Cyprus has been classed in recent years as a European and international investment funds hub, accommodating sophisticated fund structures and fund managers. It features a robust legal framework coupled with significant tax incentives, offering all the necessary infrastructure for the alternative fund industry and managers.
Cyprus was one of the first EU member states to transpose the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investments in Transferable Securities (UCITS) into national law, offering cross-border distribution of funds. Cyprus provides:
Due to the above, Cyprus has emerged as a jurisdiction of choice for the alternative investment funds industry. Cyprus has created an attractive and competitive environment in the fund industry as it offers a complete package of investment fund services ranging from licensing to ongoing maintenance and advisory support.
When opting to domicile their alternative investment fund (AIF) in Cyprus, initiators can choose between the following types of AIFs, depending on the nature of the target assets, the type and number of investors and the region and manner in which the AIF will be marketed:
Alternative Investment Funds with Unlimited Number of Persons (AIFUNPs)
Alternative Investment Funds with Limited Number of Persons (AIFLNPs)
Registered Alternative Investment Funds (RAIFs)
AIFUNPs and AIFLNPs are subject to the direct supervision of the Cyprus Securities and Exchange Commission (CySEC) and require prior CySEC’s authorisation before they can be set up and operate. RAIFs, however, are not subject to prior CySEC authorisation or on-going prudential supervision, but rather they require registration in the RAIF register maintained by CySEC.
Over the last years, AIFLNP is the most common type of fund established in Cyprus. This is because AIFLNPs have no investment restrictions, no specific investment diversification rules and are generally subject to a lighter regime. Since the introduction of RAIFs in 2018, Cyprus has witnessed an increased number in the applications for registration of RAIFs, due to the ease and speediness of their set up.
For the purposes of this chapter, references to AIFs shall include AIFUNPs, RAIFs and AIFLNPs unless explicit references to AIFUNPs, RAIFs or AIFLNPs are made, and references to investors shall mean the unitholders in AIFUNPs/AIFLNPs/RAIFs.
Cyprus AIFs may take the following legal forms:
Variable capital investment company (VCIC)
The VCIC is incorporated either as a private or a public company limited by shares under the provisions of the Companies Law, Cap 113 and the Alternative Investment Funds Law 124(I)/2018 (the “AIF Law”). Where the AIF is incorporated as a VCIC, its share capital varies according to the participating investors at any given time and is always equal to its Net Asset Value (NAV) less its liabilities. The share capital of the VCIC is divided into shares of no nominal value and can be divided into different classes of shares, with different rights attached to them.
The shares may be redeemed upon the shareholders’ request, directly or indirectly out of the VCIC’s assets. VCICs can be either internally managed by its board of directors or externally managed by an external manager (see 2.7 Requirement for Local Investment Managers). Legally segregated investment compartments of the VCIC can be created. The VCIC is the most common form of AIF formed in Cyprus.
Fixed capital investment company (FCIC)
The FCIC is incorporated either as a private or a public company limited by shares under the provisions of the Companies Law, Cap 113 and the AIF Law. The share capital of a FCIC is divided into shares with nominal value and can be divided into different classes of shares, with different rights attached to them. Legally segregated investment compartments of the FCIC can be created. FCICs can be either internally managed by its board of directors or externally managed by an external manager.
Limited partnership (LP)
A limited liability partnership is registered in accordance with the provisions of the General and Limited Partnerships and Trade Names Law (the “Partnerships Law”) and is 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 LP and is responsible for the debts and liabilities of the LP. The limited liability partners are not responsible for the debts and liabilities of the LP, beyond the amount of their contribution. LPs are externally managed by an external manager, which is also appointed as the general partner of the LP.
Following the amendment of the Partnerships Law (which is expected to take effect during this year), a new LP will be introduced, that of an LP with separate legal personality. Such LPs with separate legal personality can either be (a) internally managed by the general partner or (b) externally managed by an external manager appointed by the general partner.
Common fund (CF)
A CF is a pool of assets that is subject to the collective management of its units to the benefit of its unit holders. All unit holders are co-owners of each of the assets that comprise the CF’s asset portfolio and their liability goes only up to the amount of their contribution to the portfolio.
A CF is not a separate legal entity and therefore it should always be externally managed by an external manager who acts on behalf of the CF.
Specifically, an AIFUNP and/or a RAIF may be structured as:
An AIFLNP may be structured in the form of a VCIC or FCIC or an LP.
All types of AIFs can be either open-ended or closed-ended funds, leveraged or unleveraged and structured as single or as umbrella schemes, ie, operate with more than one investment compartment, where each investment compartment corresponds to a distinct and separate part of the assets and liabilities of the AIF.
Moreover, Cyprus AIFs may operate as European Long-term Investment Funds (ELTIFs) and are regulated in their operation by the European Long-term Investment Funds Regulation ((EU) No 2015/760). A Cyprus AIF which is structured as an ELTIF is under an obligation to limit its investment strategy to those eligible investments as prescribed in the European Long-term Investment Funds Regulation.
Usually, AIFs are structured as VCICs or limited partnerships and are set up as umbrella schemes, with multiple investment compartments.
Cyprus maintains a robust and modern legal and regulatory framework in relation to alternative funds, that is in line with all EU Directives and Regulations. In relation to the legal framework governing the establishment and operation of the AIFMs in Cyprus, Cyprus has transposed the AIFMD into national legislation with the enactment of Alternative Investment Fund Managers Law 2013 (the “AIFM Law”). The Commission Delegated Regulation No 231/2013 as well as Regulation (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings are also directly applicable in Cyprus.
In addition to the AIFM Law and the relevant EU regulations, Cyprus AIFs are subject to the AIF Law, which provides the legal framework for the recognition, regulation and supervision of AIFs. Furthermore, the legal and regulatory framework is further supplemented by directives and circulars issued by CySEC, the competent regulatory and supervisory authority for, inter alia, the AIFs and the AIFMs in Cyprus.
Several limitations apply depending on the type of investors, the strategy and the type of structure. Such limits and restrictions are governed by relevant CySEC Directives.
AIFUNPs addressed to professional and/or well-informed investors are not subject to any investment or borrowing restrictions. However, they may be subject to diversification and other requirements on risk spreading, depending on the investment strategy which they pursue, ie, private equity, money market, funds of funds, real estate or loan originating.
AIFUNPs addressed to retail investors are subject to certain investment restrictions and concentration limits. For example, their investments shall comprise one or more of the following eligible assets:
AIFLNPs are not subject to investment restrictions, to investment limits or to any diversification rules.
RAIFs are prohibited from pursuing money-market or loan originating strategies.
In accordance with the relevant CySEC Directive on the classification of AIFs, the establishment of loan originating AIFs is permissible, provided that such funds are addressed solely to professional and/or well-informed investors and are set up as either AIFUNPs or AIFLNPs. Moreover, CySEC imposes specific requirements and investment restrictions to loan originating AIFs in order to address investor protection and other regulatory prudential requirements including risk management, leverage, disclosure and reporting requirements.
The manager of a loan originating fund in Cyprus can be any eligible manager of an AIFUNP or an AIFLNP, as applicable. See 2.7 Requirement for Local Investment Managers.
In Cyprus, any activity relating to crypto-assets is not currently regulated by CySEC or by the Central Bank of Cyprus, unless the crypto-asset in question meets the criteria and falls under the existing regulatory framework. CySEC has not, to date, confirmed its position on the status of cryptocurrencies, but it follows the relevant guidelines/announcements/Q&As issued by the European Securities and Markets Authority (ESMA) regarding virtual currencies and/or other non-traditional assets.
In accordance with the current regulatory and legal framework in Cyprus, there are no restrictions on the investment policy, in relation to activities relating to crypto-assets, to be implemented by an AIFLNP or RAIF (exceptions apply for AIFUNPs). Therefore, CySEC may examine an application for the establishment of an AIF which will be investing in cryptocurrencies on a case by case basis.
Authorisation of AIFUNPs/AIFLNPs
As mentioned above, AIFUNPs and AIFLNPs are subject to the direct supervision of CySEC and require prior CySEC’s authorisation before they can be set up and operate. In order to obtain authorisation, an application signed by the management body of the applicant or by the external manager (if externally managed) should be submitted to CySEC. The application must include, inter alia, information on the persons conducting the business of the fund, its organisational structure, any delegation arrangements in place, letter of intent by the legal advisor, declarations by the external manager (if appointed) and depository (if applicable), and a declaration of commitment to the payment of the prescribed initial minimum capital (if internally managed).
An internally managed AIFUNP/AIFLNP must also submit, inter alia, an internal operations manual describing its policies and procedures, a business plan and identification documents in respect of the key officers appointed at the level of the AIF (ie, internal auditor, compliance officer, risk manager and portfolio manager(s)). Irrespective of the legal structure and type of management of the fund, the applicant should always submit to CySEC the prospectus and the constitutional documents of the AIFUNP/AIFLNP.
Overall, the regulatory approval process usually takes around three months to be completed from the submission of a complete application, depending on the complexity and the collaboration of the applicant with CySEC. There is also the option for fast-track applications for an additional fee, which speeds up the application process up to four to six weeks.
Registration of RAIFs
As mentioned, RAIFs are not subject to the direct supervision of CySEC and do not require prior CySEC authorisation in order to commence operations. However, RAIFs are not permitted to initiate operations, unless they are registered in the RAIF register maintained by CySEC. Within one month from the date of the registration of the RAIF (in the form of an investment company or a limited partnership) with the Registrar of Companies in Cyprus, the external manager must submit to CySEC an application for the registration of the RAIF in the CySEC’s RAIFs register.
Such application should be accompanied by specific documents and data including, inter alia, information on the investment strategy of the RAIF, information on use of leverage and risk profiles of the RAIF, the RAIF instruments of incorporation etc.
There is no requirement to have a local investment manager as a condition for managing a Cyprus AIF. Investment managers authorised by the competent authorities of another EEA country have the right to manage Cyprus AIFs provided that such activities are covered by the relevant authorisation. Moreover, a company established in a third country may offer investment management services to an AIFLNP provided that it is authorised to provide such service and it is subject to the prudential regulation regarding the provision of this service. To this end, a co-operation agreement must be in place between CySEC and the competent regulatory authority of the third country.
Below are the eligible managers for each type of AIF.
Externally managed AIFUNPs
These can be managed by:
Externally Managed AIFLNPs
These can be managed by;
RAIFs must always be externally managed by an AIFM or in case a RAIF is in the form of a limited partnership, under certain conditions, it may also appoint a UCITS Management Company, an IF or a CIF or a Mini Manager (established and authorised in Cyprus to manage AIFs that fall under the AIFMD thresholds) or other entity authorised in the EU to manage AIFs under the AIFMD thresholds.
Local requirements regarding the local substance principally only apply to internally managed AIFs. AIFs are required to maintain a registered address in Cyprus. However, externally managed AIFs are not required to maintain business premises or hire local employees, but are only required to have a minimum of two Cyprus residents directors.
Below are some of the main local requirements that apply:
The legal and regulatory framework in relation to AIFs in Cyprus provides for the appointment of several other service providers as follows.
Money Laundering Officer
Internally managed AIFUNPs/AIFLNPs or the appointed external managers of AIFUNPs/AIFLNPs and RAIFs must establish a regulatory and AML compliance function and an independent internal audit function. Such persons are required to be located in Cyprus in order to perform their duties on a daily basis. Pursuant to the Prevention and Suppression of Money Laundering Activities Law of Cyprus, as amended (the “AML Law”), the AML compliance function should not be outsourced to a service provider.
AIFs should have an appointed legal adviser and a qualified Cyprus-based auditor responsible to perform the audit of the AIF.
AIFs are also required to appoint a depositary responsible for the safekeeping of the AIFs’ assets, the performance of oversight and cash monitoring (unless an exception is granted in case of an AIFLNP). Where the AIFs are externally managed by an AIFM, then the depositary appointed should be a local depositary in accordance with the provisions of the AIFM Law.
Even though not a requirement under Cyprus law, AIFs or the external managers of AIFs may appoint a fund administrator for the provision of the day-to-day administration, book-keeping and accounting, NAV calculation, reporting, filling, maintenance of the register of investment shareholders and facilitation of investor transactions.
See 2.9 Rules Concerning Other Service Providers
An AIF will be considered to be a tax resident in Cyprus if its management and control is exercised in Cyprus.
In the case of an umbrella AIF with multiple investment compartments, each investment compartment is subject to tax on a stand-alone basis.
An AIF with a VCIC or FCIC legal form that is tax resident in Cyprus, will be subject to the standard provisions of the Cyprus tax law. In summary, the key features of the Cyprus tax framework are set out below.
The corporate tax rate is 12,5% on taxable profits (eg, interest, trading income, Intellectual Property (IP) income). The effective tax rate can be reduced significantly based on certain exemptions and deductions.
Key exemptions include:
Any expenses wholly and exclusively incurred for the generation of the taxable income of the entity are tax deductible. Additional important deductions which may have significant impact on the taxable income include:
Any foreign taxes may be credited against Cyprus taxes, thus reducing further the overall exposures in Cyprus. It is noted that the broad Double Tax Treaty network of Cyprus and its access to EU Directives assist in managing/eliminating foreign taxes on incomes of a Cyprus company.
There is no withholding tax on dividend and interest payments to non-Cyprus tax resident investors, nor is there stamp duty on any subscription, redemption, conversion or transfer of units in the AIF. Moreover, in line with relevant European Court of Justice case law, funds are considered to carry out economic activities for VAT purposes and thus have the status of a taxable person. This means that, depending on the transactions carried out, there may be the right or obligation to register for VAT purposes.
LPs and CFs
LPs and CFs are tax transparent for Cyprus tax purposes. In this respect, the income of the AIF is taxed directly at the level of the investors based on the relevant rules applicable in their country of residence.
Based on the Cyprus tax legislation no Cyprus permanent establishment will be deemed to arise for non-Cyprus resident investors as a result of investment into Cyprus tax-transparent investment funds.
The services provided by the investment manager and fund administrator are not subject to VAT.
Cyprus has a wide-reaching tax treaty network with over 65 tax treaties currently in force and additional tax treaties under negotiation, review or pending coming into force.
AIFs are tax residents from a Cyprus tax perspective and are therefore entitled to benefit from the respective treaties. Tax residence certificates from the tax authorities are available upon request. Eligibility for a tax treaty should also be checked from the perspective of the other contracting state.
LPs and CFs are not eligible for any tax treaty benefits given their tax transparent status.
The use of subsidiaries in fund structures for investment purposes is a common practice in the Cyprus AIFs. Instead of direct acquisition of assets, special purpose vehicles (SPVs) are usually being set up for, among others, structuring purposes in order to take advantage of tax benefits, ring-fencing and for accommodating sales/acquisitions. For example, when the asset is sold by the AIF, the purchaser will acquire the shares of the SPV and thus take ownership of the asset. SPVs are commonly used in private equity funds.
The origin of promoters/sponsors of AIFs in Cyprus varies from Europe, Asia, the Middle East and the USA. Below is an indicative list of countries from which the promoters/sponsors of AIFs originate from:
Cyprus is experiencing an increasing interest and appetite from investors around the world, but most notably from Europe, Asia and the Middle East. The investor base of Cyprus-domiciled AIFs includes, among others:
Cyprus AIFs are currently investing in the following countries/markets:
During the past years Cyprus fund management industry is fast becoming one of the most promising sectors of the economy as there has been growing interest from funds around the world and especially from Europe, Asia and the Middle East (Source: CIFA). This is evidenced from the fact that the total AuM up until the second quarter of 2020 reached EUR7.97 billion, 67.8% of which are assets managed by AIFMs and 24.4% by sub-threshold AIFMs.
The following new trends, innovation and opportunities in the AIF market in Cyprus have been identified:
In Cyprus, the main disclosure requirements in relation to AIFs are driven by EU law.
An internally managed AIF, or the external manager of an externally managed AIF, shall publish and submit to CySEC, inter alia, the following:
In case an AIF operates with multiple investment compartments, the prospectus and annual and half-yearly reports shall be prepared as one single document, for all the investment compartments of the AIF.
Furthermore, an internally managed AIF, or the external manager of an externally managed AIF, must prepare annual and semi-annual portfolio statements which include a specific reference to the categories of the investments of each managed AIF.
AIFs also submit to CySEC the following reports:
Moreover, AIFs also submit the Statistical Reporting to the Central Bank of Cyprus.
See 4.6 Disclosure Requirements for further information regarding the disclosure requirements in respect to investors.
CySEC issues Directives and frequent circulars and announcements addressed to AIFs that usually supplement and develop the existing procedures and rules. It is expected that additional CySEC Circulars and/or consultations as regards the application of the AIF Law will be issued in the near future. Further, upcoming amendments to the Partnerships Law will allow the introduction of a new legal form of AIF, that of a limited partnership with separate legal personality.
Another anticipated change is related to the Alternative Investment Fund Manager Directive II that has been approved by the European Commission and the European Parliament and EU member states are expected to transpose into their national law by 2 August 2021.
An AIFM must be established as a limited liability company with shares under the Companies Law, Cap 113, with its registered office and central management in Cyprus and operate in accordance with the provisions of the AIFM Law.
Moreover, a special purpose company (SPC) may be established with the sole purpose of providing portfolio management service to a specific AIFLNP that is below the AIFMD thresholds.
The regulatory regime applicable to AIFMs is the AIFM Law which transposes the provisions of the AIFMD. In addition to the AIFM Law, AIFMs shall comply with the relevant EU legal framework and with CySEC directives and circulars as applicable from time to time.
AIFMs must obtain authorisation from CySEC prior to providing any management functions to AIFs. For authorisation to be granted, CySEC must be satisfied that the AIFM complies with the various requirements laid down in the AIFM Law such as capital requirements, operating conditions, marketing rules etc.
AIFMs licensed and authorised in Cyprus hold a European passport enabling them to market and distribute units of AIFs to investors in all EU member states. A third-country passport is also available for Cyprus AIFMs provided that there are cooperation agreements in place between CySEC and third country regulators where non-EU AIFs are established so that under certain conditions the Cyprus AIFM may market the units of non-EU AIFs to investors within the EU and/or manage non-EU AIFs marketed outside the EU (please refer to 4.3 Rules Concerning Marketing of Alternative Funds).
AIFMs which are exempted from the AIFM Law can also opt- in (also referred to as sub-threshold AIFMs) and can be registered with CySEC.
Moreover, a lighter touch regime for sub-threshold AIFMs (referred to as “Small AIFMs or Mini Managers”) has been introduced this year in Cyprus with the Small Alternative Investment Fund Manager Law L.81(I)/2020 (the “Small AIFM Law”). The introduction of the Small AIFM Law provides additional flexibility and competitiveness to the Cyprus regulatory framework. Small AIFMs can be licensed to manage portfolios of various types of AIFs (no restrictions as to the number or types of AIFs apply), provided that the AuM do not exceed the AIFMD thresholds (ie, the AuM do not exceed EUR100 million including any assets acquired through the use of leverage; or, in total, AuM do not exceed a threshold of EUR500 million where the portfolios of AIFs consist of AIFs that are unleveraged and where investors cannot redeem their units in the first five years after investing).
A Small AIFM may provide to the AIFs it manages the following activities:
Once the AuM of a Small AIFM exceeds the AIFMD thresholds, a Small AIFM may, in accordance with the provisions of the legislation, be converted into a fully-fledged AIFM.
A fund management company is tax resident in Cyprus if it is managed and controlled in Cyprus. If so, it is subject to the standard rules of taxation and would typically have an effective tax rate between 2.5% to 12.5%. Furthermore, the provision of management, administration and marketing services to an AIF is generally VAT exempt.
As far as the employees of the fund management company are concerned they would typically be taxable in Cyprus if either:
The key exposure for such individuals is limited in most cases to the taxation of employment income in Cyprus which is taxable at progressive bands (top band is 35%).
The effective tax rate on employment income is considerably lower after taking into account the tax free band which is approximately EUR20,000 and an exemption from taxation of 50% of their employment income under conditions. Under this case, the effective tax rate would typically be between 8% to 17.5% on taxable income. Note that subject to conditions employment income from abroad is outside the scope of taxation.
Certain employees of fund management companies may also be entitled to a flat tax rate of 8% on the carried interest. Any profits they may personally have from disposal of personal investments in shares and other qualifying securities is exempt from taxation, and if they are expatriates, they would also be typically exempt from taxation on dividend income and interest.
Based on the Cyprus tax legislation, no Permanent Establishment (PE) will be deemed to arise in Cyprus in cases of:
Certain employees of fund management companies may also be entitled to a flat tax rate of 8% on the portion of their salary that is effectively connected to carried interest for a period of ten years, subject to conditions.
AIFMs and Small AIFMs may delegate any of their functions to third parties, however, not to the extent that the AIFM and/or Small AIFM can no longer be considered to be the manager of the AIF and becomes just a letter-box entity. The delegation of AIFM functions may be effected in accordance with the provisions of the AIFMD and applicable laws and regulations. Firstly, an AIFM has to notify CySEC prior to the delegation and must be able to justify its entire delegation structure on objective reasons and must be able to demonstrate that the delegate has sufficient resources to perform the respective task.
Where the delegation by AIFMs or Small AIFMs concerns part of the whole functions of portfolio or risk management (both of those functions cannot be delegated at the same time) it must be conferred only on undertakings which are authorised for the purpose of asset management and subject to the supervision of the competent authorities of its home country. Additionally, delegation to third country undertakings may be effected provided that a cooperation agreement is in place between CySEC and the competent authority of the third country.
Moreover, no delegation of the AIFMs’ functions shall be conferred on the depositary or a delegate of the depositary or any other entity whose interests may conflict with those of the AIFM or the investors of the AIF unless such entity has functionally and hierarchically separated the performance of its portfolio management or risk management from its other potentially conflicting tasks.
Finally, the AIFM shall review the services provided by its delegates on an ongoing basis and must be able to terminate the delegation with immediate effect when this is in the best interests of the investors.
In order for an AIFM to obtain CySEC’s authorisation, it must have its registered and head office in Cyprus and must satisfy the capital requirements in accordance with the AIFM Law. Additionally, the persons who effectively conduct the business of the AIFM must be of sufficient good repute and sufficiently experienced in relation to the investment strategies pursued by the AIFs managed by the AIFM. The conduct of the business of the AIFM must be decided by at least two persons meeting these conditions and their names should be disclosed to CySEC.
Moreover, the head and registered office (ie, the legal and effective seat of its operations) of a Small AIFM must be in Cyprus in order to render the entity and its officers accessible at any time by CySEC for supervision, investigation and audit purposes.
EU/EEA AIFMs which are authorised under the AIFMD, may either directly or by establishing a branch, manage AIFs in Cyprus and market their units to professional investors upon receipt of the transmission notification from the competent authorities of their home member state. The home member state remains the competent authority to ensure compliance of the AIFM with their own regulatory requirements thus CySEC shall not impose any additional requirements to the EU/EEA AIFMs for any matters falling under the AIFM Law.
A non-EU AIFM may manage EU AIFs established in Cyprus or in any other EU member state and/or market in Cyprus units of the AIFs it manages upon acquiring authorisation by CySEC subject, inter alia, to the following conditions:
From the total 136 Undertaking in Collective Investments currently authorised/registered in Cyprus, 101 invest in Cyprus entirely or partially with a collective investment of EUR1.95 billion (25.4%) and 55% of the investments in Cyprus are in private equity while 13% are in real estate. It is worth noting that 50.4% of AIF investors are professional investors, 40.9% well informed investors and 8.7% retail Investors (Source: CySEC).
The following three types of investors can invest in Cyprus AIFs, depending on the fund’s type and legal form and structure:
By way of derogation from paragraphs (a) and (b), the investor is a person who effectively directs the business of the AIF or its external manager or is a person engaged in the AIF’s investment management functions.
AIFUNPs can be marketed to all types of investors. RAIFs and AIFLNPs can be marketed only to professionals and/or well-informed investors.
Cyprus AIFM Marketing in Cyprus or the EU
A Cyprus AIFM may market units of any EU AIF in Cyprus, subject to submitting a notification to CySEC in respect of the relevant AIF with various documents such as a notification letter including a program of operations identifying the AIF the AIFM intends to market, the AIF rules or instruments of incorporation, etc. Within 20 days following receipt of a complete notification file the CySEC will inform the AIFM whether it may start marketing the AIF identified in the notification in Cyprus. A Cyprus AIFM may market units of an EU AIF that it manages, in any other EU member state as long as the conditions set out in AIFM Law are met and subject to submitting to CySEC a notification in respect of the particular EU AIF. Within 20 days from the date of receipt of the complete notification file, CySEC shall transmit this file to the competent authorities of the member state where the AIF is intended to be marketed including a confirmation that the AIFM is duly authorised to manage AIFs with the particular investment strategy. Following this procedure, CySEC shall notify the AIFM about the transmission of the notification file and the AIFM may start marketing the AIF in the host member state as of the date of that notification. If the AIFM is established in a member state other than Cyprus, CySEC shall also notify the competent authorities of that member state that the AIFM may start marketing the units of the AIF in the host member state of the AIFM.
EU AIFMs and Marketing in Third Countries
An EU AIFM authorised by a competent authority other than Cyprus may market units of an EU AIF in Cyprus, provided that certain conditions are met, from the date of the notification of the AIFM by the competent authorities of its home member state.
Cyprus AIFM may market units of a non-EU AIF, only to professional investors, within the EU under the national private placement regimes provided that it is:
CySEC has the discretion to allow AIFMs to market to retail investors in Cyprus, units of AIFs they manage in accordance with AIFM Law, irrespective of whether such AIFs are marketed on a domestic or cross-border basis or whether they are EU or non-EU AIFs upon authorisation by the CySEC.
Both local and foreign investors can invest in AIFs established in Cyprus, subject to the fulfilment of the investor eligibility criteria depending on the legal form of the AIF (see 4.2 Marketing of Alternative Funds).
A duly authorised and regulated Cyprus AIF is automatically authorised to market its units in Cyprus depending on the relevant investment restrictions as stipulated in the relevant CySEC Directive. In order to market with an EU passport, regulator-to-regulator notification is required between the home country regulator of the AIFM and the CySEC, in order to initiate marketing of those units in the EU (see 4.3 Rules Concerning Marketing of Alternative Funds).
The AIFM Law as well as the AIFMD impose requirements for information to be provided to the investors of the AIFs and to CySEC during the marketing process and on an ongoing basis. In addition to those referred to in 2.18 Disclosure/Reporting Requirements, further disclosure obligations towards investors include, both pre-investment disclosures, periodical and regular disclosures.
In Cyprus, pre-investment disclosures as well as any material changes to such information must be communicated to investors in a written form, through an offering memorandum and through other AIF documentation and reports. Additionally, AIFMs that manage EU AIFs employing leverage or marketing in the EU, must also ensure that additional disclosures are made to the investors. For example, disclosing to the investors the total amount of leverage employed by each AIF and disclosing any right of the re-use of collateral or any guarantee granted under the leveraging arrangement.
The pre-investment disclosures as well as the regular disclosures made to investors, enable them to assess the proposed investment and make informed decisions by also taking into consideration the associated risks.
Finally, it should be noted that, in accordance with the current legislative framework, AIFs in Cyprus are not required to disclose the identity of their investors.
The tax treatment of income to be earned by the investors will primarily depend upon their tax residency:
In relation to gains from disposal of units in the AIF, Cyprus and non-Cyprus tax resident investors could be subject to Capital Gains Tax at the rate of 20% in case the AIF directly or indirectly owns immovable property situated in Cyprus (as computed by reference to the increase in value of the underlying properties which are situated in Cyprus).
Cyprus signed a FATCA Intergovernmental Agreement (IGA) with the US government for FATCA implementation in December 2014. Cyprus is also one of the signatories to the Multilateral Competent Authority Agreement concluded in October 2014 for CRS implementation. Furthermore, the Cyprus government has introduced local legislation and guidance for the implementation of FATCA and CRS requirements.
As such, financial institutions in Cyprus are required to enhance their due diligence procedures and collect additional documentation from their account holders, including CRS and/or FATCA self-certification forms in order to identify whether an account is “Reportable”. Cyprus financial institutions are required to report certain specified account information (eg, account balance, dividend income, interest income, etc) with respect to “Reportable Accounts” to the Cyprus Tax Authorities which in turn will report such information to the tax administration of the relevant jurisdictions.
Cyprus has made significant strides in the development of the fund industry leading to impressive growth in recent years. The authorities’ aim, in co-ordination with the private sector, has been to create new and innovative structures for investors on a large scale which included investment opportunities in sectors such as, shipping, real estate, renewable energy, start-ups, fintech and oil and gas.
Cyprus’ regulatory and legal framework is classed as one of the most flexible in the EU, while maintaining high levels of investor protection and Cyprus' legal system, which is modelled on the English legal system, is attractive to many investors and managers. Furthermore, as an EU member state, Cyprus has ensured compliance with all EU Directives and Regulations relating to the provision of financial services. As such, Cyprus provides the financial infrastructure for fund managers to establish alternative investment funds (AIFs) and/or register with the regulator (the Cyprus Securities and Exchange Commission) (CySEC) in order to enjoy the full spectrum of their “passporting rights”.
Cyprus also offers one of the most attractive tax regimes in Europe. Foreign investors and Cyprus’ non-domiciled individuals enjoy no withholding tax on dividend distributions, interest and royalties. The AIFs having the form of an investment company, can take advantage of the wide double tax treaties in Cyprus and the attractive 12.5% corporation tax, constituting one of the lowest corporation tax percentages in Europe. Additionally, there is no stamp duty imposed on the issue of units of AIFs while fund management and administration services provided to investment funds are not subject to VAT.
Finally, Cyprus offers a competitive tax regime for fund managers, a taxation of carried interest or performance fee for AIF and UCITS fund managers. This essentially means that key personnel of investment fund management companies or internally managed AIFs may opt for a new mode of personal taxation.
Developments and Trends
Over recent years, Cyprus has been described as one of the fastest growing fund industries and economies in the EU, showing consistent growth since 2008. According to the European Fund and Asset Management Association (EFAMA) where the Cyprus Investment Funds Association (CIFA) is a full member, in 2019, Cyprus experienced the highest Net Asset Value (NAV) growth rate at a pan-European level in all categories, including management companies AIFs and UCITS.
Pursuant to the press release published by CySEC in September 2020, which provides key findings about the Collective Investment Schemes Sector for the second quarter of 2020, CySEC had under its supervision in total 238 Management Companies, AIFs and UCITS. The total number of Management Companies includes 34 AIFMs, 69 Sub-threshold AIFMs and four UCITS Management Companies. Additionally, based on the same press release, the Total Assets Under Management (AUM) reached EUR7.97 billion, recording a 5.3% increase compared to the 1st quarter of 2020.
The press release further indicates that AIFs and UCITS have invested in the sectors of shipping, energy, fintech and sustainability, ie, the areas that are pinpointed for growth over the coming years.
A further boost of confidence in the Cyprus fund sector was the 2018 announcement that Cyprus funds will be eligible to list on Clearstream’s Vestima fund processing platform - following the initial listing of more than 40 Cyprus-domiciled funds on the Thomson Reuters platform (now Refinitiv), which provides visibility to more than 20,000 global asset managers.
Investment Trends in Various Sectors of the Cyprus Economy
Recent investment trends in Cyprus's economy includes:
Moreover, a recent trend which has been identified is the increased demand for relocation of funds established in non-EU jurisdictions to Cyprus. Cyprus, as one of the emerging EU regulated funds jurisdictions, has witnessed an increasing interest from non-EU funds as a consequence of the recent de-offshorisation measures in other parts of the world, with the aim of such funds to facilitate their access and investment in the wide European market. Based on its robust legislative framework, relatively low-cost operating environment, efficient tax regime, EU passporting capability, proximity to the Middle East and Africa and longstanding preferential access to Eastern and Central Europe, Cyprus is an ideal domicile for these funds and their external managers to establish a permanent place to expand their business. Cyprus has also witnessed an interest from Asian fund managers to establish funds or fund management companies in Cyprus as their gateway to the EU, as well as a growing interest from UK fund managers who wish to retain their access in the EU market post-Brexit.
It is also worth noting that a significant trend surrounds Environmental, Social and Governance (ESG) investing, following the adoption by the European Parliament of the Taxonomy Regulation.
The Cyprus regulatory authorities are constantly modernising the regulatory environment pursuant to the applicable EU Directives and Regulations. Currently, the following are considered/have been introduced:
Additionally, it is expected that the evolvement of local banks in relation to services which will accommodate the demands of the growing industry (ie, depositories and custodians), particularly via the extension of association of local banks with further renowned global custodians and international prime brokers, will particularly assist the needs of asset managers.
Moreover, the Cyprus government is continuously entering into new double tax treaties and renegotiating existing ones, and it aims to do so with the UK (post-Brexit) in order to develop opportunities on a global scale.
New and Upcoming Regulations
Cyprus follows global trends and developments in the fund industry and is consistently amending or introducing legislation to align with international best standards and practices.
Small AIFM Law
Following the ratification of the Alternative Investment Fund Managers Law 56(I)/2013, transposing the Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD) into national legislation, Cyprus has now enacted the Sub-threshold Alternative Investment Fund Manager Law of 2020 L.81(I)/2020 (the “Small AIFM Law”) which introduces a new regime governing a new type of sub-threshold fund managers, called a “Small AIFM” or “Mini Manager”. In connection to this, CySEC has issued two directives to give guidance in relation to the procedures for authorisation and relevant fees for the establishment of a Small AIFM.
An authorised Small AIFM is licensed by CySEC to manage portfolios of various types of AIFs with the following characteristics:
The introduction of the Small AIFM Law is a very important development for Cyprus fund industry as it increases the options available for fund managers/promoters to establish an optimum structure in Cyprus. The Small AIFM enhances and provides additional flexibility and competitiveness to the already established straightforward and business-oriented Cypriot regulatory framework. The Small AIFM is more flexible than the existing type of sub-threshold AIFM, that is, a Special Purpose Company, since it has no restrictions as to the number and the type of AIFs it can manage, becoming in this way a preferable solution of a fund manager operating under the AIFMD Thresholds.
The Small AIFM regime is suitable for newcomers in the fund management industry or smaller scale fund managers, who intend to set up their business with lower setup and maintenance costs and with less strict compliance, regulatory and organisational requirements compared to the ones applicable to AIFMs, making Cyprus an ideal EU centre for small to medium sized managers. The introduction of the Small AIFM is expected to give a further boost to the already increasing growth rate of AuM managed from Cyprus and increase the number of fund managers in Cyprus.
Fund Administration Law
A new legislation is also being drafted that will provide for the effective supervision of all local fund administrators. The enactment of a fund administration law is a significant development which will surely add comfort to fund managers and investors alike as it will seek to regulate independent fund administrators at a national level.
Amendments to the Partnerships Law
Likewise, there will be an amendment to the Partnership Law in Cyprus in order to permit the establishment of investment funds in the form of limited liability partnerships with separate legal personality. This amendment incorporates the best elements of Anglo-Saxon LP, a vehicle that can be used to support private equity investments. Such structures are popular in other EU jurisdictions and it is expected that these will attract significant interest from investors and managers.
Cyprus is further focusing on the implementation of AIFMD 2. In summary, the main provisions which shall be implemented pursuant to AIFMD 2 are in relation to the “pre-marketing” aspect of AIF to investors and the conditions which qualify as “pre-marketing information”.
Without a doubt, Cyprus has seen substantial economic growth over the last years which is mostly owed to the development of new trends, innovation and opportunities which the Cyprus government has targeted in order to attract managers and investors alike. The constant modernisation of the legal and regulatory environment has led to Cyprus becoming a jurisdiction of choice for the alternative investment funds industry and it has created an attractive and competitive environment in the EU fund industry as a whole. Cyprus has thus gained a reputation of offering the complete package of investment fund services ranging from favourable tax regimes, licensing to ongoing fund administration. Cyprus is consequently considered as a trusted destination for setting up credible investment funds with a clear and transparent investor protection regime while ensuring the appropriate financial infrastructure for fund managers and funds alike.