Alternative Investment Funds
The Alternative Investment Funds Law of 2014 (the “Law”) came into force in July 2014 replacing and repealing the International Collective Investment Schemes Law of 1999 (the “ICIS Law”) in an effort to bring together under a single supervisory authority, namely the Cyprus Securities and Exchange Commission (“CySec”), all Cyprus investment firms, products and asset managers. The Law adopts relevant EU Directives on asset management and updates the funds’ regime in Cyprus; it applies to Alternative Investment Funds (the “AIFs”) established in Cyprus regulating effectively the responsibility and role of persons involved in the activities of the AIFs (such as directors, custodians, external managers etc.) and provides rules for the ongoing operations of the AIFs, their transparency requirements and supervision. Certain specialised arrangements inter alia insurance business, employee participations schemes and securitisation SPVS (special purpose vehicles) are excluded from the armpit of the Law.
What is an AIF and how can it be structured?
The purpose of an AIF is a collective investment undertaking to raise external capital from a number of investors with a view of investing such capital in accordance with a defined policy for the benefit of those investors, and which has not been authorised as a UCITS fund.
The Law permits the establishment of two types of AIFs:
- An AIF for an unlimited number of persons, which can be marketed to (i) the public or (ii) to a well informed and/or professional investor.
- An AIF which can be marketed to well informed and/or professional investors, whose number cannot exceed 75 (AIF-LNP). Among these two types of AIF, the AIF-LNP is the most lightly regulated type - it is not subject to minimum capital requirements or investment restrictions.
A professional investor is an investor who is considered a professional client, under the MiFID (Markets in Financial Instruments Directive) or may on request be treated as such. A well informed investor is an investor who is not a professional investor but is aware of the risks related with the proposed investment and shows that he has the necessary experience and knowledge to be able to evaluate the appropriateness of the investment in the AIF. A retail investor is neither a professional nor a well-informed investor.
An AIF may be structured in one the following ways:
- a limited partnership;
- a limited liability company with shares which can be either of a fixed or of a variable capital;
- a mutual/common fund (only available for AIF with no limited number of investors).
How can an AIF be used?
The AIF can be used as:
- An umbrella fund with multiple investment compartments enabling the management of different pools of assets with distinct investment policies in segregated sub-funds within the AIF.
- A mutual/common fund where the investors are all co-owners of the assets of the AIF.
- A family or closed pool fund for a limited number of investors.
Public offerings of the AIF shares/units and listings in stock markets are possible increasing in this way the participation of potential investors and promoting transparency and marketability.
The custodian / depositary is no longer a role to be undertaken strictly and solely by banking or credit institutions, the duties of the custodian / depositary can be undertaken by any investment firm or other similar in nature entity which can be particularly attractive for real estate and private equity funds.
In case the AIF-LNP’s assets are not eligible for custody, the requirement for the appointment of a custodian/depositary may be waived for an AIF-LNP or may be performed (as stated above) pursuant to the provision of clause 23(5) of the Law by “an entity which performs depositary functions within the context of its professional or business activities, for the performance of which is subject to professional registration recognised by legal, regulatory or administrative provisions or by rules of professional conduct and can provide sufficient financial and professional guarantees that it will perform sufficiently its depositary duties and meet the commitments associated with these duties”.
Other AIF Characteristics
- Open-ended and Close-ended funds: in open-ended funds the investors have the right to redeem/repurchase their units/shares upon request either at any time or at regular intervals not exceeding one year; in close-ended funds the investors have the right to redeem/repurchase their units/shares upon request either at regular intervals exceeding one year but not exceeding five years or at a specific time as specified in the AIF’s constitutional documentation.
- An AIF can be either self-managed provided that the regulations of the Law are complied with, or it can be managed by an external manager, such as an Alternative Investment Fund Manager authorised pursuant to the Alternative Investment Fund Managers Law of 2013, or a UCITS (Undertakings for Collective Investment in Transferable Securities) management company or a Cyprus Investment Firm. An AIF-LNP may also be managed by a management company set up for the exclusive purpose of managing the specific AIF-LNP subject to CySec approval. AIFs with unlimited number of persons are subject to a minimum capital of at least Euro 125.000 or Euro 300.000 in the event such an AIF with unlimited number of persons is self-managed.
Tax and other Benefits
- Flat rate of 12.5% corporate tax
- Profits realised from redemption from holdings in other companies (including AIFs) are not subject to income tax
- No taxation on capital gains
- No withholding tax on dividend distributions received by a non-Cyprus tax resident
- The AIF can take advantage of the Cyprus double tax treaty network
- Services provided by the investment manager of an AIF are not subject to a VAT charge
- The regulatory requirements and timing required for the processing of the licensing application are reasonable
- Low set-up and operations costs compared to other jurisdictions.
What we can do for you:
Advise you on the set up and structure of an AIF. Assist with the incorporation of an entity to be licensed as an AIF, including drafting all constitutional documentation required. Prepare the licensing application package (including all documents and forms required under the legal regime) for CySec and where applicable for the Registrar of Companies in Cyprus, following up with the processing of the application and liaising with CySec and other local authorities until such time as the AIF is fully operative. Provide legal support throughout the AIF’s application process and operation. Provide ongoing administration and legal services for the AIF throughout its life.
How we can help you:
Clerides Anastasiou Neophytou is a leading law firm in Cyprus specialising in corporate, commercial, and tax law and M&A transactions. We are top ranked in tax law and highly recommended in corporate and M&A by well-known international agencies ranking law firms worldwide. Our associates and staff stand ready to assist you with efficient, high value cost efficient services to help you structure your transactions in Cyprus.