While the United Kingdom continues to figure out how to deal with the impacts of its decision to leave the EU, many investors and wealth managers in the fund industry are navigating the impacts of being left out of the Deal. The option now for many investment funds post-Brexit is to find international solutions. Cyprus, with modernized legislation and a host of economic benefits for foreign investors, is a strong choice for taking advantage of the legal and financial gaps currently facing investment funds post-Brexit.
The Aspen Trust Group explores the unique cross-border opportunities for UK firms in selecting Cyprus as the next step up for investment funds post-Brexit.
Mind the Gap: What the Deal Leaves Out for Business and Wealth Managers
Asset management and financial services are some of the most hard-hit areas of the UK and the EU’s split. Beyond the scope of London’s future as a financial center, questions over the next stages of legislation and their implications for firms cause uncertainty about the maintenance of operations and growth for investment management and access to global financial services. In 2018, the European Commission publicly addressed these concerns in a Communication discussing the need for preparedness in all areas affected by the UK’s withdraw.
The issue centers largely on the conduction of business through an EU regulatory passport, namely the MiFID, which oversees regulations on the distribution of asset and fund management services. Without the MiFID, equivalence becomes the standard for determining business activity, a process that requires judgment for each piece of legislation and could face challenges with individual member states.
Moreover, many UK firms cannot afford to wait for the possibility that the UK and the EU will come to a decision to continue all business activities uniformly. Relocation to a jurisdiction that provides financial incentives and stable legislation for UK investment funds post-Brexit is a strategic opportunity.
UK and EU-Fund Managers Should Both Be Concerned
In general, European asset management regulations come from three main frameworks: the Alternative Investment Fund Managers Directive (AIFMD), the Markets in Financial Instruments Directive (MiFID) discussed above, and the Undertakings for Collective Investment in Transferable Securities Directive (UCITS).
Brexit compromises the UK’s inclusion in the directives and might have the effect of rendering the jurisdiction as a third country under EU legislation. The impact would cause UK funds and management companies to lose the passporting rights into the EU but also in the other direction as EU-managed funds would no longer be able to enter the UK with passporting rights.
Given that the UK is the largest hub for asset management in the European continent, investment and access might be pulled from UK firms. In turn, AIFs are subject to each member state’s national private placement regime (NPPR), which varies by jurisdiction. As a market strategy, this is not ideal for fund managers of investment funds post-Brexit, especially in jurisdictions that do not give permission for any NPPR.
The good news is that AIFMD covers all AIFs with recognition of EU and Non-EU AIF management companies, known as alternative investment fund managers (AIFMs). So while AIFMs lose passporting rights, they are still able to manage EU AIFs without trouble. Yet, any UK AIFs that are not EU marketed will be completely cut off from AIFMD.To avoid issues with systemic risks, investor protection, competition, and market fluctuations or disruptions, the best course of action would be to relocate to jurisdictions with strong financial service industries and proactive policies.
Beyond Filling the Gap: Operating Investment Funds Post-Brexit in Cyprus
Cyprus has been garnering the attention of many international businesses for its excellent regulatory framework, cost-optimizing tax regime, and the quality of its growing financial services sector. The pro-business environment of the jurisdiction can also be beneficial for the portfolio management and asset management of investment management companies and foreign investors alike.
At a time where the future of investment funds post-Brexit leaves many UK firms questioning how to maintain operations and growth, Cyprus provides not only a stable foundation to continue normal operations but also an opportunity to strategically invest in the future of their assets by optimizing several areas of their portfolios.
Key factors making Cyprus an ideal location for investment funds post-Brexit include:
- Access to EU Passporting and Network of International Non-Member States: Investment funds post-Brexit will still be able to enjoy business connection and operation to EU member states as well as third countries such as Switzerland, the US, India, Israel, and Singapore.
- Modern, Efficient Legal and Regulatory Framework for Better Business: Based closely on the English common law legal system, Cyprus policy offers strong protections and efficient regulatory practices that maintain transparency and compliance with the EU and international standards.
- Connection to A Pool of Highly-Skilled Professional Talent: Cyprus is a fast-growing financial hub with a multilingual, business-minded workforce focused on the service industry and also provides a network to top international talent across several world regions.
- Affordable professional fees and thriving financial service industry: Among EU member states, Cyprus has some of the lowest labor costs in comparison to high quality services. Office rental rates are also among the lowest in Europe, saving UK firms operational costs in the long-term and avoid complex bureaucracy.
- Entry in Strategic Market Location: Situated between three major continents, Cyprus brings together a blend of global market access, including Russian and Chinese partnerships, while providing more than 40 EU Trade Agreements and 65 double tax treaties.
- Advantage in Structure Flexibility: From alternative investment funds (AIFs) to registered alternative investment funds (RAIFs), Cyprus offers flexible structures, inclusive of any asset, when choosing between registered and alternative investment fund managers to get foreign investors and firms the most from their portfolio management.
- Upgrades in Tax-Friendly Regime: Investment funds post-Brexit and their associated fund managers can benefit from the attractive tax policies of Cyprus, with more than six advantages in lower or no taxation.
Tax on Investment Funds in Cyprus
One of the biggest questions investment fund owners and managers have regarding selecting a jurisdiction is “How are investors taxed on stocks and mutual fund investments?” Whether a jurisdiction provides a low or tax-free investment on mutual funds or other AIF structures presents a financial incentive to make the switch to an international location for fund owners as well as the managers that will represent their clients’ investment funds post-Brexit.
Cyprus continues to offer investors and financial managers a range of benefits for tax on investment funds, including:
- Profit taxation at 12.5%, the corporate tax rate, and one of the lowest among EU jurisdictions
- Over 60 double tax treaties and the EU Parent-Subsidiary Directive that allows for tax exemption on dividends of underlying subsidiaries
- No withholding taxes regarding dividend payments from a resident Cyprus company to non-resident individuals
- A notional interest deduction of a company’s taxable profits relating to newly-acquired capital from shareholders
- No capital gains tax on disposal of shares
- No tax on intra-EU transactions
- Possible tax relief of at least 75% of holdings at a corporate level
- Possible deduction of loss by Cyprus companies for business activity outside the jurisdiction
- Restructures and organization may allow the receiving entity to claim tax losses
Types of Investment Funds and Management Solutions in Cyprus
Under the Alternative Investment Funds Law of 2018, alternative investment funds (AIFs) can be structured as:
- A common fund
- A limited partnership
- A fixed capital investment company
- A variable capital investment company
Registered Alternative Investment Funds (RAIFs) are registered AIFs in the jurisdiction under an authorized Fund Manager (AIFM), that is licensed anywhere globally under the EU passporting framework. This sets up a prime context for UK fund managers and their clients to set up operations in Cyprus while staying connected to the UK and the rest of Europe.
Moreover, Cyprus recognizes the establishment and registration of AIFs which may perform as an umbrella fund so that strategic investment opportunities may be considered for a collection of smaller funds.The Alternative Investment Fund Management Law (2013) grants AIFMs the authorization to market and provide services as long as they are EU-authorized and manage assets worth over €100 million. For managements with fewer assets than that, Cyprus oversees and regulates them as mini-managers with policies on capital requirements.
Market Opportunities and Other Key Benefits
Another reason to consider Cyprus for the relocation of investment funds post-Brexit is the ability to join an active investing community that has worked to grow many industries in the country. Foreign investors have helped shape the real estate, shipping, hospitality, education, healthcare, energy, and film industries.
Investments in these fields continue to drive the economy of Cyprus towards being an advanced, fast-growth leader in the EU. GDP growth in the third quarter of 2019 was 3.4% and the World Bank Doing Business Report lists Cyprus as 54th in Ease of Doing Business in 2020.
As foreign investments and favorable regulatory policies propel Cyprus forward, global competitiveness becomes Cyprus’s advantage. For 2019, the country ranked 44th out 141 countries on the World Economic Forum’s Global Competitiveness Report, indicating strong international confidence in the future business outlook of the country and one of the best jurisdictions to safeguard valuable investment funds post-Brexit.
Cyprus as a Growth Leader in the EU’s Fund Industry
According to CySEC, as of September 2020, Cyprus had a total of 8 billion Euros in assets under management (AuMs) which accounted for a 5.3% increase from the previous quarter. Private equity and real estate made up most of these investment funds.
Asset holders and investment managers can capitalize on the opportunity for investment funds post-Brexit by turning to Cyprus. Already many UK firms and investors have chosen Cyprus as not only a positive locale for investment due to Brexit but also as a growth leader in general. Q4 of 2019 demonstrated the largest percentage increase in net assets among the European Investment Fund industry with a rise of 11.9% according to EFAMA Quarterly Statistical Release.
Other indicators of strong growth for Cyprus as an investment fund hub were the 10.5% increase in net AIF assets of the European AIF industry and 37.8% in net UCITS assets of the European UCITS industry in the same 2019 Q4 period.
Financial Services Sets Its Sights on Cyprus
In 2020, CySEC was providing oversight for nearly 800 international entities and had registered a workforce three times as large as the previous decade in order to maintain high-level regulatory service. While the financial sector has always been a strong component of the Cypriot economy, the pandemic and international events such as Brexit have catapulted the country into a greater role of entrepreneurship and opportunity, especially in regards to financial technology and investment funds. Put into perspective, more than 250 fintech firms have established a presence in Cyprus and provide regulatory and compliance services, industry-specific technology, artificial intelligence capabilities, and investment into blockchain.
Further, Cyprus has roughly 30 blockchain start-ups with fund investment of €142 million, maintaining a competitive edge with other European financial hubs. Among the array of fintech companies, crypto-trading and exchanging as well as alternative payment options have emerged on the scene.
To support the financial services ecosystem, cities such as Limassol have rapidly developed as financial service markets, with the city of Limassol meeting the demand with more than 8,000 ICT experts. Both private and public support systems have been established to garner innovative solutions and healthier relationships among entrepreneurs, academics, and research institutions.
The European Fund and Asset Management Association has carefully observed the exponential growth of the investment fund industry of Cyprus. Against other European locales, the fund industry in Cyprus achieved the highest growth in net asset value in Q4 (2019). Within the decade, management of assets has expanded to cover €8 billion. Should the current rate of growth remain consistent, the next five years would add €4 to that total.
One of the reasons the island has generated so much attention for the management of investment funds post-Brexit is the associated low cost of maintaining a company in the jurisdiction. Andreas Yiasemides, President of the Investment Funds Association, explains that investment fund management companies see costs two-thirds lower than other European investment fund hubs such as Luxembourg or Ireland. The result is the same standard of high-quality services and policies at much lower labor costs and key tax incentives.
Investment funds post-Brexit can find promise in the thriving economic environment of Cyprus. The maintaining of cross-border operations, management, and financial services is only one component of investment success. While these areas may be the most prominent priorities for the portfolio management of UK firms, investment funds can use Cyprus to optimize and get ahead in many other areas as well.
There is no better time than to move investment funds post-Brexit to Cyprus and the professionals at The Aspen Trust Group are dedicated to providing services with the highest in quality and most affordable in cost to help you not only manage your assets but also to expand your wealth assets to meet your financial goals. Contact our team of financial experts to learn more about the Cyprus advantage for your unique fund needs and succeed in growing your investment funds post-Brexit.