

An Irish investment limited partnership is formed under the Investment Limited Partnership Act 1994 and unlike the Limited Partnerships Act 1907, it does not limit the number of partners. An Irish investment limited partnership facilitates investors who choose to invest in a collective investment fund. It is deemed to be transparent for Irish tax purposes, can be regulated under the Alternative Investment Fund Managers Directive and is authorised by the Central Bank of Ireland, whereas a partnership formed under the 1907 Act cannot be regulated.

Why is reform required?

While the number of investment funds and the volume of assets under management continue to grow in Ireland, it is widely acknowledged that the Irish investment limited partnership has a number of shortcomings. As a result, it is not as popular with fund managers and promoters as other Irish fund structure offerings. This results in a perceived gap in the Irish offering and impacts our ability to claim to have a full suite of product offerings for the investment management sector. Consequently, reform of the investment limited partnership has been muted for a number of years.

The industry is hopeful that the amendments will:

  • Align the investment limited partnership with European Union and international standards and best practice;
  • Ensure that the structure meets the requirements of the Alternative Investment Fund Managers Directive; 
  • Facilitate the establishment of umbrella structures; and
  • Facilitate the migration of an investment limited partnership to and from Ireland.
    Where are we now?
The Irish government initially approved the reform of the 1994 Act in July 2017 via the proposal to introduce the Investment Limited Partnerships (Amendment) Bill 2018. Reform of the 1994 Act is also referenced as a strategic priority for Michael D’Arcy T.D., Minister of State for Financial Services and Insurance at the Department of Finance, in the IFS 2020 Action Plan for 2019, which was published in February of this year.

A key strategic measure noted in the plan relates to changes to the legislation governing the limited partnership. While it is worth noting that this bill was also referred to in previous action plans, it is encouraging to see that government remains committed to the reform of the legislation governing the investment limited partnership and has acknowledged its importance in supporting the development of continuous growth in the finance and funds industry in Ireland.

A draft bill is expected to be published in the coming months and subsequently enacted into law at some stage in 2019. If this does indeed happen, it will be of enormous importance to the industry and will help Ireland maintain its position at the forefront of the continuously evolving international funds sector while increasing the domicile options available for fund managers, private equity funds and venture capital funds.

Peter Vale is a Tax Partner at Grant Thornton. Brian Murphy is a Director in Financial Services Tax at Grant Thornton.