1. Types of available Alternative Investment Funds
The available legal structures which can be used for Alternative Investment Funds (AIFs) established in Cyprus are the following:
(i) Registered Alternative Investment Funds (''RAIFs''), in the form of Common Funds or Fixed/Variable Capital Investment Companies which are subject to the provisions of the Companies Law CAP. 113, or in the form of Limited Partnerships which are subject to the General and Limited Partnerships and Business Names Law CAP. 116. RAIFs do not provide limits on the number of investors that can take part nor do they provide for minimum capital requirements. However, RAIFs have to be managed by an external manager. While the other types of AIFs must first be authorized by the Cyprus Securities and Exchange Commission ("CySEC") in order to operate, RAIFs only need to be registered with CySEC.
(ii) Alternative Investment Funds with an unlimited number of persons (''AIFs''), which can take any of the forms available to RAIFs. These do not provide for any limits on the number of investors that can take part, however, they do require the existence at all times of a minimum capital requirement of €125,000. This capital requirement applies to both self-managed AIFs as well as to AIFs which are externally managed.
(iii) Alternative Investment Funds with a limited number of persons (''AIFLNPs''), in the form of Fixed/Variable Capital Investment Companies or of Limited Partnerships. The maximum number of investors that can participate in an AIFLNP is 50 in total, regardless of whether the AIFLNP might operate as an umbrella fund with more than one investment compartment. In ascertaining the total number of investors, any shareholders of a company acting as an investor will also be calculated. In case an AIFLNP is managed externally there is no requirement for the existence of a minimum capital, but if same is self-managed then it must have at all times a minimum capital of €50,000.
2. Characteristics of available legal structures for AIFs
2.1 Common Fund (Unit trust)
Is a form of a collective investment scheme regulated by contract law. Whilst the AIF Law does not expressly provide for the possibility of licensing or registration of a unit trust as an alternative investment fund, in contrast to other common law jurisdictions, it does provide for a variation of this known as a 'common' or 'mutual' fund. Under a common fund the fund itself is organised in practice as a contract between investors. Common funds have no legal form and are managed by an external manager.
2.2 Investment Company
Any of the types of AIFs referred to in paragraph 1 above may take the form of an Investment Company. Such Investment Companies are established pursuant to the Companies Law CAP. 113, and they can take the form of either a Fixed Capital Investment Company (''FCIC'') or a Variable Capital Investment Company (''VCIC'').
Regardless of the capital structure chosen, these enjoy the same benefits as common companies, meaning, they have a separate legal personality from their members, whose liability will be limited to their contribution to the capital of the company, and also they enjoy the favorable taxation rules applicable to companies established pursuant to the Companies Law CAP. 113.
Overall, the majority of the AIFs which are established in Cyprus are structured in the form of an Investment Company.
2.3 Limited Partnership
Any of the types of AIFs referred to in paragraph 1 above may take the form of a Limited Partnership established pursuant to the General and Limited Partnerships and Business Names Law CAP. 116. In essence, these are entities which require less formalities for their establishment.
3. Regulatory Framework Applicable to AIFs
The establishment as well as the operation of AIFs is regulated by the Alternative Investment Funds Law 124(I)/2018 ("AIF Law") and by any secondary legislation issued by CySEC, which is the body responsible for authorizing the establishment and issuance of licenses to AIFs, as well as for making sure that AIFs comply and operate within the regulatory framework.
Depending on the type and characteristics of the AIF, inter alia the following legislations/regulatory frameworks may be also applicable:
(i) The Companies Law CAP. 113;
(ii) The General and Limited Partnerships and Business Names Law CAP. 116;
(iii) The Alternative Investment Fund Managers Law of 2013 (Law 56(I)/2013) (''AIFM Law'') and the European Directive 2011/61/EU (''AIFMD'');
(iv) The MiFID II Law (''MiFID II'');
(v) The Small Alternative Investment Funds Managers Law of 2020 (Law 81(I)/2020);
(vi) The Open-Ended Collective Investments Funds Law of 2012 (Law 78(I)/2012);
4. Management of AIFs
As already discussed above, AIFs can be either self-managed or externally managed, with the exception of RAIFs which can only be managed externally.
The following entities are permitted to act as external managers of AIFs:
(i) A Cyprus Investment Firm, authorized by MiFID II;
(ii) A Small Fund Manager, authorized by Law 81(I)/2020;
(iii) A management company, authorized by Law 78(I)/2012;
(iv) An Alternative Investment Fund Manager (''AIFM''), pursuant to the AIFM Law;
(v) An AIFM established in a European Member State and which is duly authorized to act as such under the applicable legislations of that jurisdiction.
The most common structure for managers is that of private limited companies.
5. Who holds the funds/assets of the AIF?
Pursuant to the AIF Law, the assets of the AIF have to be in the safekeeping of a depositary.
In case the AIF or RAIF is internally managed then it can have a depositary which has either its registered office in Cyprus or abroad, and which is either an investment firm or a credit institution, or another type of institution established in a European Member State and which falls within the categories of institutions determined by Member States as permitted to act as depositary.
In case the depositary has its registered office abroad, then the third country where the depositary has its registered office/its established, must not be designated by FATF as Non-Cooperative, it must have signed an agreement with the Republic of Cyprus in accordance with Article 26 of the OECD Model Tax Convention on Income and Capital, and it must ensure effective exchange of information on tax matters. Finally, the third country in which the depositary its registered must provide for supervision and prudential regulation, including requirements for the existence of a minimum capital.
According to the AIFM Law, in case the AIF or RAIF in question is externally managed by an AIFM, then there is a need to appoint a depositary based in Cyprus.
An AIFLNP does not need to have a depositary if the total assets of the fund are less than €5 million, or the number of investors is limited to five (5), or the portfolio consists of assets subject to custody whose value does not exceed 10% of the total assets of the fund and in such a case the maximum number of investors must be limited to 25 physical persons with each of these persons having invested at least €500,000.
Lastly, depending on the investment policy of the AIF in question, if the assets it deals with are not subject to custody, then a depositary can be an entity providing such services within the context of its business activities, and for the performance of which is subject to an administrative authority, professional conduct rules, or is professionally registered according to law.
6.1 Taxation of AIFs
In case the AIF is structured as a limited partnership or a common fund, then the national laws of the residence of the investors will apply.
In case that the AIF is structured as an investment company established pursuant to the Companies Law CAP. 113, then inter alia the following standard corporate taxation rules will apply:
(i) A corporate income tax rate of 12.5% on profits;
(ii) Notional Interest Deduction regarding new equity may reduce the effective tax to be paid by up to 80%;
(iii) Any fund management services provided to the AIF are not subject to VAT;
(iv) Dividends are exempt from tax;
(v) Capital gain from sales of shares of a foreign company or from property abroad, are exempt from tax;
(vi) Any profits from a sale of securities as well as any gains from trades of securities are exempt from tax;
(vii) Each investment compartment of the AIF will be taxed separately;
(viii) No subscription tax on the assets of the fund.
(ix) Enjoy benefits under the various double tax treaties to which the Republic of Cyprus is a party.
6.2 Taxation of Investors
In case the Investor is a physical person who is both tax resident and domiciled in Cyprus, then there will be a withholding tax of 17% on dividends (this will not apply if the Investor is not domiciled in Cyprus or if he is a foreign investor). In case the Investor is a company there will be no withholding tax.
Furthermore, regardless of whether the Investor is resident and/or domiciled in Cyprus or abroad, there will be no taxation on redemption of units.
Lastly, in case the AIF is structured as a partnership or a common fund and the Investor is not resident in Cyprus, the Investor will be also exempted from any withholding tax on distributions and the national laws of the tax residency of the Investor will apply.
The above constitutes a short overview of the framework concerning Alternative Investments Funds in Cyprus.
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.