The Cypriot AIF Regime
Determined to capture the attention of the asset management industry and to be an actor at the forefront of industry developments Cyprus continuously upgrades its legislative and regulatory regime, and has developed into a key regional domicile for setting up investment funds and establishing asset management companies for pan-European reach
In July 2018, Cyprus enacted the Alternative Investment Funds Law 124(I)/2018 (the “AIF Law of 2018” or the “AIF Law”) which modernized, updated and enhanced the offering of alternative investment funds, or “non- UCITS”, which can be registered and domiciled in Cyprus as the culmination of the industry’s effort to create an attractive new European fund domicile.
The new AIF Law of 2018, which replaced and repealed the AIF Law of 2014, has introduced the possibility to create Registered AIFs in Cyprus while fine tuning other types of AIFs such as the AIFs with Unlimited and AIFs with Limited Number of Persons (AIFUNP and AIFLNP).
This development allowed to Cyprus to attract more interest as a fully-fledged fund jurisdiction and provides fund promoters and managers various structuring opportunities.
A Cyprus AIF can take any of the following legal forms:
- Fixed or Variable Capital Investment Company
- Limited Partnership (with or without a separate legal personality)
- Mutual Fund (not available for AIF-LNP or RAIF)
And the main provisions of the AIF Law allow:
- The creation of AIFs with unlimited investment compartments (i.e. umbrella funds), each with a separate investment strategy and asset pools.
- The units of AIFs to be listed on various stock exchanges.
- Flexibility in the appointment of an Investment Manager and Depositary
- Investor units to be freely transferred.
- The AIF-LNP to a maximum of 50 investors.
- A faster, easier route to market via a Registered AIF which does not require licensing as a sub fund of an existing umbrella structure by leveraging the existing regulatory and operational framework already in place.
Why Cyprus domicile
Cyprus is probably the most flexible and cost-efficient fund jurisdiction in the EU.
It is a member of the European Securities and Markets Authority (ESMA), and boasts a comprehensive funds and related services workforce. It has experienced significant growth in terms of value of assets and number of funds and fund managers and has managed in a short period of time to establish itself as one of the major EU fund jurisdictions.
Located in the NE corner of the Mediterranean Sea puts it in the center of commerce since antiquity and despite its turbulent ancient past modern Cyprus enjoys a stable and safe political and social system, a pragmatic legal and regulatory environment and an attractive tax regulation.
As of September 2022, the Cyprus funds industry boasts more than EUR 11 billion in Assets Under Management and more than 300 fund management companies and funds.
Types of AIFs
AIFs with Unlimited Number of Persons
- May be marketed to retail, or well-informed and/or professional investors
- Freely transferable investor shares
- Must appoint a Depositary
- Can be listed on a recognised stock exchange, and AIFs marketed to retail investors can be traded
- May be internally managed
- Minimum share capital requirements of €125,000 are valid for internally managed funds.
- May be subject to certain investment restrictions depending on the investor type and the overall investment policy. AIFs addressed to WIPIs shall not be subject to investment restrictions, except Loan Origination Funds, Money Market Funds, Venture Capital Funds and Funds of Funds.
AIFs with Limited Number of Persons (max 50)
- May be marketed only to well-informed and/or professional investors (WIPIs)
- Maximum number of investors is limited 50
- Freely transferable investor shares, with the condition that their transfer does not result in the AIF having more than 50 investors
- May not be required to appoint a Depositary in certain circumstances such as (i) when its total assets do not exceed €5 million (or currency equivalent) including any investment compartments thereof, or (ii) its instruments of incorporation limit the number
of its unitholders (including any investment compartments thereof) to 5 persons for the duration of the life of the AIF, or (iii) 90%
of the assets are not subject to custody and the number of investors are limited to 25 and provided each investor subscribes a
minimum of €500,000
- Assets under management do not exceed the AIFMD thresholds of €100 million (including leverage) or €500 million (without leverage, 5-year lock-up period for investors)
- May be internally managed
- Minimum share capital requirements of €50,000 are valid for internally managed funds.
- No licencing required
- No Minimum Capital Requirements
- No Investment Restrictions
- Multiple Compartments Possible
- Can operate as open or close ended
- Units of RAIFs may be listed
- Requirement to appoint local Depository
- Addressed solely to Well-Informed and/or Professional Investors
The fund manager must qualify as a full-scope Cyprus or EU Alternative Investment Fund Manager (AIFM) under the AIFMD 2011/61/EU.
|Number of Investors||Public company / common fund: unlimited Private company: 50 Limited Partnership: 100||50 physical persons, and if corporate investors, their shareholders count towards 50 persons limit. If AIFLNP’s assets not subject to safekeeping and operates without a depositary, limit reduced to 25 physical persons||Public company / common fund: unlimited Private company: 50 Limited Partnership: 100|
|Type of Investors||Professional*, Well-informed**, or Retail||Professional, Well-informed||Professional, Well-informed|
|Available legal forms||Variable or Fixed Capital Investment Company, Limited Partnership (with or without legal personality), Common Fund||Variable or Fixed Capital Investment Company, Limited Partnership (with or without legal personality)||Variable or Fixed Capital Investment Company, Limited Partnership (with or without legal personality), Common Fund|
|Management||Variable or Fixed Capital Investment Companies: either internally managed (by the board of directors) or externally managed Limited Partnership: externally managed (by its general partner) Common Fund: externally managed||Variable or Fixed Capital Investment Companies: either internally managed (by the board of directors) or externally managed Limited Partnership: externally managed (by its general partner)||Externally managed in all available legal forms|
|Minimum capital requirements||Euro 500,000, within 12 months from the date of its authorisation, which comprises of investors’ funds In case of investment compartments, applies to each compartment Internally managed AIFUNP (but not AIFM) has in addition, in cash or assets that are readily convertible into cash, at least Euro 125,000||Euro 250,000, within 12 months from the date of its authorisation, which comprises of investors’ funds In case of investment compartments, applies to each compartment||if managed by an AIFM - Euro 500,000, within 12 months from the date of its authorisation, which comprises of investors’ funds No restriction if manager is other than AIFM|
|Stock Exchange Listing||Possible, including listing a specific category of units or investment compartment(s)||Not provided||Possible, including listing a specific category of units or investment compartment(s)|
|Transfer of units||Freely transferable (except for private companies) or subject to any restrictions in the instruments of incorporation, or in accordance with Stock Exchange rules when admitted to trading on a regulated market||Subject to the restrictions imposed by applicable laws and the instruments of incorporation||Subject to any restrictions in the instruments of incorporation, or in accordance with Stock Exchange rules when admitted to trading on a regulated market (noting that a public takeover bid or exchange are not permitted)|
Taxation of AIFs
The key taxation benefits which an AIF and its stakeholders can enjoy are the following:
- Exemption from tax on profits from the disposal of securities
- Exemption from tax on dividend income (subject to certain conditions).
- No withholding taxes on repatriation of dividends, interest and royalties to non-residents.
- 12.5% corporate tax rate
- Notional Interest Deduction (being an annual tax expense calculated as a percentage of equity).
- An extensive and continuously growing network of double tax treaties. No stamp duty on the issue of units in AIFs.
- Investors in AIFs which are tax transparent are not deemed to have a permanent establishment in Cyprus