Cyprus: Looking West Through Alternative Funds

The accession of Cyprus to the EU in 2004 and its subsequent entry into the Euro zone has enhanced the island's credibility as a financial and business centre in the eyes of foreign investors.

There are a number of reasons why Cyprus has become an attractive business centre: -

• Its attractive tax environment;
• A stable legislating system;
• A stable economy;
• International expertise;
• Strategic geographic location;
• Adoption of OECD rules.

Looking West

Cyprus’ traditional use as an investment route to Eastern European countries has been rising steadily over the years. But there has also been an increase in its use as an investment route to the ‘west’ in more recent years, through vehicles offered by the financial services industry on the island.

One of these vehicles is the ‘Alternative (non UCITS) Fund’, which is governed by the International Collective Investment Schemes LAW 47(I)/1999 (ICIS Law). Other laws which are in force and governed by ICIS are the Cyprus Companies Law, the Business Names Law (except from those parts which are specified by the law) and the International Trusts Law.

The Central Bank of Cyprus has been designated as the regulatory authority for ICIS.

Investment Objectives

Among clients wishing to establish such investment schemes are financial services companies, fund managers, groups of high net worth individuals and investment firms.

The schemes may take various forms ranging from real estate funds to fund of funds. The ICIS may have a very flexible investment strategy investing in a wide spectrum of sectors simultaneously.

International Variable Capital Company

This is an International Investment Company that is incorporated under the Companies Law and which ICIS Law recognises as an as an international variable capital company. It is the most used form of the ICIS.

The share capital varies as the capital may fluctuate depending on the increase or decrease of the units of the scheme, satisfying the exit or entry of new investors. Unlike other types of Cyprus companies where a fee of 0.6 per cent applies for share capital increase, the ICIS is exempt from such a burden.

Licensing

In order to establish an ICIS, the prior approval of the Central Bank, as the regulatory and supervisory authority for ICIS, their managers and trustees, has to be obtained.

In order to obtain such approval, the Central Bank must be provided with information which will satisfy them regarding the competence of the directors, promoters, managers or trustees, as the case may be, and that their probity is such as to render them suitable to act in their respective capacities.

In order to recognise the scheme, the supervising authorities must be satisfied that:

• The directors, the promoters, the managers and the trustee of the scheme are competent and honest and that the manager, the general partner, and the trustee (as the case may be) act independently of one another;
• The manager meets the necessary requirements as per the legislation and the regulations.
• The custodian meets the requirements as per the legislation and regulations;
• The general partner meets the requirements of a manager;
• The name of the scheme is not undesirable.

Furthermore, the supervising authorities must be satisfied that the constitutional documentation and the offering memorandum of the scheme contain the information prescribed and that they are in a form acceptable to the supervising authorities.

Finally, the scheme will have to submit other documentation and information as prescribed to the supervising authorities.

Normally, it takes a total of eight weeks to register a fund under the supervision of the Central Bank of Cyprus. There is no minimum capital requirement for private funds. The registration fee requested by the Central Bank is a mere US$500 while this is also the level of annual fee that the authorities charge.

Minimum capital and subscription requirements

There is no minimum capital requirement or minimum subscriptions by investors for private ICIS.

Fund Manager and Custodian

An ICIS is required by the supervising authorities to appoint a fund manager. The manager can be either a regulated entity from Cyprus, licensed by the Cyprus Securities & Exchange Commission, or from any other member state of the EU.

There is an exemption to the appointment of a manager where the members of the board of directors have proven track records in investment management. In such a case the fund can apply to be managed by the board as long as they can support the requested exemption with the necessary documents to the supervisory authority.

Apart from appointing a manager, an ICIS must appoint a custodian who will take under custody the assets of the fund, settle all trades and make sure that that the fund is following the stated and approved investment strategy.

Until recently, the custodian was required to be local but now these services can be offered by a company that engages in custodian services in another member state or another adequately regulated third country. 

Administrator

Funds which do not have a physical office in Cyprus must appoint a company which will administer the Scheme. This company must be approved by the Central Bank and be located in Cyprus. The administrator calculates the NAV of the fund and keeps the Share registry.

Reporting Requirements

Funds regulated under the Central Bank are required to appoint an auditor who will sign the yearly accounts according to the International Accounting Standards.

Annual reports must be prepared by the managers in relation to each ICIS and must contain, as a minimum, the following information: financial statements, information on borrowing, portfolio information, a report by trustees and a report by auditors.

Half yearly reports must be prepared by the managers in relation to each ICIS and must contain, as a minimum, financial statements consisting of the balance sheet, an income and expenditure account, a statement of the sources from which the total income of the ICIS has been generated, a statement of duties, charges and fees paid out and a statement of income distribution or allocation.

Taxation

Cyprus Alternative Funds are in principle subject to tax as any other entity. Although Cyprus has the lowest corporate taxation in the EU (10 per cent), it does not qualify as a ‘tax haven’ since Cyprus complies with the OECD rules against Harmful Tax Competition.

However, by using a Cyprus Alternative fund - certain features of the Cypriot tax system and the broad DTT network can result in a higher after tax result on invested capital, than in cases of use of zero tax jurisdictions. A major reason for this, is that capital gains from the sale of securities is always tax exempt in Cyprus.

Conclusion

Alternative Funds in Cyprus are proving to be a popular entity - currently there are 61 such funds registered with the Central Bank of Cyprus. This is due to the high marketability of the ICIS, which comprise advantages such as being a regulated investment vehicle within the EU boundaries, and can possibly provide the same or even better results if compared to traditional offshore jurisdictions.