Cyprus Funds

Soteris FlourentzosManaging Director, Soteris Flourentzos & Associates LLC

Introduction

The regulatory framework in Cyprus is all-encompassing but still attractive to investment funds for varied investor requirements. An investment fund may be set up in Cyprus either as an Alternative Investment Fund (“AIF”), or as an Undertaking for Collective Investment in Transferable Securities (“UCITS”). Cyprus administers all internationally recognized legal forms of both AIFs and UCITS funds, including Common Funds and Variable Capital Investment Companies

AIFs

AIFs may be set up and marketed to: a. Retail investors, or b. Professional or well-informed investors, in which case it can be established either as unlimited AIF with more stringent regulatory requirements or as limited AIF under a more flexible regime. The EU Alternative Investment Fund Managers Directive (AIFMD 2011/61/EU) offers EU-based managers of EU hedge funds, private equity funds, real estate funds and other non-UCITS schemes (referred to in aggregate as AIFs) the possibility to manage and market such funds throughout the EU via a standardized electronic regulator-to-regulator notification procedure, or passporting regime. As such, Cyprus is at the gateway to the EU to allow AIFs to capitalize on the investment opportunities in Europe since the AIFMD imposes a barrier to non-EU AIFs to enter.

UCITS

The Undertakings for the Collective Investment in Transferable Securities IV Directive (UCITS IV 2009/65/EC) seeks to balance the investment landscape for retail investors. As a rationalization of the industry dawns, managers will favor a more consolidated portfolio of funds to take advantage of fiscal benefits. Bringing asset management value to new investors through the globally recognized UCITS brand is a viable strategic option. Cyprus has become the most accessible bridge for managers to enter either the AIF or UCITS universe, depending on their strategy and needs.

Supervision

The legislative framework also permits both AIFMs and UCITS management companies to extend the scope of their investment services to perform MiFID portfolio management and investment advice. Overseeing these fund type is the Cyprus Securities and Exchange Commission (CySEC), being the national competent authority responsible for the supervision of the securities capital market. An authorized AIFM and/or UCITS management company can access developed capital markets via established AIFs and/or UCITS funds, supervised by CySEC. Such supervision ranges from the prudential regulation requirements, administrative and accounting procedures to internal control mechanisms, conflict of interest and risk management.

Tax Optimization

Tax efficiency, asset pooling, and cost management have historically been the reasons of establishing funds offshore. However, following the EU member states’ transposition of the AIFMD, it is now more cumbersome and onerous for offshore funds to raise capital from professional investors in the EU. Cyprus has in place a comprehensive regulatory framework, fully harmonized with European laws, and offers substantially lower operating costs than comparable EU fund centers. The favorable tax regime of Cyprus makes Cyprus an ideal place inside EU to base. Not only Cyprus has one of the lowest corporate income tax rates in the European Union (12.5%), but there are tax incentives to managers setting up and operating funds, including:

  • Tax exemption from: (i) trading securities, (ii) foreign dividends, and (iii) withholding tax on income repatriation.
  • Interest received by open and closed ended collective investment schemes is considered ‘active’ interest income and taxed only at 12.5% corporate tax.
  • There is no minimum participation on inbound dividends to qualify for tax exemption.
  • The liquidation of open- and close-end collective investment schemes is not taxable if the unit holders are not tax residents of Cyprus.
  • The extension of the Cyprus Double Tax Treaty (DTT) network has created a competitive tax and corporate environment compared with other jurisdictions. There are currently more than 50 DTTs in force with 38 others being negotiated. Funds can collect dividend and interest from Cypriot treaty partners at the withholding tax rates provided under the DTT. Under most treaties profit generated from the sale of securities is only subject to tax in Cyprus and hence tax exempt. In addition, Fund management services offered to Cyprus authorized investment funds are not subject to VAT, while ancillary management services are subject to a 19% VAT rate, which is of the lowest in EU.

Passport to Europe

The adoption by Cyprus of both the AIFM and UCITS IV Directives into national law allows managers to passport funds to the rest of the EU, offering a powerful alternative and an all-important link to European capital markets. A fully recognized trading venue by the UK’s HM Revenue and Customs and Russia’s Federal Financial Markets Service (FFMS), listing on the Cyprus Stock Exchange (CSE) also gives managers of collective investment funds, custodians and fund administration providers access to Europe with the full suite of cost-effective benefits Cyprus brings. The CSE offers a competitive pricing policy in the dissemination of Net Asset Value (NAV) and periodical financial reporting. Europe has long been a favorable investor destination for its robust regulatory regime, deep capital markets and competitive investment services. Balancing this attraction, with the low-costs and tax efficiency of offshore destinations has brought with it a strategic decision for the fund manager and fund promoter. The industry needs viable solutions to bring the advantages of both Europe and offshore domiciles together, and as it evolves, Cyprus is well-positioned to meet such diverse requirements.