Alternative Investment Funds in Cyprus

Alternative Investment Funds (“AIF”) are entities 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.

Types of AIFs

The AIF Law of 2018 provides for three types of AIFs, these being AIFs with limited number of persons (AIFLNP), AIFs with unlimited number of persons (AIFUNP) and Registered AIFs (RAIFs) and they vary according to the following:

 

	AIFLNP	AIFUNP	RAIFs
Legal forms	•  Fixed Capital Investment Company (FCIC) •  Variable Capital Investment Company (VCIC) •  Limited Partnership (with or without separate legal personality) LP	•  Fixed Capital Investment Company (FCIC) •  Variable Capital Investment Company (VCIC) •  Limited Partnership (with or without separate legal personality) LP •  Common Fund (CF)	•  Fixed Capital Investment Company (FCIC) •  Variable Capital Investment Company (VCIC) •  Limited Partnership (with or without separate legal personality) LP •  Common Fund (CF)
Marketed to	•   Professional and Well-informed investors	•   Professional and Well-informed investors •   Retail investors	•   Professional and Well-informed investors
Number of investors	• Up to 50	• Unlimited	• Unlimited
Minimum share capital	•          € 50.000 if self-managed •          N/A if externally managed	•          € 1250.000 if self-managed •          € 300.000 if self-managed AIF/AIFM •          N/A if externally managed	• N/A
Minimum initial investment (year 1)	•          € 250.000	•          € 500.000	•          € 500.000
Fund Manager	•          Self-managed if company or LP with separate legal personality or •          Self-manager to be appointed	•          Self-managed if company or LP with separate legal personality or •          Self-manager to be appointed	•          Always
Assets managed	•          Up to 100 ml with leverage or •          500 ml with no leverage and no redemption rights for 50 years	•          No restrictions if managed by AIFM •          Up to 100 ml with leverage or •          500 ml with no leverage and no redemption rights for 50 years if managed by AIFM	•          No restrictions if managed by AIFM •          Up to 100 ml with leverage or •          500 ml with no leverage and no redemption rights for 50 years if not managed by AIFM
Depositary	•          Cyprus, EU or third country •          N/A if: •          total assets < 5 ml •          up to 5 investors •          up to 10% of total assets subject to custody and investors up to 25 and minimum investment per investor is at least €500.000	•          Local if managed by AIFM •          Cyprus, EU or third country if not managed by AIFM	•          Local if managed by AIFM •          Cyprus, EU or third country if not managed by AIFM

 

The difference between professional, well-informed and retail investors

Professional investors, as defined within the Second Appendix of the Law for the Provision of Investment Services, the Exercise of Investment Activities and the Operation of Regulated Markets Law, are expected to possess the experience, knowledge and expertise to make their own independent investment decisions and to assess the incurring risks.

On the contrary, well-informed investors, as defined in the AIF Law, do not qualify as professional investors but will confirm in writing they have sufficient knowledge and experience in business and finance and invest a minimum of €125.000 in the AIF or are successfully assessed as well-informed investors by a bank, an investment firm, an AIFM or a UCITS management company in Cyprus.

Retail investors are any other investors which do not fall under the two categories above.

Why set up an AIF 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:

1. Self-manage their AIF, subject to the Regulator’s approval;
2. Umbrella structures with unlimited investment compartments with separate investment strategies and asset pools;
3. 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;
4. 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:

1. 5% corporation tax on annual net profits;
2. No tax on investment fund management and administration;
3. No tax on income repatriation;
4. No withholding tax on payments made from to non-Cyprus residents
5. Exemption from tax on profit from trading in securities;
6. Exemption from tax in income from dividend distribution;
7. Exemption from tax on capital gains from the sale of immovable property outside Cyprus;
8. No stamp duty on subscription, redemption, conversion or transfer of units;
9. Double Tax Treaty network with more than 60 countries worldwide.

 

Formation process of an AIF in Cyprus.

The set up and maintenance of an AIF in Cyprus carries low costs and involves a simple and timesaving application process.

An AIF in Cyprus falls under the authorisation of the Cyprus Securities and Exchange Commission (CySEC). As part of its authorisation it will need to file information on its business plan, organisational structure and internal operations as well as the persons conducting its business and its shareholders and submit these together with regulatory documents and to CySEC. The application to CySEC requires the payment of a fee. CySEC will inform the applicant within three months from the submission of the application, a time period which can be extended if necessary.

On the contrary, a RAIF in Cyprus is not subject to the licence or regulation of the CySEC.  The sole requirement before the commencement of its operations is for the RAIF to notify the CySEC within one month from its establishment so that the latter includes the RAIf in its special Register. Within one month from submission of the relevant notification package, the CySEC will confirm the registration of the RAIF and allow the raising of capital.

The information contained in this guide should not be relied on as a substitute of proper professional advice. Legal advice should be taken prior to taking any actions.