Cyprus: why is it an attractive investment funds jurisdiction?
Written by Ioanna Michaelidou
The investment funds in Cyprus date back to 1999 when the law on the International Collective Investment Schemes (ICIS) was initially introduced and the industry has since grown significantly especially during the last decade. This is particularly evident by the fact that the total assets under management reached €11.6bn as at the 4th quarter of 20211 representing a 363% overall increase from 20162.
Cyprus has become a preferred destination for funds as it offers a solid legislative framework, one of the first in European Union to be fully harmonized with the EU funds regulations (UCITS Directive, AIFMD and MiFID II), and an attractive tax regime including a comprehensive tax treaty network with 67 countries, offering numerous benefits and incentives to foreign investors.
Furthermore, Cyprus showcases a high-quality financial services sector staffed with skilled and specialized personnel as the island is boasting to have one of the most highly educated workforces in Europe, equipped to provide services for a comparatively low cost.
All the above contribute in making Cyprus an extremely attractive and competitive destination for investment fund set-up, administration and/or the redomiciliation of existing funds registered in offshore jurisdictions.
The Cyprus Securities and Exchange Commission (CySEC) is the dedicated authority responsible for the supervision and regulation of several financial sector related entities including inter alia investment funds, fund management companies and investment firms operating in Cyprus. CySEC is also responsible for granting operating licenses to the entities under its supervision, and for this, an application must be submitted to CySEC along with all supporting documentation required by the applicable law.
Types of funds – Investment Schemes
There are two types of investment fund structures available under Cyprus law, namely the Undertakings for Collective Investments in Transferable Securities (UCITS)3 and Alternative Investment Funds (AIFs)4. The most popular fund structure nowadays is the AIFs as they allow for wider investment strategy opportunities (in both liquid and illiquid assets) while UCITs are available for investment in transferable securities and/or other liquid financial instruments, such as shares, debt and bonds.
A UCIT, a fund whose sole object is the collective investment in transferable securities and/or other liquid financial instruments, can be formed as:
a) A limited liability company with variable capital, or
b) A common fund (a contractual arrangement with no legal personality).
An AIF, a fund which raises capital from a number of investors for the purpose of investing it in accordance with the defined investment policy in both liquid and illiquid assets, can be formed as:
a) A limited liability company with fixed capital –self-managed or externally managed; or
b) A limited liability company with variable capital – the most commonly used legal form in Cyprus – may be self-managed or externally managed; or
c) A common fund (a contractual arrangement with no legal personality) – must be externally managed; or
d) A limited partnership – must be externally managed.
There are three types of AIFs under Cyprus law:
a) AIF with Limited Number of Persons – up to 50 investors (it is addressed to well informed and/or professional investors only).
b) AIF with Unlimited Number of Persons.
c) Registered AIF (RAIF) – this is one of the major trends currently in Cyprus due to its speed and cost-effective registration. This type of AIF is addressed only to well-informed and/or professional investors, and it does not require authorization from CySEC provided that it is externally managed by an Alternative Investment Fund Manager (AIFM) established in Cyprus or another EU Member State. Its establishment is notified to CySEC which in turns registers its details on a special register that it maintains.
An AIF can be marketed to retail, professional and well-informed investors. Each investor is categorized in one of the aforesaid three categories based on certain factors.
a) Professional Investors – an investor having the experience, knowledge and expertise to make its own investment decisions and assess related risks.
b) Well-Informed Investors – an investor who is not considered as professional investor but who confirms in writing that they are aware of the related risks of the proposed investment and either invests an amount of at least €125,000 or is assessed as a well-informed investor by a credit institution, an Investment Firm or a UCITS management company.
c) Retail Investors – an investor who does not qualify either as a professional or a well-informed investor.
Key Benefits of Cyprus Funds
✓ Simple, comparatively low-cost and fast set-up, management and operation.
✓ Solid and modernized regulatory framework fully harmonized with the EU Directives.
✓ Full transparency through audited reports to CySEC and investors.
✓ Reduced bureaucracy and simple reporting requirements by CySEC for funds.
✓ High-caliber and skilled financial and legal professionals.
✓ Availability of creation of an “umbrella” structure (several independent investment compartments).
✓ EU passporting rights.
✓ Possibility to be listed on Cyprus Stock Exchange and other recognized EU stock exchanges.
✓ Competitive tax incentives (such as no withholding taxes on dividends and/or on redemption of units for foreign or non-resident investors, 12,5% corporate tax being one of the lowest in the European Union).
✓ Double taxation treaties with more than 60 countries.
✓ Full VAT exemption to management services provided by a Fund Manager to a Cyprus AIF.
✓ Flexibility in terms of investment strategies.
For further information or advice on this matter, please contact Ioanna Michaelidou, Advocate in the Corporate Services Department (email: firstname.lastname@example.org, telephone number: +357 22 653155)
3 The Open-Ended Undertakings for Collective Investment (UCI) Law of 2012 (L.78(Ι)/2012), as amended by amending Law 88(I)/2015 and Law 52(I)/2016 and 134(I)/2019 and 134(I) 2021
4 The Alternative Investment Funds Law of 2018 L.124(I) of 2018, as amended