Investment Funds in Cyprus
Investment funds – variously known as collective investment schemes or mutual funds – are vehicles, registered or domiciled in Cyprus that offer eligible investors significant benefits in terms of tax neutrality, speed, flexibility and pragmatic regulation. They are typically used to pool investments for private equity funds, venture capital funds, distressed opportunities funds, real estate funds, mezzanine funds, funds of funds and hedge funds.
The Cyprus legislation allows for the set-up of both Alternative Investment Funds (AIFs) and Undertakings for Collective Investment in Transferable Securities (UCITS).
Alternative Investment Funds (AIFs)
An AIF is a collective investment undertaking to raise 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 that has not been authorised as a UCITS.
The Alternative Investment Funds Law was enacted in July 2014 to replace the International Collective Investment Schemes (ICIS) Law of 1999 and bring all investment products, asset managers and investment firms under the regulation and supervision of the Cyprus Securities and Exchange Commission (CySEC).
The new law offers more investment structuring possibilities and upgraded rules for the authorisation, on-going operations, transparency requirements and supervision of Cyprus AIFs, as well as regulation on the role and responsibilities of their directors, custodians and external managers.
It also aligned the Cyprus legal and regulatory framework with the latest EU directives on asset management, transparency and investor protection. AIFs that are established under domestic Cyprus fund legislation can therefore be sold on a private placement basis or marketed to professional investors across the EU under the AIFMD passport.
An AIF can be established with limited or unlimited duration and can take the following legal forms:
- Fixed Capital Company
- Variable Capital Company
- Limited Partnership
- Common Fund
Types of Cyprus AIFs
- AIF with Unlimited Number of Persons – these may be marketed to ‘retail’, or ‘well-informed’ and/or ‘professional investors’ and are freely transferable investor shares, which can be listed on a recognised stock exchange. AIFs marketed to retail investors can be traded. They are subject to minimum capital requirements of €125,000 (or €300,000 if a self-managed fund) and may be subject to certain investment restrictions depending on the investor type and the overall investment policy. A global custodian must be appointed.
- AIF with Limited Number of Persons – the total number of investors/unit holders cannot exceed 75. These may be marketed only to ‘well-informed’ and/or ‘professional investors’ and are freely transferable investor shares, with the condition that their transfer does not result in the AIF having more than 75 investors. Assets under management do not exceed the AIFMD thresholds of €100 million (including leverage) or €500 million (five-year lock-up period without leverage). In certain cases they may not be required to appoint a licensed manager or a custodian.
- Professional Investor – an investor who is considered to be a professional client, who has the experience and 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 – an investor who is not considered to be a professional investor, he/she must confirm in writing that they are a qualified investor who is aware of the risks involved with an investment in the relevant AIF. They must make a minimum investment of €125,000 or have 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.
- Retail Investor – an investor who does not meet the requirements listed above.
Key Benefits of the Cyprus AIF
A Cyprus AIF is cost-efficient and simple to set-up, manage and operate. It offers a modern regulatory framework that is in line with relevant EU directives, is supervised by a competent and accessible regulatory authority and enjoys reduced reporting requirements.
It provides full transparency through annual audited and half yearly reports to CySEC and investors, which include financial statements, borrowing information, portfolio information and Net Asset Value.
There are no restrictions imposed by the regulator on type of investments and, subject to approval, a Cyprus AIF can be self-managed. Cyprus AIFs can be set-up as umbrella funds with multiple compartments and can be listed on CySEC and other recognised EU stock exchanges, provided that the number of investors is not limited.
Most dividend income and capital gains of a Cyprus tax resident fund is tax-free. Interest income is taxable, but effective tax can be significantly reduced taking into account the notional interest deduction (NID) on new equity. Services provided by the investment manager of the fund are not subject to VAT.
Tax resident funds are eligible to all benefits available under a double tax treaty or EU Directives and there is:
- No withholding tax on any type of payments to non-residents
- No subscription tax on net assets of a fund
- No capital gains tax on disposal of shares/units by the holders
Sovereign fund services in Cyprus
Sovereign Trust (Cyprus) can assist with the formation of funds in Cyprus. Services include incorporation and licensing of the fund, drafting of the fund prospectus and of the necessary agreements between the fund manager and investment manager and others such as custodians, investment advisors, bankers, registrars and company secretaries.