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2014.10.28 - Cyprus: New Version of Alternative Investment Funds Law 2014

 

In 2014, a new version of the Alternative Investment Funds Law 2014 took effect in Cyprus. This law replaced the previous legislation that had been in effect over the last 15 years being the International Collective Investments Schemes Law 1999.

The 2014 Law has been harmonised with the European Union general standards and in particular the EU Alternative Investments Funds Managers Directive 2013 (the AIFM Directive) provides for three main categories of funds:

  1. Alternative Investment Funds that offer services to a wide range of investors without limiting the professional status of investors. Such Alternative Investment Funds may have the legal form of a company, a fund or a limited liability partnership.
  2. Alternative Investment Funds that offer services only to professional* or well-informed** investors. In the case of this type of licence, there are no limitations to the number of investors in the fund.
  3. Alternative Investment Funds that offer services to a limited number of investors. This type of licence provides that the number of the investors in the fund shall not exceed 75. Such Alternative Investment Funds have the legal form of a company or a limited liability partnership.

* A professional investor is a client that meets the requirements of Investments Services and Activities and Regulated Markets Law 2007 (Law 144(I)/2007).
** A well-informed investor is an investor that has confirmed their status in writing and invests at least EUR 125,000 in the fund, or possess a letter issued by a financial institution such as a bank or an investment company located in one of the European Union countries to confirm their investment experience.

It is the third category of the funds being Alternative Investment Funds with limited number of persons (AIF - LNP) which are the most interesting to entrepreneurs because the standard requirements for this type of licence are considerably easier than the first two types of licence. The key requirements that regulate the incorporation and operations of AIF – LNP are as follows:

  1. Similar to other types of mutual investment funds at the moment of its registration the AIF – LNP determines its investment strategy and issues its investment prospectus.
  2. Unlike other types of Alternative Investment Funds in Cyprus the law does not impose any limitations on investment areas for AIF – LNP nor does it provide for mandatory diversification of investments.
  3. AIF – LNP has lower registration expenses and costs for further maintenance in comparison to other types of funds.
  4. The licensing institution for AIF – LNP and the other Alternative Investment Fund types is the Cyprus Securities and Exchange Commission (CYSEC).
  5. For all Alternative Investment Fund types, an investment manager, an auditor, a custodian and a fund administrator need to be appointed but where AIF – LNP operations do not exceed specific financial criteria some of these positions have simplified requirements.
The tax regime for AIF – LNP provides for all standard benefits existing under the laws of the Republic of Cyprus in that:
  1. No tax is levied on any income derived from capital gains being the difference between the securities purchase and selling prices
  2. No tax is levied on dividends received from other countries
  3. No withholding tax is levied on interest or dividend distributions to other countries regardless of the where the payment is made to.
  4. There are no fixed duties on the sale, transfer or any other change of the ownership rights on the investor’s shares
The majority of Alternative Investment Funds operate in accordance with the above criteria and hence are fully exempt from taxation in Cyprus.

INTERNATIONAL OVERSEAS SERVICES comments:

The AIF – LNP is one of the most popular types of mutual investment funds in Cyprus. As at autumn of 2014, the AIF – LNP registered in Cyprus managed funds amounting to over EUR 3 billion.

The legal form that is used to incorporate AIF – LNP most frequently is an international variable capital company being a company that is incorporated under the corporate law of Cyprus with its authorised capital varying in accordance with the actual value of the company’s shares.

In view of the current tax benefits granted by the laws of the Republic of Cyprus, the AIF-LNP may serve as a favourable corporate basis to organise investment operations.

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