Cyprus: Cyprus International Collective Investment Schemes

Last Updated: 14 September 1999

By Elias A. Neocleous of Andreas Neocleous & Co, Limassol

Cyprus has long been used by fund promoters to domicile sub-funds in the form of local subsidiaries to take advantage of the beneficial provisions of the island’s double taxation treaties with 26 countries including many emerging markets, such as Central and Eastern Europe, CIS, India and China. Cyprus’ legal and regulatory framework did not allow the creation of open-ended investment funds and it was only possible to set up funds in the form of closed–end companies which are only suitable for limited purposes. This has changed with the enactment in May 1999 of the International Collective Investment Schemes Law No. 47(I)/99 ("the Law") which has effectively rendered Cyprus an appropriate domicile choice in the global fund industry.


Definition / Structures Available

A Cypriot International Collective Investment Scheme (a "Scheme") is defined as a scheme in the form of an international fixed capital company or an international variable capital company or an international unit trust scheme or an international investment limited partnership, the sole purpose of which is the collective investment of funds of unitholders who may redeem or repurchase their units directly out of the assets of the Scheme. The Schemes can only be established and operated by non-residents of Cyprus. No permanent resident of Cyprus may hold units in a Scheme. The combination of Cyprus’ existing trust, companies and partnership laws with the provisions of the Law allow for funds to be structured in a flexible manner. Subject to regulatory restrictions which shall be referred to further below, it is therefore possible for Schemes to be organised as umbrella funds, master or feeder funds, single or multi class funds, limited life or duration funds, funds of funds etc.

Regulatory Framework

The Law provides that the Central Bank of Cyprus is the regulatory and supervisory authority for Schemes, their managers and trustees. Schemes are authorised by the Central Bank of Cyprus through an act of recognition if they meet, inter alia, the following criteria:-

  1. The directors and promoters of the Schemes must be considered by the Central Bank to be competent and suitable in respect of matters of the kind which they would be concerned with in relation to such Schemes.
  2. The managers and trustees of the Schemes [and under the provisions of the Law all Schemes must appoint both a manager and a trustee ("unless the Central Bank grants an exemption to this effect)] who must act independently of one another and must have sufficient financial and operational resources to conduct their business effectively. Moreover, their officers must be persons of integrity and have an appropriate level of knowledge and experience. The manager should also possess sufficient investment expertise to conduct its business. Only licensed banking and trust institutions may act as trustees of Schemes under the Law. Both the manager and the trustee must have a place of business in Cyprus unless the Central Bank of Cyprus decides otherwise. Such exemptions are likely to be granted in the case of blue-chip managers or trustees.
  3. An applicant must submit to the Central Bank certain information and documentation in relation to the Scheme including its proposed constituent documents, offering circular, third-party service providers’ agreements etc. which must be in a form acceptable to the Central Bank.

Under the provisions of the Law, the Central Bank may issue regulations, directions and codes of conduct to specify the investment restrictions which must be adhered to by Schemes and their managers and trustees in relation to their investment objectives and their investment policy and other matters in connection to the conduct of the business of the Schemes. Such regulations etc. will become effective as from the date of their publication in the Official Gazette of the Republic. As at the date of the preparation of this article, no regulations have been published.

The Law draws a distinction between Schemes designated to be marketed on a retail basis to the public at large, those designated to be marketed solely to experienced and professional investors and private Schemes whose number of unitholders is limited to 100 and which impose restrictions on the transferability of units. The investment restrictions to be applied by the Central Bank in respect of the above categories of Schemes will reflect the different standards of investment protection which ought to be afforded by each of them.

Confidentiality issues

Any information with respect to Schemes, their business, promoters, trustees and managers which is acquired by the Central Bank of Cyprus for the purposes of exercising its supervisory and regulatory authority shall be held in confidence and shall not be released to any person unless a Cypriot Court issues an order of disclosure.

Furthermore, no officer, employee, manager trustee etc. of a Scheme shall divulge, disclose or use for his own benefit any information whatsoever in relation to the affairs of a Scheme except where he is obliged to do so by any of the provisions of the Law or where the Scheme is declared bankrupt or is in the process of being wound-up or where the information is given pursuant to a Court order or by virtue of any other law.

Managers / Trustees

To ensure investment protection, the Law grants wide powers to the Central Bank of Cyprus whose consent and prior approval is required for the replacement of a manager or trustee of a Scheme, any substantial change in their ownership or shareholding structure, any new appointment of director to their board and for any delegation of their duties to a third party. The Central Bank of Cyprus may also, in its discretion, replace or remove a trustee or manager with a new trustee or manager paying regard to the interests of the unitholders and creditors of a Scheme. The Law renders a manager of a Scheme liable to its unitholders for any loss suffered by them as a result of the manager’s improper performance of its obligations. A trustee of a Scheme is liable to its manager and unitholders for any loss suffered by them as a result of its improper performance of its duties and its liability shall not be affected by the fact that it has entrusted to a third party some or all of the assets in its safekeeping.


Amendments to the Cypriot Income Tax Laws of 1961 to 1998 were introduced in May 1999 with the enactment of Law No. 50(I)/99 providing for an advantageous tax treatment of Schemes as follows:-

  1. Schemes will be generally liable to income tax in Cyprus at the rate of 4.25% subject to the exemption set one in (ii) below.
  2. 90% of profits or gains realised by Schemes through the disposal or sale of securities held by them will be exempt from taxation. This effectively means that Schemes will suffer taxation at the rate of 0.425% on gains realised on the sale of securities. Other types of income such as dividend or interest will be taxed at the rate of 4.25% subject to applicable credit relief provided by any of Cyprus’ double taxation treaties which would serve to reduce or eliminate Cyprus tax.
  3. The income generated by managers and trustees through the provision of services to Schemes is exempt from any Cypriot tax.
  4. There is no withholding tax applicable to or payable by a Scheme or its shareholders, unitholders or partners.

Cyprus’ wide network of double taxation treaties adds considerably to the competitive position of Schemes over other jurisdictions. This is because the use of double taxation treaties can reduce the burden of withholding tax in the country of source of dividend and interest income and, in a few cases, eliminate source country capital gains tax. As Schemes are subject to tax in Cyprus, they may therefore remain eligible for benefits under those double taxation treaties (particularly with Central and Eastern European countries and other emerging markets) which do not contain specific anti-avoidance or limitation of benefits provisions.


The intention of the Law is to create a legal and regulatory system which balances adequate investor protection against the necessary freedom to manage the underlying investments. The Central Bank of Cyprus which is vested with a wide spectrum of powers over the supervision and regulation of Schemes has stated that it wishes to create a user-friendly framework and it remains to be seen whether this objective shall be accomplished in the light of Cyprus’ reputation as a high quality regional centre. Another major challenge facing Cyprus Schemes will be their ability to qualify for sale in regulated countries such as the European Union, Japan and the United States. Even of more importance will be Cyprus’ ability to maintain the beneficial environment of its financial services industry including the new regime for Schemes and thus continue to be an attractive place for investors having in mind its ongoing membership negotiations with the European Union.

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.

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