Alternative Investment Funds Cyprus

Alternative Investment Funds in Cyprus

1. The Cypriot AIF Regime

With the enactment of the Alternative Investment Funds Law 124(I)/2018 (the “AIF Law of 2018” or the “AIF Law”) in July 2018, Cyprus has modernised and significantly enhanced the offering of alternative investment funds, or “non-UCITS”, which can be registered and domiciled in Cyprus.

The AIF Law of 2018, which replaced and repealed the AIF Law of 2014, has introduced the possibility to create Registered AIFs in Cyprus and in addition fine-tuned the other types of AIFs (i.e. AIFs with Unlimited and AIFs with Limited Number of Persons).

With the enactment of the AIF Law of 2018, Cyprus now boasts the full spectrum of legislative framework to all fund products, both UCITS and non-UCITS, and provides fund promoters and managers various structuring opportunities.

In brief, the AIF Law of 2018 allows for the creation of AIFs with Unlimited Number of Persons (“AIF-UNP”), AIFs with Limited Number of Persons (“AIF-LNP”) and Registered AIFs (“RAIF”).

An AIF can take any of the following legal forms:

Fixed or Variable Capital Investment Company
Limited Partnership (with or without a separate legal personality)
Mutual Fund (not available for AIF-LNP or RAIF)

The main provisions of the AIF Law can be summarised as follows:

Ability to create AIFs with unlimited investment compartments (i.e. umbrella funds), each with a separate investment strategy and asset pools.
The units of AIFs can be listed on various stock exchanges.
There are various options available in relation to the appointment of an Investment Manager and Depositary, providing maximum flexibility.
Investor units are freely transferable.
The AIF-LNP is limited to a maximum of 50 investors.
Possibility to create Registered AIFs, which do not require licensing, hence time to market is significantly shortened.

2. Why Domicile your AIF in Cyprus?

During the past few years, the funds industry in Cyprus has experienced significant growth (both in terms of value of assets and in terms of number of funds and fund managers), resulting in the Island establishing itself as one of the major EU fund jurisdictions.

Its strategic geographic position, stable political system, attractive tax system, modernised AIF Law, combined with EU and Eurozone memberships, have served to attract global funds and fund managers alike.

The recent regulatory changes in the Cyprus funds industry have resulted in the full alignment of local legislation with the relevant EU Directives, including the Alternative Investment Funds Manager Directive.#

Overall, Cyprus is the most flexible and cost-efficient fund jurisdiction in the EU, a member of the European Securities and Markets Authority (ESMA), and additionally boasts a comprehensive funds and related services workforce comprising of some 4,000 qualified lawyers and 5,000 qualified accountants, establishing Cyprus as a prominent player within the EU funds industry.

The attractiveness of Cyprus as a jurisdiction of choice for AIF and fund managers alike, is displayed in the significant growth which the industry has experienced in the past few years.

As of June 2018, the Cyprus funds industry boasted a total of approximately EUR 5bn assets under management displaying significant growth over the past few years. Approximately 55% of these relate to private equity AIFs and 20% to real estate AIFs with the remaining 25% spread evenly in other AIFs.

In terms of number of AIFs, as at 31 July 2018 there were 126 authorised AIFs with another 47 under examination and 25 authorised fund management entities, with another 9 under examination.

3. AIFs with Unlimited Number of Persons

The main features of an AIF-UNP can be summarised as follows:

Can be marketed to any type of investor, including retail investors.
Can be created as a fixed or variable capital investment company, a limited partnership (with or without legal personality) or a mutual fund.
Where an AIF-UNP is formed as a limited liability company or as a limited partnership with legal personality, it can be self-managed by its Board of Directors or General Partner, and in all other cases the appointment of an external investment manager is required.
The investment manager must be:
A management company authorised under the AIF Managers Law of 2013, or the equivalent from another EU member state (in accordance with the Directive 2011/61/EU).
A management company authorised under the Open-Ended Undertakings in Collective Investments Law, or the equivalent from another EU Member state (in accordance with the Directive 2009/65/EC).
A company authorised to carry out investment management to alternative investment funds which fall below the limits set out in Article 4(2) of the AIF Managers Law or the equivalent Article 3(2) of the EU Directive 2011/61/EU.
A Cyprus Investment Firm.
Must always appoint a depositary/custodian who can be a credit institution, an investment firm or any other company subject to prudential supervision who may be based in Cyprus, the EU or in any third country which CySec has a signed cooperation agreement with (certain restrictions apply if the AIF-UNP is managed by an AIFM).
The units of the AIF-UNP can be listed on a recognized stock exchange.
Can be established with unlimited investment compartments (sub-funds / umbrella fund), each with a separate investment strategy and asset pools.
May be subject to investment restrictions and diversification rules, which vary depending on the nature of the AIF’s investments (i.e. liquid vs illiquid assets) and on the AIF’s targeted investors (i.e. retail investors vs experienced investors).
An AIF-UNP must, within 12 months of authorisation, raise capital of at least EUR 500,000 from investors, which may be extended by a further 12 months.
A self-managed AIF-UNP should have in place sufficient procedures and policies relating risk management, conflicts of interest, liquidity management, remuneration, asset valuation and its management body must comprise of at least four persons, two of which should hold an executive capacity. In addition, a self-managed AIF-UNP should have in place at all time minimum capital of EUR 125,000.

4. AIFs with Limited Number of Persons

The main features of an AIF-LNP, considered a “light-touch” investment fund, are summarised as follows:

Must be marketed only to professional or well-informed investors.
- A professional investor, as defined in Second Appendix of the Investment Services, Investment Activities and Regulated Markets Law, is an investor who possesses the experience, knowledge and expertise to make his or her own investment decisions and properly assess the risks that he or she incurs.
- A well-informed investor, as defined within the AIF Law, is an investor who does not qualify as a professional investor and:
  - Confirms in writing that he/she has sufficient knowledge and experience in relation to financial and business matters in order to properly assess the risks involved, and
  - Invests a minimum of €125,000 in the AIF or is successfully assessed as a well-informed investor by a bank, an investment firm, an AIFM or by a UCITS management company in Cyprus.
The maximum number of investors permitted, at any time, is capped at 50.
Can be created as a fixed or variable capital investment company or as a limited partnership (with or without legal personality).
Where an AIF-LNP is formed as a limited liability company or as a limited partnership with legal personality, it can be self-managed by its Board of Directors or General Partner, and in all other cases the appointment of an external investment manager is required.
The investment manager can be:
- A management company authorised under the Open-Ended Undertakings in Collective Investments Law, or the equivalent from another EU Member state (in accordance with the Directive 2009/65/EC).
- A company authorised to carry out investment management to alternative investment funds which fall below the limits set out in Article 4(2) of the AIF Managers Law or the equivalent Article 3(2) of the EU Directive 2011/61/EU.
- A Cyprus Investment Firm.
- A company created with the sole purpose of managing the investments of the specific AIF-LNP.
An AIF-LNP is not required to appoint a depositary/custodian if:
- Its assets are less than €5,000,000, or
- If it sets the maximum number of investors to 5, or
- Its assets which are subject to custody are not more than 10% of its total assets, it limits the number of investors to 25 and each investor invests at least €500,000.
If the AIF-LNP appoints a depositary/custodian, this can be a credit institution, an investment firm or any other company subject to prudential supervision based in Cyprus, the EU or in any third country with which CySec has a signed cooperation agreement with (certain restrictions apply).
There are no minimum initial capital requirements.
There are no investment restrictions.
There are no investment diversification rules.
The units of the AIF-UNP can be listed on a recognized stock exchange.
Can be established with unlimited investment compartments, each with a separate investment strategy and asset pools, however the number of investors must be limited to 50 (over the entire AIF) and in case investors are legal entities, a look-through approach is followed.
An AIF-LNP must, within 12 months of authorisation, raise capital of at least EUR 250,000 from investors, which may be extended by a further 12 months.
A self-managed AIF-LNP should have in place sufficient procedures and policies relating risk management, conflicts of interest, liquidity management, remuneration, asset valuation and its management body must comprise of at least three persons, one of which should hold an executive capacity. In addition, a self-managed AIF-UNP should have in place at all time minimum capital of EUR 50,000

5. Registered AIFs

The main features of RAIFs can be summarised as follows:

The RAIF is not licensed by CySec but registered on the relevant Register of RAIFs held by CySec. The investment manager of the RAIF, must within 1 month from the establishment of the RAIF, submits the relevant details of the RAIF to CySec for registration on the Register. CySec within 1 month from submission, will include the RAIF on the Register and thereafter, the RAIF may commence raising capital from investors.
Must be externally managed and marketed only to professional or well-informed investors.
Can be created as a fixed or variable capital investment company, a limited partnership (with or without legal personality) or a mutual fund.
Can be open or closed-ended and can be established with unlimited investment compartments.
The investment manager must be a management company authorised under the AIF Managers Law of 2013, or the equivalent from another EU member state (in accordance with the Directive 2011/61/EU) or from a 3^rd country with the relevant EU passport rights.
When a RAIF takes the form of a limited partnership (with or without legal personality) and its assets comprise of at least 70% of illiquid assets and it is closed-ended, the investment manager can be:
A management company authorised under the Open-Ended Undertakings in Collective Investments Law, or the equivalent from another EU Member state (in accordance with the Directive 2009/65/EC).
A company authorised to carry out investment management to alternative investment funds which fall below the limits set out in Article 4(2) of the AIF Managers Law or the equivalent Article 3(2) of the EU Directive 2011/61/EU.
A Cyprus Investment Firm.
Must always appoint a depositary/custodian who can be a credit institution, an investment firm or any other company subject to prudential supervision who may be based in Cyprus, the EU or in any third country which CySec has a signed cooperation agreement with (certain restrictions apply if the RAIF is managed by an AIFM).
An RAIF must, within 12 months of authorisation, raise capital of at least EUR 500,000 from investors, which may be extended by a further 12 months.
The units of the RAIF can be listed on a recognized stock exchange.

6. Taxation of AIFs

The key taxation benefits which an AIF and its stakeholders can enjoy are the following:
Exemption from tax on profits from the disposal of securities (it should be noted the Cyprus Tax Authorities have provided a wide definition of what constitutes eligible securities/titles).
Exemption from tax on dividend income (subject to certain conditions).
No withholding taxes on repatriation of dividends, interest and royalties to non-residents.
12.5% corporate tax rate, being among the lowest in the EU.
Available of the use of Notional Interest Deduction (being an annual tax expense calculated as a percentage of equity).
An extensive and continuously growing network of double tax treaties.
No stamp duty on the issue of units in AIFs.
Investors in AIFs which are tax transparent are not deemed to have a permanent establishment in Cyprus

7. Savva & Associates: Cyprus’ premier funds services provider

Since 2010, Savva & Associates has been the fastest growing professional services provider in Cyprus. We are acknowledged as the premier service provider in our field as a result of having one of the strongest technical teams on the island, adopting a service-minded approach unseen among our competitors, and being the most cost efficient Tier-1 provider in Cyprus.

We are among the few providers experienced in the licensing and administration of AIF’s, and the most cost efficient in delivering high level alternative investment fund services in Cyprus.

Our dedicated Investment Funds Division has extensive knowledge of financial services, coupled with local legal and tax expertise, ensuring efficiency in the establishment, licensing and ongoing management of AIFs.

The team comprises solely of qualified accountants, lawyers and fund experts who can assist you with:

Fund setup and licensing services
Selecting the AIF that matches your needs
We can assist you with selection the appropriate form of AIF

Preparing your AIF Application for Regulatory Approval
We have significant expertise in preparing and submitting the full application package, offering advice on the operational structure and the relevant documents that must be included in the application package.

Following up and monitoring your submission until Regulator approval
We will monitor and follow up with the Regulator, ensuring any queries by CySec are promptly handled.
Tax Advisory Services
We are well positioned to offer tax advisory services ensuring that the AIF is structured in a tax efficient manner and is fully compliant with all tax compliance requirements both in Cyprus and internationally.
Fund Formation Services
We offer you support in the incorporation of the entity to be licenced as an AIF, following approval of your application.
Fund Administration Services
We can administer a wide range of alternative investment funds through our dedicated fund administration division. Our fund administration services include:
Accounting, management and investor reporting;
Calculation of Net Asset Value. Furthermore, provision of the Net Asset Value to data vendors to ensure that current and potential investors have timely access to these valuations;
Handling all filings required by AIF Law and CySec;
Handling all statutory requirements, including tax and VAT, if applicable;
Maintenance of investor registries (including in electronic form) and other statutory and secretarial services.
Arranging for the issue, transfer, allotment, conversion, redemption and/or purchase of shares, in accordance with the fund’s constitutional documents, following the instructions of the fund, and updating the register accordingly.
Receiving, recording and dealing with letters of administration, powers of attorney, dividend mandates, vesting orders, notices of change of names and other documents affecting titles to shares or any dividends payable and consequently updating the register.
Following the custodian's orders to pay or deposit all monies and securities received.
Dispatching all such circulars, notices of meetings, reports and financial statements to all persons who are entitled to receive them.
Acting as a proxy agent in connection with the holding of meetings of shareholders, receive and tabulate votes cast by proxy and communicate to the fund the results of the tabulation.

Selection Services

Through our extensive local and international network, we can assist with the selection of the key parties of the Fund, such as: Investment Manager, Depositary, Auditor and any other qualified personnel that may be required.

We are recognised as a leading Cypriot funds firm, providing a complete and independent service to fund managers and clients. We work with many of the world’s leading independent money managers and family offices as well as funds of funds, banks and institutional funds.

For further information on establishing an AIF in Cyprus, please contact Mr. Charles Savva at info@savvacyprus.com

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