Types of Investment Funds
The Cyprus legislation allows for the set-up of both Alternative Investment Funds (“AIFs”) and Undertakings for Collective Investment in Transferable Securities (“UCITS”).
Alternative Investment Funds (“AIFs”)
An AIF is 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 law in July 2014 has aligned the Cyprus legal and regulatory framework with the latest EU directives on asset management, 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 and regulation on the role and responsibilities of their directors, custodians and external managers. The new AIF law replaces the International Collective Investment Schemes (ICIS) Law of 1999 and has brought all investment products, asset managers and investment firms under the regulation and supervision of the Cyprus Securities and Exchange Commission (CySEC). 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 AIFMD passport.
AIF Legal Forms
An AIF can take the following legal forms and may be established with limited or unlimited duration:
- Fixed Capital Company
- Variable Capital Company
- Limited Partnership
- Common Fund
Types of AIFs
1. Alternative Investment Fund with Unlimited Number of Persons
- May be marketed to “retail”, or “well-informed” and/or “professional investors”
- Freely transferable investor shares
- Must appoint a global custodian
- Can be listed on a recognised stock exchange, and AIFs marketed to retail investors can be traded
- Subject to minimum capital requirements of €125,000 or €300,000 if a self-managed fund
- May be subject to certain investment restrictions depending on the investor type and the overall investment policy
- Alternative Investment Fund with Limited Number of Persons:
- May be marketed only to “well-informed” and/or “professional investors”
- Cannot exceed total number of 75 investors / unit holders
- Freely transferable investor shares, with the condition that their transfer does not result in the AIF having more than 75 investors
- In certain cases may not be required to appoint a licensed manager or a custodian
- Assets under management do not exceed the AIFMD thresholds of €100 million (including leverage) or €500 million (5-year lock-up period without leverage)
Professional Investor: An investor considered a professional client, who has the experience and expertise to make his/her own investment decisions and assess the risks involved. To be considered a professional client, the investor must comply with the criteria prescribed in the Markets in Financial Instruments Directive (MiFID) 2004/39/EC.
Well-informed Investor: Not considered a professional investor and (i) must confirm in writing that he/she is a qualified investor aware of the risks involved with an investment in the relevant AIF and (ii) makes an investment of a minimum €125,000 or has been evaluated by a licensed bank/credit institution, an authorised investment firm or an authorised Management Company that he/she has the expertise, experience and knowledge in evaluating the suitability of an investment opportunity.
Retail Investor: An investor who does not meet the requirements listed above.
Key Benefits of the Cyprus AIF
- Cost-efficient and simple to set-up, manage and operate
- Modern regulatory framework fully in line with relevant EU directives and no burdensome reporting requirements
- Significant tax incentives offered by the country’s advantageous tax framework (see below)
- Full transparency through annual audited and half yearly reports to CySEC and investors, which include financial statements, borrowing information, portfolio information and Net Asset Value
- Supervised by a competent and accessible regulatory authority
- Reduced reporting requirements
- No restrictions imposed by the Regulator on type of investments
- May be self-managed (subject to the approval of the Regulator)
- May be set-up as umbrella funds with multiple compartments
- May be listed on Cyprus Stock Exchange and other recognised EU stock exchanges, provided number of investors is not limited
- Most income of a Cyprus tax resident Fund is tax free (e.g. most dividend income, capital gains)
- Interest income is taxable, but effective tax can be significantly reduced (taking into account the NID on new equity)
- Tax resident funds are eligible to all benefits under a double tax treaty or the EU Directives
- Services provided by the Investment Manager of the fund are not subject to VAT
- No withholding tax on any type of payments to non-residents
- No subscription tax on net assets of a fund
- No capital gains tax on disposal of shares/units by the holders
- No tax on capital gains from the sale of immovable property located outside Cyprus
- Extensive network of Double Tax Treaties in place with more than 60 countries
Undertakings for Collective Investment in Transferable Securities (UCITS)
Any organisation whose sole aim is the collective investment in transferable securities or in other liquid financial assets of capital raised from the public and whose operation is based on the principle risk-spreading and whose units are, at the request of holders, repurchased or redeemed, directly or indirectly out of the UCITS’ assets.
The availability of funds in Cyprus has grown steadily since the country’s accession to the European Union (EU) in May 2004, which resulted in the harmonisation with the acquis communitaire and EU Directives regulating funds. The transposition of the UCITS IV Directive (2009/65/EC) in July 2012, through the enactment of the Open-Ended Undertakings for Collective Investment Law of 2012 (UCI Law), was another key milestone for the Cypriot funds industry and interest in Cyprus has been on an upward trajectory ever since. UCITS are internationally regarded as one of the most effective asset management tools available, thanks to their low investment risk and high levels of investor protection.
The Cyprus Securities and Exchange Commission (CySEC) regulates and supervises Cypriot UCITS and Management Companies, and also issues permits for distributing Agents for Foreign UCITS. The Management Company and the Custodian must act – at all times – independently of each other. The business of the Management Company must also be managed by at least two persons, who fulfil the relevant legal requirements. UCITS must also appoint a Custodian responsible for keeping the assets of the fund. CySEC requires that the Custodian must have the necessary mechanisms to protect the property of the fund under its custody and forbid its use for own account or for the benefit of third parties. The Custodian can be either a Cypriot bank or a foreign bank with an active branch in Cyprus.
Key Benefits of Cyprus UCITS
- Full EU passporting rights, Cyprus UCITS can be marketed in all EU member states
- Cost-efficient to set-up and operate
- Low investment risk and internationally regarded as one of the most efficient asset management tools
- Continuous professional management by a team of experienced and reputable financial experts, with the know-how to determine investment opportunities both in Cyprus and in international markets
- Robust legislative framework that protects and promotes investor interests
- Possibility to set up umbrella funds, allowing different sub-funds and share classes
- Investments are fully transparent and easy to monitor through daily publication of Net Asset Value (NAV)
- Upon request, investors are entitled to repurchase or redeem their units from the assets of the UCITS
- Supervised by a competent and accessible regulatory authority
Eligible asset categories for a UCITS:
- Transferable Securities (TSs)
- Money Market Instruments (MMIs)
- Open-ended collective investment schemes
- Deposits with eligible credit institutions
- Financial derivative instruments
Restrictions on UCITS
A UCITS must operate on a principle of risk spreading and as a consequence a UCITS must be properly diversified. There are many individual limits around the areas of asset eligibility and concentration.
UCITS Legal Forms
- Common Fund
- Variable Capital Company Share
- Third-party managed €200,000
- Self-managed €300,000
The Master-Feeder structure allows the creation of a structure investing its portfolio into another UCITS, even if located in another EU country. Streamlining the efficiency of the fragmented European industry of investment funds and the search for economies of scale are the driving rationale for the introduction of this investment rule. In a MasterFeeder structure investor contributions go into a Feeder fund, which invests at least 85% of its assets in the Master Fund and the remaining 15% may be invested in other assets subject to the investment objectives of the Feeder Fund.
Umbrella Funds are established with several investment compartments, commonly called sub-funds, with each one constituting a separate pool of assets. The UCITS fund constitutes a single legal entity and each sub-fund has its own separate Net Asset Value (NAV) calculation and issues units corresponding to its assets. Rights of the unitholders of a specific sub-fund only arise from the assets of that compartment and each compartment is liable for the obligations arising from its constitution, operation or dissolution. A compartment of an umbrella fund may invest in another compartment (target) of the same umbrella fund subject to certain restrictions, such as diversification strategies, exposure and no circle investment. Each sub-fund may be dissolved or liquidated separately without affecting the operations of the others and are segregated, thus not subject to ‘cross -class liability’.
All foreign UCITS, which qualify under the relevant EU directive, based in another EU member state seeking to market their shares in Cyprus must apply to the Cyprus Securities and Exchange Commission (CySEC) for registration.