On 14 February 2012, the Central Bank of Ireland issued a policy update in respect of the payment of dividends out of capital by Irish authorised retail collective investment schemes. Under its updated policy the Central Bank has removed the prohibition on the payment of such distributions and all Irish authorised retail funds, including UCITS, may pay dividends out of capital provided they adhere to the following requirements:

  • appropriate provision allowing for distributions out of capital must be contained in the fund's constitutional document;
  • the rationale for the payment of dividends out of capital must be clearly outlined in the fund's prospectus;
  • the prospectus and any subscription form or marketing material must include a prominent risk warning at the front of the document setting out the risk associated with paying distributions from capital, i.e., that the fund's capital will be eroded, that the distribution may negatively impact on future capital growth and that the distributions could continue until all of the capital is depleted;
  • the prospectus must highlight that distributions out of capital may have different tax implications from distributions of income and it must recommend that investors seek advice in this regard, and
  • documentation issued to unitholders in conjunction with such a distribution should indicate that the distribution has been paid out of capital.

Conclusion

The change in the Central Bank's policy is welcomed in that it reflects the willingness of the Central Bank to consider fresh approaches to policy matters and facilitates promoters of Irish retail investment funds who wish to establish funds with units that pay dividends from capital. These funds are particularly attractive to investors who wish to invest in assets which provide a consistent level of income as well as those that wish to maintain a stable net asset value.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.