During the last decade, Cyprus alternative investment market faced rapid expansion due to the introduction of several investment norms such as the Alternative Investment Fund ("AIF") and the Registered Alternative Investment Fund ("RAIF"). Those norms offer several incentives which turn to benefit investors by minimizing many market risks and losses.
An AIF is a collective investment undertaking, including investment compartments, which raise capital from several investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors. Typically, it involves non-traditional assets such as a hedge fund, a private equity, a real estate etc. The capital for an AIF can be raised from professional investors or well-inform investors having proper knowledge in this field and being involved in similar transactions.
However, due to inherent market risks, the norm of Alternative Investment Fund Manager ("AIFM") assists the scheme. An AIFM is typically a legal person whose regular business is managing one or more AIFs by running the day-to-day life of the AIF and absolving investors from it. Alternatively, the AIFM allows for any AIF that is established in Cyprus to be sold on a private placement basis in the EU.
Cyprus Market offers the below options:
- An AIF with Unlimited number of persons
- may be formed as a Common Fund, Limited Partnership, Fixed Capital Investment Company, or Variable Capital Investment Company.
- has freely transferable shares
- is subject to minimum share capital requirements of €125.000 or €300.000 if self-managed and over the asset thresholds. There is no minimum capital requirement if it is externally managed
- minimum assets under management within the first 12 months: €500.000
- must appoint a depositary
- there are no restrictions if an external AIFM is appointed. If an AIFM is not appointed, then AIF can hold assets under the threshold of €100m including assets acquired through leverage or €500m without leverage and the unitholders have no redemption rights for 5 years.
- An AIF with Limited number of persons
- may be formed as Limited Partnership, Fixed Capital Investment Company, or Variable Capital Investment Company
- may be marketed to professional and/or well-informed investors only
- may have up to 50 investors
- there is minimum share capital requirement of €50,000 if is self-managed. There is no minimum capital requirement if it is externally managed
- minimum assets under management within the first 12 months: €250.000
- under certain circumstances may be exempted from appointing a depository;
- there are no restrictions if an external AIFM is appointed. If no AIFM is appointed, the AIF can hold assets under the threshold of €100m including assets acquired through leverage or €500m without leverage and the unitholders have no redemption rights for 5 years.
- A Registered AIF (RAIF)
- may be formed as a Common Fund, Limited Partnership, Fixed Capital Investment Company or Variable Capital Investment Company but RAIFs cannot be set up as Fund of Funds, Money Market Funds or Loan Origination Funds
- RAIF does not need to be licensed by CySEC and it does not fall under the direct supervision of CySEC. However, the establishment of a RAIF needs to be notified to CySEC and included in a CySEC RAIFs register.
- RAIF may be set up as an umbrella fund which has separate compartments treated as a separate legal entity.
- have freely transferable shares
- not subject to minimum capital requirements
- unlimited number of investors
- is allowed to invest in non-financial assets
- minimum assets under management within the first 12 months: €500.000 (may be extended to 24 months).
- must appoint a licensed AIFM which supervises the RAIF and provides certain mandatory services (risk management, compliance, internal compliance audit etc.). AIFM may be from Cyprus, from the EU or outside the EU provided that it has received the passport of Directive 2001/61/EU and has defined a reference country in EU
- The AIFM should also appoint a custodian as per the provisions of AIFM Law.
More specifically, the introduction of RAIF is considered one of the most important changes made in the fund industry. A RAIF will be a special type of an AIF that will not be subject to authorisation itself from CySEC, but it will be regulated through its manager who should always be a licensed AIFM. For a RAIF registration, an application to CySEC is submitted by the External Manager for registration in CySEC's registry within (1) month from the RAIFs registration with the Registrar of Companies/the signing of the Rules of Incorporation in the case of a common fund, accompanied with many documents. CySEC within a period of (1) month from the receipt of all required information/documentation verifies that the license of the Manager also covers the investment strategy of the RAIF. Once CySEC confirms that the RAIF has been included in the special register, the RAIF may start to operate.
B. REGULATORY FRAMEWORK: CYPRUS AND EU
AIFs and RAIFs
Main CY/EU Legislation
- The Alternative Investment Funds Law of 2018 (124(I)/2018)
- Directive OD 124-01 of CySEC regarding the registration of RAIF in the RAIF register and the deletion from it
- Directive DI131-2014-02 of CySEC regarding the terms and conditions of operation of AIFs with limited number of persons and the authorisation procedure to an AIF with limited number of persons
- Directive DI131-2014-01 of CySEC regarding the procedure for the authorisation of an AIF.
- Directive OD131-2014-03 of CySEC on the categorization of the AIFs of the Republic and other related issues
- Directive DI131/56/02 of CySEC regarding the procedure and conditions for the marketing of units of AIFs and AIF-LNPs in the Republic, the organisation of the marketing network, the obligations of the persons that participate in the marketing network, as well as the conditions for the marketing of units of AIFs established in the Republic, in another member state or in a third country.
- Directive OD131-2014-05 of CySEC on the custodian of AIF and AIF-LNPs and the conditions for the assignment of custodian functions of AIF and AIF-LNPs.
- Directive 124/56-01 of CySEC on the payable fees and annual contributions of AIFs and their managers
- Directive OD131-2014-04 of CySEC regarding the organization and operation requirements of the external AIF manager which is an investment firm or an investment company of another member state other than the Republic
Main CY/EU Legislation
- The Alternative Investment Fund Managers Law of 2013 (56(I)/2013)
- The Small Managers of Alternative Investment Organizations Law of 2020 (81(I)/2020)
- REGULATION (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings and amending Regulations (EU) No 345/2013, (EU) No 346/2013 and (EU) No 1286/2014.
C. ADVANTAGES AND FLEXIBILITY
In general, the below advantages are offered through setting up an AIF in Cyprus:
- Units of AIFs can now be listed on several stock exchanges and are freely transferable
- Registered AIFs do not require to be licenced. Registered AIFs merely need to be registered on the regulator's register. This can be done in a period of 30 days after submission
- Cyprus has no restrictions regarding the type of investments, therefore there is the opportunity to form AIFs with unlimited investment compartments (umbrella funds)
- Low set-up and maintenance charges
- A Cyprus AIF can be self-managed by its Board of Directors, always subject to the approval of CySEC
- Cyprus AIFs can benefit from Cyprus tax system given the below
- the Cyprus tax system exempts all profits made from the disposal of securities.
- No tax is imposed on dividend income and capital gains of Cyprus tax resident fund (subject to conditions)
- No withholding tax on dividend distributions, interest and royalties to non-residents
- Corporation tax of 12.5% which is amongst the lowest rates in the EU
- No stamp duty on issue of units of AIFs/RAIFs
- Services provided by the Investment Management and Fund Administrators are not subject to any VAT
- Can be seen through a collective Investment scheme
- They offer diversification and transparency
- Protection: All the activities required to manage assets are performed by the professionals responsible for the AIF/RAIF (administrator, auditor). What is more, the funds are regulated by a competent authority and property management is performed by licensed professionals (oversee construction, manage tenants, perform maintenance, pay taxes etc.).
To be more precise, RAIF offers greater flexibility because of the below characteristics:
- Transparency and increased investor protection through disclosure of information and circulation of reporting statements;
- Not licensed or supervised by CySEC.
- Lower cost than other EU fund jurisdictions; cost efficient to set up and maintain a Cyprus RAIF;
- The investor is relieved from concentrating all his/her funds in a single asset
D. OUR SERVICES
Haviaras & Philippou LLC can assist on the below parts:
- Assistance during authorization procedures for AIFs, RAIFs and AIFMs
- Legal services in relation to all matters for AIFs, RAIFs and AIFMs
- Provision of compliance services
- Regulatory advice
- Set up AIFs and RAIFs
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.