International Collective Investment Schemes Law 47(I) of 1999 as amended ("the Law") makes provisions regarding the setting up of an International Collective Investment Scheme (ICIS). Depending on the form it takes, this investment vehicle may provide greater flexibility than a UCITS structure in terms of reduced regulatory restrictions and greater investment flexibility.
Under the above legislation, a Scheme may take one of the following forms:
1. International Fixed Capital Company (IFCC)
2. International Variable Capital Company (IVCC)
3. International Unit Trust Scheme (IUTS)
4. lnternational Investment Limited Partnership (IILP)
All four legal types of Schemes, can either be of limited or unlimited duration.
It must be noted that the Central Bank of Cyprus recognises, for the time being, only Private Schemes ie Schemes which have up to 100 investors. Such Schemes must appoint a Custodian which must be a Cyprus bank, unless specifically exempt by the Central Bank of Cyprus. It must also be noted that Private schemes which do not have a physical presence in Cyprus, must appoint a company to carry out the administration work of the Scheme. The said company must be based in Cyprus and be approved by the Central Bank of Cyprus.
In what follows, the features of a private ICIS set up in the form of an International Variable Capital Company will be considered.
Investment Manager/Trustee
A private ICIS set up in the form of an International Variable Capital Company has attributes which are particularly suited to the needs of investors seeking an investment vehicle free from cumbersome and restrictive provisions. A key benefit to this structure, especially in anticipation of the Alternative Investment Management Directive, is the absence of a requirement for appointing a professional management company or trustee1.
Structural Flexibility
For the purposes of an ICIS in this form, no par value needs to be assigned to the shares and it is possible for the Articles of Association of such companies to provide that the company may redeem issued shares by applying directly or indirectly funds of its share capital.
Absence of Investment Restrictions
When an ICIS is set up as a private ISIC, it is not subject to the restrictions applicable to other forms of ICISs under the Law2. Effectively it is therefore not subject to prohibitions in cross investments and in leverage of the portfolio. It is possible to set up a fund of funds.
Reduced Regulatory Restrictions
The Markets in Financial Instruments Directive3 which is transposed into national legislation by virtue of Law 144(I)/2007 does not apply to ICISs4 thus alleviating from burdensome regulatory requirements which might have otherwise applied in relation to certain activities of the fund.
Further to this, an entity set up in the form of a Private ICIS is not required by the Law to issue an offering memorandum but may chose to do so for marketing purposes. It is worth noting that in the case in which a Private ICIS does chose to issue such an offering memorandum, the cumbersome requirements of the Prospectus Directive shall not be applicable5.
No Borrowing Restrictions
In accordance with Regulation 311/99 issued by the Central Bank of Cyprus6, issued pursuant to section 67 of the Law, an ICIS may borrow an amount equivalent to up to a maximum of 10% of its assets, which borrowing may be secured on the assets of the ICIS, and cash held and amounts receivable may not be set-off against borrowings when determining the percentage of borrowings outstanding. By virtue of section 37 of the Law however, a private ICIS is not bound to observe these provisions and hence is free of borrowing restrictions which are characteristic of other types of ICIS and UCITS.
Favorable Tax Treatment
In addition to the above benefits, ICISs may be structured in a manner which would create tax efficiencies. They are subject to corporate income tax at a flat rate of 10% which is currently the lowest in Europe. Profits realized from the sale of securities are fully exempt from tax and dividends received from non tax resident subsidiary companies are also exempt from tax provided certain requirements are met. The Inland Revenue has recently clarified the definition of securities removing the grey area in relation to certain instruments such as for example ADRs and GDRs.
Investors in private ICISs disposing of their units in the ICIS benefit from the provision that redemption of participations/shares in such funds is considered a disposal of securities/titles which means that the redemption proceeds exceeding the capital contributed by the investor shall be exempt from corporate income tax in Cyprus.
Reduced Set Up and Maintenance Cost
The cost of legal fees for setting up a fund in Cyprus it is a fraction of the cost of setting up a fund in Luxembourg. The Cypriot regime also permits local representatives to represent a fund to the regulator rather than requiring direct client presence with the regulator as in Luxembourg. Also there is no levy on fund assets under management. Fund administration and custodial services are also cheaper than in other jurisdictions.
Conclusion
The Private ICIS set up in the form of a variable capital company is considered to be an efficient vehicle for hedge fund structures. In view of the Alternative Investment Funds Directive in the pipeline, the importance of setting up such funds within the EU will be greater.
Footnote
1. Section 37 of the Law
2. Section 38 of the Law.
3. Council Directive 2004/39/EC
4. section 3(2) (a) of Law 144(I)/2007 specifically provides for this
5. sections 2 and 3(2)(a) of Law 114(I)/2005
6. Regulations on Investment Restrictions for International Collective Investment Schemes
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.
