The Alternative Investment Funds Law (the "AIF Law") was enacted by the Cyprus House of Representatives on 10/07/2014. The AIF Law repeals the International Collective Investment Schemes Law (the "ICIS Law") the former legislative framework for investment funds in Cyprus, which has been in place since 1999. AIFs are authorized and regulated by the Cyprus Securities and Exchange Commission ("CySEC").
Cyprus has been making significant progress in attaining a coveted title of "location of choice" in respect of investment funds driven by the example of other successful Mediterranean jurisdictions and with awareness of how competition is also looking to grow its financial markets and to become a major financial centre. Added to this is the long standing relationships Cyprus has with countries in Europe, the Middle East, North Africa and Asia.
The fund business has grown in Cyprus despite the huge impact of the financial crisis that engulfed the country, the Eurozone and Europe. A mixture of legislation and compliance with international regulatory standards has contributed to this.
The AIF Law provides a strong but reasonable regulatory environment that furnishes international standards and give to potential investors comfort. The AIF Law aims to strengthen the funds regime in Cyprus by modernising and expanding the legal and regulatory product toolbox available to asset managers and promoters of AIFs. Changes introduced in the regime are in line with recent EU directives on asset management, with emphasis given on transparency rules and investor protection.
Secondly Cyprus and the AIF Law provide a tax environment that has benefits for both fund promoters and investors.
Thirdly Cyprus provide good quality qualified resources in terms of legal, accounting, administration including secretarial and custody services to support the fund in its set up and operational phases.
Cyprus is rapidly growing as a centre for private as well as public investment funds and with the recent transposition of the Undertakings for Collective Investment in Transferable Securities (UCITS) IV Directive, Cyprus now offers a European passport to the Fund Management Industry. Cyprus has also implemented the Alternative Investment Fund Managers Directive (AIFMD) which enables the ability to offer outstanding possibilities for cross-border and global fund distribution benefiting from an efficient and reliable fund infrastructure.
By combining a good infrastructure with low costs while complying with EU fund regulations and international best practices, Cyprus adequately meets these requirements.
What is an AIF?
An AIF is defined as a collective investment undertaking (including its investment compartments) which:
- raises external 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
- has not been authorised as a UCITS.
Types and forms of AIFs
AIFs are categorised into the following two types:
i. Unlimited number of persons, which may be marketed to (i) retail or (ii) well-informed and/or professional investors,
ii. Limited number of persons (being 75), which may be marketed to well-informed and/ or professional investors.
Any investor that is considered and/or may be treated on request as a "professional client" within the meaning of the Markets in Financial Instruments Directive 2004/30/EC (MiFID) is considered to be a professional investor. In general, "professional clients" are defined as clients who may have the experience, knowledge and expertise to make their own investment decisions and who are able to properly assess the risks that they incur in their investment decisions regarding the services products and transactions for which they are suited.
A well-informed Investor is an investor not considered to be a Professional Investor who meets and/or fulfill the following criteria:
A) Confirms in writing that he is a well-informed investor and has been notified of the risks associated with investing in the AIF in question, and
B) either:
(ii) he has been evaluated as a well-informed investor either by a banking institution, or a MiFID compliant investment firm, or UCITS management company, or AIFM, and further that he has the appropriate expertise and required knowledge to assess the suitability of the investment
AIFs may be structured in four forms:
a. variable or fixed capital company;
b. limited partnership and;
c. common fund (only for Unlimited number of persons AIFs)
The AIF Law introduces new structuring options which were not possible under the previous legal framework, such as:
i. Umbrella structures with multiple investment compartments, which allow the management of different pools of assets with different investment policies, the assets and liabilities of each such pool of assets being ring-fenced;
ii. Common funds, which are contractual fund structures where investors participate as co-owners of the assets of the AIF. This is a commonly used investment vehicle in other established funds jurisdictions such as Luxembourg and Ireland, particularly for structuring investments of pension funds;
iii. Possibility to make public offerings of shares/units of AIFs (the offering of ICIS shares/units was restricted to private placement only);
iv. Possibility of listing, which increases the AIF's potential investor base and enhances marketability and transparency;
v. The Depositary function may now be undertaken, in certain cases, by an entity other than a credit/ banking institution, subject to certain conditions. This may aid in the structuring and operations of AIFs not directly investing in financial and money market instruments, such as private equity and real estate funds.
The AIF Law provide that an AIF can be established either as an Open-ended fund or as a Closed-ended fund:
i. Open-ended fund, investors have the right to redeem and/or repurchase their units upon request at any time or, at regular intervals not exceeding one year;
ii. Closed-ended fund, investors have the right to redeem and/or repurchase their units upon request at regular intervals exceeding one year but less than five years (with the exception of venture capital funds constituted in accordance with EU Regulation 345/2013 in which the initial period of redemptions may be extended up to 10 years from their incorporation date) or, at a specific point of time which is defined in the offering documents or the prospectus or the Memorandum and Articles of the AIF.
Competitive advantages of Cyprus AIFs
- Flat corporate tax rate of 12,5% on their taxable profit
- No tax on gain from disposal of shares and other qualifying titles
- Dividend income is tax exempt subject to very easy to meet conditions
- No CFC rules
- No withholding taxes on any payments made from Cyprus to non-Cyprus resident persons (such payments include dividends, interest and royalties)
- full exemption from tax on gains from trading in securities and a generous participation exemption regime on foreign dividends
- Attractive and extensive network of double tax treaties
- Anti-money laundering regulations in line with EU directives and international standards
- On the white list of the OECD
- Low set-up and operational costs
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.
