Alternative Investment Funds (AIF) in Cyprus
Cyprus in the last few years is establishing itself as one of the top investment fund centers in Europe.
The Fund management industry is fast becoming one of the most promising sectors of Cyprus economy. The volume of funds and assets under management have shown huge increase, as assets under management have more than tripled from €2.1 billion in 2012 to €6.8 billion in June 2019. Assets under management are expected to reach €20 billion in the next five years.
What is an Alternative Investment Fund or AIF in short?
Alternative Investment fund is joint investment agreement raising capital from a number of investors with a view to investing it in line with an investment policy for the benefit of the involved investors.
Legal framework.
Alternative Investment Funds legislation has aligned Cyprus legal and regulatory framework with the European directives on asset management enhancing transparency and investor protection.
Cyprus has 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. In addition, new rules shape the regulation on the role and responsibilities of their directors, custodians but also external managers.
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.
An AIF can take the following legal forms and may be established with limited or unlimited duration:
- Fixed Capital Investment Company – FCIC
- Variable Capital Investment Company – VCIC
- Limited Partnership – LP
- Common Fund – CF
A Variable Capital Investment Company (VCIC) and Fixed Capital Investment Company (FCIC) may be set-up as self-managed, or it may be externally managed. A Limited Partnership (LP) and Common Fund (CF) must always appoint an external manager.
Types of Investors.
Professional.
A professional investor is the person who has the experience and expertise to make his/her own investment decisions and assess the risks involved. The investor must also comply with the criteria prescribed in the Markets in Financial Instruments Directive.
Well-informed.
When a person is not considered a professional investor confirming in writing that he is a qualified investor aware of the risks involved with an investment in the relevant AIF. Also, a Well-informed investor has to make an investment of a minimum €125,000 or has been evaluated by a licensed bank, or an authorised investment firm or an authorised Management Company that he has the experience and knowledge in evaluating an investment opportunity.
Retail.
Any investor who not considered either professional or well-informed investor.
Types of AIF’s. There are two different types of AIF’s.
AIF with unlimited number of persons.
- May be marketed to “retail”, or “well-informed” and/or “professional investors”
- Freely transferable investor shares
- Minimum capital requirements of €125,000 or €300,000 if a self-managed fund
- Must be appointed to a global custodian
- Can be listed on stock exchange, and AIFs marketed to retail investors can be traded
- Depending on the investor type and the overall investment policy may fall under certain investment restrictions
AIF 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
- May not be required to appoint a licensed manager or a custodian in some cases
- Assets under management do not exceed the AIFMD thresholds of €100 million (including leverage) or €500 million (5-year lock-up period without leverage)
Tax advantages of AIF in Cyprus.
- Notional Interest Deduction (NID) for new equity may reduce taxable base for interest received by up to 80% (for company-type funds) reducing the effective tax on interest to 2.5%Tax resident funds are eligible to all benefits under a double tax treaty or the EU Directives
- Services provided by the Investment Manager of 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
- Extensive network of Double Tax Treaties in place with more than 60 countries
- Dividends received, capital gains arising from sale of property abroad, capital gains from sale of shares of foreign property companies are excluded from tax
Other advantages of AIF in Cyprus.
- Easy to set-up, cost-efficient management and operations
- A framework fully in line with EU directives
- Full transparency through annual audited reports to CySEC and investors (That includes financial statements, borrowing information, acquiring portfolio information and Net Asset Value)
- Supervised by a competent and accessible regulatory authority
- No restrictions imposed by the Regulator on type of investments
- Can be self-managed – subject to the approval of the Regulator
- Can be set-up as umbrella funds with multiple compartments
- Can be listed on Cyprus Stock Exchange and other recognised EU stock exchanges ( in case the number of investors is not limited)