Cyprus is the EU’s up and coming funds jurisdiction with growth in Assets under Management (AUM) of approximately 20 per cent over the last 12 months. The jurisdiction caters fully for the twin-pillars of the Union’s funds regulatory regime: the Alternative Investment Fund Managers Directive (AIFMD); and Undertakings for Collective Investments in Transferable Securities Directive (UCITS). Cyprus is also arguably the most cost competitive domicile in the EU, boasting one of its lowest corporate tax rates.
Alternative Investment Funds (AIFs) in Cyprus operate in the shadow of the EU’s AIFMD regime, as such Cypriot funds fall into two broad categories:
- ‘Full scope’ AIFs, whose managers fall within the AIFMD regime, and which consequently benefit from EU/EEA passporting rights; and
- ‘Sub-threshold’ AIFs, whose management falls outside of the AIFMD regime.
In practice, the test for determining whether the AIFMD is relevant to fund set-up will depend on whether the fund’s AUM are expected to exceed the following thresholds: €100 million; or €500 million where the fund is closed-ended (ie no right to redeem within five years) and where it does not employ leverage techniques.
Types of Funds
EU regulation aside, Cypriot funds follow the pattern of funds in all other reputable funds jurisdictions: funds may be open- ended or closed ended; funds may be utilised as hedge funds or private equity funds; funds may be single portfolio funds or umbrella funds.
The domestic regime, implementing the AIFMD, is governed by the Alternative Investment Funds Law 2018 (AIF Law) and the Alternative Investment Fund Managers Law 2013 (AIFM Law). Under the AIF Law there are four broad categories of AIFs:
Full scope AIFs
Full scope AIFs are funds whose managers can exercise EU ‘passporting’ rights under the AIFMD framework. These AIFs can be either externally managed, ie where a third party fund manager is appointed, or self-managed. Self-managed AIFs conduct investment management as an internal matter through the board of directors or specially convened investment committees.
Full scope AIFs are able to passport services freely to professional investors throughout the EEA under the terms of the AIFMD. This type of AIF must appoint an external alternative investment fund manager (AIFM) licensed under the AIFM Law or equivalent in another EEA state or else apply to become licensed itself as an AIFM where it is self-managed.
Passporting AIFs in Cyprus will typically market solely to “professional investors”, a term defined in the AIFMD, or “well-informed investors” a term defined in the AIF Law.
AIFs with a limited number of persons (AIFLNPs)
AIFLNPs are not within the scope of the AIFMD. They subject certain restrictions such as the maximum number of investors not exceeding 50 persons and the condition that investors must be of a professional or well-informed status.
As such, the AIFLNP is Cyprus’ equivalent or a ‘private’ or ‘family office’ fund found in other jurisdictions. In addition, the assets under management cannot exceed the thresholds under the AIFMD, ie €100 million or €500 million without leverage and a five-year lock-up period. As sub-threshold funds AIFLNPs are not eligible for EU passporting rights under the AIFMD.
For an AIFLNP the manager need not be licensed as an AIFM and may instead be an investment firm (licensed under the MiFID II regime) and in certain cases an unregulated entity.
AIFLNPs usually take the legal forms as outlined further below, ie company or limited partnership. AIFLNPs can also be self-managed or appoint an external fund manager.
Self-Managed alternative investment funds with a limited number of investors (SMAIFLNPs)
Self-managed alternative investment fund with a limited number of investors (SMAIFLNPs), essentially the same as the AIFLNPs above but for the fact they are self-managed.
Registered Alternative Investment Funds (RAIFs)
AIFs, AIFLNPs, SMAIFs and SMAIFLNPs are considered to be licensed funds, which are licensed by the Cyprus Securities and Exchange Commission (CySEC) under either the AIF Law or AIFM Law. RAIFs on the contrary are not licensed by CySEC, only registered, and consequently may be established more quickly.
RAIFs are specifically relevant to professional and ‘well- informed’ investors only. A RAIF may be organised through any of the fund vehicles options noted above. Moreover, they may be structured in the form of an umbrella fund or as single portfolio vehicles.
RAIFs are not subject to CySEC authorisation and licensing procedures, but to mere registration. To this effect RAIFs are not subject to ongoing monitoring by CySEC and as a result it is a prerequisite that they are externally managed by an AIFM established and licensed in Cyprus or in any other EU / EEA member state. It is for the AIFM to ensure the general supervision and compliance in accordance with its own regulatory regime.
There are no minimum capital requirements in respect of setting up a RAIF in Cyprus and there are no significantly rigid investment restrictions in respect of RAIFs. The only caveat to this is that fund of funds, money market funds or loan origination funds are subject to special requirements.
The assets under management of a RAIF are subject to no limitation, however, minimum assets under management of at least €500,000, or the currency equivalent, is to be reached within the first 12 months of registration.
Other fund types in Cyprus
Retail funds (UCITS funds)
Undertakings for Collective Investment in Transferable Securities (UCITS) are collective investment schemes for retail investors. In Cyprus UCITS are governed by the Open-Ended Undertakings for Collective Investment Law of 2012 (the UCI Law) which transposes the UCITS IV Directive into national law. Similar to AIFs, UCITS are regulated by CySEC. The efficient tax framework and process for authorisation make Cyprus an attractive jurisdiction for the establishment and operation of UCITS.
Companies limited by shares are the most common form of entity used for the establishment of open-ended investment funds, with an investor’s liability being limited to the amount paid or agreed to be paid in respect of their shares. Companies are registered under the Companies Law (Cap 113) which is heavily inspired by the UK’s Companies Act 1948.
The AIF Law operates to amend certain provisions of the Companies Law regime unsuitable for investment funds. It also clarifies that the capital of investment fund companies may be classed as being with either variable capital (broadly suitable for open-ended vehicles) or fixed capital (broadly suitable for closed-ended vehicles).
AIFs may be structured, under the AIF Law, as umbrella funds, known locally as funds with multiple investment compartments. Companies which are umbrella funds are known in other jurisdictions as segregated portfolio companies or protected cell companies. It is conceivably possible for a limited partnership in Cyprus to be formed as an umbrella fund.
Limited partnerships are the most popular form of fund vehicle for private equity funds as they offer greater flexibility to vary the rights and obligations of limited partners than is possible within a corporate framework. They are also usually tax transparent. Cypriot limited partnerships are formed under the Partnership Law (Cap 116) which is heavily influenced by the English Limited Partnership Act 1907. A variation of limited partnership, known as the ‘partnership limited by shares’, was introduced in 2015.