The Alternative Investment Funds Law of 2014 (the "AIF
Law") was enacted by the Cyprus parliament on 10 July 2014 and
will enter into force following its publication in the Official
Gazette, which is expected to take place in the next few days. The
AIF Law replaces and repeals the International Collective
Investment Schemes Law (the "ICIS Law"), which has been
in place since 1999.
Under the ICIS Law, International Collective Investment Schemes
("ICIS") were regulated and supervised by the Central
Bank of Cyprus. The AIF Law gives the Cyprus Securities and
Exchange Commission ("CySEC") responsibility regulation
and supervision of alternative investment funds ("AIFs"),
bringing all investment products, asset managers and investment
firms under a single regulatory body.
The AIF Law updates the funds regime in Cyprus and aligns it with
the latest EU directives on asset management, with a focus on
transparency and investor protection. It sets out rules for the
authorisation, ongoing operations, transparency requirements and
supervision of AIFs in Cyprus and regulates the role and
responsibilities of their directors, custodians and external
managers.
The AIF Law defines an AIF as a collective investment undertaking
that raises external capital from a number of investors with a view
to investing it in accordance with a defined investment policy for
the benefit of those investors, and that has not been authorised as
a UCITS.
Holding companies, schemes covered by the Social Insurance Law or
the law regulating Insurance Business, occupational benefit and
retirement schemes, employee participation schemes or employee
savings schemes, securitisation special purpose entities and
approved investment companies listed on the Cyprus Stock Exchange
are outside the scope of the AIF Law.
The AIF Law provides for two classes of AIF, namely AIFs available
to an unlimited number of investors ("unlimited") and
those available to 75 investors or fewer ("restricted").
The former may be marketed to all investors, including retail
investors. The latter may be marketed only to well-informed or
professional investors. The definition of a professional investor
follows the Markets in Financial Instruments Directive
2004/39/EC. A well-informed investor is an investor not
considered to be a professional investor who confirms in writing
that he is a well-informed investor and has been notified of the
risks associated with investing in the AIF in question, and invests
at least €125,000 in the AIF or has been evaluated by a bank
or regulated investment business as a well-informed investor
possessing the appropriate expertise and knowledge to assess the
suitability of the investment.
AIFs may be structured as variable or fixed capital companies or as
limited partnerships, In addition, unlimited AIFs may be structured
as a mutual fund. The unit trust structure provided for by the ICIS
Law is no longer available.
The AIF Law introduces new structuring options which were not
available under the previous legislative framework, such as
umbrella structures with multiple investment compartments, which
allow the management of different pools of assets with distinct
investment policies, with the each such pool of assets being
ring-fenced, and common contractual funds, which are commonly used
in other jurisdictions, where investors participate as co-owners of
the assets of the AIF.
The AIF Law also enables public offerings of shares of AIFs to take
place, in contrast to the position under the ICIS Law, where only
private placements were allowed. Securities issued by AIFs may also
be listed, which increases liquidity, marketability and
transparency and widens the potential investor base.
Under the AIF Law the role of depositary is no longer reserved to
credit or banking institutions and may, subject to specified
conditions be undertaken by other entities. This may be more
convenient for AIFs not investing in financial and money market
instruments, such as private equity and real estate funds.
The enactment of the new AIF Law marks a long-awaited modernisation
of Cyprus's investment funds regime. Combined with the
island's stable and transparent political legal and commercial
infrastructure, its reliable and familiar common-law legal system
and the excellent professional and financial services available at
a competitive cost, it should transform Cyprus into a major force
in the international funds market. Cyprus's tax regime is
particularly beneficial, offering a corporate income tax rate of
12½%, among the lowest in the EU, full exemption from tax on
gains from trading in securities and a generous participation
exemption regime on foreign dividends in conjunction with an
extensive network of double tax treaties for international tax
planning.
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.