Alternative Investment Funds in Cyprus
An Alternative Investment Fund (“AIF”) is an entity that collects funds from investors for their investment and is regulated by the law. Typically, the entity is a company of fixed or variable capital with specified purposes, but may also be a limited partnership. Cyprus offers one of the most competitive alternative investment funds framework as it offers low registration and administration costs as well as an attractive taxation and legal regime.
Why set up a Fund in Cyprus
Cyprus has established itself as the distribution centre to Eurasia, India, China and further emerging markets due to its position on the crossroad for Europe, Asia and Africa, Cyprus. Within a fully-fledged anti-money laundering system in compliance with the EU Directives, Cyprus does not impose any restriction on the type of investments of an AIF and imposes only light reporting standards to the Regulator. The Cypriot legal framework accelerates the time of trading of an AIF as in the case of RAIFs which bear no licensing requirement before they emerge in business.
The AIF Law in Cyprus, also, offers to the investors the following options:
Self-manage their AIF, subject to the Regulator’s approval;
Umbrella structures with unlimited investment compartments with separate investment strategies and asset pools;
Common fund structures providing for the co-ownership of assets of the AIF by the investors in contract – highly used in other established fund jurisdictions as Luxemburg and Ireland;
Listing on recognised stock exchanges in Cyprus and Europe, apart from those with limited number of investors, and increased marketability.
Tax Benefits of an AIF in Cyprus
An AIF in Cyprus is part of an EU and OECD compliant tax system. When formed as a limited liability company and managed wholly in Cyprus, an AIF is treated like any other Cypriot entity and enjoys one of the most attractive taxation packages in Europe offering:
5% corporation tax on annual net profits;
No tax on investment fund management and administration;
No tax on income repatriation;
No withholding tax on payments made from to non-Cyprus residents
Exemption from tax on profit from trading in securities;
Exemption from tax in income from dividend distribution;
Exemption from tax on capital gains from the sale of immovable property outside Cyprus;
No stamp duty on subscription, redemption, conversion or transfer of units;
Double Tax Treaty network with more than 60 countries worldwide.
How to setup a Fund in Cyprus
The establishment of a Cyprus investment fund is required to obtain prior authorization from the Cyprus Securities and Exchange Commission (CySEC – the Regulator) being the competent supervisory authority and Regulator in respect of entities including, but not limited, to investment funds (Alternative Investment Funds, UCITS, EUVECA etc.), fund management companies (Alternative Investment Fund Managers, UCITS Management Companies etc.) and Investment Firms. An application form accompanied with the certain supplementary documents is required to be submitted for the consideration and approval of CySEC. Having all the aforesaid financial entities under a single integrated Regulator indicates Cyprus’ solid international presence as a reliable and safe investment hub, committing towards effective, consistent and fair supervision of all Cyprus investment entities for the benefit of investors.
BKMS Limited is a fully-fledged service provider able to accommodate all the business needs of an investment fund initiator as well as providing guidance for the registration, operation and “passporting” procedures as provided in the relevant legislation.
Special category for well-informed investors and professional investors (“WIPI”)
Available Funds in Cyprus
The most popular investment fund structures in Cyprus consist of Undertakings for Collective Investments in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs) with emphasis on the latter.
Pursuant to the applicable legislation, an AIF can be structured as either a common fund (a contractual agreement) or an investment company (Variable/Fixed capital) or a limited partnership (LP). On the other hand, a UCITS may be structured as either a common fund or a variable capital investment company.
Each of the above available fund structures can be established with various investment compartments which allow for the segregation of assets and liabilities between compartments. Each one of the Investment Compartments may differ in terms of investment policy, minimum subscription amount, redemption terms etc.
Special category for professional investors
and well-informed investors
WIPI investors may choose to set up an AIF with Limited Number of Persons (“AIFLNP”). An AIFLNP can take one of the following legal forms:
Fixed or Variable Capital Investment Company; or
An AIFLNP is exclusively addressed to WIPI and investors and, the number of its unitholders is restricted to a maximum number of fifty (50) natural persons.
The management of an AIFLNP in the legal form of an investment company (limited liability company) can be exercised internally by its board of directors or externally through the appointment of an eligible Fund Manager. An AIFLNP in the form of a Limited Partnership is always externally managed by its General Partner.
An AIFLNP may refrain from the obligation to appoint a Depositary if:
its total assets under management do not exceed the amount of €5 million, or currency equivalent; or
the number of its unitholders is restricted to a maximum number of five (5) natural persons; or
> the value of its assets that are subject to custody do not exceed ten per cent (10%) of its total assets; and
> the number of its unitholders is restricted to twenty five (25) natural persons; and
> each one of the unitholders contributes at a minimum investment of at least €500.000, or currency equivalent.
Advantages of setting up an AIFLNP:
No restrictions or diversification rules are imposed by the regulatory framework on the underlying type of the AIFLNP’s investments
Low set up and ongoing costs, as there is no legal requirement to appoint an a Depositary if certain conditions are met and other service providers
Subject to a lighter legislative regime compared to other fund structures, for example less robust organisational structure requirements
Credit Acquiring Companies
Since the establishment of a statutory framework regulating the purchase and sale of credit facilities in Cyprus, it is now possible for legal entities to engage in activities for acquiring credit facilities in Cyprus, subject to prior authorisation from the Central Bank of Cyprus. This development enabling the establishment of the so-called credit acquiring companies (“CAC”) has undoubtedly re-shaped the scene of the banking and financial sector in Cyprus with the penetration of private companies, other than credit institutions in the credit market and is expected to further expand the range of investment possibilities in Cyprus.
Specifically, the Sale of Credit Facilities and Related Matters Laws of 2015 and 2018 (L.169(I)/2015 and L.86(I)/2018) (the "Law") gives the power to the CBC to authorise, regulate and supervise the business activity of credit acquiring by an credit institution which is either incorporated in Cyprus and governed by Cypriot law, or operate, by means of a branch in the Republic of Cyprus. The Law defines credit facilities those that have been granted either to (a) natural persons where the total balance of the credit facilities, at the time of the transfer, does not exceed EUR 1m; or (b) micro and small enterprises, where the total balance of the credit facilities to that enterprise or group of connected enterprises, at the time of the transfer, does not exceed EUR 1m. Credit facilities not fulfilling the above-mentioned criteria fall beyond the application of the Law and as such, may be sold to any legal entity without prior authorization by the CBC.
The authorisation requirements set out in the Law revolves around, inter alia, the assessment of the proposed directors, key officers and shareholders, the formulation and maintenance of a business plan and a sound organisational structure ensuring the provision of services in accordance with the Law and evidence that the entity’s activities will not be detrimental to the financial stability in Cyprus. It is also worth highlighting the efficient timeframe of the application procedure, which, as prescribed in the Law, should not take longer than three months from the date of submission of the application.
While a minimum initial capital requirement is in place, currently set at EUR 100.000, the Cyprus parliament opted not to impose express limits on leverage and liquidity requirements at this stage, in order to offer wider opportunities for new companies entering the market for such services, with a view to facilitating private debt restructuring.
The implementation of the legal framework so far is regarded as a success story, in the sense that it enables credit institutions to dispose of non-performing loans at an appropriate price to regulated entities, enabling in this way for alternative market players, other than credit institutions, to enter the market of credit facilities acquisition and management, while at the same time the Law ensures that such activities are properly carried out to the benefit of the national financial system.