An Alternative Investment Fund (AIF) is a collective investment undertaking that raises capital from investors that become the AIF’s unitholders, aiming at investing the capital raised in accordance with a pre-defined investment policy for the benefit of the AIF’s unitholders.
The fund regime in Cyprus has strengthened upon the advent of the new AIF Law, offering more investment structuring possibilities, and upgraded rules for the authorisation, on-going operations, transparency and supervision of AIFs, as well as the regulation on the role and responsibilities of their directors, depositaries and external managers. The new AIF Law introduces various enhancements to the previous AIF Law, rendering Cyprus AIFs more attractive and more flexible. This development aims at establishing Cyprus as one of the fastest growing fund centres in Europe.
Cyprus has an efficient ecosystem of support in the Funds sector. This includes the availability of qualified people who are up to date with the developments in the industry, a range of consultants who can provide effective and competitive solutions, a regulator understanding the business and aiming at facilitating authorisations and at effectively supervising them, training academies that can support continuous professional development, reskilling or upskilling of people on areas of interest, essential infrastructure and an efficient tax system.
Legal and regulatory framework
The establishment and operation of AIFs in Cyprus is regulated by the Alternative Investments Funds Law of 2018 (124(I)/2018). The Cyprus Securities and Exchange Commission (CySEC), the competent authority, is responsible for issuing circulars and directives which also govern AIFs in Cyprus as secondary legislation.
The EU AIF Managers Directive (AIFMD), which relates to fund managers, was transposed into national law by the Alternative Investment Funds Manager Law of 2013, 56(I)/2013 (AIFM Law), as amended from time to time.
Fund structures
AIF
An AIF can be set up as a variable capital investment company, a fixed capital investment company, a limited liability partnership (LLP), or as a mutual fund. Once the legal entity has been set up, it may proceed with submitting an application for authorisation by CySEC as an AIF under the AIF Law. It should be noted that umbrella structures are possible for all set ups. Moreover, such funds can be either externally or internally managed (except in the cases where funds are set up in the form of mutual funds and LLPs). Once the legal entity has been set up and authorised by CySEC, the UCITS Management Company or the AIFM (as applicable) may initiate the procedure to market the units/shares of the Fund in the EEA on a cross-border/passporting basis.
AIFLNP
CySEC has implemented attractive solutions for the establishment of funds in Cyprus with the adoption of a unique national legislation. With respect to AIFs, CySEC has introduced the AIF with Limited Number of Persons/Investors (AIFLNP), an AIF whose assets must be below the AIFMD thresholds and may be exempted from appointing a depositary. AIFLNPs can be self-managed or externally managed by entities exempt from the scope of the AIFMD.
RAIF
CySEC, in 2018, introduced the concept of registered AIFs (RAIFs). A RAIF is always externally managed by an authorised AIF Manager (AIFM) under the AIFMD or where the RAIF is below the AIFMD thresholds it can be managed by a Mini AIF Manager (applicable only for certain RAIF types). RAIFs are not subject to authorisation by CySEC, however AIFMs intending to manage a RAIF will be required to submit a notification to CySEC for the inclusion of the RAIF on CySEC’s RAIF registry prior to distributing RAIF units to possible investors.
Authorisation/registration timeframes
The authorisation/registration process requires comprehensive attention to the documentation submitted to CySEC. Different timeframes apply for each type of authorisation/registration envisaged, as per the relevant legislations, from the date of submission of a complete application/notification package. In particular, the following timeframes apply although these may vary depending on the completeness of information submitted to CySEC:
- One month for the registration process of a RAIF
- Six months for the authorisation of an AIF and an AIFLNP
Key Benefits of a Cyprus AIF
- Supervised by CySEC and the new legislation fully in line with relevant EU directives
- Full transparency through annual audited reports to CySEC and investors, which include financial statements, borrowing information, portfolio information and Net Asset Value
- Flexibility has been increased since an AIF investment strategy can include several asset classes
- Significant tax incentives offered by the country’s advantageous tax framework
- Cost-efficient and simple to set-up, manage and operate.
Tax Benefits
An AIF, as long as it is incorporated as a Limited Liability Company, will benefit from all advantages that the Cyprus tax system offers, some of which are the following:
- It can benefit from the 12.5% flat corporation tax on annual net profits earned worldwide
- Profits from disposal of shares and other titles are exempt from taxation
- Exemption of any withholding tax from the payment of dividend and interest to non-residents
- Dividend income is in most cases exempt from taxation
- No tax on redemption of units by unitholders
- The dividends deemed to be paid to Cyprus tax residents would only be taxed at 3% defence tax whereas for a normal company this tax is 17%
- The wide network of double tax treaties of Cyprus will ensure that taxation is kept at the minimum for dealings with these countries
- In the case that the AIF is managed and controlled from outside the Republic it will be considered a non- Cyprus tax resident and full exemption from Cyprus tax would be applicable.
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.
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