Alternative Investment Funds (AIFs) in Cyprus

Cyprus Alternative Investment Funds: Types, Structure, and Requirements

Cyprus has become an attractive destination for alternative investment funds (AIFs) due to its strategic location, business-friendly environment, and favourable legal and regulatory framework. AIFs are collective investment vehicles that pool capital from investors to invest in a variety of assets, such as real estate, private equity, and hedge funds, offering alternative investment options beyond traditional stocks, bonds, and cash.

An Alternative Investment Fund (AIF) in Cyprus is a type of investment fund that is established and operated in accordance with the laws and regulations of Cyprus. These types of funds are typically used for alternative investments, such as real estate, private equity, or hedge funds, and are not subject to the same regulations as traditional investment funds. AIFs in Cyprus are typically set up as open-ended or closed-ended funds, and may be marketed to both retail and institutional investors. They are regulated by the Cyprus Securities and Exchange Commission (CySEC).

Types of Cyprus Alternative Investment Funds

There are three main types of Alternative Investment Funds (AIFs) in Cyprus:

1. AIFs with Unlimited Number of Persons (AIFs-UNP). These funds can be marketed to an unlimited number of retail and professional investors. AIFs-UNP can be established as common funds, investment companies, or limited partnerships with or without separate legal personality.
2. AIFs with Limited Number of Persons (AIFs-LNP). AIFs-LNP can have up to 50 investors and are designed for professional or well-informed investors. They can be set up as investment companies, limited partnerships with or without separate legal personality, or common funds.

3. Registered AIFs (RAIFs). RAIFs are a type of AIF that do not require authorisation from the Cyprus Securities and Exchange Commission (CySEC) but are registered and supervised indirectly through their appointed regulated external manager. They can be established as investment companies, limited partnerships, or common funds and can be marketed to professional and well-informed investors only.

Structure and Requirements

The structure and requirements of Cyprus AIFs vary depending on the type of fund:

1. AIFs-UNP

• Legal forms: Common fund, investment company, or limited partnership
• Investor base: Retail and professional investors
• Minimum capital requirement: €125,000 or €300,000 for self-managed AIFs
• External manager requirement: Optional, unless self-managed

2. AIFs-LNP

• Legal forms: Common fund, investment company, or limited partnership
• Investor base: Professional and well-informed investors only
• Minimum capital requirement: No minimum for externally managed AIFs; €50,000 for self-managed AIFs
• External manager requirement: Optional, unless self-managed

3. RAIFs

• Legal forms: Common fund, investment company, or limited partnership
• Investor base: Professional and well-informed investors only
• Minimum capital requirement: None
• External manager requirement: Mandatory

Regulations and Applicable Laws

An aspect to consider when setting up an AIF in Cyprus is the regulatory requirements. AIFMs must comply with various regulatory requirements to ensure that the fund is managed and administered in a safe and sound manner.

One of the key regulatory requirements is the need to be authorized or registered with the Cyprus Securities and Exchange Commission (CySEC). AIFMs must apply for and obtain authorization or registration from CySEC before they can start marketing or managing AIFs in Cyprus. This involves submitting an application that includes detailed information about the AIF, the AIFM, and the AIFM’s operations, and passing a fitness and propriety test to ensure that the AIFM is capable of managing the AIF in a safe and sound manner.

In addition to the regulatory requirements set by CySEC, AIFs in Cyprus must also comply with the EU Alternative Investment Fund Managers Directive (AIFMD). This directive sets out requirements for the management, marketing, and reporting of AIFs, as well as rules around depositary and risk management functions.   This includes implementing measures to ensure that the AIF is managed in a safe and sound manner, reporting information about the AIF to the regulator, and disclosing information about the AIF to investors.

AIFMs must also comply with the EU’s Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations. This includes implementing measures to prevent and detect money laundering and terrorist financing, such as customer due diligence, reporting suspicious transactions, and keeping accurate records of transactions.

In summary, regulatory requirements for an AIF in Cyprus include:

• Obtaining authorization or registration from the Cyprus Securities and Exchange Commission (CySEC)
• Complying with the EU AIFMD
• Complying with the EU’s Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations.

The key legislation and regulations governing the establishment and operation of AIFs in Cyprus are:

1. The Alternative Investment Funds Law of 2018 (Law 124(I)/2018). This law replaced the previous AIF Law of 2014 and introduced the new AIF types and their requirements. It governs the authorization, ongoing operation, and supervision of AIFs in Cyprus.
2. The Cyprus Securities and Exchange Commission (CySEC). CySEC is the regulatory authority responsible for overseeing the activities of AIFs, AIFMs (Alternative Investment Fund Managers), and their service providers in Cyprus. CySEC is responsible for granting licenses, monitoring compliance, and enforcing regulations.

3. The European Union’s Alternative Investment Fund Managers Directive (AIFMD). As a member of the European Union, Cyprus is subject to the AIFMD, which sets out the regulatory framework for alternative investment fund managers (AIFMs) operating within the EU. The AIFMD covers authorisation, operation, and transparency requirements for AIFMs, as well as rules on the marketing of AIFs within the EU. Cyprus has implemented the AIFMD into its national law through the Law 56(I)/2013 on the Alternative Investment Fund Managers, which aligns the country’s legal and regulatory framework with the EU directive.

Advantage of setting up an AIF in Cyprus

The main advantage of setting up an AIF in Cyprus is its favourable tax regime, which includes a corporate tax rate of 12.5% and exemptions on withholding taxes for dividends and interest paid to non-residents. Additionally, Cyprus has a well-developed financial services sector and a large network of double tax treaties, making it an attractive location for international investors.

It is worth noting that AIFs in Cyprus must appoint a fund administrator, which is responsible for maintaining accurate records of the fund’s assets, liabilities, and transactions, and for preparing financial statements and other reports. They also must appoint a depositary, which acts as a custodian of the fund’s assets and is responsible for ensuring that the assets are safe-guarded and that the fund’s operations are in compliance with the applicable laws and regulations.

Overall, establishing an Alternative Investment Fund in Cyprus offers a range of benefits, including a favorable tax regime, a well-developed financial services sector, and a large network of double tax treaties. It’s important to ensure that the fund is in compliance with the laws and regulations of Cyprus and the EU, by appointing a fund administrator and depositary and ensuring that the fund is managed, marketed and reported in accordance with the AIFMD.

Forms of an AIF

An AIF in Cyprus can be set up in the form of a company, a partnership or a unit trust. The most common form is a company, particularly an open-ended variable capital investment company (OVCIC) which is a new legal form of a company specifically designed for AIFs. This type of company allows for an easy and flexible management of the fund’s assets and liabilities, as well as the issuance of new shares or the redemption of existing shares.

Once the AIF is established, it must be registered with CySEC, which involves submitting an application along with various documents, including the fund’s offering document (prospectus) and the fund’s constitutional documents. CySEC will review the application and may request additional information or documents before granting approval.

Once the AIF is registered, it can start to raise capital and invest the assets. The AIF will be subject to ongoing reporting and regulatory requirements, including filing annual and semi-annual financial statements and submitting regular reports to CySEC.

Marketing an AIF in Cyprus to investors is subject to certain rules and restrictions. AIFs are typically marketed to professional or sophisticated investors, and the AIFM must ensure that the investors are fully informed about the risks and features of the AIF before they invest. AIFs can be marketed in Cyprus and other EU countries with certain conditions and restrictions.

It is also important to note that Cyprus has a strong reputation as a reputable and compliant jurisdiction for AIFs, which is recognized by various international bodies, including the European Securities and Markets Authority (ESMA) and the International Organization of Securities Commissions (IOSCO). This reputation, together with the favourable tax regime, the well-developed financial services sector, and the large network of double tax treaties, makes Cyprus an attractive location for establishing and managing AIFs.

Flexibility of Cyprus AIFs in Terms of Investment

One of the key benefits of AIFs in Cyprus is the flexibility they offer in terms of investment strategies and asset classes. AIFs can invest in a wide range of assets, including real estate, private equity, hedge funds, and other alternative investments. This allows AIF managers to diversify their portfolios and potentially generate higher returns for investors.

Another advantage of AIFs in Cyprus is the ability to leverage the fund’s assets. Leverage can increase the potential returns for investors, but it also increases the risk of loss. AIF managers must be aware of the risks associated with leverage and implement appropriate risk management strategies to minimize those risks.

The AIFMD also requires an AIFM to establish an adequate risk management system and to regularly monitor and review the AIF’s risk profile. The AIFM must also ensure that the AIF is in compliance with the AIFMD and any other applicable regulations. It’s worth noting that AIFMs must be authorized by CySEC and must comply with rules on conduct of business, Organizational requirements and transparency.

In summary, setting up an Alternative Investment Fund (AIF) in Cyprus can offer a range of benefits, including a favorable tax regime, a well-developed financial services sector, and a large network of double tax treaties. It also offers flexibility in terms of investment strategies and asset classes, and the ability to leverage the fund’s assets. However, AIFs also come with regulatory requirements and risks that must be managed. It’s essential for AIF managers to comply with the laws and regulations of Cyprus and the EU, and to establish an adequate risk management system to minimize potential losses for investors.

Transparency and Reporting Requirements of an AIF

Another important aspect to consider when setting up an AIF in Cyprus is the transparency and reporting requirements. AIFMs must report regularly to CySEC and to the investors, providing them with detailed information on the AIF’s performance and risk profile. The AIFM must also provide investors with regular financial statements, including balance sheets, income statements, and cash flow statements.

Additionally, AIFMs must also disclose any conflicts of interest that may arise during the management of the AIF, and have in place adequate measures to prevent or manage such conflicts.

It’s also worth noting that AIFMs must have a sound governance structure in place, including clear lines of responsibility and oversight, and must have in place effective internal control and risk management systems.

For investors, investing in an AIF in Cyprus can offer the opportunity to access a wide range of alternative investments that may not be available through traditional investment vehicles. However, it’s important for investors to carefully consider the risks and potential returns of the AIF, and to fully understand the investment strategies and risk management techniques used by the AIFM.

In summary, AIFs in Cyprus must comply with a range of transparency and reporting requirements, and AIFMs must have a sound governance structure in place, including clear lines of responsibility and oversight, and must have in place effective internal control and risk management systems. Investors should be aware of the potential tax implications and should carefully consider the risks and potential returns before investing.

Liquidity Management

Another important aspect to consider for AIFs in Cyprus is the liquidity management. AIFs must have the ability to meet redemption requests from investors in a timely manner and without causing significant dilution or damage to the remaining investors. This is especially important for open-ended AIFs, where investors can redeem their shares at any time. AIFMs must have in place adequate liquidity management processes and procedures to ensure that they can meet redemption requests without disrupting the fund’s operations or causing significant losses to the fund or its remaining investors.

Risk Management Processes and Procedures

In addition to liquidity management, AIFs must also have in place robust risk management processes and procedures. This includes assessing, monitoring, and managing the risks associated with the fund’s investments, as well as the risks associated with the fund’s operations and management. The AIFM must have a thorough understanding of the risks associated with the fund and must implement appropriate risk management strategies to minimise those risks.

Depositary Function

Another important aspect of AIFs in Cyprus is the depositary function. AIFMs must appoint an independent depositary to safeguard the assets of the fund and to ensure that the fund’s assets are properly accounted for. The depositary’s role is to ensure that the assets of the fund are properly safeguarded, and to ensure that the fund’s assets are properly accounted for, among other responsibilities.

It is worth noting that AIFs in Cyprus are subject to ongoing supervisory and regulatory oversight by CySEC. This includes regular inspections, monitoring of the fund’s operations and compliance with the rules and regulations, and enforcement action if necessary. AIFMs must also cooperate with CySEC and provide the necessary information and documentation to enable CySEC to carry out its supervisory and regulatory functions.

In summary, AIFs in Cyprus must have the ability to manage liquidity, robust risk management processes and procedures, an independent depositary function, and subject to ongoing supervisory and regulatory oversight by CySEC. AIFMs must also comply with the rules and regulations and cooperate with CySEC to enable it to carry out its supervisory and regulatory functions.

Marketing and Distribution of the Fund

Another important aspect to consider when setting up an AIF in Cyprus is the marketing and distribution of the fund. AIFMs must comply with the rules and regulations regarding the marketing and distribution of AIFs in Cyprus, as well as in any other countries where the fund is marketed or sold.

In Cyprus, AIFMs must obtain a license from CySEC before they can market and distribute their AIFs to the public. They must also comply with the rules and regulations regarding the marketing and distribution of AIFs, which include providing investors with detailed information on the fund’s investment objectives, strategies, and risks, as well as any other relevant information.

Additionally, AIFMs must also comply with the rules and regulations regarding the suitability of the AIF for different types of investors. This means that the AIFM must take into account the characteristics and risk tolerance of each investor, and must only market or distribute the AIF to investors who are suitable for the investment.

It’s also worth noting that AIFMs must also comply with the rules and regulations regarding the distribution of the AIF in other countries. This includes complying with the laws and regulations regarding the marketing and distribution of AIFs in those countries, as well as obtaining any necessary licenses or approvals before marketing or distributing the AIF in those countries.

In summary, AIFs in Cyprus must comply with the rules and regulations regarding the marketing and distribution of AIFs, including obtaining a license from CySEC, providing investors with detailed information on the fund’s investment objectives, strategies, and risks, and complying with the rules and regulations regarding the suitability of the AIF for different types of investors. AIFMs must also comply with the rules and regulations regarding the distribution of the AIF in other countries and obtaining necessary licenses or approvals before marketing or distributing the AIF in those countries.

Taxation of AIFs

Another important aspect to consider when setting up an AIF in Cyprus is the tax implications. AIFs in Cyprus are subject to corporate income tax on their income and capital gains, and investors in the fund may also be subject to taxes on their investment income and capital gains.

The AIF itself is considered as a tax resident in Cyprus if it is managed and controlled in Cyprus, and is subject to corporate income tax at the rate of 12.5%. Income and capital gains derived from investments in the EU are generally taxed at a lower rate or exempt from tax under the EU Parent-Subsidiary Directive and the EU Interest and Royalties Directive.

It’s worth noting that some types of AIFs may be eligible for a reduced tax rate or tax exemptions under Cyprus’s laws. For example, AIFs that invest in certain types of assets, such as real estate or renewable energy, may be eligible for a reduced tax rate or tax exemptions. Additionally, AIFs that invest in Cyprus may be eligible for tax incentives or benefits under Cyprus’s laws.

As for the investors, the tax treatment will depend on the investor’s tax residence, the type of AIF and the nature of the income and capital gains. Generally speaking, dividends and capital gains are taxed at the investor’s personal tax rate. It’s also worth noting that some countries have entered into Double Taxation Agreements (DTA) with Cyprus, which may reduce or eliminate the taxes that investors are required to pay on their investment income and capital gains.

In summary, AIFs in Cyprus are subject to corporate income tax on their income and capital gains, and investors in the fund may also be subject to taxes on their investment income and capital gains. However, some types of AIFs may be eligible for reduced tax rate or tax exemptions under Cyprus’s laws, depending on the type of assets they invest in, and certain investors may benefit from Double Taxation Agreements. It’s important to consult with a tax professional to fully understand the tax implications of setting up and investing in an AIF in Cyprus.

Operational Requirements

Another important aspect to consider when setting up an AIF in Cyprus is the operational requirements. AIFMs must comply with various operational requirements to ensure that the fund is managed and administered in an efficient and effective manner.

One of the key operational requirements is the need to establish and maintain effective systems and controls to manage the risk of the AIF. This includes establishing policies and procedures for risk management, monitoring and managing the AIF’s exposure to various risks, and implementing measures to mitigate those risks.

AIFMs must also establish and maintain effective systems and controls to ensure compliance with the laws and regulations that apply to the AIF. This includes implementing policies and procedures to ensure compliance with the laws and regulations that apply to the AIF, monitoring compliance with those laws and regulations, and taking appropriate action to address any non-compliance.

Another important operational requirement is the need to establish and maintain accurate and complete records of the AIF’s transactions and financial position. This includes maintaining records of the AIF’s assets, liabilities, income, and expenses, as well as records of the transactions that the AIF enters into.

AIFMs must also establish and maintain effective systems and controls to protect the assets of the AIF. This includes implementing measures to prevent and detect fraud, implementing procedures to safeguard the AIF’s assets, and ensuring that the AIF’s assets are properly insured.

In summary, operational requirements for an AIF in Cyprus include:

• Establishing and maintaining effective systems and controls to manage the risk of the AIF
• Establishing and maintaining effective systems and controls to ensure compliance with laws and regulations that apply to the AIF
• Establishing and maintaining accurate and complete records of the AIF’s transactions and financial position
• Establishing and maintaining effective systems and controls to protect the assets of the AIF.

It’s important to note that operational requirements can change as laws and regulations change. AIFMs should stay informed about the operational requirements and ensure they are in compliance with them at all times.

Conclusion

Cyprus offers a variety of alternative investment funds, including AIFs-UNP, AIFs-LNP, and RAIFs, each catering to different types of investors and investment strategies. The country’s legal and regulatory framework, which is in line with EU standards, provides a supportive environment for AIFs to operate and grow. By understanding the different types of AIFs, their structure, requirements, and the applicable laws and regulations, investors and fund managers can make informed decisions when considering Cyprus as a jurisdiction for their alternative investment fund ventures.

Our services relating to Cyprus Alternative Investment Funds

Our dedicated team of lawyers offers comprehensive legal and advisory services, ensuring that your AIF venture in Cyprus is compliant with all applicable regulations and laws.

Our services include:

1. Consultation: We assist clients in determining the most suitable AIF structure for their specific needs and investment strategy, taking into account investor preferences and legal requirements.
2. Formation and Licensing: We guide clients through the entire AIF formation process, including preparing and submitting all necessary documentation to the Cyprus Securities and Exchange Commission (CySEC) for obtaining the required licenses.
3. Regulatory Compliance: We ensure that your AIF adheres to all relevant regulations and laws, including the Alternative Investment Funds Law of 2018, the Law on Alternative Investment Fund Managers, and the European Union’s AIFMD.
4. Ongoing Legal Support: Our team provides ongoing legal advice and support throughout the lifecycle of your AIF, addressing any changes in regulations or the fund’s operations, and ensuring seamless compliance.
5. Service Provider Coordination: We collaborate with other essential service providers such as external managers, custodians, and auditors to facilitate smooth AIF operations.