This article is of interest to:
- Below AIFMD threshold funds
- Onshore funds requiring a lighter regulation in the EU
- Start-up fund managers
- Venture capital managers
- Real estate managers
- Private equity managers
Introduction of Registered Alternative Investment Fund in Cyprus ("RAIF")
Over the last few years, the Cypriot government, the regulator (Cyprus Securities and Exchange Commission "CySec") and stakeholders of the fund industry have developed a strong collaboration. This has resulted in the enactment of law 124(I)/2018 called the 'Alternative Investments Funds Law of Cyprus' (the "AIF law"). Along with the AIF law, several other amendments have been made to align the Cypriot fund legislation to the competitive environment of the ever growing international fund industry.
Speed to market is key when considering the jurisdiction of choice for a new fund. The AIF law has circumvented the requirement for regulatory approval when establishing a RAIF and the Alternative Investment Fund Manager (the "AIFM") will need to notify the CySec. The AIFM will then continue to monitor the RAIF and it's compliance with the applicable rules and regulations.
RAIFs may be structured as a common fund, a limited liability partnership (with legal personality or not) or a company with fixed or variable capital. With the exception of the variable capital company, which needs to be open ended, all other structures can either be open or closed ended. RAIFs may be set up as umbrella funds which have separate compartments treated as a separate legal entity.
A local custodian or depositary must be appointed for the safekeeping of assets. Apart from the custodian, an independent financial auditor will need to conduct the financial audit of the RAIF and express an opinion on whether the RAIFs accounts present a true and fair view in accordance to International Financial Reporting Standards (IFRS).
The recently introduced tax amendments exclude investors from the creation of a permanent establishment in the Republic of Cyprus, exclusively due to the investment in a RAIF. This means that any income derived by the investor is taxed in the investor's country of tax residency. A special mode of taxation is applicable to the senior executives of RAIFs that participate in the profits. This mode of taxation provides for taxation at a rate of 8%, with a minimum tax payable of €10,000 per year, under conditions. Prior to this amendment, carried interest was taxed as income, at the normal income tax rate.
In general, a RAIF is treated as Cypriot tax resident entity and subject to income tax at a rate of 12.5% on profits. It can also benefit from a number of exemptions including no tax on dividend income, foreign exchange gains and gains arising from the disposal of securities.
The Cypriot regulatory environment, combined with Cyprus' geographical location at the crossroad of three continents, is attracting investment fund promoters offering unique investment opportunities and specialised expertise. Closely associated with the Central and Easter European region the Middle East, India and Asia, a Cypriot RAIF can perform very well with EU and non-EU investors, or when EU-wide investments will be carried out.
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.