Cyprus emerged during the last years as a preferable jurisdiction for the investment fund industry due to its robust legal framework as well as the tax incentives offered both for Alternative Investment Funds and fund managers. Cyprus was one of the first EU member states that transposed into national law the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investments in Transferable Securities (UCITS) and therefore created an attractive environment for the funds industry.
Following the enactment of the Alternative Investment Funds Law of 2014, a lot of developments and improvements noticed in the fund industry with the latest being in 2018 when a new more enhanced law was enacted namely the Alternative Investment Funds of 2018 (the “Law”), improving certain provisions of the previous law and allowing the establishment of the Registered Alternative Investment Funds in addition to the Alternative Investment Funds with Limited and Unlimited Number of Persons (collectively referred to as the AIFs unless explicit reference is made otherwise).
Pursuant to the Law, AIF or Alternative Investment Fund is a collective investment undertaking, including investment compartments thereof, which raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors and does not require authorization pursuant to the UCITS laws.
Types of AIFs
The types of AIFs offered in Cyprus pursuant to the Law are the AIFs with Unlimited Number of Persons (“AIFUNP”), the AIFs with Limited Number of Persons (“AIFLNP”) and the Registered AIFs (“RAIFs”). AIFUNPs and RAIFs may take any of the following legal forms:
a) As a Mutual/Common Fund (“C.F.”); or
b) As a fixed capital investment company (“F.C.I.C.”) or variable capital investment company (“V.C.I.C.); or
c) As a limited partnership registered subject to the General and Limited Partnership and Business Names Law (“Partnership Law”). Following the expected amendment of the Partnership Law there will be the possibility of registering a limited partnership with separate legal personality which may be either internally managed by the general partner or externally managed by an external manager appointed by the general partner.
AIFLNPs may take any of the following forms:
a) As FCIC or VCIC; or
b) As a limited partnership registered subject to the General and Limited Partnership and Business Names Law (“Partnership Law”). Following the expected amendment of the Partnership Law there will be the possibility of registering a limited partnership with separate legal personality which may be either internally managed by the general partner or externally managed by an external manager appointed by the general partner.
All types of AIFs can be of an open-ended or a closed-ended type and may be structured as single or as umbrella schemes with one or more investment compartments where each investment compartment corresponds to separate assets and liabilities of the AIF.
In Cyprus the most common structure used for AIFs are umbrella AIFs in the form of VCICs or limited partnerships.
The competent authority responsible for the authorisation and ongoing prudential supervision of AIFUNPs and AIFLNPs is the Cyprus Securities and Exchange Commission (“CySEC”) whereby prior authorisation is required before they are established. RAIFs are not subject to the prior authorization or supervision of CySEC however they must be registered to the RAIF register maintained by CySEC following their incorporation with the Registrar of Companies.
Eligible Investors
AIFUNPs can be addressed to well-informed and/or professional investors or retail investors.
AIFLNPs and RAIFs can be addressed to well-informed and/or professional investors but cannot be addressed to retail investors.
Management of AIFs
AIFUNPs and the AIFLNPs can be self-managed by their board of directors if they have the legal form of a FCIC/VCIC or limited partnership with separate legal personality or externally managed with the appointment of a fund manager.
AIFUNPs may be externally managed by:
· an Alternative Investment Fund Manager (“AIFM”) or
· a UCITS Management Company or
· a sub-threshold AIFM (or Mini Manager) established and authorized in Cyprus to manage AIFs that fall under the AIFMD thresholds or
· any other EU entity authorised to manage AIFs that fall under the AIFMD thresholds or
· a MiFID II Investment Firm or a Cyprus Investment Firm (“CIF”).
AIFNPs may be externally managed by
· a UCITS Management Company or
· a MiFID II Investment Firm or a CIF or
· a sub-threshold AIFM (or Mini Manager) established and authorized in Cyprus to manage AIFs that fall under the AIFMD thresholds or
· any other EU entity authorised to manage AIFs that fall under the AIFMD thresholds or
· a third country firm which is authorized to provide the portfolio management service and is subject to prudential regulation regarding the provision of this service or
· a special purpose company having its sole purpose of providing portfolio management services to a specific AIFLNP.
RAIFs shall always be externally managed by an AIFM or in case the RAIF is in the form of a limited partnership with or without a separate legal personality, under certain conditions, it may appoint:
· a UCITS Management Company or
· a MiFID II Investment Firm or a CIF or
· a sub-threshold AIFM (or Mini Manager) established and authorized in Cyprus to manage AIFs that fall under the AIFMD thresholds or
· any other EU entity authorised to manage AIFs that fall under the AIFMD thresholds or
Minimum capital requirements of AIFs
An internally managed AIFUNP which operates in the form of an investment company (excluding an AIFM which is an internally managed AIF) shall have an initial capital of at least €125.000 (either in cash or assets readily convertible to cash). No minimum capital requirements are applicable for externally managed AIFUNPs
An internally managed AIFLNP shall have an initial capital of at least €50.000 (either in cash or assets readily convertible to cash). No minimum capital requirements are applicable for externally managed AIFLNPs.
There are no minimum capital requirements for RAIFs.
Requirement for the appointment of a depositary
AIFUNPs and RAIFs shall always appoint a depositary whereas subject to certain conditions, the appointment of a depositary is not always mandatory for AIFLNPs.
Minimum Assets Under Management (“AuM”)
AIFUNPs and RAIFs shall raise capital of at least €500.000 from investors within 12 months from the date of its authorisation or registration respectively. AIFLNPs must raise capital of at least €250,000 from investors within 12 months from the date of its authorisation.
It is provided by the Law that where the AIF or AIFLNP is established with multiple investment compartments, the amount of minimum AuM shall apply for each compartment and the payments made by the investors shall be in cash or assets that relate to the investment policy of the AIF or AIFLNP and are free of any liens.
Tax benefits
On another note, the applicable taxes are one of the important matters that concern the investors and the funds.
The main taxation benefits for the Fund are as follows:
a) No capital gains tax on the sale of securities;
b) No tax on dividends received;
c) No subscription tax on net assets of funds;
d) 12,5% corporate tax rate;
e) Notional Interest Deduction on new equity injected the effective interest tax;
f) No capital gains tax for the sale of immovable property situated outside Cyprus or from sale of shares of foreign property companies;
g) Each AIF compartment should be treated as a separate taxpayer;
h) A wide network of Double Tax Treaties.
Even though, the tax treatment of income earned by the investors will primarily depend upon their tax residency, the main taxation benefits for the investors are as follows:
a) No tax on dividends payable to non-Cyprus tax residents;
b) No tax on the sale or redemption of AIF units (Cyprus and non-Cyprus tax resident investors could be subject to Capital Gains Tax at the rate of 20% where the AIF directly or indirectly owns immovable property situated in Cyprus (as computed by reference to the increase in value of the underlying properties which are situated in Cyprus);
c) No wealth tax.
The establishment of the Alternative Investment Funds Law of 2018 purported to the harmonization of the Cyprus Law with the EU legal framework by offering protection to the investors and opportunities to those who are interested to establish a fund. The fact that Funds are regulated, and their management is controlled by the competent authority – CySec provides extra comfort and protection to the investors. It’s a sector that is fastest growing in Cyprus, the safest way to invest and thus the new era of the financial industry.
Our law firm provides legal advice and assistance to the clients interested to proceed with the establishment of a Cyprus AIF and cooperates with licensed Fund Managers.
The content of this article is intended to provide a general guide to the subject matter. For further information or advice, please contact Christiana Antoniou, Partner at CTA Law Firm, christiana.antoniou@ctalaw.net.
