Legal Framework and Taxation of Cyprus Investment Funds
Angelos Gregoriades, Member of the Board, Head of Tax and Corporate Services
Cyprus is a cost-effective EU, OECD, FATF and Euro Zone jurisdiction with the lowest corporate tax rate in the EU. Its business and commercial law is based on English law. It offers platforms for pursuing alternative investment strategies both through Cyprus UCITS and through Cyprus alternative investment funds. Cyprus has also reputed professionals regarding investment fund administration and taxation; e.g. 90% of Cyprus accountants hold one of the two top UK professional qualifications and have acquired significant experience in the financial centre of London. At the same time big audit houses, including all “big four”, as well as international law firms specialised in alternative investments are actively present in the financial services sector. Cyprus’ cost-effectiveness, its EU Membership rendering the set-up and pan-European marketing of UCITS possible, its OECD and FATF compliance as well as the competitive level of local service providers motivate its presentation as a jurisdiction eligible for (re-)domiciling alternative investment platforms.
Cyprus investment funds can be categorised as UCITS and as alternative investment funds (non-UCITS). The new Cyprus UCITS law transposing the UCITS IV Directive into Cyprus law (draft law) is expected to be voted during the summer session of the House of Representatives. Regarding non-UCITS, Cyprus currently provides for the set-up of International Collective Investment Schemes of private type (ICIS/private ICIS respectively) under the ICIS Law of 1999.
Legal framework of Cyprus UCITS
Depending on the desired balance of power between investors and management, a Cyprus UCITS can be set-up either as a Common Fund (CF) or as a Variable Capital Investment Company (VCIC). The CF is a platform primarily for retail investors, while the platform primarily suitable for professional investors, claiming co-decision in certain matters, would be the VCIC. Both CF and VCIC can issue different classes of units/shares respectively.
Pursuant to the UCITS IV Directive, a UCITS management company authorised in an EU jurisdiction may manage UCITS authorised in other EU jurisdictions without having to demonstrate any physical presence in these latter jurisdictions (‘management company passport’). In case of remote management of a Cyprus UCITS by virtue of the ‘management company passport’, the applying management company must submit an Information Flow Agreement (IFA) with the Cyprus based depositary. A Cyprus authorised UCITS management company apart from being equipped with such a passport can also obtain a passport for certain core and non-core MiFiD investment services. Furthermore, it may also be authorised to manage collective investment schemes other than UCITS. A Cyprus UCITS management company must have an initial minimum capital of 125.000 EUR fully paid-up in cash and dispose of at least two executive Directors of sufficient repute and experience.
Set-up and licensing of a Cyprus CF
As UCITS of contractual type, the CF lacks legal personality, i.e. it is to be considered as a mass of assets under management entrusted for safe-keeping to a duly appointed Cyprus based depositary. The CF cannot act on its own and must always appoint a UCITS management company and a depositary. The functioning and the investment policy of the CF, the rights and obligations of the investors as well as the identity of its service providers are laid down in its management regulation, which has to be accepted by each investor prior to subscribing. The decision-making power is vested in the management company, which exercises all rights deriving from the assets of the CF, whereas the investors have only a consultative role. If the management company decides for instance, to change the content of the management regulation or proceed to a merger, then the investors can have their units redeemed under the conditions prior to the change or merger.
The decision on granting the operation license of a CF is taken by the Cyprus Securities and Exchange Commission (CySEC) within two months from complete file submission. The application file and the accompanying documentation can be submitted in English comprising:
Application form completed by the management company mentioning the names of its directors managing the CF
Identity of the depositary, statement of acceptance of its duties and the names of the depositary’s directors monitoring the activity of the CF
Undertaking of payment of the initial minimum net assets (200.000 EUR fully paid-up in cash) by the management company
Draft management regulation co-signed by the management company and the depositary
Draft Key Investor Information Document (KIID)
Set-up and licensing of a Cyprus VCIC
The VCIC, being the UCITS of statutory type, has the form of a public company limited by shares with variable capital, i.e. the share capital being always equal to its net asset value (NAV). The VCIC may not appoint a UCITS management company but can be internally managed by its board of directors instead. It may also not appoint a depositary, provided among others that its shares are traded to at least 80% on the Cyprus or on an EU stock market, a relevant exemption has been granted, and an auditor verifies at least twice a month NAV calculation and compliance with investment limits. The investors in a VCIC are granted co-decision powers with regard to certain matters concerning the continuity of the VCIC such as its merger and dissolution. The functioning and the investment policy of the VCIC, the rights and obligations of the investors as well as the identity of the service providers of the VCIC are laid down in its instruments of incorporation, which have to be accepted by each investor prior to subscribing.
The decision on granting the operation license of a VCIC must be taken by the CySEC within two/six months (depending on whether being externally/internally managed respectively) from complete file submission. The file and the accompanying documentation can be submitted in English comprising:
Identity of the management company with statement of acceptance and the names of its
directors/identity of at least two executive members of the board of directors of sufficient repute and experience (depending on whether being externally/internally managed respectively) responsible for managing the VCIC. If the VCIC has not appointed a management company a program of operations has also to be submitted setting out, at least, the organisational structure
Identity of the depositary (if appointed), statement of acceptance of its duties and the names of the depositary’s directors monitoring the activity of the VCIC
Evidence of payment of initial minimum share capital (depending on whether being externally or internally managed the initial minimum share capital has to be either 200.000 or 300.000 EUR fully paid-up in cash respectively) by the management company/board of directors (depending on whether being externally/internally managed respectively)
Draft instruments of incorporation
Possible cost effective and investor attractive Cyprus UCITS structures
Cyprus UCITS can be set-up as umbrella schemes with several sub-funds and with segregation of assets and liabilities for each sub-fund being thus secured against creditor and investor claims from other sub-funds. Each sub-fund constitutes a separate pool of assets and is governed by the provisions of the draft law also with regard to minimum net assets/share capital respectively. Cross-investment within the umbrella is possible, so that fund of funds policies can also be pursued within it. The dissolution or liquidation of a sub-fund does not lead to the dissolution or liquidation of the umbrella, unless a legal cause intervenes.
Following the introduction of master-feeder structures by the UCITS IV Directive, Cyprus feeders offer to offshore, to new and to medium-sized investment managers, for which the industry fees of other jurisdictions could be seen as a barrier, the possibility to enter the pan-European UCITS market. Cost-effectively created Cyprus feeders, whereas no subscription or redemption fees for investments in the master are charged would benefit from the experienced management of masters in mature UCITS centres. Simultaneously the Cyprus feeders would act as distribution channel with regard to wealthy regions, with which Cyprus has traditionally close relationships.
The draft law also regulates the set-up of capital and/or performance guarantee UCITS determining the eligible guarantors and the content of the documentation of such a UCITS. Furthermore, together with the regulation of UCITS mergers the draft law also regulates their division.
Cyprus non-UCITS: Private ICIS offer flexibility
While UCITS are EU law regulated public investment funds, private ICIS lie on the antipode. They have been introduced by national initiative and are addressed by means of private offer to a restricted number of persons (up to 100) both retail and/or professional. Unlike UCITS, private ICIS are subject to minimal regulation so that no rules regarding eligible assets, diversification and borrowing apply. Their supervisory authority is the Central Bank of Cyprus (CBC), which exercises its supervision by controlling the eligibility of the persons to manage the ICIS. A private ICIS, which can be either open or closed-ended, may take one of the following forms:
VCIC (internally or externally managed)
Fixed capital investment company (internally or externally managed)
Limited partnership (managed by the general partner)
International unit trust
If a corporate ICIS, which is the currently preferred vehicle, decides to appoint an external manager, this can be a Cyprus or elsewhere authorised collective portfolio management company, provided the latter is subject to adequate supervision. It is also possible that an ICIS appoint a Cyprus private limited company holding its management shares as its manager, provided that this company has at least one member of the board of directors with sufficient repute and experience and that this company provides management services exclusively to this particular ICIS.
Re-domiciliation of non-UCITS
The Cyprus Companies Law (the Law) allows by analogous application foreign or Cyprus corporate, i.e. personae at law, non-UCITS to transfer their registered office both to and from Cyprus. For re-domiciling to Cyprus an application must be filed with the CBC, which is currently reviewed on a case by case basis depending on the home jurisdiction of the applicant and the type of license in its possession. Secondly, a temporary certificate of re-domiciliation must be obtained from the Cyprus Registrar of Companies (Registrar) providing the applicant with the status of a legal person under the Law, and conferring upon it all respective rights and obligations. Within six months from the issue of the temporary certificate, proof of de-registration in the country of origin must be submitted to the Registrar in order to receive a certificate of continuance.
For a unit trust change of applicable law is allowed. Thus, re-domiciliation is possible and mirrors, to some extent, that for corporate entities. For a limited partnership the decision will be taken on a case by case basis.
Re-domiciliation of UCITS
The provisions of the Law apply analogously to corporate, i.e. personae at law, UCITS with CySEC being the competent authority for the re-domiciliation of UCITS. CySEC may issue relevant regulations to define the conditions under which authorisation will be granted.
The provisions of the Law apply analogously also to a CF.
Re-domiciliation of management companies
The provisions of the Law shall apply analogously to management companies of UCITS and non- UCITS with CySEC being the competent authority.
Taxation of Cyprus UCITS/non- UCITS (ICIS)
Common tax provisions apply with regard to Cyprus UCITS and non-UCITS (ICIS). In summary the Cyprus tax regime provides for, but is not limited to:
Exemption from tax on dividends received from non-resident companies (subject to very lenient conditions)
Exemption from tax (both income tax and capital gains tax) on profit from sale of securities including shares, bonds and other financial instruments that are linked with equities
No withholding tax on income repatriation by the UCITS/non-UCITS (ICIS) to the non-resident unit holder
Zero tax if management and control is outside Cyprus
Zero tax on liquidation if the unit-holders are not tax residents of Cyprus.
It should be noted that tax implications may arise in terms of the investment fund’s obligation to distribute dividends and in the event of liquidation but only to the extent that the investment fund has Cyprus tax resident unitholders.
Taxation of management companies A (UCITS/non-UCITS) management company which is not managed and controlled from Cyprus is exempt from any taxation at local level.
A resident (UCITS/non-UCITS) management company is subject to tax under the same terms and conditions with any other Cyprus company. In summary, a Cyprus company is subject to:
Corporate income tax at the rate of 10% on taxable income credited or accrued following the deduction of allowable expenses
No withholding tax on dividend payments to non-resident shareholders
As a cost-effective EU jurisdiction with favourable taxation, Cyprus can be used for the set-up and management of UCITS. The provisions applying to Cyprus UCITS offer economies of scale (umbrella UCITS), attractive structures (capital and/or performance guarantee UCITS) and can also be used as channels for implementation of alternative strategies in the EU and as distribution channels (master-feeder structures). Furthermore Cyprus can be used for the set-up of alternative investment funds pursuing a flexible investment policy, while the low corporate tax rate and the various tax exemptions are an asset for alternative investment fund managers considering to relocate in the EU pursuant to the adoption of the Alternative Investment Fund Managers Directive.
Angelos Gregoriades is Member of the Board and Head of Tax and Corporate Services of KPMG Ltd having set-up a department fully dedicated to investment funds. Angelos is Member of the Board of the Cyprus Investment Promotion Agency and Chairman of the Tax Committee of the Institute of Certified Accountants in Cyprus. As a member of KPMG’s Tax network, Angeloshas participated in numerous merger, acquisition and corporate restructuring operations at both national and international level and has written many articles and presented seminars on the role of Cyprus as a regional financial and commercial centre.
KPMG in Cyprus traces its origins back in 1948. It comprises more than 750 people, including 37 board members, working from 6 offices throughout the island.