Alternative Investment Funds in Cyprus - 25th Oct 2017

By: Costas Constantinou

Alternative Investment Funds (AIFs): A collective investment undertaking raising external capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and that has not been authorised as an Undertaking for Collective Investments in Transferable Securities (UCITS).

The enactment of the Alternative Investment Funds (AIF) law in July 2014 aligned the Cyprus legal and regulatory framework with the latest EU directives on asset management, with the aim to enhance transparency and investor protection. Following on-going efforts to modernise its fund framework, Cyprus introduced a new law offering more investment structuring possibilities and upgraded rules for the authorisation, on-going operations, transparency requirements and supervision of Cyprus AIFs, as well as the regulation on the role and responsibilities of their directors, depositaries and external managers.

The AIF law replaced the International Collective Investment Schemes (ICIS) Law of 1999 and brought all investment products, asset managers and investment firms under the regulation and supervision of the Cyprus Securities and Exchange Commission (CySEC). These developments are a welcome evolution, offering expanded structuring possibilities for fund promoters, which will undoubtedly boost Cyprus’ status as one of the fastest growing fund centres in Europe.

AIFs that are established under domestic Cyprus fund legislation can be sold on a private placement basis or marketed to professional investors across the EU under the Alternative Investment Fund Managers Directive (AIFMD) passport. Cyprus is determined to continue the development of its fund product to ensure it meets and exceeds industry needs, with a further upgrade to its framework expected to be implemented by the end of 2016. In order
to speed up the process of authorisation, the jurisdiction will be introducing the Registered AIF regime, whereby the fund does not require authorisation from CySEC or subsequent monitoring, while being stamped as an ‘AIF’ by virtue of the law. This new type of fund needs to fulfil the following conditions: the fund manager must qualify as a full-scope Cyprus or EU Alternative Investment Fund Manager (AIFM), and the fund must be targeted to professional investors and/or well-informed investors. Third country AIFMs will be able to submit a request for registration of an AIF, once the country where these have been established has granted passporting rights pursuant to the AIFMD. CySEC will rely on the regulated status of the AIFM, to ensure compliance and indirect supervision of applicable laws and appropriate standards by the fund. Another key bene t of this fund is the use of the EU marketing passport via its AIFM.

The Registered AIF may be organised in any legal form available under Cyprus Law (investment company, limited partnership and common fund), and can be open or closed-ended and be established with multiple compartments. It can follow any strategy and invest in any type of assets. However, the set-up of Loan Origination and Money Market Funds under the registered AIF regime will not be permitted. Other key operational features, such as the issue and redemption of units, are similar to the regulated AIF regime.

Furthermore, it has been decided to introduce a licensing requirement and supervision regime for the Cyprus sub- threshold AIFM (‘Mini Manager’). A sub- threshold AIFM could manage the following: AIFs with limited or unlimited number of persons, Registered AIFs taking the form of a Limited Partnership as well as non-Cypriot AIFs (subject to the discretion of competent authorities in the other jurisdiction). The list of key requirements which relate to the governance and other organisational requirements is currently being discussed with the regulator, but the aim is to provide a reasonable and proportionate sub-threshold AIFM. And finally, also the relevant framework to regulate the provision of Fund Administration services is soon to be put in place.

Tax benefits

Cyprus has an advantageous and fully EU and OECD-approved tax regime, with AIFs also enjoying significant tax benefits. An AIF is treated identically to any other Cypriot entity and can benefit from the 12.5% flat corporation tax on annual net profits earned worldwide. Furthermore, they benefit from the following features of the Cyprus tax regime:

Key Benefits of Cyprus AIF

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