The continuous efforts by Cyprus’s regulatory authorities and industry professionals to upgrade and modernise the country’s legislative and regulatory framework for funds are resulting in Cyprus emerging as a new investment fund centre in Europe. The enactment of the new Alternative Investment Funds Law and the UCITS IV Directive are the latest in a long line of efforts to transform Cyprus into a true financial jurisdiction.

The new Alternative Investment Funds (AIFs) Law creates an attractive and competitive environment for the further enhancement and development of the fund industry in Cyprus, and aligns it with the latest EU directives on asset management with a focus on transparency and investor protection.

The new Law has replaced the existing law on International Collective Investment Schemes (ICIS), which was introduced in 1999. Any existing ICIS structures will either maintain their current organisational structures and comply with the AIF Law where required, or reorganise their structures in order to benefit from new opportunities made available under the AIF Law. In principle, ICIS will be considered to fall under the Limited Number of Investors category (see Types of AIFs below).

Cyprus now offers both Alternative Investment Funds and EU regulated Undertakings for Collective Investment in Transferrable Securities (UCITS). Industry experts believe UCITS to remain more of a niche market while the Alternative Investment Funds will continue to dominate funds business.

More than just modernising the existing law, the new framework increases Cyprus’s competitive offering by opening the market for new types of funds. Furthermore, funds can now be marketed to both professional and retail investors, not to mention the introduction of umbrella funds with segregated investment compartments. Having all types of Funds under a single regulatory authority, the Cyprus Securities and Exchange Commission (CySEC), is an ulterior benefit.

Moreover, Cyprus now offers easy EU passporting to the fund management industry, providing unparalleled opportunities for cross-border and global fund distribution. This is expected to attract EU and non-EU companies interested not only in having access to European Union investors, but also in gaining the badge of an EU compliant manager. Redomiciliation of funds is also possible.

The comparatively low costs and high quality of services make Cyprus an attractive funds jurisdiction, and restructuring of existing companies under a new AIF can resolve many of the problems posed by increased regulations and the proposed de-offshorisation requirements in Russia.

Cyprus has long been a jurisdiction of choice for companies and individuals in search of an ideal location to structure their investments into Europe, the Middle East, Africa, Russia and the CIS. Becoming a Funds Jurisdiction will change the island from a ‘flow-through’ zone into a jurisdiction that will collect and manage funds for international investments.

This new industry will attract international players that will assist Cyprus’s economic recovery and build a brand of excellence as a modern financial centre. There is potential in the Cypriot investment fund sector to develop into a multi-billion euro industry, and it offers an opportunity for the island to strengthen the existing investment relations with Russia, but also to open up new gateway relations with the Middle East, Africa and China.

Definition of an AIF

An Alternative Investment Fund (AIF) is defined as a Collective Investment Scheme, including its investment compartments, which:

  • raises capital from a number of investors with a view to investing it according to a defined policy for the benefit of those investors;
  • has the exclusive purpose of the collective investment of its available capital in assets to ensure the investors the benefit of the results of the management of their assets; and
  • has not been authorised as a UCIT under the UCITS IV Directive.

Types of AIFs

AIFs in Cyprus are categorised into the following two types:

Firstly, there are AIFs with Unlimited Number of Investors, which may be marketed to retail, well-informed and/or professional investors. They are also subject to certain investment restrictions due to risk spreading and to ensure liquidity. Furthermore, AIFs with Unlimited Investors must appoint a global custodian. There is a minimum capital requirement of €125.000, or € 300.000 if the fund is self-managed.

The second category includes AIFs with Limited Number of Investors, which cannot exceed more than 75 investors and can only be marketed to professional and/or well-informed investors.

All types of AIFs can be open-ended or close-ended Funds.

Investor classifications

The investors of an AIF are classified in three categories. Firstly, we have the Professional Investors, who fulfil the requirements for a professional client of the Markets in Financial Instruments Directive (MiFID).

The second category includes the so-called Well-informed Investors, who are not considered to be professional investors but can confirm in writing that they are qualified and aware of all risks involved in the investment of the relevant fund. Further, their investment in the AIF has to be at least €125.000, or they have to be evaluated as a well-informed investor by a MiFID Compliant investment firm, a banking institution, a UCITS management company or an AIF, confirming that they have the required expertise and knowledge to assess the investment’s suitability.

The term Retail Investor simply includes all investors who do not meet the above requirements.

Investment manager requirements

Depending on the type of structure, the fund can be either self-managed, or it may be set up as externally managed.

For AIFs with Unlimited Number of Investors the External Manager’s requirements depend on the manager’s residence. If established in Cyprus, the manager must be authorised under relevant local law (the Alternative Investment Managers Law or the Investment Services and Activities and Regulated Markets Law, or a Management Company of the Open Ended Undertakings in Collective Investments Law). If coming from another EU member state, the external manager must be authorised either under the AIFM Directive or the UCITS IV Directive. If established in a third country, the manager will need to comply with the relevant provisions of the AIFM Directive rules on third-country undertakings.

For AIFs with Limited Number of Investors, the licensing requirements for an external manager depend on the investment objectives. If the Fund is to invest exclusively in types of assets other than financial instruments (e.g., real estate, shipping, energy, etc.), the externally appointed manager can only be a company incorporated solely for the purpose of managing the specific AIF whose suitability is deemed by CySEC.

Furthermore, if the Fund is to invest in financial instruments, then the external manager established in Cyprus must be authorised under the Open Ended Undertakings in Collective Investments Law or the Investment Services and Activities and Regulated Markets Law. If established in an EU member state, the external manager must be an investment firm authorised under the MiFID, and if established in a third country, the manager must be a licensed portfolio manager and have adequate regulation and supervision in its home country.

If the AIF is self-managed, there are some restrictions as to the amount of assets in the fund’s portfolio.

Administrator requirements

Although outsourced administrator services are not regulated by CySEC under current legislation, and no license is required at the moment, the global trend in the industry is leaning towards increased consolidation and regulation. This means that long-term planning is required when choosing a fund administrator.

Administrators’ duties include, among others, the set-up and implementation of the structure, fund and portfolio accounting, directorship and corporate secretarial services, administration, preparation of financial statements and audit, and calculating the Net Asset Value (NAV).

Custodian requirements

AIFs must appoint a single and independent custodian for cash monitoring and functions relating to safekeeping of assets. Subject to CySEC’s approval, the custodian can be in an EU member state or in a third country. The custodian can be either a credit institution or an investment company or any other entity determined by its host country as eligible for custodian services.

An AIF with a limited number of persons can be exempted from the requirement to appoint a custodian.

Reporting requirements

The main reporting requirements of an AIF include the half yearly report, which includes non-audited financial information, and the annual report, which contains information regarding the fund and its activities, as well as the audited financial statements. These reports, together with the Prospectus of the fund, should be made available to investors.

Umbrella funds

The new AIF Law allows AIFs to be set up with several investment compartments, each constituting a separate pool of assets. Such an AIF represents a single legal entity. The different investment compartments have to issue units corresponding solely to the assets of each one. Therefore, asset value per investment compartment may differ. Unit holders of a specific compartment shall only have rights arising from the assets to the specific compartment, while each compartment shall be liable for the obligations arising solely from its constitution, operation or dissolution.

Different compartments within a single AIF have the possibility to invest in each other only if this is allowed in its constitutional documentation, under the condition of certain defined investment restrictions.

Competitive advantages of Cyprus AIFs

Cyprus offers one of the most international, business friendly and cost-effective environments for fund administration in the EU. Boasting one of the most highly educated workforces in Europe, it is safe to say that Cyprus offers more than just sunshine: English is the business language of the UK trained accountants and lawyers who cherish a global outlook and high service standards.

Cyprus AIFs can prove to be a viable option for resolving many of the issues posed by increased international regulation and the proposed de-offshorisation requirements in Russia.

Cyprus also has an exceptionally beneficial tax regime for businesses. In fact, the country is becoming a destination of choice in the EU for Fund Managers and Management Companies for the following tax reasons:

  • uniform corporate tax at 12.5%;
  • 35% cap on personal income tax;
  • gains from trading in a wide range of securities are exempted from tax (including shares and units of investment funds);
  • double tax treaties with more than 50 countries.

Fund taxation

  • Only interest received by open- and closed-end collective schemes is taxed at 12.5%.
  • There is no defense tax.
  • Dividends received, gains arising from the trading of securities, capital gains from the sale of property abroad and from the sale of shares of foreign property companies are all exempted from tax.
  • There is no minimum participation on inbound dividends to qualify for tax exemption.
  • There is no subscription tax on the net assets of the fund.
  • Fund management services are not subject to VAT.
  • If the unit holder is not tax resident in Cyprus, the liquidation of open- and closed-end collective schemes is not taxable.

Single regulator

With the implementation of the new framework for Alternative Investment Funds, all regulation has been consolidated under the Cyprus Securities and Exchange Commission (CySEC). This is set to result in more streamlined procedures and further enhance Cyprus’s appeal as a fund domicile. In addition to AIFs, CySEC now regulates UCITS funds, Management Companies and MiFID regulated Investment Firms.

Redomiciliation

Foreign entities have been able to redomicile in Cyprus since 2006. Companies engaged in licensed activities, such as fund management, must produce relevant consent for redomiciliation from the relevant authority in their country. Moreover, a company that intends to undertake licensed activities in the Republic of Cyprus should obtain the appropriate license from the local authorities before commencing activities.

Cyprus Investment Funds Association (CIFA)

The Cyprus Investment Funds Association (CIFA) is the association of professionals, businesses and organisations offering services and being involved in the Investment Funds Sector in Cyprus. It was set up in February 2013 to raise awareness of what Cyprus has to offer international managers, administrators and investors.

CIFA focuses on enhancing the high level of sophistication of the Investment Funds Industry, and addresses the broad range of needs and issues faced by service providers and businesses involved in the sector. The mission of CIFA is to shape regulation in Cyprus, help its members capitalise on industry trends, enhance professionalism, integrity and quality, and promote the Cyprus Investments Funds Industry.

Andreas Athinodorou, the CEO of the Aspen Trust Group, is one of the founding members and on the Board of Directors of CIFA.

A challenge fund managers face on a day-to-day basis is finding a reputable funds jurisdiction that offers ease of doing business at the right level of cost. With the new Alternative Investment Funds Law, Cyprus has stepped up to the league of modern financial centres capable of satisfying the appetite of fund managers and investor principals looking for a European domicile. Capitalising on our experience in assisting in the licensing and administration of Alternative Investment Funds with diverse portfolios of investment in Poland, Russia, India and other key investment destinations, we offer our clients a single point of contact for the structuring and set-up of funds and the provision of ongoing management services.