FUNDS IN CYPRUS
Cyprus over the last few years has been making significant progress in respect of the sector of investment funds. Despite the massive impact of the financial crisis that affected the country along the Eurozone, the fund business in Cyprus is continuingly growing mostly because of the excellent infrastructure, the highly qualified work force and the sufficient and practical regulatory environment that comforts international standards.
Fund promoters are finding essential the existence of some parameters in order to value a jurisdiction. Firstly, the laws and regulations binding the fund industry need to be in accordance with international standards in order to make potential investors willing to invest. Secondly, the existence of highly qualified workforce in terms of legal, administration, secretarial and accounting knowledge and practice in order to support the setup and the continuous operation of the funds. Thirdly, the tax environment is essential to be beneficial for both the promoters and the investors of the fund.
Cyprus has adopted the Undertakings for Collective Investment in Transferable Securities (UCITS) IV Directive, by which can now offer European passport to the fund managers. In addition, it has implemented the Alternative Investment Fund Managers Directive (AIFMD). Thus, the fund infrastructure is considered to be more consistent and efficient. Furthermore, the recent enactment of the Alternative Investment Funds Law of 2014 aligns the Cypriot Investment Funds legal framework with the recent developments in the EU. In respect of taxation, Cyprus has adopted and recently updated a series of taxation treaties with other jurisdictions.
It can be argued that, the existing high-quality workforce along with the particularly low costs and the compatibility with the best European and international practices constitute Cyprus as a desirable fund jurisdiction.
Available funds in Cyprus:
In Cyprus there are two types of Investment Funds regulated by CySEC, UCITS and the newly introduced AIF’s. The International Collective Investment Schemes are regulated by Central Bank of Cyprus.
The Undertakings for Collective Investment in Transferable Securities (UCITS) are investment funds that are established in the European Union and must comply with the EU Directive, currently IV. The Directive aims to allow collective investment schemes to operate all over the European Union, provided that is authorised by one member state. Many EU members’ states have imposed additional regulatory requirements in order to protect the local asset managers. The most important UCITS IV restrictions are:
- portfolio diversification
- no more than 10% of a UCITS net assets may be invested in transferable securities
- index replicators can take exposures up to 20% of net assets to single issuers
- All the net assets of a UCITS can be invested in other collective investment schemes, provided that no more than 20% invested in any one CIS
- master-feeder structures are permitted
- up to 20% of the net assets of a UCITS can be invested in cash deposits with any one credit institution
- the maximum aggregate exposure to securities/instruments not listed or traded to a recognized market is 10% of the UCITS net asset value
- borrowings are limited to 10% of net assets (for temporary purposes only)
The Cyprus Stock Exchange (CSE) listed funds are also established in the form of open-ended UCITS. There can be structured as contractual funds, variable capital companies, International Unit Trusts or International Variable Capital Companies.
International Collective Investment Schemes (ICIS) are often private funds and non-UCITS funds that can be established as a Variable Capital Investment Company (VCIC) or open-ended fund, a Fixed Capital Investment Company (FCIC) or closed fund, a unit trust or a Limited Partnership. ICIS sole scope is the collective investment of the funds of its investors.
For a Cyprus based ICIS scheme, the management of the fund must be made a manager incorporated in Cyprus as a financial services firm or by an overseas jurisdiction firm with the same qualification (in such case the administration of the fund must take place in Cyprus). Unless an exemption is granted by the Central Bank of Cyprus, the custodian of the fund must be based in Cyprus.
The main advantages of an ICIS are:
- the legal formation of ICIS as ‘Company’ is taking advantage of the double taxation treaties of Cyprus with other jurisdictions
- there is no restrictions by the Regulator as to the type of investments
- low costs in respect of setting-up the scheme and its administration
- the management services provided are not subject to VAT
- no heavy and time-consuming reporting requirements to the Regulator
It has to be noted that the introduction of the Alternative Investment Funds Law of 2014 has repealed and replaced the previous International Collective Investment Schemes Law of 1999 and there is the requirement that existing ICIS have to be convert to the appropriate AIF category.
The Alternative Investment Funds (AIF’s) are non-UCITS funds and despite the fact that are not complement with EU funds are widely recognized on international basis subject to compliance with the relevant national securities law in each different case. AIF’s can be sold on a private placement to the investors.
The newly introduced enactment allows three types of AIFs to be registered in Cyprus:
- AIF’s available to the public in the form of a company, a limited partnership or a mutual fund.
- AIF’s available to experienced investors in the form of a company, a limited partnership or a mutual fund.
- AIF-LNI with limited number of investors in the form of a company or a limited partnership.
Some of the advantages enjoyed by an AIF are:
- Tax exceptions on profits from disposal of shares and other financial instruments and foreign dividends
- No withholding tax for interest and dividend payments made to non-residents and on redemption of units
- Advantage of the double taxation treaties of Cyprus with other jurisdictions
- Tax Residency Certificate can be obtained
- Dividends distributed or deemed to be distributed by an AIF to Cyprus tax residents are subject to 3% Special Defense Contribution (SDC), compared to 17% that applies to dividends from normal limited liability companies to Cyprus tax residents.
- No formal requirement to appoint local Directors.
- Under certain conditions no requirements to appoint an external investment manager and a custodian.
The regulatory regime:
The regulation of investment funds in Cyprus falls under the Central Bank and CySEC along with the EU directives and regulations which apply to funds.
Alternative Investment Fund Managers Directive (AIFMD)
Cyprus has incorporated into domestic law on the 5th of July 2013 the EU Alternative Investment Fund Managers Directive by introducing the AIFM Law 56(I)/2013. The AIFM Law regulates every Cyprus based legal person that manages any alternative investment fund in Cyprus, the EU and non-EU. Importantly by 2015 the law will also bind to non-EU AIFMs that have designated Cyprus as their ‘member state of reference’ for their managerial and/or marketing activities.
CySec under the AIFMD Law must be provided with information about the identities of the managers and of the funds that they manage. CySec must also be informed about the investment strategies pursued, the main instruments of trading, the main exposures and the most important concentrations they hold.
The AIFM Law is containing provisions relevant to the investment funds in Cyprus. Importantly, states that:
- The eligible legal form for setting-up a Cypriot AIFM is a limited liability company by shares
- The minimum initial capital for a Cypriot AIFM is set at €125,000, plus professional liability insurance or additional own funds. The authorisation period is three months in principle
- The depositary of a Cypriot alternative investment fund can be localised in another member state up to 2017, if the depositary is a credit institution
- Special rules apply for Cyprus management companies of undertakings for collective investment in transferable securities (UCITS) applying to be additionally authorised as AIFMs. When their assets under management exceed €250 million, they are not required to provide the initial minimum capital of €125,000 and the additional own funds required
When a Cypriot AIMF obtains the required by law thresholds detailed under the law, must submit an application to CySEC in order to be authorized as an AIFM within 30 calendar days. CySEC has the authority to restrict the license in accordance to specific investment strategies.
Due to the introduction of the AIFMD, the fund management procedures are placed in a more demanding environment. As a result, investment and fund managers, administrators and lawyers involved in the industry are spending significantly more time in relation to task such as risk management, compliance, regulatory oversight and fund administration procedures.
Regulation of UCITS
UCITS as most of retail funds have a lot of restrictions and constraints. They can be sold to retail investors who may not be professional and with limited capital to invest. For the most retail funds it is necessary for the fund administrator to calculate their Net Asset Value daily and they accept subscriptions and redemptions on a daily basis. In addition, the Regulatory reporting in a retail fund is a lot higher than non-retail funds. In order for a firm to achieve these requirements must have qualified and experienced team.
One of the features of these funds is the restrictions imposed. The following are examples of some of the areas where UCITS IV imposes restrictions:
- Eligible Assets
- Techniques and instruments relating to eligible assets (strategies)
- Risk management process relating to financial derivatives instruments (FDI) (securities/derivatives).
The impact of the financial crisis of 2008 is still affecting the funds. The introduction of new regulations has given a greater degree of security over the investors and the market in general. Of course, for the fund workforce is crucial to be aware and follow the new regulations and amendments, which are affecting the provision of legal and fund administration services. What is more, fund management along with fund administration in Cyprus is continuingly improving in terms of professionalism in order to attract investments.