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Fortifying the Cypriot investment funds’ legal framework

Published Date:Wednesday, October 30, 2013
The Cypriot funds' industry has been developing in recent years and is now making significant strides ahead to position itself as a reputable funds’ jurisdiction. The transposition of the Alternative Investment Funds Manager Directive (AIFMD) into national law on the 22nd July 2013 has strengthened the Cyprus funds' industry and made the local legislation compliant with the EU regulatory framework.

The AIFMD affects both Alternative Investment Fund Managers (AIFM's) in the EU as well as those who market or offer investment management services to EU Alternative Investment Funds (AIF's). The AIFMD Law outlines the rules for supervision, the operation and transparency of AIFM's in Cyprus. In order to obtain authorization, the AIFM will need to file information on itself and the AIF, for which it intends to manage, to the local regulator the Cyprus Securities and Exchange Commission. The information required to be submitted includes details of the shareholders, corporate structure, remuneration policies, valuation and pricing methodology, depositaries as well as investment strategy. Once authorization is granted it will be valid across all EU member states and the European Securities and Markets Authority (ESMA) will keep a central register listing each authorized AIFMs’ details.

By having regulated AIFM's, AIF's will be freely marketed across the EU through passporting. The AIFMD Law regulates the marketing of AIF's and allows a passport for the AIF to be distributed to professional investors (as defined by MiFID) in all other EU states. The EU passporting does not include the marketing and distribution of the AIF to retail investors, as this is subject to the approval of the regulator in each EU state.

Moreover, by having the EU directive transposed into national law, Cyprus offers assurances to investors that the AIF is being managed in line with an EU regulatory framework thus attracting a potentially larger pool of investors.

The Cyprus International Collective Investment Scheme (ICIS) will be classified as a non UCITS (Undertakings for Collective Investment in Transferable Securities) fund and is under the scope of the AIFMD Law.  Due to the attractive fiscal benefits offered in Cyprus, including low corporate tax, withholding tax exemptions and an extensive network of double tax treaties, Cyprus AIF's offer foreign investors a tax efficient vehicle through which they can structure their investments. Cyprus AIF's are commonly used to structure investments in private equity as any earning realized from the disposal of such shares, would not be subject to tax in Cyprus.

Moreover, proceeds from the redemption of units in a Cyprus AIF are also tax exempt at the investor level. Cyprus AIF's that own shares in a foreign subsidiary can receive dividends, in most cases, tax exempt in Cyprus.

The enactment and implementation of the Law is a welcome development as it strengthens the legal framework for funds, impacts the way administrators, depositaries, and fund managers operate and provides detailed guidelines on how the supervision of these entities should be governed.

As a result of the recently enacted AIFMD Law the following benefits have been obtained:

  • An EU-wide “passport” under which AIFM's can provide cross border management and marketing services to AIF's;
  • Detailed regime regarding depositary functions of safekeeping, cash monitoring and oversight;
  • Operating conditions for AIFM's including internal control and compliance, risk management, liquidity management, transparency, delegation arrangements, conflicts of interest, and remuneration policies;
  • Rules regarding third-country undertakings.

For further details regarding the latest developments in the Cypriot investment funds' industry, for identification of tax implications and advise on the licensing and regulatory requirements of Cyprus AIF's,  please contact Mr. Charles Savva at +357 22 516 671, or by email at c.savva@savvacyprus.com.