The enactment of the Alternative Investment Funds Law of 2014 ("AIF Law") marked the beginning of a new era and strong opportunities for Cyprus in the fund industry. The new AIF Law came to harmonise the Cyprus legal framework with the European legislation in an attempt to enhance its competiveness and place the country as an important player in the field of alternative investment funds.
The new AIF Law provides for the requirements for the establishment of alternative investments funds ("AIFs"), their operation and supervision as well as setting the framework for the key persons involved in the management and operations of such funds.
B. LEGAL FORMS OF ALTERNATIVE INVESTMENT FUNDS
An alternative investment fund may be set up in any of the following legal forms:
- Common fund with no legal personality where the investors participate as co-owners of the assets;
- Fixed capital Investment company in the legal form of a limited liability company with shares;
- Variable capital Investment company in the legal form of a limited liability company with shares;
- Limited partnership registered under the Cyprus Partnership Law.
C. THE CATEGORIES OF AIFs
The AIF Law provides for mainly two categories of investment funds of:
- unlimited number of persons which:
- may be formed in any of the legal forms mentioned above;
- may be marketed to professional and/or well informed investors or retail investors;
- have freely transferable shares;
- are subject to minimum share capital requirements of €125.000 or €300.000 if self-managed and over the asset thresholds;
- must appoint a depositary;
- limited number of persons which:
- may be formed as fixed/variable capital company or limited liability partnership;
- may be marketed to professional and/or well informed investors only;
- may have up to 75 investors;
- no minimum share capital requirements;
- under certain circumstances may be exempted from appointing a depository;
- has portfolio of assets under the Alternative Investment Fund Managers Directive ("AIFMD") threshold (EUR 100mln leveraged or EUR 500mln unleveraged)
D. HOW ALTERNATIVE INVESTMENT FUNDS COULD BE MANAGED
Funds may be self-managed
An AIF, either for limited or unlimited number of persons, may be self-managed if it is established as a variable/fixed investment company and one of the following applies:
- the assets of the portfolio of the AIF including any assets acquired through leverage, in total do not exceed a threshold of EUR 100mln or
- the assets of the portfolio of the AIF, where the AIF does not employ leverage and its unit holders have no redemption rights exercisable for a period of 5 years, do not exceed a threshold of EUR 500mln.
The management must be conducted by at least two persons with sufficient experience and specialisation.
Common funds and limited partnerships must be externally managed. In the case of partnerships, the duties and obligations of the external manager are undertaken by the general partner.
Externally managed funds
An AIF with unlimited number of persons may be externally managed by an AIFM, a UCITS management company, or a licensed Cyprus Investment Firm.
A fund with limited number of persons may not be managed by an Alternative Investments Fund manager under the AIFM law. It may be externally managed only by a UCITS management company, a licensed Cyprus Investment Firm or a company incorporated for the sole purpose of managing the AIF whose suitability is examined by the Cyprus Securities and Exchange Commission.
E. OTHER PROFESSIONALS
The active involvement of the other professionals is important for the smooth operation of alternative investment fund. Apart from its management a fund must engage:
- An Administrator, being responsible for the calculation of the Net Asset Value (NAV) of the fund, its administration, accounting, keeping of registry including processing of subscription and redemption of units. Currently, there is no licensing requirement for the position of the fund administration.
- A Depositary, being responsible for custody and safekeeping of assets depending on the type of assets of the fund as well as overviewing the cash movements of the fund.
- An auditor, for the audit of the financial statements of the fund, to review the activities of the fund and report to CySEC.
F. WHERE TO APPLY
The Cyprus Securities and Exchange Commission (CySEC) is the regulatory authority, responsible under the AIF Law for the licensing and supervision of Alternative Investment Funds. The commencement of operations of an AIF requires its prior authorisation.
CySEC must review an application and communicate its decision within three months of the submission of a duly completed application.
G. TAXATION OF FUNDS AND INVESTORS
Cyprus based funds and their investors can benefit from a favourable tax environment:
- Corporation tax at 12.5% on profits
- No taxation on dividends received by the fund
- No taxation on any profit from the trading of securities and sale of other titles by the fund
- No withholding tax on dividends to foreign investors
- No taxation in Cyprus on redemption of units by the unitholders
H. THE FUTURE OF FUNDS IN CYPRUS
The transformation of the investment funds regime in Cyprus in combination with the island's regional position, attractive tax environment and professional service sector has made Cyprus an alternative jurisdiction for the setting up of funds. The new upcoming changes to the legislation and the continuous efforts of the Regulator and professionals can only result in developing this sector further.
I. HOW KINANIS LLC CAN ASSIST
- Assistance in structuring of schemes
- Preparation of fund application to CySEC
- Assistance in drafting of constitutional and other legal documents
- Consulting in legal, tax and accounting matters
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.