Introduction
A Cyprus fund provides an attractive mechanism for tax efficient investment in various jurisdictions. The purpose of an International Collective Investment Scheme (ICIS) is the collective investment of funds by unit-holders.
A Cyprus Private International Collective Investment Scheme is ideal for investment in jurisdictions like Russia, South Africa, Ukraine, Poland, Czech Republic, Hungary, Romania, Bulgaria, and others.
The establishment, operation and regulation of International Collective Investment Scheme are governed by the law No. 47 (I) of 1999 and regulated by the Central Bank of Cyprus.
It should be noted however that the monitoring body for Private International Collective Investment Schemes (PICIS) will soon be the Cyprus Securities and Exchange Commission.
Fund Type
Taking into account the investment policy and the particular investment objectives, an International Collective Investment Scheme may be designated as one of the following:
- Marketed to the general public (regulated by the Cyprus Securities and Exchange Commission);
- Marketed solely to experienced investors (regulated by the Cyprus Securities and Exchange Commission, can have more than 100 investors, and Investment Manager with EU license is required), or
- A private International Collective Investment Scheme (maximum of up to 100 investors).
Form of Private International Collective Investment Scheme
An International Collective Investment Scheme may take one of the following four legal forms:
International Variable Capital Company (IVCC)
- The most commonly used International Collective Investment Scheme legal form is that of an International Variable Capital Company. This is a company whose legal form is much the same as a Cyprus LLC, except that it has variable capital i.e. can be issued and redeemed as investors buy in and sell units of the fund.
- Is an international company incorporated under Companies Law and recognized to operate as an international variable capital company by the International Collective Investment Scheme law.
- Can have fixed or unlimited duration.
- Unit holders are non residents of Cyprus and the share capital of the company may vary according to the investors participating/exiting the fund.
International Fixed Capital Company
- Same as IVCC, except that issued units are defined upon formation.
International Unit Trust Scheme
- Is an international trust created under the International Trusts Law recognized to operate as an International Unit Trust Scheme by the International Collective Investment Scheme law.
- A trust is legally defined as a relationship by a person (the settlor) who places assets under the control of the trustee for the benefit of a third party (the beneficiary). These assets are separate and are not part of the trustee’s own estate.
- The title of the trust assets stands in the name of the trustee and the trustee is empowered to manage the assets held in trust in accordance with the terms of the trust agreement.
- Can have fixed or unlimited duration.
- Under section 2 of the International Trust Law, a trust
qualifies as a Cyprus international trust where:
- The settlor is not a permanent resident in Cyprus;
- At least one trustee is a permanent resident in Cyprus;
- No beneficiaries are permanent residents in Cyprus, and;
- The trust property does not include immovable property situated in Cyprus.
International Investment Limited Partnership Scheme
- Is a limited partnership that is registered under the Partnership and Business Names Law recognised to operate as an international investment limited partnership according to the International Collective Investment Scheme law.
- The partnership must appoint a general partner who acts as the manager of the fund and who is responsible for any debt and obligations of the scheme that may arise. Limited partners are also members of the scheme and their liability is limited to the amount they have contributed to the scheme.
- A legal entity can also be a partner with limited liability. The partners or unit holders of the fund that have limited liability should not take part in the conduct of the business of the scheme or have the power to contract on behalf of the international investment limited partnership. All contracts, deeds, instruments, letters and documents whatsoever shall be entered into, drafted, signed and executed by the general partner on behalf of the international investment limited partnership.
- Can have fixed or unlimited duration.
COMMON USES OF CYPRUS FUNDS
Clients who set up and operate International Collective Investment Scheme include financial services companies, fund managers, investment firms and high net worth individuals. The following are the most common uses of a Cyprus fund:
- Property investment, namely in countries having double tax treaties with Cyprus (i.e. Russian, India, Poland, Ukraine, Czech Republic, Hungary and others);
- Accumulation of funds of high net worth individuals in a private fund;
- Investments in securities (as defined in Cyprus tax legislation), bonds and other financial instruments, capitalising tax free gains;
- Collective fund of several sub-fund portfolios;
- Fund of a number of other funds or sub-funds, each with a specific objective, projected target return and risk profile;
- In the case of Polish projects, International Collective Investment Scheme being used to hold various types of Polish operating companies in the form of Spólka komandytowo-akcyjna (SKA, or “Joint Stock Limited Partnership”).
ADVANTAGES OF Private International Collective Investment Scheme
Tax Advantages
- Treated as a regular Cyprus company, thus subject to CIT of 10%, being the lowest rate in the EU. However, in practice, most Private International Collective Investment Schemes earn only exempt income, effectively not being subject to tax in Cyprus.
- No tax on disposal of securities as defined by tax law (in brief, titles are defined as shares, bonds, units, debentures, founder and other titles of companies or legal persons and rights thereon).
- Participation exemption system on dividends and profits from abroad, with no minimum holding period.
- No withholding taxes on payments of dividends, interest, and royalties (royalty w/h tax subject to some conditions) paid to non residents.
- No thin capitalisation rules.
- Wide network of double tax treaties (DTT).
Other Advantages
- Greater operational flexibility, in terms of both the choice and structuring of the investment portfolio, and in relation to the internal structuring of the Fund itself. Cyprus investment funds have access to the widest possible variety of investment instruments and may often pursue more aggressive investment strategies than if they were registered in other jurisdictions such as Luxembourg, Malta and Ireland.
- Flexible regulator.
- Minimum regulation and statutory requirements.
- EU member state and compliant with EU laws and regulations.
- Recognition as a mature international business centre with developed infrastructure, a resilient economy, and highly qualified professionals.
- Licensing in Cyprus and the existence of a regulatory framework improves transparency and legitimacy with regard to shareholders, authorities and others.
- Legislation is in place and is continuously reviewed in order to both regulate and harmonise operations in the international business sector.
- A Cyprus fund can list easily on any stock exchange within the EU.
- Access to European Securities Markets.
- No asset diversification requirements or investment restrictions.
Private International Collective Investment Scheme application process
Our opinion regarding the Private International Collective Investment Scheme application process is based on the provisions of the International Collective Investment Schemes Law (No47 (I) of 1999), on Cyprus Company Law CAP 113, the Policy Statement, Guidelines and Regulations on the establishment and management of International Collective Investment Scheme issued by the Central Bank and on practical experience.
The Central Bank recently modified its policy regarding Private International Collective Investment Scheme, with many current requirements being informal i.e. not published in website and Guidelines and Regulations.
Getting started
- 3 to 4 corporate and/or individual investors are required, with each contributing cash or in kind a minimum of EUR€ 50,000;
- At least one management shareholder;
- Minimum of 2 Cypriot executive Directors;
- A sound business strategy.
- The Investor Shares or Units of the Fund are non voting shares that carry an equal right to dividends and to any other distributions that the Management of the Fund may from time to time declare. These Units have no voting rights in the Fund and have no participation in the management of the affairs of the Fund;
- In the case of a corporate investor, the Cyprus Central Bank does not require details of Beneficial Owner (although administrator of fund is legally required to have such KYC information);
- Investment shares cannot be sold to third parties;
- Can be redeemed at prevailing Net Asset Value per share (subject to any restrictions stated within the M&AA and Private Offering Memorandum);
- Maximum 100 private investors.
IMPORTANT NOTE: While it is permissible to have closed circuit website, it is prohibited to advertising a Private International Collective Investment Scheme to the public at large.
The Management Shares carry no right to dividends and on a winding up rank last for the return of only the 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 right to vote and are entitled to one vote per share with regards to, inter alia, the following matters:
- The appointment or removal of any Director;
- The winding up of the Fund;
- Any amendment to the Memorandum and Articles of Association of the Fund affecting the foregoing matters subject to the provision of the relevant companies’ law;
- 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 authorized but unissued shares and the creation of new authorized shares or other shares, as the holders of the Management Shares may determine;
- 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 Management 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 company, partnership or other person or entity controlled by any of such persons (as determined by the holders of the Management Shares);
- 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 by way of the cancellation of the relevant shares and the issue of Management Shares or otherwise; and
- 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.
- Minimum of two Cyprus resident Directors, which must be “fit & proper”;
- Cyprus Central Bank is no longer approving as “fit and proper” for example lawyers with no Fund experience;
- Fit & Proper- in order to demonstrate, a prospective Director must
supply the CYPRUS CENTRAL BANK with the
following:
- CV, demonstrating relevant experience and qualifications;
- Reference letters from all employers for last 10 years (no gaps are permitted);
- Additional three reference letters i.e. from bankers, lawyers, colleagues etc;
- If Director owned their own business for all or part of the last 10 years, then client reference letters should be provided in place of employer reference letters;
- Copy of all degrees and certificates;
- Clean police clearance report from country of residence;
- Copy of passport and utility bill;
- Must complete and sign Personal Questionnaire (PQ) form.
- The most important element of the Private International Collective Investment Scheme application is the Private Offering Memorandum (POM);
- The POM is typically a 25-35 page document detailing structure of fund, strategy, and risks to investors;
- POM must state the following:
- Expertise of management;
- Details of activities of SKA(s);
- Size of current projects in EUR or PLN;
- Forecasts and budget estimate;
- % completion of current project;
- Details of future projects;
- Details of leveraging at the Fund and SKA levels.
Fund Manager
- It is possible, but not a requirement, to appoint a fund manager which must be approved by the Central Bank of Cyprus;
- Manager is recommended when volume of investment decisions is high;
- Manager will provide investment advice and recommendation to the Board of Directors of the fund and is required to have an established place of business in Cyprus;
- The fund manager does not in any way release the Directors of their statutory duties or liability;
- Manager can be foreign entity.
IMPORTANT NOTE: A foreign fund manager should not have authority to negotiate and conclude contracts outside Cyprus on behalf of the Private International Collective Investment Scheme, otherwise a Permanent Establishment of the Private International Collective Investment Scheme may arise in that country under dependent agent clause (pursuant to DTT provisions).
Central Bank Requirements for approved Private International Collective Investment Scheme
Once a Private International Collective Investment Scheme license has been granted by the Cyprus Central Bank, each fund will be required to submit the following:
- Quarterly Net Asset Valuation (NAV) report;
- Balance Sheet every six months;
- Full audited FS every year.
OUR Private International Collective Investment Scheme SERVICES
Savva & Associates is the leading provider of Private International Collective Investment Scheme services particularly involving Polish and Easter European investment, with extensive experience advising on and forming International Collective Investment Scheme structures. We can also assist with the ongoing management and operation of a Cyprus fund. Our fund services include:
- Advice regarding the effective utilization of a Cyprus fund structure;
- Application to the Central Bank of Cyprus to obtain approval for fund licensing;
- Formation of Cyprus company which will apply for fund license;
- Assistance in drafting the offering memorandum and other legal and secretarial documentation which is required;
- Provision of administrative services including directors, secretary, registered office facilities and management, where applicable;
- Compliance services including accounting, internal audit , due diligence and fund valuation.
