As a globally recognised financial centre, a reputable service provider and a low tax jurisdiction, Cyprus is an ideal passporting jurisdiction for funds seeking EU investors.
The island benefits from the reliability of its own domestic regulatory framework, as well as that of Europe. In combination these have made Cyprus competitive with other EU fund jurisdictions such as the UK and Luxembourg, as well as being more advantageous than traditional offshore fund jurisdictions such as the Cayman Islands or the British Virgin Islands.
Legal Framework
In May 1999 Cyprus introduced Law 47(1) /1999, for the regulation of operations and supervision of International Collective Investment Schemes (ICIS). In 2004 Cyprus adopted the EU directives for Undertakings for Collective Investments in Transferable Securities (UCITS). The European regulatory framework currently consists of UCITS IV and the Alternative Investment Fund Managers directive.
Investors who choose an ICIS benefit from the fact that whereas an ICIS provides the opportunity to manage a European fund, it exempts such fund management from the burdensome requirements of EU legislation, applicable in the case of UCITS.
All the legal forms an ICIS may take enjoy the option of being established with limited or unlimited duration, and can vary in respect of their target group: they can be a private scheme, addressed to the general public, or open exclusively to experienced investors.
Types of ICIS
International investment companies (Fixed or Variable Capital)
A variable capital company benefits from not being subject to a minimum capital requirement; whereas an international investment company with fixed capital must fulfil the minimum capital criterion established by Cyprus’ central bank.
In contrast, a private ICIS enjoys no minimum capital requirement. A private ICIS is the scheme most commonly used by promoters in Cyprus, because it can benefit from a number of exemptions from administrative and compliance requirements.
International Unit Trusts
The main advantage of establishing a trust scheme is that Cyprus provides a legal framework which ensures the protection of the assets, and guarantees confidentiality – a highly desirable attribute. It is commonly accepted that confidentiality and asset protection are achieved as a result of Cyprus’ stable legal framework. Trusts established in Cyprus for the purposes of ICIS are defined as international trusts, and are governed by international trust law.
International Investment Limited Partnerships
Similar to ordinary limited liability partnerships, the partners of an international investment limited partnership enjoy limited liability equal to the amount they contributed to the capital of the scheme. A general partner is appointed, the code of conduct and obligations for whom are clearly indicated by the law.
Application procedure
The following documentation is required to be submitted to the Central Bank of Cyprus:
1. The Standard Application Form duly completed and signed;
2. A personal questionnaire for natural persons;
3. A questionnaire for legal persons;
4. A questionnaire completed by the manager;
5. A questionnaire completed by the trustee;
6. A personal questionnaire for persons who will be providing trustee services.
UCITS
The objective of establishing a UCITS is the collective investment of funds raised by the public into transferable securities, 90 percent of which must consist of listed securities.
The aim of the UCITS directives is to allow collective investment schemes to operate freely throughout the EU on the basis that the fund is authorised by only one member state. Nevertheless, many of the EU member states introduced further regulatory requirements which have impeded free operation with the effect of protecting local asset managers.
In Cyprus, UCITS Law 59(I)/2008 was enacted and amended in order to comply with the EU Directives. The establishment of UCITS require licensing by the Cyprus Securities and Exchange Commission (CySEC), the relevant domestic regulatory authority.
Types of UCITS
UCITS can either take the form of a mutual fund company or a variable capital investment company, according to the nature of its operations. Depending on the form, the legal framework provides for the respective requirements. In both occasions, the entity benefits from the flexibility of consisting not only of a single fund, but also an umbrella fund including various other funds.
Mutual fund
The idea of a mutual fund focuses on establishing a pool of transferable securities and other liquid financial assets, as defined by the law, which belong either jointly or separately to unit holders, and whose operations are governed by the Common Fund regulation.
Since the mutual fund is not a legal personality, a management company is appointed in order to apply and obtain the licence to operate by CySEC.
If the fund is formed as a mutual fund, the following information must be submitted:
• Information about the applicant and the natural persons that will be responsible for the management of the common fund;
• The organisational measures taken for the common fund;
• Information about the depositary, including legal details, as well as details of the natural persons responsible for the monitoring of the common fund and the management company;
• Information about the representatives who will forward the application;
• Other supporting information required according to the law, as well as to the regulations issued by CySec.
Variable capital investment company
The investment company consists of a limited liability company with shares established in accordance with the provisions of the Companies Law. Its main objective is the collective investment in transferable securities or other liquid assets, as these are defined by the relevant legislation.
The investment company either appoints a management company or declares itself as ‘self-managed’ – but it cannot undertake the management of third parties’ assets.
The application for the licensing of a variable capital investment company by CySec must be accompanied by:
• Information about the applicant;
• Information about the depositary;
• Corporate information of the variable capital investment company;
• Information about the representatives, auditors, and legal consultants of the company;
• Special information in relation to the variable capital investment company: particularly financial information about the company, including its share capital and financial statements;
• Additional information about the company: a questionnaire that includes information in relation to the history of the company and its criminal record, if any;
• Certificates, statements, and other information;
• Additional supporting information as requested by the law and regulations.
Taxation
The most attractive incentive for establishing collective investment schemes in Cyprus are the tax incentives which, during recent years, have become even more advantageous for prospective investors.
Fund taxation
Generally the net income of the fund is subject to 10 percent flat corporate taxation. Dividend income, profits from sale of shares and other financial instruments, and fair-value gains, are exempt from taxation. There is no withholding tax in Cyprus on any payments of dividends or interest abroad, irrespective of whether there is a double taxation treaty or not with the country involved.
Dividend income
Dividend income received by the fund from abroad is exempt from taxation in Cyprus, provided that either the company paying the dividend is not engaged directly or indirectly more than 50 percent in activities which lead to passive income, or that the rate on the taxable profits applicable in the country of the company paying the dividend is not substantially lower than the relevant tax rate that applies in Cyprus. For example, an effective tax rate of at least five percent in the country of the company paying the dividend satisfies this condition.
Investor taxation
Dividend distributions in respect of registered funds are taxed at three percent – only applicable to Cyprus tax resident unit holders. Thus dividends paid to non-Cyprus residents are totally exempt. Additionally, the redemption of units is considered as disposal of securities, subject to the provisions of the latest law amendments, and are exempt.
Double taxation treaties
The double taxation treaties signed between Cyprus and other countries encourage the establishment of Cyprus-registered funds. Since such treaties ensure the transfer of funds between the contracting countries with very low or even no further taxation, cheap or tax-free repatriation of funds is ensured.
Moreover, the fact that Cyprus retains double taxation treaties with non-EU countries gives the opportunity to the citizens of these countries to invest in Europe through Cyprus funds, and be treated as Europeans.
Conclusions
The fact that the schemes are supervised by a responsible regulatory authority aims to ensure that the involved parties meet the minimum requirements set by law, and that unit holders’ assets are handled with reasonable care and transparency, for the incomes and confidence of the promoters, unit holders and beneficiaries.
The common-law based legal system of Cyprus, in combination with the exceptional piece of legislation governing ICIS and the EU UCITS directives, provides a certain, stable, safe and predictable legal environment for the unit holders. The high level of professional services offered from Cyprus firms in reasonably low costs is another reason for choosing Cyprus over any other EU jurisdiction or offshore jurisdiction.
The above findings, along with the exceptional tax advantages, have undoubtedly rendered Cyprus an outstanding financial centre for the establishment of ICIS and UCITS.
Socrates Ellinas is an advocate at Areti Charidemou & Associates LLC.
For more information – Tel: + 357 25 50 80 00; socratis.ellinas@aretilaw.com;
www.aretilaw.com
