Setting up Alternative Investment Funds and Registered Alternative Investment Funds in Cyprus allow investors to conduct business through a fund without the daily management required of other company structures. This type of structure along with the favorable tax regime of Cyprus enables investors to raise more capital and High-Net-Worth-Individuals to financially benefit from this alternative method of investment.
The Aspen Trust Group details the legal framework of Alternative and Registered Alternative Investment Funds in Cyprus and the taxation policies that have made the jurisdiction a rising star among EU funds jurisdictions.
The Business of Funds
Abraham van Ketwich, an Amsterdam-based merchant, is often cited as the first person to professionally record an initiation of managed investment funds in 1774. It is believed that the Trust System was the idea to inspire King William I to launch close-ended investment companies in the Netherlands in 1822.
In defining trusts, one needs to mention that they establish the relationship in which the settlor gives the trustee the right to hold assets on behalf of the beneficiary. In this relationship, there are three separate parties: the settlor, the trustee, and the beneficiary. They are created as means to protect, manage, and distribute the trustor’s assets in an effort to provide legal protection and save time, money, and paperwork.
Funds originated as a way to diversify investment opportunities and in order to increase the appeal of investments to lesser investors with limited capital, other jurisdictions began to establish their own fund-like trusts. Switzerland in 1849 and Scotland in the 1880s initiated the global funds’ wave and the concept soon found its way to Great Britain, France, and the United States by the 1890s.
Both the Boston Personal Property Trust, 1893, and the Alexander Fund in Philadelphia, 1907, solidified the creation of the modern-day fund structure.
With its rise in popularity, trusts and mutual funds have expanded to include Alternative Investment Funds. Cyprus is the latest jurisdiction to make significant legislation to boost incentives for the establishment of Alternative and Registered Alternative Investment Funds.
The most recent of these is the Alternative Investment Funds Law 2018, which introduced the provisions for establishing Registered Alternative Investment Funds in Cyprus, which are not regulated by the Cyprus Security and Exchange Commission, but supervised by a mandatory licensed Alternative Investment Fund Manager.
The goal of the new law is to provide more cost-conscious fund vehicles and to decrease the time until a fund may start providing investment opportunities.
Setting Up Alternative Investment Funds in Cyprus
Cyprus has a legal framework set up for three types of Alternative Investment Funds:
– Alternative Investment Funds, with unlimited number of investors;
– Alternative Investment Funds of Limited Number of Investors; and
– Registered Alternative Investment Funds.
Alternative Investment Funds
An Alternative Investment Fund may be founded and operated as either an open-ended or close-ended fund. Its legal form may be as a Variable Capital Investment Company, Fixed Capital Investment Company, Limited Partnership, or a Common fund.
Moreover, Alternative Investment Funds may be managed internally or externally, but the assets of the fund must be entrusted to a depositary that has a registered office in Cyprus, an EU member country, or a third country. If the fund is managed externally, no initial capital is required. However, if the fund is self-managed, the initial capital requirements are set at 125,000 Euros or 300,000 Euros, depending on satisfying AIFMD (Managers Directive) conditions.
Cyprus Alternative Investment Funds have no restrictions on the number of investors as long as the legal form allows it.
These types of funds must also have a minimum value of Assets Under Management (AuM) of 500,000 Euros within 12 months.
Alternative Investment Funds of Limited Number of Investors
Cyprus Alternative Investment Funds of Limited Number of Investors follow similar guidelines as Alternative Investment Funds but are limited to up to 50 investors. Its legal form may be as a Variable Capital Investment Company, Fixed Capital Investment Company, or Limited Partnership.
If managed externally, there are also no initial capital requirements, but if self-managed, the capital requirements are 50,000 Euros.
There are also no restrictions placed on investment strategy, whereas Alternative Investment Funds do apply some restrictions for liquidity and risk diversification.
With this type of fund, the minimum AuM within 12 months is only 250,000 Euros.
Registered Alternative Investment Funds
Registered Alternative Investment Funds in Cyprus may take the legal form of a Variable Capital Investment Company, Fixed Capital Investment Company, Limited Partnership, or a Common fund. The country does not require authorization but the fund must be registered to a RAIF register.
There are a few restrictions to the investment strategy of this type of fund, such as the fund cannot pursue a Money Market policy or be a fund of funds.
Further, the number of investors is unlimited and it must be externally managed, which also means that there are no initial capital requirements.
The minimum AuM within 12 months is 500,000 Euros.
2022 Amendments to RAIF and AIF Law
In January 2022, CySEC introduced a new directive known as Circular C484 pertaining to the external management affairs of RAIFs. Under the published directive, CySEC would begin to oversee assessment towards the authorization of External Managers of RAIFs. Any external managed AIFs would also be subject to assessment. Qualifying RAIFs would be deregistered from the RAIF Register and re-registered under the CySEC RAIF Register.
Several components of the assessment, when applicable, include:
- Incorporation certificate
- Investment strategy and policy in regards to the External Manager
- Regulatory documents of the RAIF
- Depository appointment arrangement
- Information Memorandum
- Attestations of external auditors, legal advisors, and promoter of the External Manager and the CySEC registration application
Parties interested in establishing Registered Alternative Investment Funds in Cyprus should register from this point forward with the relevant application and offices, based on structure.
- Investment companies or Limited Partnerships: External Manager submits an application to CySEC RAIF Register within one month of incorporation (into the Registrar of Companies as well as Intellectual Properties)
- Mutual Funds: External Manager submits an application to CySEC RAIF Register within one month of regulation production.
- Existing Companies: Upon deciding to convert into a RAIF, External Manager submits an application to the CySEC RAIF Register within one month from amendments to the memorandum and the articles of association.
Significant Provisions for Regulation and Constitutional Documents of RAIF Structures
When drafting the regulatory framework for Registered Alternative Investment Funds in Cyprus, External Managers should take into consideration these important provisions of AIF Law:
- That the RAIF is subject to Part VIII, AIF Law
- That the name includes the legal status of the RAIF and reference to being a RAIF
- That information related to the type or concerning umbrella-type RAIFs is included
- That depositary matters are mentioned
- That subscription and redemption matters are mentioned
- That mutual funds matters are mentioned
- That investment companies matters are mentioned
- That limited partnerships matters are mentioned
- That mergers matters are mentioned
- That relevant units matters are mentioned
For guidance and assistance with RAIF documentation and compliance, The Aspen Trust Group is here to provide your RAIF with a range of quality services that ensure that your RAIF registration and structuring process goes smoothly.
The Tax Benefits of Registered Alternative Investment Funds in Cyprus
Both Alternative Investment Funds and Registered Alternative Investments Funds in Cyprus enjoy six key tax benefits.
- Favorable tax rate of 12.5%
Cyprus-based funds as well as their investors reap the rewards of the island’s favorable tax environment as the corporate tax rate is only 12.5%. The resulting net profits are taxed at this low rate with no imposition of taxes on the net assets of the fund.
- No tax on gains from sale of shares or bonds
Any gains from the sale of securities or bonds are exempt from taxes in Cyprus
- No tax on Dividend Income
Dividend income received in Cyprus is not taxed in Cyprus.
- No Special Defence Contribution on interest income
Interest income is considered “active” income and is also exempt from the Special Defence Contribution Tax in Cyprus. In other words, interest income is taxed at the corporate tax rate of 12.5% on any resulting tax profits.
- Eligibility for Notional Interest Deduction on capital raised by investments
Another key tax benefit of setting up an Alternative or Registered Alternative Investment Fund in Cyprus is that the amount of capital raised by investments could be eligible for Notional Interest Deduction (NID), with the potential to reduce the taxable base by up to 80%.
In terms of funds with multiple compartments, each is taxed separately even though each compartment is not a separate legal entity.
- No withholding taxes on dividend payments
Cyprus has no withholding taxes on dividend payments or redemptions.
Overall, this jurisdiction is one of the most attractive tax environments for establishing and operating an Alternative or Registered Alternative Investment Fund.
Additional Benefits of AIFs and RAIFs in Cyprus
A favorable tax environment is only one criterion for optimizing the benefits of establishing Alternative Investment Funds or Registered Alternative Investment Funds in Cyprus. Investors, families, and HNWIs need to carefully assess the health and success of their Funds’ jurisdiction market to ensure the success and longevity of their wealth management endeavor.
Growth of Funds and Investment Jurisdiction
Over the past decade, Cyprus has been the European locale for many funds and investments. Part of the reason so many foreign investors have chosen the jurisdiction for wealth management is due to the influential growth of its financial management and services sector.
Moreover, these investments are not limited to one or two key industries, but rather across a wide range of fields. Investment growth has occurred in family offices; corporate structures; start-ups, technology, and innovation; real estate; natural and renewable energy; shipping; film production; and intellectual property.
Despite the Covid-19 pandemic, Cyprus is still leading among European countries in substantial growth of its economy and continues to receive both domestic and foreign investment annually.
Gateway to the European Market
Another advantage of AIFs and RAIFs in Cyprus is the access to the European market. As soon as registration with CySEC is complete, an AIF or RAIF may passport, or manage, market, and distribute units, to professional investors in any of the other EU member states. No additional permission is required using the regulator-to-regulator notification mechanism, cutting down the cost and time of gaining approval and compliance with each nation’s laws. CySEC also has some cooperation arrangements in effect that allow the marketing of units to several non-EU professional investors.
Flexibility in Structure
Finally, given access to talented financial service providers and managers, Cyprus provides AIFs and RAIFs with exceptional quality assessment and flexibility in the structural formatting of funds. Large entities and families alike can tailor their Fund to meet the demands of their unique situation and to maximize the financial incentives that they receive from their wealth portfolio.
Effective legal framework and regulatory policies coupled with some of the most rewarding financial incentives for wealth management and investment make it easy to secure a legacy of wealth for generations to come. Whether structuring Alternative Investment Funds or Registered Alternative Investment Funds, Cyprus provides a safe, reliable environment for your financial wealth to expand in the way you see fit.
Standing out from Other Jurisdictions
In Europe, three main jurisdictions are listed as ideal places for establishing an Alternative or Registered Alternative Investment Fund, but Cyprus is quickly emerging as a top choice throughout the EU.
The first jurisdiction with a solid investment reputation is Luxembourg. Currently, Luxembourg is the largest investment center in Europe and the next largest after the U.S. The second jurisdiction is Ireland, another major investment center in Europe.
While both of these jurisdictions offer a gateway into the financial market of Europe, they are not geographically connected to other global market hubs. Cyprus not only allows for entrance into the EU, but also investment possibilities with Africa, the Middle East, and Asia.
Luxembourg has an annual subscription tax of 0.0, 0.01, and 0.05% of net assets based on fund structure and no withholding tax for distribution unless the EU Savings Directive applies. Some Alternative Investment Funds are required to pay the corporate tax rate of 17%. The minimum capital required within 12 months is either 1 million Euros or 1,250,000 Euros, also depending on fund structure.
Another significant Alternative Investment Funds jurisdiction is Malta. Setting up an Alternative Investment Fund in Malta only requires an initial deposit of 300,000 Euros. However, fund managers and advisors who are tax residents are subject to a general income tax of 35% and chargeable capital gains tax also at 35%, although some relief may come through the tax relief system of the country.
Both Malta and Cyprus are leading the way for smaller investors to establish Alternative Investment Funds, but the option for Registered Alternative Investment Funds in Cyprus is ideal for families or HNWIs wishing to protect wealth assets in different compartments under an umbrella-fund model.
Utilizing Alternative Investment Funds with The Aspen Trust Group
In general, there are many ways to utilize Alternative Investment Funds and Registered Alternative Investment Funds in Cyprus. With some of the most tax-incentivized policies and strategic geographical location to markets, Cyprus offers investors as well as families substantial opportunities for wealth acquisition and management.
Through our wide range of investment and family office services, The Aspen Trust Group can assist in establishing and managing Alternative and Registered Alternative Investment Funds in Cyprus. Consult with our team of professionals today and see how we strive to give our clients a brighter future.