Regarding Alternative Investments Funds in Cyprus - Interview with Mrs. Yiota Costa @ SOTERIS FLOURENTZOS & ASSOCIATES LLC
1: What sort of investment funds can be set up in Cyprus and what are the main characteristics of each fund?
Under Cyprus law, there are two distinct types of investment funds: (a) Alternative Investment Funds (“AIF”) and (b) Undertakings for Collective Investment in Transferable Securities (“UCITS”), both of which are regulated by the Cyprus Securities and Exchange Commission (“CySEC”).
An AIF is characterized as a collective investment fund designated for raising external capital from several investors with a view to investing funds in favor of those investors according to a defined investment policy. The Alternative Investment Funds Law 124(I)/2018 (the “AIF Law”) provides a framework for the creation of either an AIF with Unlimited Number of Persons (“AIFUNP”) or an AIF with Limited Number of Persons (“AIFLNP”), which is limited to a maximum of 75 investors, or a Registered AIF (“RAIF”), which is registered as an AIF by virtue of the law without obtaining authorization from CySEC. The AIF may exist in the legal form of a Fixed Capital Investments Company, or a Variable Capital Investment Company, or a Limited Partnership, or a Common Fund (the latter available only as an AIFUNP).
A UCITS is characterized as a collective investment undertaking whose sole aim is the collective investment in transferable securities and/or other liquid financial instruments of capital raised from the public. The UCITS shall be an open-ended investment undertaking and shall be marketed to the public in Cyprus or other EU member states in accordance with the law. Its units shall, at the request of holders, be repurchased or redeemed, directly or indirectly, out of the assets of undertakings. There are two legal forms that a UCITS can take; either to be constituted as a Common Fund or as a Variable Capital Investment Company.
2. What type of investor does mostly choose Cyprus to set up an investment fund?
There are three type of investors that mostly choose Cyprus to set up an investment fund: (a) Professional Investors, (b) Well-informed Investors or Eligible Counterparties, and (c) Retail Investors.
Professional Investors are those investors who possess the experience, knowledge and expertise to make their own investment decisions and duly assess the risk those investment decisions incur.
Well-Informed Investors or Eligible Counterparties are those investors who are not considered as professional investors and must confirm in writing that they are qualified investors aware of the risks involved with an investment in the relevant AIF and make an investment of at least €125,000 or have been evaluated by a licensed bank/credit institution, an authorised investment firm or an authorised management company as having expertise, experience and knowledge in evaluating the suitability of an investment opportunity.
Retail investors are those investors who do not meet either the requirements of being categorized as a Professional Investor or as a Well-Informed Investor/Eligible Counterparty.
3. Why should an investor choose Cyprus and what are the main benefits of Cyprus in comparison to other EU countries?
Cyprus, being an EU member state and a Eurozone member, compliant with EU laws, standards, directives and regulations, is one of the fastest growing centers of investment funds in Europe due to the continuous development of its legal and financial regulatory framework. Moreover, Cyprus' thriving financial services sector makes it one of the leading jurisdictions in Europe in the investment domain, for its extensive range of excellent legal and accounting services. It is geographically located between three continents, Europe, Asia and Africa, which allows Cyprus to act as a footbridge between Europe and the emerging Middle East and African markets as well as the attractive Asian economies. In addition, registration and operational cost with respect to the various types of investment vehicles in Cyprus are among the lowest in the EU. Investors are offered a quite favorable EU and OECD-approved tax regime and tax planning opportunities, as there are no specific tax requirements with respect to the Cypriot AIFs and UCITS. The above investment funds enjoy all of the tax advantages offered by the Cypriot tax legislation in comparison to other EU countries, which include, inter alia, double taxation treaties with over 60 countries worldwide allowing for tax efficient structuring of investments, Cyprus-based funds and asset managers benefit from low tax burdens levied on Cyprus-based corporations and provides incentives and tax benefits for high-earning managers and high-net-worth individuals.
4. Funds are traditionally used to finance large scale investments. In which fields do you mostly see an interest from investors and what’s your role as a legal advisor?
Funds are considered as vehicles which operate under more strict and transparent rules than normal limited liability companies, which give the ability to raise capital from private and institutional investors who are not really interested in being involved in the day to day management of their investment but seek a good return on their investment in accordance with the risk they chose to undertake. Funds are traditionally being used as an alternative method to bank financing and are used to finance real estate, shipping and other large scale investments. It is also one of the most widely used vehicle from venture capitalists whose investments may need extra funding.
Operating a UCITS and an AIF in Cyprus and generally any type of investment fund, entails significant legal exposure and it is crucial for the UCITS and the AIF and all the service providers to remain compliant with the relevant law so that any liability, both corporate and personal, will be avoided. Legal advisors’ key role is to provide legal advice on warnings and guidance to safely and effectively navigate the process of forming and operating a Cyprus fund, and highlighting the obligations of different key players of a fund, so that any potential liability would be avoided.
5. How do you experience the role of The Cyprus Securities and Exchange Commission (CySEC) as the regulatory authority? Do you experience any bureaucracy that inhibits the time efficiency or any potential growth of the alternative investment funds industry?
CySEC is the independent public supervisory authority who is responsible to supervise and regulate the investment services market and transactions in transferrable securities carried out in Cyprus. The CySEC’s role in supporting financial innovation is to address the risks and opportunities involved for the end-investor and the overall integrity of the Cyprus and European financial system and to analyze the potential areas of supervisory priorities in order to enhance the regulatory and supervisory treatment of new or innovative financial activities.
CySEC developed its web portal through which the regulated entities, can submit digitally signed documents, forms and letters. The regulated entities are connected in one system for all their document submissions. In this way, the costs of printing and storing the physical documents were eliminated since it is not required to be submitted using this format, decreasing the bureaucracy via the automated document submission procedure and ensuring the safety and integrity of the correspondence in total.
In general terms, CySEC’s role as a supervisory authority is improving through the time making the alternative investment funds industry in Cyprus to expand rapidly in a time efficient way.
6. What are the primary capital requirements and what are the risks an investor should be aware of?
The share capital requirement for a self-managed UCITS is €300,000, whereas for the third-party managed UCITS the share capital requirement is €200,000.
The way the AIFUNP is managed specifies the minimum capital requirements to which the fund is subject; for externally managed AIFUNP there is no minimum share capital requirement, whereas for self-managed AIFUNP the requirement is set at €300.000. This capital requirement applies to each investment compartment, when the AIF is established as an umbrella fund.
The AIFLNP must appoint a Depositary, unless its total capital does not exceed the amount of €5.000.000, or its members are limited to 5 natural persons, or its portfolio includes assets that can be stored and the value of which does not exceed 10% of the total value of the portfolio and the members are capped at 25 natural persons each of whom must have invested at least €500.00 in the AIFLNP. Any AIFLNP must, within 12 months since the date of its authorisation, have a minimum share capital of at least €250.000, which shall be raised through investments.
Every investor has to be aware of the risks involved with an investment. Investment in any compartment of an AIF involves special risks, and purchase of investment shares should be considered only by persons who can bear the economic risk of their investment for an indefinite period and who can afford a total loss of their investment. The value of the investment shares and the income from them is not guaranteed and it may go down as well as up, and investors may not get back the amount invested. Consequently, there is a potential risk of the loss of the entire amount of the value of an investors’ investment. Some of the risk factors that an investor should take into account are: a) Economic and/or political instability which may result in the imposition of restrictions on the free movement of capital; b) Market and Acquisition Risks where in some cases acquisition of some assets may be subject to delay and during the period of delay it may be difficult to prove beneficial ownership of the assets; c) Currency risk, where the value of an investor’s investment may be affected favorably or unfavorably by fluctuations in the rates of the different currencies; and d) Leverage risk which creates an opportunity for increased net investment income dividends for the investors, but also creates risks; it is not guaranteed that the use of leverage, if employed, will result in a higher yield on the investment.
7. What taxation rules applies on AIF’s in Cyprus?
Corporate Income Tax is imposed on Cyprus tax resident companies at the uniform rate of twelve and a half percent (12.5%) for each year of assessment on all income accrued or derived from all chargeable sources both within and outside Cyprus (i.e. worldwide income basis), subject to available exemptions and deductions as per the law. Any interest income received from an AIFLNP is considered as "active" income and is exempt from Special Defence Contribution Tax. This means that interest income is taxed as normal business income at 12.5% on any resulting net profits. All relevant expenses incurred wholly and exclusively for the production of (taxable) income constitute deductible expenses whereas, inter-alia, dividends, capital gains or profits from the disposal of "securities" constitute tax exempt incomes. Availability for Notional Interest Deduction for new equity as of tax year 2015 onwards, may reduce taxable base up to 80%. No subscription tax on the net assets of the fund is applied and fund management services provided to alternative investment funds are not subject to VAT.
8. The political situation in the island and in the surrounding area is fenced with lots of turbulences, how does this effect the alternative investment funds industry in Cyprus and how do you see the AIF’s future in Cyprus?
In general terms, political situation in Cyprus and in the surrounding area could lead to legal, fiscal and regulatory changes or the reversal of legal/fiscal/regulatory/market reforms. However, the transformation of the investment funds regime in Cyprus in combination with the island's strategic geographic position, attractive tax environment and the experienced professional service sector has made Cyprus the center of the EU funds jurisdictions. With its efficient and up-to date regulation, which is fully harmonised with the related EU Directives, provides a framework in which AIFs can operate efficiently. As the value of assets under fund management in Europe is increasing with a consistent growth rate, Cyprus with steady and important steps to the right direction, will play a significant role in the future of the global funds industry and more specifically of the AIF’s industry.
About the interviewee
Yiota Costa joined Soteris Flourentzos & Associates LLC in March 2016 as an Associate Lawyer. Having obtained the LL.B. (Hons) Law from the University of Leicester, U.K. in 2013, she decided to specialize in corporate and commercial law. During her studies, she was an ELSA member (European Law Students’ Association). Yiota Costa deal with a wide range of corporate and commercial matters, including amalgamations, cross-border corporate restructurings, re-organizations and mergers & acquisitions.