Alternative Investment Funds Cyprus

ALTERNATIVE INVESTMENTS FUNDS (AIF) IN CYPRUS OVERVIEW

1. LEGAL FRAMEWORK

In general, there are two types of Investment funds in Cyprus
a) AIF
b) UCITS

AIFs are governed by the Alternative Investment Funds Law of 2014, the ‘Law’. The regulator is CySec.

Definition of AIF: AIFs are collective investment undertakings which raise capital from a number of
investors with a view to investing it in accordance with a defined investment policy.
A defined investment policy is a policy about how the pooled capital in the undertaking is to be
managed to generate a pooled return.

The factors to consider are the following:

  • The policy is determined and fixed;
  • It is usually set out in an offering document (POM);
  • There is an obligation to follow the investment policy;
  • It specifies investment guidelines including any restrictions, i.e. on leverage or types of investment

Examples of AIFs are hedge funds, private equity funds, real estate funds, venture capital funds plus
others.

 

2. TYPES OF AIF

AIFs may be established with:

A) Unlimited number of persons/investors or
B) A limited number of persons/investors – AIFLM

A) AIF – With Unlimited Number of Investors – This may take the form of the following legal entities:
i) Variable Capital Investment Company (VCIC)
ii) Fixed Capital Investment Company FCIC)
iii) Limited Partnership (LP)
iv) Common Fund (CF)

The major characteristics of this type of fund are:

  • May be addressed to Retail as well as professional investors
  • Unlimited number of investors may participate
  • Can be open or closed-ended
  • Minimum Capital requirement €125k
  • Minimum Asset under Management requirement of €500k within a maximum period of 24 months
  • Investment restrictions apply for liquidity and risk diversification
  • An obligation to appoint Depository
  • In case of a VCIC or FCIC addressed to retail investors, then those AIFs can be listed in the Stock exchange and be traded.
  • Statutory obligation to report Annual Audited statements to CySec and investors
  • Also half yearly unaudited reporting to CySec and investors
  • As manager of this type of funds can act any:- Licensed AIFM
    – UCIT manager licensed in the EU
    – MiFID Investment firm
    – Cyprus based Mini manager
    – EU Subthreshold AIFM
    – In case of companies, the fund can be self-managed and be licensed both as AIF and AIFM

 

  B) AIF – With Limited Number of Investors (AIFLM) – This may take the form of the following legal entities:
i) Variable Capital Investment Company (VCIC)
ii) Fixed Capital Investment Company FCIC)
iii) Limited Partnership (LP)

The major characteristics of this type of fund are:

  • May be addressed only to professional investors
  • Investors’ number is limited to a maximum of 75
  • Can be open or closed-ended.
  • It is not subject to minimum capital requirements, but the regulator is currently considering an amount of €50k for self-managed funds.
  • Minimum asset under management within a maximum period of 24 months is €250k.
  • Investment restrictions do not apply
  • Can be exempt from Depository appointment if less than 5 investors join the fund or AUM does not exceed €5m
  • Annual audited reporting is an obligation to CySec and Investors
  • As manager of this type of funds can act any:- Third country manager
    – UCIT manager licensed in the EU
    – MiFID Investment firm
    – Cyprus Mini manager
    – EU Sub-threshold AIFM.
    – In case of companies, the fund can be self-managed and be licensed both as AIF and AIFM

 

3. WHY A CYPRUS AIF

There is a number of advantages to establishing a Cy AIF, mainly those are categorized into the tax benefits
and non-tax benefits.

a) Tax Advantages

There are no specific sections or modes in the Cyprus tax for AIFs. Provided that an AIF is set up as a
limited company and is managed and control in Cyprus, then this will be taxed as any other Cyprus
based company. This gives rise to the following tax benefits:

  • Tax exemption from the profit on a sale of shares and other financial instruments
  • Exempt from tax on foreign dividend income received
  • No withholding tax on payments of interest and dividends to non-residents
  • No stamp duties exist on the redemption-subscription-repurchase or transfer of units
  • Dividends distributed from AIF are subject to 3% Special Defense Contribution rather than 17% that applies to any other normal Cyprus limited liability company
  • A wide network of DTT
  • In practice, most AIF swill generates exempt tax form of income in case of company AIF form, thus no tax will be payable.

b) Other Advantages

  • Cyprus is an EU member state compliant with EU laws and regulations. It is an EU and OECD approved Tax regime.
  • Cyprus is a Eurozone member state
  • Any Cyprus-based fund can be marketed across the EU without any other license (passporting)
  • An extensive network of legal, accounting and financial services
  • Significant cost benefits in setting up and managing a Cyprus-based fund structure (roughly estimated at one-third of the cost that compared to other competitive jurisdictions).
  • Fully harmonized and modern fund legislation for AIF
  • The option of listing in stock exchanges of recognized markets
  • AIF may also be used by third-country investors, to apply for Cyprus citizenship.

 

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