Introduction
The enactment of the Alternative Investment Funds law in July 2014 has aligned the Cyprus legal and regulatory framework with the latest EU directives on asset management, transparency and investor protection. Following on-going efforts to modernize its fund framework, Cyprus introduced a new law offering more investment structuring possibilities and upgraded rules for the authorisation, on-going operations, transparency requirements and supervision of Cyprus AIFs and regulation on the role and responsibilities of their directors, custodians and external managers.
The new AIF law replaces the International Collective Investment Schemes (ICIS) Law of 1999 and has brought all investment products, asset managers and investment firms under the regulation and supervision of the Cyprus Securities and Exchange Commission (CySEC). This development is a welcome evolution, presenting expanded structuring possibilities for fund promoters which will undoubtedly boost Cyprus’ status as one of the fastest growing fund centers in Europe.
A new law offering more investment structuring possibilities
AIFs that are established under domestic Cyprus fund legislation can be sold on a private placement basis or marketed to professional investors across the EU under the AIFMD passport.
Items Introduced by the new AIF Law:
- Common Funds, a contractual structure where investors participate as co-owners of assets
- Umbrella structures with multiple investment compartments, allowing the management of different asset pools with separate investment policies and with ring-fenced assets and liabilities
- Public offerings of AIF shares / units
- Listing of securities issued by AIFs, increasing investor base, liquidity, marketability and transparency
- Role of depositary no longer solely reserved for credit or banking institutions, but may under certain conditions be carried out by other entities
AIF Legal Forms
An AIF can take the following legal forms and may be established with limited or unlimited duration:
- Fixed Capital Company (FCC)
- Variable Capital Company (VCC)
- Limited Partnership (LP)
- Common Fund (CF)
Types of AIFs
Alternative Investment Fund with Unlimited Number of Persons:
- may be marketed to retail, or well-informed and/or professional investors
- freely transferable investor shares
- must appoint a global custodian
- can be listed on a recognised stock exchange, and AIFs marketed to retail investors can be traded
- subject to minimum capital requirements of €125,000 or €300,000 if a self-managed fund
- may be subject to certain investment restrictions depending on the investor type and the overall investment policy
Alternative Investment Fund with Limited Number of Persons
- may be marketed only to well-informed and/or professional investors
- cannot exceed total number of 75 investors / unit holders
- freely transferable investor shares, with the condition that their transfer does not result in the AIF having more than 75 investors
- in certain cases may not be required to appoint a licensed manager or a custodian
- assets under management do not exceed the AIFMD thresholds of €100 million (including leverage) or €500 million (5-year lock-up period without leverage)
Investor classification
Investors can be classified into the following three categories:
- Professional Investor: An investor considered a professional client, who has the expertise to make his/her own investment decisions and assess the risks involved. To be considered a professional client, the investor must comply with the criteria prescribed in the Markets in Financial Instruments Directive (MiFID) 2004/39/EC.
- Well Informed Investor: No considered a professional investor and (i) must confirm in writing that he/she is a qualified investor aware of the risks involved with an investment in the relevant AIF and (ii) makes an investment of a minimum €125,000 or has been evaluated by a licensed bank/credit institution, an authorised investment firm or an authorised Management Company that he/she has the expertise, experience and knowledge in evaluating the suitability of an investment opportunity.
- An investor, who does not meet the requirements listed above.
Redomiciliation
Information relating to the Cyprus Alternative Investment Funds (CyAIF) and the opportunities that exist in the redomiciliation of offshore jurisdiction funds to a more conforming jurisdiction within the EU. Some of the advantages of redomiciling the fund in Cyprus are:
- Falls under EU regulation which makes it uniform in all EU member states. Local laws and directives are virtually a transposition of the EU regulation. Cyprus’ legal system is based on Common Law;
- The CyAIF can be marketed easily in the EU via passporting rules. Some jurisdiction may have additional requirements which can be easily addressed;
- Low setup and redomiciliation costs in comparison to other jurisdictions like Ireland or Luxembourg;
- Hedge Fund strategies fall within the AIF spectrum. The AIF law provides increased flexibility as a number of asset classes can be included in an AIF investment strategy;
- Affords investor identity protection. The Fund Administrator maintains the registry, and it is not publicly accessible.
Taxation
Cyprus has an advantageous and fully EU and OECD-approved tax regime, with AIFs also enjoying significant tax benefits. An AIF is treated identically to any other Cypriot entity and can benefit from the 12.5% flat corporation tax on annual net profits earned worldwide. A recently approved non dom tax relief code makes it attractive for expats to setup operation in Cyprus. Furthermore, AIFs benefit from the following features of the Cyprus tax regime:
- No subscription tax on net assets of a fund
- Exemption from tax on profits from sale of shares and other instruments
- No withholding tax on income repatriation or dividends paid to unit holders
- No capital gains tax on disposal of shares/units by the holders
- Tax exemption on capital gains from the sale of immovable property located outside Cyprus
- An extensive network of Double Tax Treaties in place with more than 50 countries worldwide
Additional Information
Some important items introduced by the new AIF Law are:
- Common Funds, a contractual structure where investors participate as co-owners of assets
- Umbrella structures with multiple investment compartments, allowing the management of different asset pools with separate investment policies and with ring-fenced assets and liabilities
- Public offerings of AIF shares / units
- Listing of securities issued by AIFs, increasing investor base, liquidity, marketability and transparency
The various AIF legal forms that have been introduced are the Fixed Capital Company (FCC), the Variable Capital Company (VCC), the Limited Partnership (LP), and the Common Fund (CF). All these forms can be of limited or unlimited duration. The more popular AIFs with unlimited number of persons (investors) may be marketed to retail, or well-informed and/or professional investors and can be listed on a recognized stock exchange. The externally managed AIFs are subject to minimum capital requirements of €125,000 whereas the internally managed have a minimum of €300,000 both of which can include subscribed capital (meaning Unit Holder participations).
For further information please do not hesitate to contact our office directly.