Investment Funds in Cyprus
Cyprus has emerged as a preferred jurisdiction in EU for the investment fund industry, attracting fund managers and investors due to its robust legal framework and attractive tax incentives. As one of the first EU member states to transpose the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investment in Transferable Securities (UCITS) into national law, Cyprus offers a stable and competitive environment for fund structuring and management.
Regulatory Developments in Cyprus’ Investment Fund Industry
The enactment of the Alternative Investment Funds Law of 2014 marked a significant milestone in the evolution of the Cypriot funds industry. Subsequent improvements led to the introduction of the Alternative Investment Funds Law of 2018 (the “Law”), which streamlined regulatory processes and introduced the concept of Registered Alternative Investment Funds (RAIFs). The Law provides a comprehensive legal framework for the establishment and operation of Alternative Investment Funds (AIFs), ensuring compliance with EU regulations and investor protection.
Types of Alternative Investment Funds (AIFs) in Cyprus
The Law defines an AIF as a collective investment undertaking that raises capital from multiple investors to invest according to a defined investment policy for their benefit. The available types of AIFs in Cyprus include:
- AIFs with Unlimited Number of Persons (AIFUNPs)
These funds are suited for well-informed, professional, and retail investors. They may be structured as:
- Mutual/Common Funds (C.F.)
- Fixed Capital Investment Companies (F.C.I.C.)
- Variable Capital Investment Companies (V.C.I.C.)
- Limited Partnerships under the General and Limited Partnership and Business Names Law, with or without separate legal personality
- AIFs with Limited Number of Persons (AIFLNPs)
Restricted to a maximum of 50 investors, AIFLNPs cater to well-informed and professional investors. They may be structured as:
- Fixed or Variable Capital Investment Companies
- Limited Partnerships under the Partnership Law, with the potential for separate legal personality
- Registered Alternative Investment Funds (RAIFs)
RAIFs offer a streamlined process without prior authorization from the Cyprus Securities and Exchange Commission (CySEC), provided they are managed by a licensed AIFM. They may take the form of:
- Mutual/Common Funds
- Fixed or Variable Capital Investment Companies
- Limited Partnerships
All AIF structures may be established as either open-ended or closed-ended funds and may operate as single-fund or umbrella schemes with multiple investment compartments, ensuring asset and liability segregation.
Regulatory Supervision and Management of AIFs
The competent authority for authorizing and supervising AIFUNPs and AIFLNPs is CySEC, whereas RAIFs must only be registered with CySEC after their incorporation.
AIFs can be managed internally by their board of directors (if structured as an investment company) or externally by:
- Alternative Investment Fund Managers (AIFMs)
- UCITS Management Companies
- MiFID II Investment Firms or Cyprus Investment Firms (CIFs)
- Sub-threshold AIFMs (Mini-Managers)
- Third-country firms authorized for portfolio management
- Special purpose portfolio management companies (for AIFLNPs only)
Timeframe for Licensing
The licensing process for AIFs typically takes six months, whereas RAIFs benefit from a much faster registration process of only three weeks. This expedited timeframe makes RAIFs an attractive option for fund managers seeking a quicker market entry.
Capital Requirements and Depositary Obligations
The Law mandates minimum capital requirements for internally managed AIFs:
- AIFUNP: €125,000 (cash or assets convertible to cash)
- AIFLNP: €50,000 (cash or assets convertible to cash)
- RAIF: No minimum capital requirement
Additionally, all AIFUNPs and RAIFs must appoint a depositary, while AIFLNPs may be exempt under certain conditions.
Minimum Assets Under Management (AuM)
AIFs must raise a minimum level of capital within 12 months of authorization:
- AIFUNP & RAIF: €500,000
- AIFLNP: €250,000
For umbrella structures, these thresholds apply to each investment compartment, ensuring adequate investor contributions aligned with the fund’s investment policy.
Tax Benefits of Establishing an AIF in Cyprus
One of the key attractions of Cyprus as a fund jurisdiction is its favourable tax regime:
- No capital gains tax on the sale of securities
- No tax on dividends received by the fund
- No subscription tax on net fund assets
- 12.5% corporate tax rate
- Notional Interest Deduction (NID) for new equity contributions
- No capital gains tax on immovable property sales outside Cyprus
- Each investment compartment is treated as a separate taxpayer
- Extensive Double Tax Treaty network
Investor Tax Benefits
Investor taxation depends on residency, but key advantages include:
- No withholding tax on dividends for non-Cyprus tax residents
- No tax on the sale or redemption of AIF units (except in cases where the AIF owns Cyprus-based immovable property)
- No wealth tax
How Spencer West in Cyprus can Assist
Our firm specialises in providing expert legal advice on the establishment and operation of AIFs in Cyprus. We collaborate with licensed fund managers to offer seamless solutions tailored to our clients’ investment strategies.
For more information on setting up an AIF in Cyprus, please do not hesitate to contact Mr. Theo Antoniou, Founding Partner at Spencer West Cyprus at [email protected]
Disclaimer: The content of this article is intended for informational purposes only and does not constitute legal advice.
