In today’s increasingly regulated financial landscape, Actively Managed Certificates (AMCs) have emerged as an ideal tax-transparent investment vehicle. Offering both flexibility and clarity, these regulated instruments ensure that investors can maximize returns while maintaining compliance with tax regulations. For asset managers and investors seeking transparency, efficiency, and robust compliance, AMCs provide a clear solution.
Why AMCs are Tax-Transparent
AMCs offer significant advantages in terms of tax transparency. In structures like those issued under Guernsey’s Protected Cell Company (PCC) regime, AMCs are subject to the tax regulations of both Guernsey and Switzerland (the latter for stamp duty). However, the tax obligations ultimately rest with the individual investor, depending on their country of residence. For instance, a South African investor would be taxed on income and capital gains under South African tax law, with no loopholes that convert taxable income into exempt capital gains. This straightforward structure reduces the risk of unexpected tax liabilities and ensures investors can meet their obligations efficiently.
An AMC launched through the Swiss Exchange, settled via Euroclear, and denominated in ZAR (foreign currency), offers offshore long-term investment opportunities which provide tax certainty to international investors. Offshore issuance is often chosen for its cost-effectiveness compared to setting up local South African structures, further benefiting investors.
Challenges with Local AMCs: A Taxation Minefield
Historically, South African bank-issued AMCs have raised significant concerns due to their undisclosed treatment and perceived benefits. These structured products, often structured by financial institutions, allowed investors access to long-term investment returns and deferral of the investment tax treatment—a strategy that has drawn attention from regulators and raised potential tax avoidance questions. Although many of these instruments have been restructured or closed down, their legacy continues to affect the perception of locally issued AMCs.
Moreover, access to private debt listings on local exchanges remains limited with the added limitation of what assets can be wrapped in the product. Investors are often confined to the bank’s ecosystem, with no flexibility in choosing brokers or custodians, asset class and higher associated costs. In contrast, offshore AMCs allow for greater flexibility and tax transparency, offering a clear, compliant structure for international investors.
Offshore AMCs: A Tax-Optimized Alternative
Offshore AMCs stand out as a cost-effective alternative to traditional funds. Compared to the high costs of setting up a fund—particularly UCITS or similar vehicles—an AMC provides greater control for asset owners with lower operational expenses. For example, the costs of setting up an Active ETF, which functions similarly to an AMC, are often prohibitive for smaller asset managers. Offshore AMCs allow these managers to offer a diversified range of investment opportunities, including private debt and South African equities, all while ensuring tax compliance similar to funds being achieved.
The offshore structure’s transparency is crucial to its appeal. Tax-transparent AMCs do not rely on complex tax strategies or hybrid structures that could expose investors to scrutiny. Instead, they focus on providing straightforward, compliant tax solutions that fit seamlessly within the investor’s home jurisdiction laws.
The Struggles of Local Exchanges
Despite the advantages of offshore AMCs, local issuance on platforms like the JSE or CTSE remains costly and provides limited scope of product coverage. In addition, the setup costs can often exceed R1 million, with variable annual fees adding further expense. While some offshore AMCs offer exposure to South African assets, such as equities and bonds, their offshore issuance often proves to be a more efficient and transparent solution for both asset managers and investors.
Efforts to collaborate with South African exchanges to create more cost-effective, transparent solutions have faced challenges, mostly relating to regulations being either outdated or conflicting with other acts. Exchanges such as A2X are working to create options for secondary listings which may include foreign-issued AMCs, but approval from regulatory bodies like the FSCA is still pending. In the meantime, offshore structures continue to dominate due to their tax advantages, cost savings, and broader global access.
Transparent Pricing and Liquidity
Transparency isn’t just about taxes—it extends to pricing and liquidity. Offshore AMCs offer daily pricing on platforms like Telekurs and Bloomberg, ensuring that investors can track their holdings in real time. Pricing is determined independently, based on the gross NAV of the broker’s portfolio, less the daily accrual of fees, providing a reliable and transparent mechanism for valuation. These factors are crucial for maintaining investor trust, especially in tax-transparent investment vehicles.
The Future of Tax-Transparent AMCs
As more investors and asset managers seek tax-efficient, flexible investment solutions, low maintenance and with substance solutions, AMCs will continue to gain prominence. Offshore issuance not only provides cost-effective solutions but also offers a pathway for global tax compliance. The demand for tax-transparent investment vehicles is growing, and the AMC structure—particularly those issued offshore—offers an increasingly appealing alternative to traditional funds or bank-issued products.
Looking ahead, it’s essential for issuers, regulators, and local exchanges to collaborate in creating tax-transparent, affordable solutions that meet the needs of both onshore and offshore investors. For now, offshore AMCs remain the most effective way for asset managers to provide tax-transparent exposure to a range of global markets.
Conclusion
Tax-transparent AMCs represent a pivotal innovation for investors who demand flexibility, cost-effectiveness, and compliance with tax regulations. Whether for South African or international investors, these offshore instruments offer a clear advantage over local counterparts. With their transparent pricing, tax-efficient structure, and broad access to global assets, AMCs are set to remain a vital tool for investors seeking both tax certainty and investment performance.
As the market continues to evolve, AMCs will remain at the forefront of investment strategies, delivering the clarity, control, and compliance that modern investors expect.