The Alternative Investment Funds Law of 2014 (the “AIF Law”) was enacted by the Cyprus House of Representatives on July 2014 and come into Law the same month.

The purpose of the AIF Law is to define the domestic rules governing the authorization criteria and procedure, operational and transparency requirements and supervision of AIFs of the Republic.

Importantly, the AIF Law in conjunction with the Alternative Investment Fund Managers Law of 2013 (the “AIFM Law”) harmonizes the Cypriot Investments Fund regime with the EU legislative framework thus making Cyprus a cost efficient, credible alternative to onshore fund jurisdictions such as Luxembourg, Lichtenstein, Ireland and the UK.

Under the AIF Law, the Cyprus Securities and Exchange Commission is the competent regulatory and supervisory body.

An Alternative Investment Fund (AIF) is a collective investment undertaking, including its investment compartments which may be established and operated by Cyprus residents or non-Cyprus residents and:

raises external capital from a number of investors, with a view to investing such capital in accordance with a defined investment policy for the benefit of these investors, and

it is not an Undertaking for Collective Investments in Transferable Securities (UCITS).

The main difference between UCITS and AIFs is that the former is obliged to invest at least 90% of its assets on listed securities or recently listed transferable securities while for the latter this is not mandatory.

An investor which is considered to be a professional client or may, on request, be treated as a professional client within the meaning of Annex II of the Investment Services and Activities and Regulated Markets Law as amended

An investor which is not a professional investor and fulfills the following conditions:

the investor confirms in writing that he is a well-informed investor and that he is aware of the risks related with the proposed investment; and

either his investment in the AIF amounts, at least, to €125 000, or he is assessed as a well-informed investor, either by a credit institution that falls within the scope of the Banking Laws as amended, or by an Investment Firm, or by a UCITS management company and the above mentioned assessment shows that he has the necessary experience and knowledge to be able to evaluate the appropriateness of the investment in the AIF

An investor who does not meet the conditions required to be included in the professional investors’ or the well informed investors’ category

An AIF-UNP may be set up in one of the following legal forms:

• Mutual Fund (Common Fund)
• Fixed Capital Investment Company
  • Incorporated under Cyprus Companies Law and recognized to operate as a fixed capital investment company by the AIF Law
  • Its share capital cannot vary and remains fixed
  • Legally segregated sub-funds can be created
• Variable Capital Investment Company
  • Incorporated under Cyprus Companies Law and recognized to operate as a fixed capital investment company by the AIF Law
  • Its share capitalvaries according to the participating investors at any given time
  • The share capital of the company is equal to the net asset value (NAV) of the shares of the company at any time
  • Legally segregated sub-funds can be created
• Limited Liability Partnership
  • Registered in accordance with the General and Limited Partnerships and Trade Names Law and recognized to operate as a limited liability partnership under the AIF law
  • The General Partner exercises the management of the LLP and is responsible for the debts and liabilities of the LLP
  • The limited liability partners are not responsible for the debts and liabilities of the LLP, beyond the amount of their contribution
  • A limited liability partnership can also have a corporate entities act as partners

An AIF-UNP can accommodate an unlimited number of unit-holders which can be:

• Professional investors and/or
• Well informed investors and/or
• Retail Investors

The units of an AIF-UNP can be marketed to such investors in the Republic subject to rules set out in the AIF Law.

The units of an AIF-UNP can be marketed to professional and/or well informed investors in another member state or third country only if this is allowed by the legislation of that member state or third country.

The units of an AIF-UNP can be marketed to retail investors in another member state or third country subject to conditions defined in the AIF Law.

• An AIF-UNP established in the form of an investment company and marketed to retail investors can be listed and traded on a recognized stock exchange in the Republic, the EU or other third country.
• An AIF-UNP marketed to well informed and or professional investors can be listed BUT NOT traded on a recognized stock exchange in the Republic, the EU or other third country. It can nevertheless be traded on a regulated market of tradable AIFs or on a Multilateral Trading Facility (MTF).

The AIF Law allows for multiple investment compartments. Each compartment can have its own distinct investment policy and operate individually from the rest. Most importantly, each compartment is “risk fenced” from the rest in the sense that it can be dissolved and liquidated separately without affecting any assets or liabilities of the other compartments.

CySec may specify certain investment restrictions according to:

• the nature of assets in which the AIF invests at
• the investors to which the AIF is adressed at

Self Managed

The AIF-UNP can be self-managed (i.e. it does not appoint an external manager) provided that it is established as an investment company and one of the following applies:

1. the assets of the portfolio of the AIF, including any assets acquired through use of leverage, in total do not exceed a threshold of EUR 100.000.000;
2. the assets of the portfolio of the AIF, where the AIF does not employ leverage are locked for a period of 5 years following the date of initial investment in each AIF, and they do not exceed a threshold of EUR 500.000.000

If the AIF-UNP is self-managed then it should appoint at least a person responsible for the portfolio management who meets the following conditions:

1. it is certified to provide the investment service of portfolio management
2. it is registered in the Public Register

Externally Managed

The AIF-UNP can appoint a fund manager if the above thresholds are exceeded or if it chooses so. The external manager can be:

1. an AIFM
2. a UCITS management company
3. a Cyprus Investment Firm (CIF)

An AIF-UNP in the form of a Common Fund SHOULD appoint an external manager

• €125,000 if the AIF – UNP is externally managed
• €300,000 if the AIF – UNP is self-managed

The AIF-UNP MAY NOT appoint a custodian IF the fund assets are not eligible for custody (such as real estate assets).

The AIF-UNP MUST appoint a custodian IF the fund assets are financial instruments.

Eligible Custodians

• a credit institution
• an Investment Firm authorized to offer the services of safe-keeping
• another entity which is subject to prudential regulation and ongoing supervision

Location

AIF-UNP managed by an AIFM

The custodian MUST be located in Cyprus, OR UNTIL July 2017 may be located in another EU member state

AIF-UNP not managed by an AIFM

The custodian must be located in Cyprus or any other EU member state or third country, with which Cyprus has signed a cooperation agreement

The Fund Administrator renders services with regards to administrative accounting and bookkeeping services, NAV calculations and registrar services.

Although no license is required to act as a Fund Administrator, the Fund Administrator still has to be approved by CySec.

A qualified professional Cyprus auditor must be appointed upon formation of the AIF-UNP and will attend to annual audit

A legal counselor must not necessarily be identified at the AIF – UNP application stage.

The management of the operations of the AIF shall be conducted by at least two natural persons, with sufficient experience and specialization. CySec requires the Directors to be  “fit and proper” which in the case of a fund managing financial instrunments this translates in having adequate financial and fund management experience as well as academic credentials.

An AIF-LNP may be set up in one of the following legal forms:

• Fixed Capital Investment Company
  • Incorporated under Cyprus Companies Law and recognized to operate as a fixed capital investment company by the AIF Law
  • Its share capital cannot vary and remains fixed
  • Legally segregated sub-funds can be created
• Variable Capital Investment Company
  • Incorporated under Cyprus Companies Law and recognized to operate as a fixed capital investment company by the AIF Law
  • Its share capitalvaries according to the participating investors at any given time
  • The share capital of the company is equal to the net asset value (NAV) of the shares of the company at any time
  • Legally segregated sub-funds can be created
• Limited Liability Partnership
  • Registered in accordance with the General and Limited Partnerships and Trade Names Law and recognized to operate as a limited liability partnership under the AIF law
  • The General Partner exercises the management of the LLP and is responsible for the debts and liabilities of the LLP
  • The limited liability partners are not responsible for the debts and liabilities of the LLP, beyond the amount of their contribution
  • A limited liability partnership can also have a corporate entities act as partners

An AIF-LNP can accommodate a maximum number of 75 unit-holders which can be:

• well informed investors, and/or
• professional investors

The units of an AIF-LNP can be marketed to such investors either to the Republic or to another member state or to a third country subject to rules set out in the AIF Law.

An AIF-LNP cannot be listed nor traded on a recognized exchange

The AIF Law allows for multiple investment compartments. Each compartment can have its own distinct investment policy and operate individually from the rest. Most importantly, each compartment is “risk fenced” from the rest in the sense that it can be dissolved and liquidated separately without affecting any assets or liabilities of the other compartments.

No Investment policy restrictions

Self Managed

If the assets are of a financial nature, then the fund should appoint at least a person responsible for the portfolio management who meets the following conditions:

1. it is certified to provide the investment service of portfolio management
2. it is registered in the Public Register

Externally Managed

AIF-LNP which is in the form of a partnership shall always appoint an external manager

The AIF-LNP which manages one or more financial instrunments can appoint an external manager which could be:

1. a UCITS management company
2. a Cyprus Investment Firm (CIF)
3. a company established in a third country as long as it is authorized to provide the portfolio management service and is subject to prudential regulation regarding the provision of that service

AIF-LNP that does not invest in financial instruments can appoint as external manager any company incorporated solely for the purpose of managing the specific AIF, which does not hold any license for portfolio management.

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The AIF-LNP MAY NOT appoint a custodian if:

• its assets under management are less that €5 million, or
• there are less than five investors, or
• all investments are considered not to be eligible for custody (e.g. real estate, commodities etc.)

Eligible Custodians

• a credit institution
• an Investment Firm authorized to offer the services of safe-keeping
• another entity which is subject to prudential regulation and ongoing supervision

Location

When a custodian is required such a custodian can be based in Cyprus, EU or a third country that has cooperation agreement with CySec.

The Fund Administrator renders services with regards to administrative accounting and bookkeeping services, NAV calculations and registrar services.

Although no license is required to act as a Fund Administrator, the Fund Administrator still has to be approved by CySec.

A qualified professional Cyprus auditor must be appointed upon formation of the AIF-LNP and will attend to annual audit

A legal counselor must not necessarily be identified at the AIF – LNP application stage.

The organization and operation of an alternative investment fund with limited number of person is subject to the provisions of the Companies Law where it has taken the form of a company or of the General and Limited Partnerships and Trade Names Law where it has taken the form of a limited partnership. CySec requires the Directors to be “fit and proper” which in the case of a fund managing financial instrunments this translates in having adequate financial and fund management experience as well as academic credentials.

• Low set up and maintenance costs.
• An AIF can be established and operated by non-residents. There is no formal requirement to appoint local directors. In practice the BoD can compromise of purely foreign Directors who regularly meet in Cyprus, hence management and control requirements are met.
• An AIF can be structured in the form of an umbrella fund (multiple investment compartments), enabling the creation and management of different legally segregated ring-fenced sub funds. In this way the fund can accommodate many different investors each with a different risk appetite and investment caliber.
• Plethora of multilingual, highly educated and trained professionals that can support an AIF’s operational needs.
• Cyprus is an EU member state compliant with EU laws and regulations
• For some type of AIFs and under certain conditions an external Investment manager may not be required
• For some type of AIFs and under certain conditions the appointment of a depository/custodian is not mandatory.

As legal entities, funds incorporated in Cyprus benefit from the low tax burdens levied on Cyprus based corporations as well as from some recently enacted tax provisions that provide further tax incentives for the set up and operation of funds.

• The lowest corporate tax (12.5%) in the EU
• Tax exemption for: a) dividends received, b) gains arising from the trading of securities, c) capital gains from sale of property abroad and d) capital gains from sale of shares of foreign property companies.
• No subscription tax on the net assets of the fund
• Fund management services are not subject to VAT
• Ancillary management services are subject to a 19% VAT rate, the lowest in the EU
• Double Tax Treaties with more than 50 countries
• Interest received by open and closed end collective investment schemes is considered “active” interest income and taxed only at 12.5% corporate tax (no defense tax)
• No minimum participation on inbound dividends to qualify for tax exemption
• The liquidation of open and closed end collective schemes is not taxable if the unit holders are not tax residents of Cyprus
• No stump duties on the subscription, redemption, repurchase or transfer of units

• No withholding tax on dividends
• No taxation on redemption of units
• No deemed distribution restrictions

• If the investor is a company, there is no withholding tax on dividends
• If the investor is a physical person, the withholding tax on dividends is 17%
• No taxation on redemption of units
• Defense tax of 3% (as opposed to the normal rate of 17%) on deemed dividend distribution on 70% of the funds accounting profits within a two-year period from the tax year to which the profits relate.