Cyprus: A Jurisdiction For Alternative Investment Funds

Last Updated: 16 June 2017
Article by Christi Kythreotou

Cyprus emerges as a new investment fund centre in Europe following the efforts for the evolvement and upgrade the regulatory and compliance framework which was initiated in the late 1990s. The enactment of the Alternative Investment Funds Law, No. 131(I)/2014 (AIF Law) aimed at the creation of an attractive and competitive environment for further enhancement and development of the alternative funds industry in Cyprus.

The following possibilities for alternative investment funds (AIFs) exist under the AIF Law:

  • Umbrella funds with multiple investment compartments/sub-funds which may adopt different investment policies and manage different pool of assets
  • Transferability of shares
  • Public offerings of AIF's shares or units
  • Listing of securities issued by AIFs

Legal Form

AIFs may be open-ended or closed-ended and may take one of the following legal forms:

  • Fixed Capital Company
  • Variable Capital Company
  • Limited Partnership
  • Common Fund (contractual)

The relevant rules applicable to the respective legal form are based on Anglo-Saxon common law principles which are incorporated in Cyprus law (company law, partnership law and contract law etc.). 

AIFs may have a limited or unlimited duration.

Investor Classification

AIFs may be established either to be marketed to retail investors or to professional and/or well informed investors (see below for the exception applicable to AIFs with limited number of persons). Investor classification is made on the following basis:

  • Professional Investor: For an investor to be considered as professional investor the requirements for professional clients under Markets in Financial Instruments Directive 2004/39/EC (MIFID) must be satisfied. A basic characteristic of professional investors is the fact that they possess the experience, knowledge and expertise to make their own investment decisions and to properly assess the risks they incur.
  • Well-Informed Investor: A well-informed investor is not a professional investor within the above meaning but one who:

    • confirms in writing the well-informed investor status and awareness of the risks related with the proposed investment; and
    • makes an investment of at least €125.000 or has been assessed as having the expertise, experience and knowledge in evaluating the suitability of the investment opportunity in the AIF by a credit institution, investment firm or  a management company for Undertakings for Collective Investment in Transferable Securities (UCITS Management Company).
  • Retail Investor: A retail investor is an investor who does not fulfil the above requirements so as to be classified as a professional or well-informed investor.

Types of AIFs

The AIF Law allows for the establishment of AIFs to be addressed to an unlimited number of investors as well as for funds addressed to a limited number of persons (maximum 75) who may only be professional and/or well-informed investors (the AIFLNPs).

AIFs may be subject to investment restrictions depending on the investor type, the category of the assets to be held in their portfolio and the overall investment policy to be adopted. On the other hand, AIFLNPs are not subject to investment restrictions or investment limits. 

Management of AIFs

AIFs may be managed externally by a manager appointed to perform the management of the portfolio of assets and risks as well as other related services. Different entities may undertake this role depending on the type of AIF:

  • For AIFs the external manager may be:
    • A full scope Alternative Investment Fund Manager (AIFM) under the Alternative Investment Fund Managers Directive (AIFMD);
    • a UCITS Management Company;
    • a MIFID Investment Firm;
    • an AIFM established in a third country but complying with the relevant provisions of local legislation.
  • For AIFLNPs the external manager may be:
    • a MIFID Investment Firm;
    • a UCITs Management Company;
    • an entity established under local law solely for the purpose of managing a specific AIFLNP;
    • an entity established in a third country licensed to provide asset management services and subject to prudential supervision.

In the case of AIFs which are companies, the AIF Law provides the option of self-management whereby the management of the portfolio of assets is performed by the board of directors subject to certain restrictions (cap on value of the assets under management, restrictions on leverage, lock-up periods).


The depositary of an AIF may be a credit institution or a MIFID Investment Firm or other entity which is subject to prudential regulation and ongoing supervision and which is eligible to act as depositary under its home state legislation. The depositary must have its registered office in Cyprus or in the European Union or in a third country, provided that the Cyprus Securities Exchange Commission (CySEC) has signed with the competent authorities of the third country a Memorandum of Understanding for Cooperation and Exchange of Information. Under certain circumstances it is possible for small AIFLNPs not to appoint a depositary.

Utilisation of the AIFs

AIFs may be utilised for investments in a wide range of asset classes. Such funds have been established for investments in debt and equity securities as well as real estate and private equity. In a structure with multiple investment compartments/sub-funds, different compartments/sub-funds may invest in diverse asset classes.

Key benefits:

  • Cost-efficient and simple set-up process with fees being significantly lower than in the more mature fund centres e.g. Ireland and Luxembourg.
  • A single and accessible regulator for the alternative funds and their managers.
  • Flexibility as to the asset classes that may be included in the AIF portfolio.
  • Transparency, reporting and risk management aiming at investor protection.
  • Regulated environment in line with the European Union regulatory framework for Alternative Investment Fund Managers, MIFID Investment Firms and UCITSs.
  • Passporting of the marketing of funds in the European Union where the manager is an AIFM.
  • Redomiciliation in and out of Cyprus is possible.


Cyprus' growth in this sector has been driven by the country's tax treaty network, originally rendering it a jurisdiction for launching funds with investments mainly into Russia, former Soviet republics and Eastern Europe and recently also in Asian countries.

Main aspects of tax treatment in Cyprus:

  • Subject to 12.5% flat corporation tax
  • Exemption from tax on dividends received by the AIF
  • Exemption from tax on profits from sale of securities or other instruments (except where the securities are in companies owning immovable property in Cyprus)
  • No subscription tax on assets of funds
  • Exemption on capital gains tax from the sale of immovable property located outside Cyprus
  • No capital gains tax on disposal of shares/units by the holders
  • Benefiting from an extensive network of more than 50 double tax treaties offering interesting tax planning opportunities

Anticipated developments

Following consultation with the industry and experts, it is intended that changes will be introduced aiming to further enhancement of the existing legal framework and of the product offering:

  • Registered Alternative Investment Funds (RAIFs): A regime for "registered" but not authorised alternative investment funds will be adopted. This regime will be additional to the existing authorisation regimes for AIFs and AIFLNPs. The aim is the facilitation of quicker and more efficient launch at reduced cost. RAIFs will be governed by mandatory rules set out in the law and their constitutional documents. Compliance will be the responsibility of the fund manager. Such funds will be notified to the CySEC and be entered in a special register (similar to the "Reserved Alternative Investment Fund" of Luxembourg, the "Notified AIF" of Malta etc.).

RAIFs will have the following characteristics/options:

  • any legal form available for AIFs but not internally managed;
  • open or closed-ended;
  • may invest in any type of assets and follow any type of investment strategy;
  • a full scope Cyprus or EU AIFM;
  • may be addressed to professional investors and/or well-informed investors;
  • possible umbrella structures.

Where a RAIF will take the form of a limited partnership, be closed-ended and its investments will be in illiquid assets, it will be possible for the management to be undertaken by a manager who is not a full scope AIFM.

  • The Mini Manager: A new regime for licensing and supervision of fund managers not falling within the authorisation provisions of the AIFMD will be introduced. Corresponding to the approach adopted in other fund jurisdictions such regime intends to regulate the fund manager instead of the product.
  • Others issues: Shortfalls and inadequacies that have been identified in the existing framework will be addressed. The most important ones will be:
  • The clarification of the concept of segregated liability of sub-funds.
  • The changes relevant to limited partnerships giving the choice for legal personality while maintaining the tax transparency status and the adoption of non-management safe harbours that will contribute to enhanced legal certainly for investors investing in such structures.


In a rapidly changing funds industry, the options and opportunities available for the setting up and operation of alternative investment funds under the Cyprus regulatory regime are worth exploring by fund managers, investors and their advisors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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