Guide to Fund Formation and Asset Management
A straight-forward guide summarizing key aspects of the Cyprus Fund System
Cyprus adopts a progressive and competitive approach, attracting asset managers in Cyprus, maintaining its status as one of the leading global financial centers.
The national competent supervisory authority of funds and fund managers in Cyprus is the Cyprus Securities and Exchange Commission (CySEC), working closely with the European Securities and Markets Authority (ESMA), an independent European Union Authority responsible for securities and capital markets supervision. ESMA oversees and assists the national competent authorities of EU Member States, safeguarding the stability of the EU's financial system by enhancing the protection of investors and promoting stable and orderly financial markets.
As a member of the European Union, Cyprus has transposed (1) the UCITS Directive (and its amendments and EU Level 2 acts) which harmonises the legal framework for investment funds that are sold to retail investors throughout the EU (the “UCITS”) (2) the AIFMD directive (and its amendments and EU Level 2 acts) (the “AIFMD”) harmonising the rules for authorising, supervising and overseeing EU fund managers of a wide range of alternative investment funds (the “AIF”), including hedge funds, private equity funds, and (3) the MIFID II directive (and its amendments and EU Level 2 acts) and MiFIR harmonising the rules for authorising, supervising and overseeing investment firms (the “CIFs”) and harmonising the rules on protection of investors in financial instruments.
With lower set-up and operation costs, enticing tax incentives, highly-evolved legal system, access to skilled workforce and with an investment-driven ecosystem, Cyprus is increasingly drawing fund managers and investors, making Cyprus one of the fastest-growing jurisdictions in the asset management industry.
Cyprus has developed the legal framework offering the following fund structure options, in line with the EU legal framework:
Legal Forms of FUNDS in Cyprus
A. An undertaking for collective investment in transferable securities (UCITS) established pursuant to the Cyprus Open- Ended Undertakings for Collective Investment Law of 2012 (as amended) (the “UCITS Law”), taking one of the following legal forms:
Common Funds (CF), established under the Cyprus Contract law Cap 149 (as amended) with no legal personality;
Variable Capital investment companies, established under the Companies Law Cap 113 (as amended).
B. Alternative Investment Funds (AIFs) established pursuant to the Cyprus Alternative Investment Fund Manager Law of 2013 (as amended) (the “AIFM Law”), taking one of the following legal forms:
Common Funds (CF), established under Cyprus Contract law Cap 149 (as amended) with no legal personality;
Fixed Capital (FCC) or Variable Capital (VCC) investment companies, established under the Companies Law Cap 113 (as amended);
Partnerships (LP), established under the General and Limited Partnerships and Trade Names Law Cap 116 (as amended)
Managers of Funds in Cyprus
A. UCITS Fund are managed:
Internally (self-managed), by the Board of Directors if →
the UCITS funds is a VCC
it maintains a minimum initial capital of €300,000
it has a suitable organisational structure in compliance with UCITS Law and relevant regulations, and
has at least two Directors subject to ‘fit and proper’ test, with the relevant and specialised experience and integrity to manage its affairs
Externally, by →
a UCITS management company licensed in Cyprus pursuant to UCITS Law
an EU UCITS management company licensed in an EU Member State which has passported its licence pursuant to UCITS Law
B. AIF Funds are managed:
Internally (self-managed), by the Board of Directors if →
the AIF fund is an FCC or VCC
the aggregate value of AUM does not exceed €100million; if unleveraged and investors have no redemption rights for at least 5 years the aggregate value of AUM does not exceed €500million
it maintains a minimum initial capital of €125,000 (if AIFMD Sub-Threshold), or €300,000 (if above AIFMD threshold)
it has a suitable organisational structure in compliance with the AIFM Law and relevant regulations, and
has at least two Directors subject to ‘fit and proper’ test, with the relevant and specialised experience and integrity to manage its business
Externally, by →
a UCITS management company licensed in Cyprus pursuant to UCITS Law, with authority to manage AIFs (or EU UCITs management company with passported licence in Cyprus)
an AIFM management company licensed under the AIFM Law (or EU AIFM with passported licence in Cyprus)
an investment firm (IF) licensed in Cyprus under the MIFID Law (“CIF”) (or EU IF with passported licence)
a Mini-Manager, licensed in Cyprus pursuant to Small Alternative Investment Managers Law of 2020 (Mini-AIFM Law), managing only sub-threshold AIF funds (if AIFMD Sub-Threshold), having to comply with lower-threshold licensing rules (the “Mini-Manager”) (or EU Mini-Manager with passported licence)
non- EU fund manager which is subject to prudential supervision (subject to specific requirements and rules)
AIFMD Sub-Threshold explained → the size of the AIF matters to determine the applicability of the AIFMD. The AIFMD will not apply to AIFs that fall below this threshold
an AIF which has assets under management (AUM) do not exceed €100 million, including assets acquired using leverage or
an AIF which has assets under management (AUM) do not exceed €500 million, where no leverage has been used and it is a closed end fund with no redemption rights for the first 5 years.
If the AIFMD sub-threshold is exceeded the AIFMD rules will apply (Above AIFMD Threshold).
Types of AIFs established in Cyprus are:
A. The AIF (AIF with unlimited number of investors):
Form → set up as a CF or FCC or VCC or LP with possibility to set up an umbrella fund structure.
Investors → unlimited number of retail and/or well-informed and professional investors.
Fund management → either:
If below AIFMD threshold Internal → for FCC/VCC (self-managed), managed by its Board of Directors (see above) or Mini-Manager (see above); or
External (see above)
Capital requirements → an initial capital of €125k must be maintained
Depositary/Custodian → a Cyprus or EU licensed credit institution/ investment firm or a third country firm (subject to certain conditions).
B. The AIFLNP (AIF with limited number of persons):
Form → set up as a FCC or VCC or LP with possibility to set up an umbrella fund structure;
Investors → limited to up to 50 well-informed and professional investors;
Fund management → either:
Internal (self-managed) by its Board of Directors (see above); or
External (see above, with exception of AIFM manager)
Capital requirements → an initial capital of €50k must be maintained
Depositary/Custodian → either:
a Cyprus or EU licensed credit institution/ investment firm or a third country firm (subject to certain conditions).
exempted from Depository/Custodian requirements if total assets are less than €5million or AIFLNP has less than 5 investors or its assets are not subject to custody rules
C. A Registered Alternative Investment Fund (RAIF):
Licence → No, only registered with CYSEC
Form → set up as a FCC or VCC or LP (subject to specific requirements) with possibility to set up an umbrella fund structure;
Investors → unlimited but only to well-informed and professional investors;
Fund management → only External (see above), however, if manager is is not an AIFM, the following conditions shall apply: (i) the RAIF invests at least seventy per cent (70%) of its assets to illiquid assets, and (ii) the RAIF is a closed-ended AIF.
Capital requirements → no minimum capital requirements
Depositary/Custodian → either:
a Cyprus or EU-licensed credit institution/ investment firm or a third country firm (subject to certain conditions).
exempted from Depository/Custodian requirements if total assets are less than €5million or AIFLNP has less than 5 investors or its assets are not subject to custody rules
o There are no investment restrictions, however RAIFs shall not be set up as Funds of Funds, Money Market Funds or Loan Origination Funds;
o Depositary/Custodian → a Cyprus or EU- licensed credit institution/ investment firm or a third-country firm (subject to certain conditions).
Key tax benefits of Funds and Fund Managers established/residing in Cyprus
o Corporate tax on net profits of 12.5%
o Exemption from corporate tax for sale of securities (eg shares, bonds)
o Exemption from corporate tax for Dividend income (subject to conditions)
o Exemption from capital gains tax from sale of foreign immovable property
o No subscription tax on the net assets of the fund.
o No stamp duty on subscription, redemption conversion or transfer of Funds shares/units
o No withholding tax on profit distributions to non-Cyprus tax resident investors or to Cypriot tax resident companies.
o Benefit from double taxation avoidance treaties with over sixty countries
o CFs and LPs are considered transparent for tax purposes. Waiting on new amendments to Partnership Law that would provide LPs legal personality
o VAT exemption for fund management services.
o Notional Interest Deduction on equity may be applicable to Cyprus companies (being an interest expense calculated as percentage of equity), reducing the effective tax rate.
o Tax exemptions on personal income tax for staff relocating and residing in Cyprus, as follows:
o Exemption from personal income tax of 20% of the remuneration from any employment exercised in Cyprus by an individual who was resident outside Cyprus before the commencement of his employment, or €8.550, whichever is the lower. This exemption applies until 2025
o Exemption from personal income tax of 50 % of the remuneration from any employment exercised in Cyprus by an individual who was resident outside Cyprus before the commencement of his employment in Cyprus. This exemption applies for a seventeen-year (17) period, commencing on the year of employment, provided that the said income exceeds fifty-five thousand Euro (€55.000) annually
More Information
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