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Alternative Investment Funds (“AIFs”) in Cyprus

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In July 2014 the House of Representatives approved the enactment of the Alternative Investment Funds Law of 2014 (the “AIF Law”). The AIF Law aligns the Cypriot Investment Funds legal framework with the recent developments in the EU, particularly with the EU Alternative Investment Fund Managers Directive (the “AIFM Directive”), in conjunction with the Alternative Investment Fund Managers Law of 2013 (the “AIFM Law”). 

AIFs, being “non-UCITS” funds, are established under domestic Cyprus fund legislation. Unlike UCITS, they are not harmonised EU funds and do not have an equivalent of the "UCITS Passport" (although a similar distribution permission is possible via the AIFM Directive and Law). However, they are widely recognised internationally and can be sold on a private placement basis to investors subject to compliance with local securities laws.

The AIF Law allows for three different types of AIFs to be registered in Cyprus:

  1. AIFs available to the public in the form of a Company (with fixed or variable capital), a Common Fund, or a Limited Liability Partnership. All three legal forms allow for legally segregated sub-funds to be created and there are no limits to the number of investors.
  2. AIF's available to professional and/or well-informed investors in the form of a Company (with fixed or variable capital), a Common Fund, or a Limited Liability Partnership. All three legal forms allow for legally segregated sub-funds to be created and there are no limits to the number of investors.
  3. AIFs with Limited Number of Persons (the “AIF-LNP”) in the form of a Company (with fixed or variable capital) or a Limited Liability Partnership. Both legal forms allow for legally segregated sub-funds to be created and the maximum number of investors is limited to 75.   In essence, the AIF-LNP is a “light-touch” regulated investment fund, representing the most flexible legal form provided by the AIF Law.  It also most closely mirrors the previously used Private International Collective Investment Scheme (“PICIS”).

It should be noted the enactment of the AIF Law has repealed and replaced the previous  International Collective Investment Schemes Law of 1999 (the “ICIS Law”), with existing ICIS required to convert into any of the above mentioned three categories of AIFs.
The following memo highlights the characteristics of the current AIF industry in Cyprus, and focuses on the most common form, being the AIF-LNP. 
An AIF-LNP can have up to a maximum of 75 investors, also known as unit-holders, and must be marketed only to professional and/or well informed investors. 
The AIF Law defines a professional investor as an investor who is considered to be a professional client or may, upon the investor’s request, be treated as a professional investor within the meaning of Annex II of the Investment Services and Activities and Regulated Markets Law, as amended.
The AIF Law defines a well-informed investor as being a non-professional investor who fulfils the following conditions:

1. Confirms in writing that he is a well-informed investor and that he is aware of the risks related with the proposed investment; and
2. Either invests a minimum of EUR 125,000 in the AIF, or he is successfully assessed as a well-informed investor by either: 
  1. A credit institution in Cyprus or the EU;
  2. An investment firm in Cyprus or the EU;
  3. A UCITS management company.
The purpose of an AIF-LNP is the collective investment of funds within a defined investment strategy, by the unit-holders. Such vehicles provide an arrangement that enables a group of investors to add collectively their assets, have these professionally managed and invested by independent managers/entities and, in case of successful investment, extract their profits in a tax efficient manner.

 The main advantages offered to the investors in an AIF-LNP are:
  • No investment restrictions;
  • No investment diversification requirements;
  • No minimum initial capital requirements;
  • Low setup and maintenance costs;
  • The ability to create legally segregated sub-funds.
Further details about the various advantages afforded by AIFs are detailed in section 4 below.

More than 60% of AIF-LNP registered in Cyprus were incorporated in the last six years (under the ICIS regime) and originate from a wide range of countries throughout Europe.

80% of these funds take the legal form of International Variable Capital Companies and 20% are registered as Limited Liability Partnerships.  The following table depicts the various industries represented by the Cyprus AIF-LNP regime:


Of the almost 80 AIF-LNP currently established, investment has been targeted in a wide spectrum of jurisdictions.  The regional focus of all currently established AIF-LNP is summarised in the diagram below:


As at March 2015, the registered AIF-LNP in Cyprus had total assets under management of EUR 3.05 billion (as published by the statistics department of the Central Bank of Cyprus).

There are no specific provisions or special modes of taxation in Cyprus tax law regarding AIFs. Therefore, provided an AIF is structured in the form of a private limited liability company, and its management and control is exercised in Cyprus, it is taxed in the same way as a Cyprus tax resident company.  All of the advantages afforded by the Cyprus tax regime will fully apply to the AIF regime.
The following are the main tax advantages enjoyed by an AIF:

  • Exemption from tax on profits from disposal of shares and other financial instruments;
  • Exemption from tax on foreign dividends received (with some conditions);
  • No withholding tax on interest and dividend payments made to non-residents;
  • No stamp duties on the subscription, redemption, repurchase or transfer of units;
  • Dividends distributed or deemed to be distributed by an AIF to Cyprus tax residents are subject to 3% SDC (compared to 17% that applies to dividends from normal limited liability companies to Cyprus tax residents); 
  • No withholding tax on redemption of units;
  • Can obtain a Tax Residency Certificate;
  • Enhanced image and creation of substance. Unlike private companies, an AIF is subject to regulation and monitoring, all Directors are deemed to be “fit and proper”, investment strategy is documented within an Offering Memorandum, and a custodian/depositary and investment manager are typically appointed.
  • A wide network of Double Tax Treaties is in place with more than 57 countries worldwide, securing tax incentives and encouraging the channelling of funds in other countries with nil or low withholding tax rates;
  • In practice most AIFs generate only exempt forms of income, hence are not subject to Cyprus tax. 

The following are the main non-tax advantages afforded by an AIF-LNP:

  • No asset diversification rules whatsoever (compares favourably to Luxembourg, Ireland and Malta, being the other major EU fund jurisdictions).  Whereas most EU fund jurisdictions impose various asset diversification requirements, the Cyprus AIF-LNP allows for a project whereby all investment is targeted into a single Special Purpose Vehicle i.e. AIF-LNP holds shares in a single foreign company, hence acts in a holding company capacity. It should be noted that only the AIF-LNP legal form is not subject to asset diversification requirements;
  • No minimum initial capital requirements;
  • No investment restrictions.  This is in contrast to other forms of AIF;
  • No formal leveraging restrictions.  This is in contrast to other forms of AIF;
  • No formal requirement to appoint local Directors. In practice Board of Directors can comprise of purely foreign Directors who regularly meet in Cyprus, hence management and control requirements are met;
  • No requirement to appoint an external investment manager, subject to certain conditions;
  • No requirement to appoint a custodian/depositary, subject to certain conditions;
  • Various IFRS consolidation exemptions are available under the Cyprus Companies Law Cap. 113;
  • The ability to create legally segregated sub-funds, where the investor of each sub-fund is fully protected as each sub-fund is liable only for its liabilities and there are no circumstances where a liability or a claim against a sub-fund will affect any of the other sub-funds of the AIF-LNP.

Under the applicable Cypriot legislation, namely the AIF Law, the Cyprus Securities and Exchange Commission (“CySec”) is the regulatory and supervisory authority for AIFs and may, upon a written application, recognise a Company, a Common Fund or a Partnership as an AIF. 
The various legal forms in which an AIF-LNP can manifest in are analytically described as follows:
(i) Fixed Capital Investment Company (FCIC)

  • Incorporated under Cyprus Companies Law and recognised to operate as a fixed capital investment company by the AIF Law. 
  • Its share capital cannot vary and remains fixed. 
  • Legally segregated sub-funds of the FCIC can be created.

(ii) Variable Capital Investment Company (VCIC)

  • Incorporated under the Cyprus Companies Law and operates as a variable capital investment company by the AIF Law. 
  • Its share capital varies according to the participating investors at any given time. 
  • The share capital of the company is equal to the net asset value (NAV) of the shares of the company at any time.
  • The VCIC is the most common form of AIF-LNP formed in Cyprus.
  • Legally segregated sub-funds of the VCIC can be created.

(iii) Limited Liability Partnership (LLP)

  • A limited liability partnership registered in accordance with the General and Limited Partnerships and Trade Names Law and recognised to operate as a limited liability partnership under the AIF law.
  • As with all limited partnerships, there must be a General Partner who exercises the management of the LLP and is responsible for the debts and liabilities of the LLP.
  • The limited liability partners are not responsible for the debts and liabilities of the LLP, beyond the amount of their contribution. 
  • A limited liability partnership can also have a corporate entities act as partners.

Setting up a regulated AIF-LNP entails professional regulated services by qualified providers such as Savva & Associates. It also involves other professionals, which must be approved by CySec. Savva & Associates undertakes the selection and appointment of all professionals required for an AIF-LNP to be licensed, established and operate seamlessly, and our clients have the choice at all times to provide their own Investment Manager, Custodian or Auditor so long as such providers are approved by  CySec. 
In detail, the roles in an AIF-LNP are typically as follows:

(i) Investment Manager

  • Currently the appointment of an external Investment Manager is not mandatory in the case of an AIF-LNP formed as an FCIC or VCIC. An AIF-LNP formed as a Limited Liability Partnership must appoint an investment manager who undertakes the duties and responsibilities of the general partner.
  • If managed internally, the persons carrying out the internal management must be approved as to their investment experience and capacity by CySec.
  • The external investment managers who can be appointed to manage an AIF-LNP (depending on the type and size of the investments) are: a UCITS management company, an Alternative Investment Fund Manager (licensed under the AIFM Directive), a licensed Investment Firm (from any part of the world, subject to conditions) or an entity whose sole purpose is the management of the specific AIF-LNP.
  • We can provide both properly qualified individuals acting as Investment Managers of an AIF-LNP or appropriately licensed companies both from Cyprus and abroad.

(ii) Custodian/Depositary

  • The appointment of a custodian/depositary is not required for AIF-LNP if:
  • When a custodian/depositary is required and the AIF-LNP is below the AIFM thresholds then the custodian/depositary can be a credit institution, a Cyprus Investment Firm or any other entity to be determined as eligible. 
  • The custodian/depositary shall bear responsibility for holding and safeguarding the assets placed under the AIF-LNP, should these be tangible or intangible assets. 
  • We maintain excellent approved intermediary relationships with banks in Cyprus and within and outside Europe and can arrange for the appointment of a suitable custodian.
  • For substance purposes, we strongly recommend a Cyprus based custodian/depositary be appointed.

(iii) Fund Administrator

  • The fund's administrator renders services with regards to book-keeping and accounting, compliance, reporting, filing, share issue, transfer and redemption and other relevant services (see section 9  below for specific reporting requirements). 
  • The Administrator must be approved by CySec and our expectation at present is that CySec will require the administrator to be based in Cyprus – this is in line with the current practice under the ICIS regime. 

(iv) Auditors

  • A qualified professional Cyprus auditor must be appointed upon formation of the AIF and will attend to the annual audit.

(v) Legal Advisors 

  • The AIFs lawyers draft various documentation such as the Memorandum and Articles of Association in the case of variable capital company (or partnership agreement in case of LLP) and attend to the legal formation, licensing and regulatory compliance of the AIF both upon formation and thereafter. 
  • Although legal counsel must not necessarily be identified at the AIF application stage, we strongly recommend that an experienced law firm be appointed to act as legal counsel.

Directors' Functions
The Directors are responsible for the overall management and control of a fund. The Directors should review the operations of the fund at regular meetings and should meet on a regular basis, at least quarterly. For this purpose, the Directors should receive periodic reports from the Administrator detailing the fund's performance. 

Irrespective of whether or not an AIF appoints an Investment Manager, the Directors are overall responsible for the management of a fund, and all final investment decisions taken.  
Management Shareholders' Functions
The holders of Management Shares have the right to vote as explained in detail below. The Management Shares are entitled to one vote per share and carry no right to dividends and on a winding up rank last for the return of capital paid up initially and will be paid out of the general assets of the fund, if any. Management Shares are not redeemable. The holders of the Management Shares have the exclusive right to vote (to the exclusion of the holders of participating units), and in such case are entitled to one vote per share, in respect of each of the following matters:

  1. The appointment or removal of any Director;
  2. The appointment of a new Investment Manager and/or removal of the existing Investment Manager;
  3. The winding up of the fund;
  4. Any amendment to the Memorandum and Articles of Association of the fund affecting the foregoing matters;
  5. To create one or more additional classes and sub-classes of shares or other shares of such number, par value and denomination, whether by means of conversion or by way of cancellation of all or any of the authorised but unissued shares and the creation of new authorised shares or other shares, as the holders of the Management Shares may determine;
  6. To create one or more classes of Management Shares or other shares of such number, par value and denomination together with such rights (including without limitation as to the fees and charges to which the assets attributable thereto are subject) as the holders of the Management Shares may determine for issuance to the manager of the fund or a director or employee thereof or any person connected with any such person (as determined by the holders of the Management Shares) or a fund, partnership or other person or entity controlled by any of such persons (as determined by the holders of the Management Shares);
  7. To re-designate as Management Shares such shares registered from time to time in the names of persons to whom Management Shares may be issued as the holders of the Management Shares determine (subject to the creation of such class of shares pursuant to section (vi) above) by way of the cancellation of the relevant shares and the issue of Management Shares or otherwise; and
  8. To amend the Memorandum and Articles of Association to provide for the creation of one or more additional sub-classes of shares or one or more classes of Management Shares pursuant to sections (v) and/or (vi) and all matters incidental thereto as the holders of the Management Shares may determine, provided that no such amendments may adversely affect the rights attaching to the shares in issue on the date they are made.
It is important to note that participating shareholders (i.e. holders of investment units) cannot participate in any way in the management of an AIF.  This is in contrast to the inner workings of a private limited liability company whereby various management powers can be assigned to the shareholders.

A comprehensive application must be submitted to CySec in order to obtain an AIF-LNP license.
The application must include the following:
  • Private Offering Memorandum (Prospectus), being a 40+ page document listing among other things the strategy of the fund, expected return for investors, risk management, and identification of all key providers.
  • Details of all proposed Directors, with each providing the following:
  1. Copy of passport and recent utility bill evidencing residential address.
  2. CV with details covering a minimum period of 10 years.
  3. At least two reference letters (presented upon request).
  4. Non-bankruptcy certificate.
  5. Criminal record certificate.
  6. Duly completed CySec questionnaire form.

In case the certificates and documents that accompany the application are not in an official language of the Republic or in English, they must be accompanied by their true translations.

It should be noted that all Directors must be “fit and proper”, meaning they must have adequate financial and fund management experience and academic credentials.  In addition, in practice CySec requires a minimum of two executive Directors.

  • Details of the following key service providers:

    1. Investment Manager (not required for AIF-LNP)
    2. Auditor
    3. Custodian
    4. Administrator

  • An experienced provider can typically prepare a full application within a two week period.
  • CySec will require anywhere from 4 to 12 weeks for review and approval of the application (provided there are no deficiencies in the application).
  • An application fee must be paid to CySec.  

The following is a list of the current filing and reporting requirements for all AIF-LNP as determined by CySec:

  1. Accounting, preparation of annual Financial Statements, and preparation of annual tax return (IR4).
  2. Annual audit.
  3. Monthly or Quarterly Statistical reporting to the Central Bank of Cyprus - must be submitted within 15 working days from the end of each month and quarter.
  4. Annual Information Reporting to CySec – submitted within 45 days from the year end.
  5. Annual report submitted to CySec regarding prevention of money laundering and terrorist financing, as prepared by the duly appointed Money Laundering Officer. 

With less than one hundred AIF-LNP currently established in Cyprus, there are only a handful of providers with experience in preparing an AIF-LNP application and providing ongoing services in various capacities i.e. administrator, auditor, custodian etc.

Savva & Associates is the leading provider of corporate and AIF-LNP services in Cyprus.  
Some of the highlights of our expertise in the AIF industry include the following:
  • We administer the second highest number of existing AIF-LNP in Cyprus, including some of the biggest Russian-based AIF-LNP projects which have been established to date.
  • Professional staff of 20, consisting of primarily qualified chartered accountants and Cypriot and EU qualified lawyers.
  • Strong team of Russian and Polish speakers.
  • Strong presence in the European, Russian and Middle East markets.
  • Excellent network of partners and associates. 
  • We are the most cost efficient tier-1 provider, with extensive AIF-LNP experience.

A list of all existing AIF-LNP along with a summary of their activities and key providers can be obtained directly from the website of CySec.

Our team of investment fund professionals is well positioned to assist you with the following AIF related services:

  • Preparation and submission of an AIF license application to CySec.
  • Provision of tax and legal advice regarding the effective utilisation of a Cyprus fund structure.
  • Formation of Cyprus company which will apply for fund license.
  • Recommendation and appointment of key service providers.
  • Provision of administrative services including directors, secretary, and registered office.
  • Acting as Fund Administrator on an ongoing basis, therefore will undertake all compliance services including accounting, internal audit, and fund net asset valuations required by CySec.

Please let us know if you have any questions or comments regarding the above information. Upon your request we can provide you with a summary of the initial information and documentation we will require in order to commence an AIF-LNP application.