13 Aug The Growing Fund Industry: Regulatory framework updates in Cyprus
In July 2018 the Republic of Cyprus parliament passed an array of amendments to existing legislation introducing important changes to the fund industry in Cyprus. The amendments were initiated in an effort to capture a series of recent EU and international trends and best practices concerning the investment fund industry and aim to reinforce the position of Cyprus as an up-and-coming hub in the worldwide fund industry.
The new piece of legislation relating to the alternative investments funds (“AIF”) has replaced the current Law 131(I)/2014 on Alternative Investment Funds. The emphasis is on the registered alternative investments funds (“RAIFs”) introduced for the first time and which aim to provide an affordable and less regulated fund structure in Cyprus. The procedure for registering in the register of RAIFs will be simpler than the authorisation procedure required for the alternative investments funds.
Based on the new law the key characteristics of the RAIFs will be the following:
- Requirement to appoint a local depository;
- No minimum capital requirements;
- Ability to operate as open or close ended fund;
- It is addressed only to professional and/or well-informed investors;
- Contains the option for an umbrella structure with multiple investment compartments;
- Cannot be registered as Money Market Funds or Loan Originating Funds
- Can be structured:
– as an investment company of variable or fixed capital; or
– as a common fund; or
– as a limited partnership.
The Rules or Regulation of the RAIF may:
- Provide for the mandatory (in advance or in retrospect) approval of each new unit holder under the established conditions and procedure, establishing the relevant procedure in case of non-approval.
- Include a preference clause for the transfer of units for the rest of the unit holders or for specific unit holders, establishing the procedure for the case the beneficiary of the preference right does not exercise his/her right
- RAIF units may be listed in a secondary market. Section IV applies.
- RAIF units’ prices may be published in the Cyprus Stock Exchange or in another secondary market and in this case provisions of Article 8(2) apply.
The new set of amendments to the existing legislation also introduce the option for structuring an AIF as a limited partnership with inherent legal personality, as well as, significant tax benefits to the unitholders and the fund managers.
In addition to the introduction of RAIFs, the below new provisions in the Cyprus tax legislation have also been introduced in relation to investment funds.
- No permanent establishment will be deemed to arise in Cyprus in the case of investment into Cyprus tax-transparent funds by non-resident investors and/or in the case of management from Cyprus of non-Cyprus investment funds. As a result, income earned on such investments will be taxed in the country of residence of the investor.
- Introduction of a special mode of taxation at the rate of 8% and a minimum annual tax payable of €10.000 (subject to specific criteria) for certain employees and executives of investment fund management companies. This new mode of taxation will be available for a total period of ten years.
- Persons who are both Cyprus tax resident and Cyprus domiciled will be subject to special defence contribution at a rate of 17% (instead of 3% which was applicable up to date) on profits deemed to be received from Cyprus investment funds.