On 31 July 2018, the Cyprus Parliament enacted Law 124(I)/2018 Alternative Investments Funds Law of Cyprus (the AIF law) which allowed for the establishment of a new investment vehicle called Registered Alternative Investment Funds (RAIF).
The AIF Law 2018
With revocation of the Alternative Investment Funds Law 131(I)/2014 and the enactment of the AIF law 2018, RAIFs are not subject to authorisation requirements to commence their operations by Cyprus Securities and Exchange Commission (the CySEC) or any other authority since in effect a RAIF is indirectly subject to regulatory supervision through its Alternative Investment Fund Manager (AIFM) established in Cyprus or in another EU Member State. As a result of its flexible regulation, it is now swift, cost-efficient and simple to set up, manage and operate a Cyprus AIF.
Within one month from the date of filing a duly completed 'notification pack', CySEC will proceed to add the AIF to the list of Registered AIFs. This is a registration rather than a formal authorisation process. To this end CySec maintains a special register for RAIFs. Once CySec confirms that a RAIF has been included in the special register, a RAIF is free to start its operation. The notification pack includes but not limited to the following:
1. Information regarding investment strategies, the policies of the external manager for the use of leverage, the risk profile and characteristics of the RAIF it manages;
2. The regulation or the memorandum of the RAIF the manager intends to manage;
3. Information in relation to the appointment of a Depository;
4. The RAIF's Information Memorandum;
5. The authorisation of the AIFM.
The new Cyprus RAIF can take the form of:
1. a common fund,
2. an investment company with variable or fixed capital or
3. as a limited partnership.
It is possible to set up a RAIF as an umbrella fund, allowing the setup of multiple investment compartments or "sub-funds" or a single fund as well as structuring it as an open-ended or closed-ended. There will be no investment restrictions for RAIFs, with the exception that they cannot be set up as Funds of Funds, Money Market Funds or Loan Origination Funds.
In terms of investors, a Cyprus RAIF has no restriction as to the number of investors. It can have an unlimited number of investors. In addition, a RAIF can be invested in any kind of asset as there is no limitation for the assets under management as long as the investors follow a sound investment strategy.
Conditions to set up a RAIF
A RAIF in Cyprus must be managed by an AIFM, which must be licenced in Cyprus or any other EU member state and is obliged to supervise the RAIF. As an alternative to an AIFM, it may also be managed by an Undertaking for Collective Investment in Transferable Securities (UCITS) Manager licensed in the EU or a Cyprus Investment Firm (CIF). In such an event, the RAIF must necessarily be closed-ended, be set up as a partnership and invest a minimum 70% of its funds in illiquid assets (real estate property, ships, planes etc.).
A RAIF is exclusively aimed at well-informed and/or professional investors, it is not possible to be marketed to retail investors.
For the safekeeping of RAIF's assets, it is mandatory to appoint a local Depository, which may be a financial institution in Cyprus or a CIF and with the consent and under the supervision of the local Depositary, bank accounts may be maintained anywhere in the world.
The AIFM will provide services to the RAIF, which are common to "normal" AIFs, such as internal compliance and investor compliance, risk management, internal compliance audit etc.
Where an RAIF is managed by an AIFM, a RAIF must invest a minimum of EUR 500.000, which must be realised within the first year from its establishment.
New Income Tax Law in relation to RAIFs
There also have been changes in Cyprus income Tax Law in an attempt to attract both foreign investors and senior fund administrators to Cyprus.
Investment in an AIF will not be considered as a permanent establishment in Cyprus thus allowing any income earned by these investors in relation to such investments to be taxable only in their country of residence.
This amendment also introduces a special mode of taxation for the variable renumeration received by executives of the administrator or manager of an AIF at the rate of 8% to an individual, with a cap of EUR 10.000 per year.
The experience so far
The AIF law provides for an amended, fully-upgraded legal and regulatory framework, fully in compliance with relevant EU Directives, for establishment and management of Cyprus funds which enhances significantly international position of Cyprus as a jurisdiction of choice for the establishment or transfer of AIFs and AIFMs.
A major advantage of RAIF under the new law has been that it is set up simply and swiftly without additional burdens of bureaucracy which in turn brings about a relatively cost-efficient investment vehicle. Not only this ensures that Cyprus remains competitive on the international market as a fund jurisdiction but also makes Cyprus a reliable, efficient and attractive player in EU fund industry.
New amendments in Income Tax Law as a further incentive for funds and RAIF structure with all legal and regulatory advantages and flexibility combined with Cyprus' geographical location pose a promising prospect for investors to be established in Cyprus and to invest into a growing economy such as Cyprus.
You can read the full text of Law 124(I)/2018 in English here.
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.