The International Collective Investment Schemes Law No. 47(1)/99 (‘the Law’) was enacted in May 1999. Its intention is to create a legal and regulatory system which balances adequate investor protection against the necessary freedom to manage the underlying investments. Cyprus should become an important participant in the business of mutual funds and an attractive place for investors in the European Union, Japan and the United States.
17.1 Definition and structures available.
A Cypriot International Collective Investment Scheme (a ‘Scheme’) is defined as a scheme in the form of:
- an International Fixed Capital Company
- an International Variable Capital Company
- an International Unit Trust Scheme, or
- an International Investment Limited Partnership
whose sole purpose is the collective investment of funds of unitholders. The Schemes can only be established and operated by non-residents of Cyprus and no permanent residents of Cyprus may hold units in a Scheme.
The combination of the relevant Cyprus laws allows funds to be structured in a flexible manner, e.g. as umbrella funds, master or feeder funds, single or multi class funds, limited life or duration funds or funds of funds.
17.2 Regulatory framework
The Central Bank of Cyprus is the regulatory and supervisory authority of Schemes. It has stated that it wishes to create a user-friendly framework.
Schemes will be authorised by the Central Bank if they meet the following criteria:
17.2.1 The directors and promoters must be considered by the Central Bank to be competent and suitable in respect of matter related to such Schemes.
17.2.2 The managers and trustees must act independently of one another and must have sufficient financial and operational resources and skill to conduct their business efficiently. Their officers must be persons of integrity, with an appropriate level of knowledge and experience.
17.2.3 Only licensed banking and bank institutions may act as trustees of Schemes.
17.2.4 The managers and trustees of a Scheme must have a place of business in Cyprus unless the Central Bank decides otherwise.
17.2.5 An applicant must submit to the Central Bank for approval documents and information relating to the Scheme, including its proposed constituent documents, offering circular and third-party service providers agreements.
The Law distinguishes between:
- Schemes designed to be marketed on a retail basis to the public at large.
- Schemes designed to be marketed solely to experienced and professional investors.
- Private Schemes whose number of unitholders is limited to 100 and which impose restrictions on the transferability of units.
The restrictions to be imposed by the Central Bank will reflect the different standards of investment protection which should be provided by each category.
17.3 Confidentiality
Any information relating to a Scheme, its business, promoters, trustees or managers which is acquired by the Central Bank for the purpose of exercising its regulatory and supervisory authority is to be held in confidence and not released to any person except by court order.
No officer, employee, manager, trustee etc. of a Scheme shall disclose or use for his own benefit any information relating to the affairs of a Scheme unless he is obliged by law to do so, e.g. where the scheme is declared bankrupt or is in the process of being wound up.
17.4 Managers and trustees
The previous consent of the Central Bank is required for the replacement of a manager or trustee of a Scheme, any substantial change in the ownership or shareholding structure, any new appointment of a director and any delegation of duties to a third party.
The Central Bank has the discretionary power to remove or replace a manager or trustee. A manager of a Scheme is liable to its unitholders for any loss suffered by them as a result of the manager’s improper performance of its duties, regardless of the fact that it may have entrusted some or all of the assets in its safekeeping to a third party.
17.5 Taxation
Amendments to the Cypriot Tax Laws of 1961 to 1998 were introduced in May 1999 with the enactment of Law No. 50(I)/99 providing for an advantageous tax treatment of Schemes as follows:
17.5.1 Schemes will be generally liable to income tax in Cyprus at the rate of 4.25% subject to the exemption set out below.
17.5.2 90% of profits or gains realised by Schemes through the disposal or sale of securities held by them will be exempt from taxation. This effectively means that Schemes will suffer taxation at the rate of 0.425% on gains realised on the sale of securities. Other types of income such as dividends or interest will be taxed at the rate of 4.25% subject to applicable credit relief provided by any of Cyprus’ double taxation treaties which would reduce or eliminate Cypriot tax.
17.5.3 The income generated by managers and trustees through the provision of services to Schemes is exempt from any tax.
17.5.4 There is no withholding tax applicable to or payable by a Scheme or its shareholders, unitholders or partners.
Cyprus’ wide network of double taxation treaties adds considerably to the competitive position of Schemes over other jurisdictions. This is because the use of double taxation treaties can reduce the burden of withholding tax in the country of source of dividend and interest income and, in a few cases, eliminate source country capital gains tax. As Schemes are subject to tax in Cyprus, they may therefore remain eligible for benefits under those double taxation treaties (particularly with Central and Eastern European countries and other emerging markets) which do not contain specific anti-avoidance or limitation of benefits provisions.
The purpose of this publication is to assist clients and associates in clarifying and appreciating the range of opportunities which are available in or through Cyprus. Although every effort has been made to provide the reader with a clear and comprehensive picture of the island's beneficial regime, it should be appreciated that is not possible to cover all aspects comprehensively in a publication of this size.
Individuals or companies who are seriously considering using Cyprus for any of their international business activities are advised to obtain expert professional advice before taking positive action.
