1 Legislative and regulatory framework
1.1 In broad terms, which legislative and regulatory provisions govern alternative investment funds in your jurisdiction?
The establishment and operation of alternative investments funds (AIFs) in Cyprus is regulated by the Alternative Investments Funds Law of 2018 (124(I)/2018). The Cyprus Securities and Exchange Commission (CySEC), the competent authority, is responsible for issuing circulars and directives which also govern AIFs in Cyprus as secondary legislation.
The EU AIF Managers Directive (2011/61/EU), which relates to fund managers, was transposed into national law by the Alternative Investment Funds Manager Law of 2013, 56(I)/2013 (AIFM Law), as amended from time to time.
1.2 Do any special regimes or provisions apply to specific types of alternative investment funds?
The AIF Law applies to:
- AIFs with a limited number of persons (AIFLNPs), which can have a maximum of 50 unitholders; and
- registered AIFs (RAIFs).
1.3 Do the legislative and regulatory provisions governing alternative investment funds have extra-territorial reach?
The AIF Law regulates the establishment and operation of AIFs, AIFLNPs and RAIFs in Cyprus. To the relevant extent, it also regulates the marketing of units of EU or third-country AIFs in Cyprus. Part III of the AIF Law applies to EU and third-country AIFs that wish to market their units in Cyprus.
1.4 Are any bilateral, multilateral or supranational instruments in effect in your jurisdiction of relevance to alternative investment funds?
The EU regulations governing the operation of funds and AIFMs are directly enforceable in Cyprus, as Cyprus is an EU member state. Additionally, the directives of the European Parliament and Commission – which, together with the regulations, constitute the EU framework for AIFs – have been transposed into national law and are enforceable.
1.5 Which bodies are responsible for regulating alternative investment funds in your jurisdiction? What powers do they have?
CySEC is the competent authority under the AIF Law for the licensing and supervision of AIFs in Cyprus. CySEC has the authority to approve or reject applications for the authorisation of AIFs and AIFLNPs. Although they are not subject to any authorisation requirements, RAIFs are indirectly supervised through their AIFM and must be registered in the register of RAIFs maintained by CySEC, by way of notification addressed to CySEC.
CySEC may issue circulars and directives regarding the implementation of the relevant national laws and the exercise of its supervisory authority. Additionally, CySEC may impose administrative penalties in case of infringement of the AIF Law or its directives, and has the authority to suspend and/or withdraw the authorisation of a regulated entity.
1.6 To what extent do the regulators cooperate with their counterparts in other jurisdictions?
Cooperation between the regulator and its counterparts in other jurisdictions is essential, due to the cross-border nature of the activities of regulated entities within the scope of the AIF Law. CySEC actively cooperates with its counterparts by concluding bilateral and multilateral agreements in the form of memoranda of understanding, and by participating in other committees and groups together with the national committees of other countries. Such groups include:
- the European Securities and Market Authority;
- the European Systemic Risk Board;
- the International Organization of Securities Commissions; and
- the Mediterranean Partnership of Securities Regulators.
2 Form and structure
2.1 What types of alternative investment funds are typically found in your jurisdiction?
Alternative investment funds (AIFs), AIFs with a limited number of persons (AIFLNPs) and registered AIFs (RAIFs) are the most common types of funds in Cyprus. These funds may be structured as an umbrella scheme within the limits set out in the AIF Law.
2.2 How are these alternative investment funds typically structured?
AIFs and RAIFs may take the following legal forms:
- a common fund;
- a variable capital investment company (VCIC);
- a fixed capital investment company (FCIC); or
- a limited partnership with no legal personality.
AIFLNPs may take the following legal forms:
- a limited partnership with no legal personality; or
- an investment company – either a VCIC or FCIC.
AIFs and AIFLNPs may be internally or externally managed. RAIFs must be managed by an external manager. All kinds of funds can be either open or closed-ended.
2.3 What are the advantages and disadvantages of these different types of structures?
An AIF in the form of an investment company (VCIC or FCIC) is established according to the Companies Law (Cap 113) and enjoys the same benefits as a common company. An investment company has a separate legal personality from its members and such members have limited liability, according to their participation in the capital of the company. Additionally, the taxation rules mentioned in question 8.1 are applicable to an investment company.
Partnerships are considered as transparent entities, with fewer formalities for their establishment according to the law. The operation of a partnership is mainly governed by the partnership agreement, which sets out the rules for the fund's operation.
2.4 What are the most widely used alternative investment funds structures used in your jurisdiction?
The most common structure for AIFs in Cyprus is the investment company, either a VCIC or FCIC. Most investment companies are externally managed by AIFMs or management companies of undertakings for collective investment in transferable securities.
2.5 Is there a preferred alternative fund structure for particular investment strategies (ie, hedge fund/private credit/private equity)?
CySEC's latest statistics for assets under management in Cyprus, published on 5 March 2020, revealed an increase in the number of hedge funds and private equity funds operating in Cyprus. Most assets under management relate to the management of private equity funds. The most common structure for such investment strategies is a fund operating in the form of an investment company.
2.6 Are alternative investment funds required to have a local administrator appointed?
Although fund administration may be performed by the fund manager in the course of the collective management of a fund, in practice, the function of the administrator is delegated to a third party located in Cyprus.
2.7 Are alternative investment funds required to appoint a local custodian to hold assets? If yes, what legal protections are in place to protect the alternative investment fund's assets?
AIFs and RAIFs which are externally managed by an AIFM must appoint a depositary based in Cyprus according to the AIFM Law. Internally managed funds and funds which are not managed by an AIFM must appoint a depositary which is based in Cyprus, in another EU member state or in a third country.
According to the AIF Law, the assets of the AIF must be entrusted to a depositary for safekeeping. If an external AIFM is appointed, the provisions of the AIFM Law regarding the duties of the depositary will apply.
AIFLNPs are exempt from the obligation to appoint a depositary if:
- the total assets do not exceed €5 million;
- the instruments of incorporation limit the number of investors to five; or
- the portfolio consists of assets subject to custody whose value does not exceed 10% of the fund's total assets.
In order to protect the assets of the fund, the AIF Law provides that the assets must be entrusted to a depositary, and not to the external manager or to the board of directors, where the fund is internally managed. This avoids the possibility of a conflict of interest between the depositary, the AIFM, the fund and/or its investors. The AIFM Law provides that, subject to further requirements, credit institutions, investment firms and other categories of institution may act as depositaries. The AIFM Law also sets out specific rules on the duties and obligations of depositaries, and establishes different rules for the safekeeping of financial instruments and different types of assets.
2.8 Is it possible for an alternative investment fund to redomicile to your jurisdiction? If yes, what considerations are required and what are the steps involved?
According to the AIF Law, it is possible to redomicile in Cyprus:
- a fund established as an investment company in another country, where the provisions of the Companies Law (Cap 113) will apply; and
- a fund established under the law of contract of another country.
3.1 Must alternative investment funds be authorised or licensed in your jurisdiction?
The operation and establishment of alternative investment funds (AIFs) and AIFs with a limited number of persons (AIFLNPs) are subject to authorisation by the Cyprus Securities and Exchange Commission (CySEC).
Registered AIFs (RAIFs) do not require authorisation; however, their external manager should provide CySEC with notification so that the RAIF may be included on the register of RAIFs maintained by CySEC.
3.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
According to the AIF Law, AIFs and AIFLNPs will be granted authorisation if CySEC approves:
- the relevant application;
- the fund's rules or instruments of incorporation;
- the choice of external manager or, in the case of internally managed funds, the persons who effectively conduct its business; and
- the choice of depositary.
3.3 What is the process for obtaining authorisation of alternative investment funds and how long does this usually take?
The application for the granting of authorisation for an AIF or an AIFLNP must contain, among other things:
- information on the business and structure of the AIF;
- sufficient information on the people who effectively direct the business of the AIF;
- the name and date of the manager (if appointed); and
- the identity of the persons responsible for the risk and portfolio management functions, and of the depositary (if appointed).
The following documentation must be submitted together with the application for authorisation:
- the AIF's fund rules;
- its instruments of incorporation or partnership agreement, depending on the legal form of the AIF;
- a draft of its offering document; and
- other related constitutional documents.
CySEC will inform the external manager of the AIF or the AIF directly, if internally managed, of its decision within six months of submission of a complete application. During this process, CySEC may request additional clarifications and/or documents.
4 Management and advisory relationships
4.1 How are alternative investment fund managers and advisers typically structured in your jurisdiction?
AIFMs registered in Cyprus are structured as companies limited by shares, as this a requirement under the law.
4.2 What are the advantages and disadvantages of these different types of structures?
A management company is a private limited liability company established under the Companies Law (Cap 113). In effect, a management company has a separate legal personality from its members and such members have limited liability, according to their participation in the capital of the company. Additionally, the taxation rules mentioned in questions 8.1 and 8.2 are applicable to a management company.
4.3 Must alternative investment fund managers be authorised or licensed in your jurisdiction?
Alternative investment fund managers (AIFMs) under the AIFM Law must be authorised by the Cyprus Securities and Exchange Commission (CySEC).
4.4 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
An AIFM will be granted authorisation if CySEC is satisfied that:
- it meets the conditions of the AIFM Law, including the initial capital and own funds provisions;
- the persons who effectively conduct the business of the AIFM are of sufficiently good repute and sufficiently experienced;
- the shareholders or members of the AIFM are suitable; and
- the head office of the AIFM is located in Cyprus.
CySEC may refuse to grant authorisation to an AIFM if the effective exercise of its supervisory functions is prevented by:
- close links between the AIFM and other persons; or
- laws, regulations or administrative provisions of a third country governing natural or legal persons with which the AIFM has close links, or difficulties in the enforcement of such laws, regulations or administrative provisions.
4.5 What is the process for obtaining authorisation and how long does this usually take?
An application for authorisation should be submitted to CySEC, consisting of the application form available from CySEC, accompanied by information on the AIFM, the managed AIFs and any additional information that is requested. An applicant will be notified of CySEC's decision within three months of submission of a duly completed application; this period may be extended if deemed necessary by CySEC. The authorisation must be used within 12 months of grant; otherwise, it is withdrawn.
4.6 What other requirements or restrictions apply to alternative investment fund managers and advisers in your jurisdiction?
An AIFM must be a limited liability company with its registered office and central management in Cyprus. In addition, a minimum initial capital of €125,000 is required if the AIFM will be acting as an external manager. However, if the AIFM is an internally managed AIF, the initial capital must be €300,000. Finally, the business of the AIFM must be conducted by at least two persons who are of good repute and sufficiently experienced. An important restriction is that different persons should conduct the risk and portfolio management functions.
4.7 Can an alternative investment fund manager impose restrictions on the issue, redemption or transfer of interests in the funds under management?
Any provisions for the issue, redemption and transfer of units, as well as any related restrictions, must be included in the instruments of incorporation of the AIF and comply with the provisions of the law. The external manager or the board of directors, if the AIF is internally managed, may decide on the suspension of the redemption or repurchase of units. Such suspension is allowed only if there are exceptional circumstances justifying the suspension or if the instruments of incorporation allow for such action.
4.8 Are there any requirements regarding the ownership of alternative investment fund managers? If so, please provide details.
According to the AIFM Law, CySEC will grant authorisation to an AIFM in Cyprus if, among other things, the shareholders or members which have qualifying holdings are suitable, taking into account the need to ensure the sound and prudent management of the entity.
4.9 Can alternative investment fund managers delegate to third-party investment managers or investment advisers? If yes, please provide details of any specific requirements.
An AIFM may delegate functions to a third party under certain conditions, according to the AIFM Law. The AIFM must inform CySEC prior to the delegation of functions and such delegation should be justified by objective reasons. Furthermore, the third party to which the functions of the AIFM will be delegated should have sufficient resources to undertake the relevant tasks, and the persons who effectively conduct its business should have sufficient experience and be of good repute. Notwithstanding the above, the AIFM should be in position to establish that the third party is qualified to undertake, and is capable of undertaking, such functions. The AIFM cannot delegate its functions to the extent that it can no longer be considered the manager of the fund or to the extent that it becomes a letterbox entity.
The AIFM cannot delegate the risk and portfolio management functions to the depositary or to any other entity whose interests may conflict with those of the AIFM or its investors.
4.10 Can alternative investment fund manager provide investment management services to clients other than alternative investment funds? If yes, do any additional requirements apply?
According to the AIFM Law, external AIFMs may also manage undertakings for collective investment in transferable securities (UCITS), provided that they are duly authorised under the UCITS Law.
An AIFM requires an additional authorisation under the Investment Services and Activities and Regulated Markets Law if it will provide the following services:
- management of portfolios of investments, including those owned by pension funds and institutions for provision for occupational retirement, in accordance with Article 19, paragraph 1 of Directive 2003/41/EC, following mandates given by investors on a discretionary, client-by-client basis; or
- non-core services which include investment advice, safekeeping and administration relating to shares or units of collective investment undertakings, and the receipt and transmission of orders regarding financial instruments.
5.1 Is the marketing of alternative investment funds subject to authorisation in your jurisdiction?
The marketing of alternative investment funds (AIFs) is subject to notification or authorisation obligations, depending on the jurisdiction in which the manager is established and whether the fund is marketed to retail, well-informed or professional investors.
The Cyprus Securities and Exchange Commission (CySEC) has issued a relevant marketing directive which establishes the rules under which units are marketed.
5.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
An AIF authorised by CySEC or a registered AIF (RAIF) which is registered in the register of RAIFs maintained by CySEC may market its units in Cyprus without obtaining further authorisation. However, if such entities intend to market their units outside Cyprus, this may be done subject to the relevant laws of the competent authorities of the target jurisdiction, and must be communicated to CySEC.
AIFs and RAIFs addressed to professional investors and managed by an AIF manager (AIFM) (in accordance with the provisions of the AIFM Directive) may market their units in other EU member states under the ‘passporting' regime of the AIFM Directive. Such entities are not required to obtain additional authorisation from CySEC, since they are already authorised by the competent authority of their home member state. However, CySEC must be notified through a notification procedure.
5.3 What is the process for obtaining authorisation and how long does this usually take?
The rules and the procedure for obtaining authorisation, where applicable, are stated in the marketing directive issued by CySEC. Entities that wish to market their units in Cyprus and that are not entities mentioned in question 5.2 must submit an application form and send the relevant information to CySEC.
5.4 To whom can alternative investment funds be marketed?
Units of all types of AIFs may be marketed to professional and well-informed investors. However, only AIFs may market their units to retail investors, subject to the requirements set out by law.
5.5 What are the content criteria that marketing materials for alternative investment funds must satisfy?
The marketing materials must be precise, clear and not misleading. In addition to the instruments of incorporation of the fund, the following materials, among others, should be disclosed to investors:
- a description of:
- the investment strategy and objectives of the fund;
- the types of assets in which the fund may invest;
- any applicable investment restrictions;
- the circumstances in which the fund may use leverage; and
- the types and sources of leverage permitted;
- the identity of the manager of the fund, the depositary, the auditor and any other service provider;
- a description of the fund's valuation procedure and the pricing methodology for valuing assets;
- a description of the fund's liquidity risk management, including the redemption rights in both normal and exceptional circumstances, and the existing redemption arrangements with investors; and
- the procedure and conditions for the issue and sale of units.
5.6 What other requirements or restrictions apply to marketing materials for alternative investment funds?
The marketing materials of the AIF must also outline:
- the possible benefits that investors may earn;
- their obligations as investors; and
- the risks which the investment may entail.
The marketing materials of an AIFLNP, as well as its instruments of incorporation, must specify that:
- the maximum number of investors is 50; and
- the fund is addressed only to professional and/or well-informed investors.
The marketing materials of RAIFs must include the following information, in capital letters:
- The RAIF is not authorised by CySEC;
- The RAIF is addressed only to professional and/or well-informed investors; and
- The RAIF's registration in the RAIF register is not considered authorisation by CySEC.
5.7 Can alternative fund managers from other jurisdictions market alternative investment funds in your jurisdiction without authorisation?
EU licensed managers may market units of funds in Cyprus under the European passporting system. In effect, EU licensed managers may market units in Cyprus, following a notification of authorisation issued by their competent authority to CySEC, without any obligation to obtain authorisation from CySEC.
Managers established in third countries may manage and market the units of a fund only if they obtain prior authorisation from CySEC.
5.8 Is the appointment of local marketing entities required in your jurisdiction?
There is no requirement to appoint a local marketing entity in Cyprus.
5.9 Is it possible to market alternative investment funds to retail investors in your jurisdiction? If so, are there specific requirements?
Only an AIF which is addressed to an unlimited number of persons may market its units to retail investors. This marketing is subject to authorisation by CySEC. The marketing materials must be precise, clear and not misleading, and must not contradict the information contained in the offering document. The marketing materials must contain the following:
- details of where and in which language the offering document may be obtained;
- the authorisation number of the AIF;
- a reference that the performance of investments in units is not guaranteed and that past performance does not guarantee future returns. In the case of an AIF with guaranteed performance, this reference shall be limited to the fact that past performance does not guarantee future returns;
- if the AIF replicates a stock exchange index, a specific statement on the attention that investors should pay to its investment policy; and
- if the net asset value of the AIF may have high volatility, a specific statement drawing the attention of investors to this fact.
CySEC may impose further obligations on AIFs or AIFMs regarding marketing to retail investors, although such obligations may not be stricter than the EU framework.
6 Investment process
6.1 Do any investment or borrowing restrictions apply to the portfolios of alternative investment funds?
The investment and borrowing restrictions of an alternative investment fund (AIF) are specified in the Classification of AIFs Directive. Restrictions may apply depending on whether the fund is targeted at retail or professional and well-informed investors.
Retail investors: An AIF targeted at retail investors may invest in one or more of the following eligible assets:
- transferable securities;
- money market instruments;
- units of collective investment undertakings;
- financial directive instruments;
- deposits with credit institutions;
- real estate and real estate-related assets;
- mortgage related securities;
- collateralised debt obligation securities, up to 30%;
- commodities, up to 20%; and
- foreign exchange, up to 20%.
General restrictions for AIFs addressed to retail investors include the following:
- The AIF cannot obtain shares carrying voting rights which enable it to exercise significant influence on the management of the issuing body. This rule does not apply to investments in other investment funds, private equity AIFs and real estate AIFs;
- The AIF cannot raise capital from investors by issuing debt securities; and
- The AIF cannot grant loans or act as a guarantor for third parties.
An AIF targeted at retail investors may borrow, if permitted to do so by its constitutional documents. However, such borrowings must not exceed 25% of the net assets of the AIF at any time.
Professional and well-informed investors: AIFs, AIFs with a limited number of persons (AIFLNPs) and registered AIFs (RAIFs) targeted at professional or well-informed investors are not restricted in any way regarding the eligible assets for their investments. However, such funds are subject to the following non-exhaustive restrictions:
- They cannot raise capital from investors by issuing debt securities (subject to derogation);
- They cannot grant loans or act as a guarantor on behalf of third parties, unless the granting of guarantees is permitted, subject to the provisions of the classification of the fund; and
- They cannot carry voting rights which enable them to exercise significant influence over the management of the issuing body. This rule does not apply to investments in other investment funds, private equity AIFs and real estate AIFs.
Regarding borrowing restrictions, AIFs, AIFLNPs and RAIFs targeted at professional or well-informed investors are not restricted unless otherwise defined in their constitutional documents or the offering memorandum.
A RAIF cannot be classified as a loan originating fund, fund of funds or money market fund.
6.2 Are there any specific legal or regulatory requirements regarding investments in particular assets?
The Classification of AIFs Directive sets out requirements and restrictions on investments in cash, investments in other investment funds and investments in real estate of AIFs targeted at retail investors. Additionally, the directive imposes restrictions on the investment of the fund in other collective investment schemes.
7 Reporting, governance and risk management
7.1 What key disclosure requirements apply to alternative investment funds in your jurisdiction?
Alternative investment funds (AIFs) and their managers (AIFMs) must disclose the following documents, among others, to investors:
- the offering document, fund rules and instruments of incorporation;
- a description of the liquidity risk management;
- the latest net asset value of the fund or the latest market price of its units, including a description of the valuation procedure and the pricing methodology for valuing assets;
- the annual report for each financial year; and
- a half-yearly report covering the first six months of the financial year.
An open-ended AIF addressed to retail investors must distribute to investors a key investor information document, along with the documents mentioned above.
7.2 What key reporting requirements apply to alternative investment funds in your jurisdiction?
AIFs, AIFs with a limited number of persons (AIFLNPs) and registered AIFs (RAIFs) must provide the Cyprus Securities and Exchange Commission (CySEC) with the following:
- the offering document, fund rules and instruments of incorporation;
- all material changes to the offering document;
- the annual report for each financial year;
- a half-yearly report covering the first six months of the financial year;
- information regarding investment strategies; and
- reports regarding anti-money laundering practices.
7.3 What key governance requirements apply to alternative investment funds in your jurisdiction?
The governing body of an internally managed AIF must comprise at least four natural persons, of whom at least two must perform executive duties. The business of the AIF must be conducted by at least two natural persons who are of sufficiently good repute and possess sufficient knowledge and experience to perform their duties. The persons who effectively direct the business of the internally managed AIF or the persons effectively directing its external manager must not participate in the governing body of the depositary of the AIF. Furthermore, the portfolio and risk management functions must be performed by separate persons.
An internally managed AIFLNP must have a governing body comprised of at least three natural persons, of whom at least one must perform executive duties. The business of the AIFLNP must be conducted by at least two natural persons who are of sufficient good repute and have sufficient knowledge and experience to perform their duties. The persons who effectively direct the business of the internally managed AIF or the persons who effectively direct its external manager must not participate in the governing body of the depositary of the AIF.
7.4 What key risk management requirements apply to alternative investment funds in your jurisdiction?
According to the AIF Law, the critical principle is that risk management functions and operating units, including portfolio management functions, be performed by separate persons. Persons who perform the risk management functions of an AIF must obtain CySEC certification, according to the Certification Directive issued by CySEC.
Internally managed AIFs and AIFLNPs must establish safety measures to prevent conflicts of interest and ensure the independent and effective performance of the risk management functions. Additionally, such AIFs and AIFLNPs must establish and enforce adequate risk management systems in order to monitor and manage all potential risks relating to their investment strategy or the strategy to which they are exposed. Risk management systems should be reviewed at least once a year and should be adjusted as and when necessary.
Internally managed AIFs and AIFLNPs must establish an appropriate, documented and regularly updated due diligence process while investing, which accords with their investment policy, investment objectives and risk profile.
These principles also apply where an AIF or RAIF is managed by an external manager, subject to the AIFM Law.
8.1 How are alternative investment funds treated for tax purposes in your jurisdiction?
Alternative investment funds (AIFs) in Cyprus are subject to standard taxation rules. Hence, AIFs, AIFs with a limited number of persons (AIFLNPs) and registered AIFs (RAIFs) established in the form of an investment company enjoy the same tax benefits as companies incorporated under the Companies Law. The taxation framework for such funds in Cyprus includes:
- a corporate income tax of 12.5% on profits;
- a tax exemption on dividend income and on the disposal of securities;
- an exemption from stamp duty regarding the subscription, redemption, repurchase or transfer of units; and
- the absence of withholding tax on dividend payments or redemptions.
Such incorporated funds, as tax residents of Cyprus, can also claim double tax treaty benefits under Cyprus' wide network of double tax agreements.
AIFs in the form of a common fund or a limited partnership are considered as tax transparent funds and are thus subject to the tax laws applicable to each investor.
Each compartment of an umbrella AIF is considered as a separate entity for tax purposes and the relevant taxation rules apply to each compartment.
8.2 How are alternative investment fund managers and advisers treated for tax purposes in your jurisdiction?
Most AIF managers (AIFMs) are typically structured as a company and as such are subject to the standard rules of taxation discussed in question 8.1.
An amendment to Cyprus tax law introduced provisions on the tax treatment of a carried interest received by a Cyprus tax-resident employee of an AIFM. The law defines a ‘carried interest' as a profit share in the AIF, which is allocated to employees of a management company as a reward for their management of the fund. Subject to the requirements set out by law, the employee may elect that the carried interest distributed to him or her be taxed at the flat rate of 8%. In that case, the minimum payable tax per year is €10,000, for a maximum period of 10 years. If the employee waives this right, the standard taxation rules will apply and no minimum tax will be payable.
These provisions apply if the taxpayer is employed at one of the following entities:
- an AIFM;
- a company to which the AIFM has delegated either portfolio or risk management; or
- an internally managed AIF.
Finally, according to the law, only specific types of employees (eg, senior management, risk takers) may elect for taxation at the flat rate of 8% for their carried interest.
8.3 How are alternative investment fund investors treated for tax purposes in your jurisdiction?
The tax rules regarding investors vary, depending on whether the investor is Cyprus resident.
Cyprus resident investors are subject to the rules of the Cyprus tax framework regarding income arising from their investment in an AIF in Cyprus.
By contrast, non-Cyprus residents that invest in an AIF in Cyprus in the form of a common fund or partnership are not considered to have a permanent establishment in Cyprus for tax purposes. Hence, they are exempt from any withholding tax on distributions and from any tax on the redemption of their units in an AIF, under Cyprus law. However, the national tax legislation of their country of residence may apply.
8.4 What effect do international laws such as the US Foreign Account Tax Compliance Act and international standards such as the Common Reporting Standard have in your jurisdiction?
The US Foreign Account Tax Compliance Act and the Common Reporting Standard are both applicable in Cyprus, as Cyprus has signed the respective treaties and adopted local legislation for their implementation. As a result, legal entities, including AIFMs, must comply with the reporting requirements set out in the legislation. This must be followed by reporting to the relevant jurisdictions, according to the requirements set out by law.
8.5 What preferred tax strategies are typically adopted in the alternative investment fund context?
Cyprus is considered an attractive jurisdiction for the establishment of collective investment schemes. Due to the favourable tax regime for companies in Cyprus, which is fully compliant with EU law, most AIFs are established in the form of an investment company and enjoy the tax benefits set out in question 8.1.
9 Trends and predictions
9.1 How would you describe the alternative investment fund landscape and prevailing trends in your
EU jurisdictions are considered ideal for the establishment of alternative investment funds (AIFs), since there is a healthy and transparent framework for such investment vehicles. Cyprus is an attractive jurisdiction in which to establish AIFs, since it is fully compliant with EU law. The relevant EU directives have been transposed into national law and have established the framework for the creation and management of AIFs. The assets under management in Cyprus are increasing year on year, reflecting the fact that Cyprus is a promising jurisdiction for AIFs.
9.2 Are any new legal or regulatory developments anticipated which will impact on alternative investment funds or alternative investment fund managers in your jurisdiction?
The following developments are expected to impact on alternative investment funds (AIFs) in Cyprus:
- Sub-threshold AIF manager (AIFM) – the mini-manager: A new law is under discussion in Parliament on the licensing and operation of sub-threshold AIFMs, which fall under the exemptions of the AIFM Directive and should be regulated under national law.
- Fund Administration Service Provider Law: This law will regulate independent fund administrators under national law.
Relevant amendments are expected to be introduced to the Partnership Law and the Companies Law.
9.3 Do you envisage any particular industry strategy of attracting particular interest in the next 12 months?
The Cyprus fund industry aims to further increase the amount of assets under management in order to attract financial institutions to act as depositaries for AIFs in Cyprus. A number of summits and exhibitions are under preparation in order to attract new markets, such as the Southeast Asian and American market.
10 Tips and traps
10.1 What are your top tips for the smooth establishment and management of an alternative investment fund in your jurisdiction, and what specific challenges would you note?
Cyprus is dynamically positioning itself as one of the top emerging investment fund centres in Europe. The successful establishment of an alternative investment fund (AIF) in Cyprus requires that certain factors be taken into consideration. One of the most important tips is the preparation of a precise and thorough prospectus and other legal documents, which can be achieved by engaging knowledgeable professionals and managers. It is also important to open a communication gateway with the regulator and stay up to date with amendments to the existing framework for AIFs.
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.