Cyprus: Cyprus Alternative Investment Funds - Your Gateway To Europe And Beyond

Last Updated: 8 June 2016
Article by Charles Savva

With the July 2014 enactment of the Alternative Investment Funds Law (the "AIF Law" or "Law"), Cyprus modernised and significantly enhanced the offering of alternative investment funds, or "non-UCITS", which can be registered and domiciled in Cyprus.

The AIF Law replaced the previous International Collective Investment Scheme Law of 1999, and has resulted in the regulation of all investment products, asset managers and investment firms being under the auspices of the Cyprus Securities and Exchange Commission ("CySec").

With the enactment of the AIF Law, Cyprus now offers the full spectrum of legislative framework to all fund products, both UCITS and non-UCITS, and provides fund managers the opportunity to structure as a licensed Alternative Investment Fund Manager, in accordance with the relevant EU directive, or a MiFID compliant Investment Firm, both offering EU passporting.

The Law allows for the creation of AIFs with Unlimited Number of Persons ("AIF-UNP"), or AIFs with Limited Number of Persons ("AIF-LNP"), the latter being the most flexible and "light-touch" regulated form of investment fund.

An AIF can take various legal forms from Fixed or Variable Capital, Limited Partnership or Common Fund (available only as an AIF-UNP).

The main provisions of the AIF Law can be summarised as follows:

  1. Ability to create AIFs with unlimited investment compartments (i.e. umbrella funds), each with a separate investment strategy and asset pools.
  2. Can list the units of AIFs on various stock exchanges.
  3. Various options available in relation to the appointment of an Investment Manager and Depositary, providing maximum flexibility.
  4. Investor units are transferable.
  5. The AIF-LNP is limited to a maximum of 75 investors.

During the last three years, the funds industry in Cyprus has experienced significant growth, resulting in the Island establishing itself as one of the major EU fund jurisdictions, with many reasons to domicile your AIF in Cyprus.

Its strategic geographic position, stable political system, attractive tax system, modernised AIF Law, combined with EU and Eurozone memberships, have served to attract global funds and fund managers alike.

The recent regulatory changes in the Cyprus funds industry have resulted in the full alignment of local legislation with the relevant EU Directives, including the Alternative Investment Funds Manager Directive.

Overall, Cyprus is the most flexible and cost efficient fund jurisdiction in the EU, a member of the EuropeanSecurities and Markets Authority (ESMA), and additionally boasts a comprehensive funds and related services workforce comprising of some 2,500 qualified lawyers and 4,000 qualified accountants, establishing Cyprus as a prominent player within the EU funds industry.

The Cyprus Law provides two types of AIFs, the AIF with unlimited number of persons (AIF-UNP) and AIF with Limited number of persons (AIF-LNP).

The main features of an AIF-UNP are summarised as follows:

  1. Can be marketed to any type of investor, including retail investors.
  2. Can be created as a limited liability company, a limited partnership or a common fund.
  3. Where an AIF-UNP is formed as a limited liability company, it can be self-managed by its Board of Directors, and in all other cases the appointment of an external investment manager is required.
  4. The investment manager must be:
  • A management company authorised under the AIFM Managers Law of 2013, or the equivalent from another EU member state (in accordance with the AIFM Directive).
  • A management company authorised under the Open Ended Undertakings in Collective Investments Law, or the equivalent from another EU Member state (in accordance with the UCITS IV Directive).
  • A company authorised to carry out portfolio management services under the Investment Services and Regulated Markets Law (i.e. a Cyprus Investment Firm).
  1. Must always appoint a depositary/custodian who can be a credit institution, a MiFiD investment firm or any other company subject to prudential supervision who may be based in Cyprus, the EU or in any third country which CySec has a signed cooperation agreement with (certain restrictions apply if the AIF-UNP is managed by an AIFM).
  2. Must be established with a minimum initial capital of €125,000 (or €300,000 in the case of a self-managed AIF-UNP).
  3. The units of the AIF-UNP can be listed on a recognized stock exchange.
  4. Can be established with unlimited investment compartments (sub-funds / umbrella fund), each with a separate investment strategy and asset pools.
  5. Is subject to investment restrictions / diversification rules which vary depending on the nature of the AIF's investments (i.e. liquid vs illiquid assets) and on the AIF's targeted investors (i.e. retail investors vs experienced investors).

The main features of an AIF-LNP, considered a "light-touch" investment fund, are summarised as follows:

  1. Must be marketed only to professional or well-informed investors.
    • A professional investor, as defined within the MiFiD Directive, is an investor who possesses the experience, knowledge and expertise to make his or her own investment decisions and properly assess the risks that he or she incurs.
    • A well-informed investor, as defined within the AIF Law, is an investor who does not qualify as a professional investor and:
      • Invests a minimum of €125,000 in the AIF, or
      • Is successfully assessed as a well-informed investor by a bank, an investment firm or by a UCITS management company in Cyprus.
  2. The maximum number of investors permitted, at any time, is capped at 75.
  3. Can be created as a limited liability company or a limited partnership.
  4. Where an AIF-LNP is formed as a limited liability company, it can be self-managed by its Board of Directors. If the AIF-LNP is formed as a limited partnership, it must appoint an external investment manager.
  1. The investment manager must be:
    • A management company authorised under the Open Ended Undertakings in Collective Investments Law, or the equivalent from another EU Member state (in accordance with the UCITS IV Directive).
    • A company authorised to carry out portfolio management services under the Investment Services and Regulated Markets Law (i.e. a Cyprus Investment Firm).
    • A company created with the sole purpose of managing the specific AIF-LNP.
  2. An AIF-LNP is not required to appoint a depositary/custodian if:
    • Its assets are less than €5,000,000, or
    • If it sets the maximum number of investors to 5, or
    • Its assets are not subject to custody.
  3. If the AIF-LNP  appoints a depositary/custodian, this can be a credit institution, a MiFiD investment firm or any other company subject to prudential supervision based in Cyprus, the EU or in any third country with which CySec has a signed cooperation agreement with (certain restrictions apply if the AIF-UNP is managed by an AIFM).
  4. There are no minimum initial capital requirements.
  5. There are no investment restrictions.
  6. There are no investment diversification rules.
  7. The units of the AIF-UNP can be listed on a recognized stock exchange.
  8. Can be established with unlimited investment compartments, each with a separate investment strategy and asset pools, however the number of investors must be limited to 75 (over the entire AIF).

The key taxation benefits which an AIF and its stakeholders can enjoy are the following:

  1. Exemption from tax on profits from the disposal of securities (it should be noted the Cyprus Tax Authorities have provided a wide definition of what constitutes eligible securities/titles).
  2. Exemption from tax on dividend income (subject to certain conditions).
  3. No withholding taxes on repatriation of dividends, interest and royalties to non residents.
  4. 12.5% corporate tax rate, being among the lowest in the EU.
  5. An extensive and continuously growing network of double tax treaties.
  6. No stamp duty on the issue of units in AIFs.

Savva & Associates: Cyprus' premier funds services provider

Savva & Associates is a premier funds services provider  in Cyprus with a team of qualified accountants, lawyers and fund experts assisting international clients worldwide.

We are a Cyprus Securities and Exchange Commission licensed fiduciary and corporate services providers. We are one of the few providers experienced in the licensing and administration of AIF's, and the most cost efficient in delivering high level alternative investment fund services in Cyprus.

Our dedicated Investment Funds Division has extensive knowledge of financial services, coupled with local legal and tax expertise, ensuring efficiency in the establishment, licencing and ongoing management of AIFs.

To discuss your specific AIF needs and to find out more about Cyprus fund formation and the complete AIF submission process contact Mr Charles Savva, (Managing Director and Head of Tax) at c.savva@savvacyprus.com or Mr Panayiotis Vassiliades, (Chartered Accountant and Director of S&V Audit Services Ltd) at p.vassiliades@svauditservices.com

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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Authors
Charles Savva
 
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