Types of Funds

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Overview

The regulatory framework of investment funds in Cyprus is robust and aligned with the wider and well-established EU regulations; it provides for the establishment of funds as either UCITS (Undertakings for Collective Investment in Transferable Securities) or AIFs (Alternative Investment Funds) which can be any funds that are Non-UCITS.

UCITS

The UCITS IV, or Directive 2009/65/EC (Undertakings for Collective Investment in Transferable Securities), which was transposed into Cyprus law in 2012 (The Law 78(I)/2012), is an EU legislation which regulates funds that can be offered to the public at large. These funds can be sold across the EU subject to a notification procedure with each country regulator. UCITS Funds are safe and well-regulated investment vehicles that follow stringent regulations regarding the use of leverage, derivatives, and investment concentration for risk mitigation, which makes them a popular choice in Europe, South America, and Asia.

Non UCITS

Alternative Investment Funds are Non-UCITS Funds (as per meaning of UCITS IV Directive) which fall under the AIFMD Directive 2011/61/EU (Alternative Investment Fund Managers Directive) which was transposed into Cyprus law in 2013 (AIF Law 2013) and amended in 2018 (AIF Law 124(I)/2018); it has introduced the possibility to create three types of AIFs (AIF-LNP, AIF, RAIF) in Cyprus. Examples of such funds are Hedge Funds, Commodities Funds, Funds of Funds, Real Estate Funds, and private equity Funds.
These funds are popular amongst Hedge Fund Managers, Private Equity Managers, Family Offices and Wealth Managers. Some of them are lightly regulated and may not be suitable to Retail Investors.

AIFs (Non-UCITS)

The Alternative Investment Funds Law 124(I)/2018, to the extent amended (hereinafter, the ‘’AIF Law’’) defines alternative investment funds as any collective investment undertakings, including investment compartments thereof, which, collectively:

  • Raise capital from Professional and Well-Informed investors (some Funds could also be open to Retail Investors), with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and
  • Do not require authorisation pursuant to article 9 of the Open-Ended Undertakings for Collective Investment Law or pursuant to the legislation of another Member State which harmonises article 5 of Directive 2009/65/EC∙

The AIF Law allows for three types of AIFs to be established in Cyprus

Alternative Investment Funds with Limited Number of Persons (Up to 50) (AIF-LNPs)

AIF-LNP are Alternative Investment Funds with Limited Number of Persons (Up to 50) that can raise capital from a limited number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors. Examples of such funds are Hedge Funds, Commodities Funds, Funds of Funds, Real Estate Funds and Private Equity Funds. They can be set up as an umbrella fund with multiple segregated compartments (Sub-Funds). An AIF-LNP could be converted into an AIF in accordance with the provisions and upon the submission of the relevant application and the granting of authorisation in accordance with article 13.3 of the AIF Law.

Alternative Investment Funds with Unlimited Number of Persons (AIFs)

AIF-UNP are Alternative Investment Funds with Unlimited Number of Persons that can raise capital from Professional and Retail Investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors. Examples of such funds are Hedge Funds, Commodities Funds, Funds of Funds, Real Estate Funds and Private Equity Funds. They can be set up as an umbrella fund with multiple segregated compartments (Sub-Funds). An AIF could be converted into an AIF-LNP subject to the provisions of Part VII, upon the submission of the relevant application and the granting of authorisation in accordance with article 126 of the AIF Law.

Registered AIFs (RAIFs)

RAIFs are Registered Alternative Investment Funds that can raise capital from Professional and Well-Informed investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors. RAIFs do not require an authorization from the Cyprus Securities & Exchange Commission, however they must be externally managed by an AIFM or a UCITS / CIF if it is set up as a Limited Partnership investing at least 70% of its money in Illiquid Assets. RAIFs can be set up within 2 to 3 months and can start marketing immediately after they are added to the CySec RAIF Register, which make them the ideal vehicle to speed time to market. Examples of such funds are Hedge Funds, Commodities Funds, Funds of Funds, Real Estate Funds and Private Equity Funds. They can be set up as an umbrella fund with multiple segregated compartments (Sub-Funds). A RAIF could be converted into an AIF in accordance with the provisions and upon the submission of the relevant application and the granting of authorisation in accordance with article 13.3 of the AIF Law.

Legal Structures:

AIFs and RAIFs can be set up in one of the following structures:

  • Variable Capital Investment Company (V.C.I.C)
    A Private Limited Liability company registered in Cyprus, with Variable capital.
  • Fixed Capital Investment Company (F.C.I.C)
    A Private Limited Liability company registered in Cyprus, with Fixed Capital.
  • Limited Partnership (L.P)
    A Limited Partnership registered in Cyprus.
  • Common Fund (C.F)
    A common fund is a form of collective investment scheme based upon contractual law rather than being enacted through a corporation or partnership.

AIF-LNP can be set up in one of the following structures:

  • Variable Capital Investment Company (V.C.I.C)
  • Fixed Capital Investment Company (F.C.I.C)
  • Limited Partnership (L.P)

Taxation

  • No Tax on Capital gain from disposal of securities (shares, units of funds, bonds, options).
  • No Tax on Dividend income.
  • Can claim Notional Interest Deduction (NID) on capital injected.
  • Interest income is exempt from Special Defense Contribution Tax (SDCT).
  • Corporation tax rate of 12.5% on taxable profits.
  • No withholding taxes on dividend payment or redemptions.
  • No Tax on Capital Gains from the sale of immovable property located outside Cyprus.
  • No tax based on Assets Under Management.
  • No VAT on services provided by the Investment Manager.
  • Benefit from a network of Double Tax Treaties with more than 62 countries.
  • In case of AIFs with multiple compartments, each compartment is taxed separately, even though each compartment is not considered a separate legal entity.

Key advantages of setting up an AIF in Cyprus:

  • Low Set-Up and maintenance costs compared to EU Fund Centres (Ireland, Luxembourg)
  • Light regulation and reporting obligations (Annual/Semi-Annual, Holdings, Borrowing and NAV Reports)
  • Flexible Investment Strategy with no restrictions on asset allocations, allowing the rollout of any alternative strategy, such as Hedge Fund, Real Estate, Private Equity, Commodities.
  • Easy Distribution in other EU jurisdictions through Passporting regime following a simple notification to the local regulator of the country where the fund will be sold to professional Investors (Non-UCITS Passporting).
  • AIFs can be listed in a regulated stock exchange in Cyprus and the EU for price quoting.
  • AIFs which are marketed to Retail Investors can be listed and traded on the stock exchange in Cyprus and the EU, hence providing more liquidity to the investors.

Actual Trends:

A growing number of AIFs have already been set up in Cyprus, and particular growth was evident in the AIF-LNPs/RAIFs types and there are many pending applications at CySec. According to the Cyprus Central Bank Data, as of 30th of September 2020, the number of reporting funds (UCITS and AIFs) reached 208 Funds, registering an increase of 4.5% compared to June 2020 (199 Funds). In terms of AuM, the fund industry is worth € 5.6 Billion, of which 93.4% (or € 5.23 Billion) represent the share of AIF funds. This highlights the growing importance of Cyprus as a Hub for Alternative Investment Funds set up amongst global investors.

The AIF structures are particularly popular for investments in:

  • Real estate funds.
  • Fund of Funds structures.
  • Absolute return strategies.
  • Private equity funds.
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