CYPRUS ALTERNATIVE INVESTMENT FUNDS · CYPRUS ALTERNATIVE INVESTMENT FUNDS OVERVIEW OF THE...

CYPRUS ALTERNATIVE INVESTMENT FUNDS

OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND FOR

LIMITED NUMBER OF INVESTORS (AIFLNP)

2019


OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND

FOR LIMITED NUMBER OF INVESTORS (AIFLNP)

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Contents Page

A. INTRODUCTION ............................................................................. 4

B. WHO CAN BENEFIT FROM THE SET UP OF A FUND .......................... 4

C. WHY SET UP A FUND IN CYPRUS .................................................... 5

D. TYPES OF ALTERNATIVE INVESTMENT FUNDS IN CYPRUS ............. 6

E. THE ALTERNATIVE INVESTMENT FUND FOR LIMITED NUMBER OF

INVESTORS (AIFLNP) ..................................................................... 6

1. Authorisation Process.......................................................................................... 6

2. Legal Forms ............................................................................................................ 8

3. Fund Manager ........................................................................................................ 9

4. Depositary Requirements .................................................................................. 9

5. Investment Strategy ......................................................................................... 10

6. Eligible Investors ................................................................................................ 10

7. Limitation on Number of Investors .............................................................. 10

8. Initial Capital Requirements ........................................................................... 11

9. Value of Assets under Management ............................................................ 11

10. Fund Taxation ...................................................................................................... 11

F. FUNDS AT A GLANCE .................................................................... 13

G. THE FUTURE OF FUNDS IN CYPRUS .............................................. 14

H. HOW KINANIS LLC CAN ASSIST ................................................... 15




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A. INTRODUCTION

Cyprus is dynamically positioning itself as one of the top emerging investment

fund centres in Europe. The fully upgraded and modernised legislative and

regulatory framework, which is in full compliance with the European legislation,

has enhanced competiveness and has placed the country in the league of

important jurisdictions for the Alternative Investment Funds industry.

The Government, the Regulator and the Professionals have firmly committed in

providing their full support in developing further the Funds industry in Cyprus and

there is strong belief that this joint effort will create even more positive results.

B. WHO CAN BENEFIT FROM THE SET UP OF A FUND

Conducting business through a fund, a vehicle which operates under more strict

and transparent rules than normal limited liability companies, gives the ability to

raise capital from private and institutional investors who are not really interested

in being involved in the day to day

management of their investment but

seek a good return on their investment

in accordance with the risk they chose to

undertake.

Funds are traditionally being used as an

alternative method to bank financing and

are used to finance real estate, shipping

and other large scale investments. It is

also one of the most widely used vehicle from Venture Capitalists whose

investments may need extra funding.

FUNDS

ASSET AND TAX

PROTECTION

INVESTMENT AND

FINANCING

VENTURE CAPITALISTS

FAMILY OFFICES




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The way investment funds operate provide a clear separation between ownership

and the management and control of the underlying investments. This is due to the

fact that the management is not performed by the owners (unitholders) but by

fund managers who are subject to specific rules and supervision. This makes it

appropriate for High Net Worth Individuals seeking to achieve asset protection and

tax optimisation by replacing their traditional holding companies with a more

sophisticated and professionally managed and regulated vehicle, as well as Family

Offices who want to manage the family wealth in a more flexible and transparent

way with specific risk and investment characteristics.

C. WHY SET UP A FUND IN CYPRUS

Cyprus being an EU Member State has a lot to offer in the financial services sector

and the Funds industry in particular. With its efficient and up-to date regulation,

which is fully harmonised with the related EU Directives, provides a framework in

which Fund Managers and Funds can operate efficiently.

Further, Cyprus is an already established International Business Center with years

of experience in servicing international clients. The skills and knowhow obtained

from the experienced lawyers and accountants is now put at work in servicing the

Funds industry in a cost effective manner, keeping the set-up and ongoing

operational costs well below other established EU Fund jurisdictions, without

compromising the quality of the services offered.

The island’s strategic geographic location allows Cyprus to act as a footbridge

between Europe and the emerging Middle East and African markets as well as the

attractive Asian economies.

Why Cyprus

EU Legal Framework

Experienced Professionals

Cost Effective

Strategic Location

Attractive Tax Regime




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Finally, Cyprus enjoys one of the most attractive taxation systems which is fully

compliant with EU and OECD requirements. Funds set up in Cyprus will have

access to a wide network of double taxation treaties and will be benefited from

low tax burdens levied on Cyprus based entities. In addition, specific incentives

exist for fund managers and high-earning employees making the relocation of

such persons very attractive from a taxation perspective.

D. TYPES OF ALTERNATIVE INVESTMENT FUNDS IN CYPRUS

There are three types of Alternative

Investment Funds that can be set up in

Cyprus. It is the Alternative Investment Fund

of unlimited number of investors (AIF), the

Alternative Investment Fund of Limited

Number of Investors (AIFLNP) and finally the

Registered Alternative Investment Fund

(RAIF). In this publication we provide an

overview of the AIFLNP, which is a type of fund that may be suitable for family

offices and HWNI using the fund as an alternative to a group holding company.

We will identify below its main characteristics and requirements. For more

information on the other types of Alternative Investment Funds you may refer to

our separate publications on each specific fund type.

E. THE ALTERNATIVE INVESTMENT FUND FOR LIMITED NUMBER OF

INVESTORS (AIFLNP)

1. Authorisation Process

The Cyprus Securities and Exchange Commission (CySEC) is the regulatory

authority, responsible under the AIF Law for the licensing and supervision of

Alternative Investment Funds in Cyprus.

AIFLNP

RAIF

AIF




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The operation of an AIFLNP is subject to the prior granting of authorisation

and notification of authorisation by CySEC, only if CySEC approves:

• The relevant application;

• The AIFLNP’s instruments of incorporation;

• The choice of external manager, or in case of internally managed AIFLNP,

the persons who effectively shall conduct the business of the AIFLNP;

and

• The choice of the depositary, if appointed.

The application for the granting of authorisation for an AIFLNP must be

accompanied by the following data:

• the name of the AIFLNP, its registered address and address of its

headquarters,

• sufficient information and data, including a resume for the people who

effectively direct the business of the internally managed AIFLNP,

• the name and data identifying and certifying the appropriateness of the

external manager, as well as the identity of the person or persons

responsible for the risk management and portofolio management functions,

• a statement by the external manager confirming agreement to perform the

investment management functions of the AIFLNP,

• a statement by the depositary confirming agreement to perform the

depositary functions for the assets of the AIFLNP,

• the identity of the person or persons appointed by the depositary as

responsible for monitoring the activity of the AIFLNP,

• a draft of the AIFLNP’s instruments of incorporation in case of an investment

company or partnership agreement in case of an AIFLNP set up as limited

partnership,

• a draft of the AIFLNP’s offering document,

• a draft of the AIFLNP’s key investor information document

CySEC shall inform the external manager of the AIFLNP or the AIFLNP directly,

if internally managed, within 6 months of the submission of a complete

application file as described above.




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2. Legal Forms

An AIFLNP may be established and operate as open-ended or close ended fund

and take the following legal forms:

• Variable Capital Investment Company (VCIC)

• Fixed Capital Investment Company (FCIC)

• Limited Partnership

An AIFLNP may operate as an Umbrella Fund structure, with more than one

investment compartments (sub-funds).

According to the AIF Legislation, the Umbrella Fund and the Sub-Funds

constitute a SINGLE legal entity but each Sub-Fund is:

• Ring fenced and fully segregated

from the Umbrella Fund and the

other Sub-Funds.

• Each Compartment’s investors’

rights are restricted to the assets of

the compartment.

• Each Compartment can be dissolved

separately.

• Each Compartment can have its own

investment strategy.

• The set-up and running costs of each

compartment is lower than separate

funds.

Single Legal Entity

Fully Segregated

Separate Investors'

rights

Can be dissolved

separately

Own investment

strategy

Separate tax payer

Reduced Costs




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3. Fund Manager

AIFLNP’s may be either internally or externally managed.

An AIFLNP which is internally managed, may take the form of an Investment

Company or a Limited Partnership with separate legal personality. The persons

who will be responsible for the internal management and the core functions of

the AIFLNP must meet specific conditions and characteristics in order to be

approved by CySEC.

An externally managed AIFLNP may take the legal form of Investment

Company or Limited Partnership without separate legal personality and can be

managed by:

• a UCITS Management Company (established in Cyprus or the EU)

• an Investment Firm (established in Cyprus or the EU)

• a Sub-threshold manager (in Cyprus or the EU)

• a third country company authorized to provide the portfolio

management service

• an EU or a non-EU company which has the sole purpose of providing the

portfolio management service to the specific AIFLNP

4. Depositary Requirements

The assets of the AIFLNP shall be entrusted to a depositary which has its

registered office in Cyprus, an EU member state or a third country.

The eligible depositaries for an AIFLNP include Credit Institutions, Investment

Firms or an institution under prudential regulation and supervision, and

recognised by the Member State as eligible for custody.




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There are certain exemptions to the obligation of an AIFLNP to appoint a

depositary if:

• The Total assets under management of all investment compartments is

less than €5.000.000, or

• The total number of investors for all investment compartments is

restricted to 5 persons, or

• The assets eligible to custody do not exceed the limit of 10% of the total

value of the AIFLNP’s portfolio, and

i) the total number of investors for all investment compartments is

restricted to 25 persons and

ii) each of the investors invests at least 500.000 in the AIFLNP

5. Investment Strategy

An AIFLNP is not subject to any investment restrictions. It may invest in any

asset class without any conditions on the combination of assets invested or any

strict ratio requirements.

6. Eligible Investors

A Cyprus registered AIFLNP can only be addressed to professional and well-

informed investors and is not possible to be marketed to retail investors.

7. Limitation on Number of Investors

An AIFLNP can accept a maximum total of 50 investors. Investors are regarded

only the natural persons, therefore, in case of legal entities investing in an

AIFLNP, the number of shareholders of that entity is taken into account. The

limitation of a maximum total of 50 investors applies to all investment

compartments in aggregate.




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8. Initial Capital Requirements

In the case of an externally managed AIFLNP there are no initial capital

requirements, as such requirements are imposed on the manager.

For self-managed AIFLNP the minimum capital requirements are set to €50.000,

which must be available at any time in the form of cash which is deposited in

the name of the AIFLNP in an approved credit institution in an EU member state

or in the form of assets readily convertible to cash.

9. Value of Assets under Management

AIFLNPs must hold assets of at least €250.000 for each investment

compartment within 12 months from the date of authorisation, through the

means of capital raising from investors

CySEC may extend the 12 month period for up to additional 12 months, if this

is considered as necessary.

Any capital commitments for the acquisition of units as well as the amount of

minimum initial capital as identified in section 9 above, are not taken into

account for the calculation of the AIFLNP’s assets under management.

It must be noted also that the assets under management of an AIFLNP,

cumulatively for all compartments, must always be below the AIFM thresholds.

10.Fund Taxation

Cyprus based funds and their investors can benefit from a favourable tax

environment. An AIFLNP will be subject to Corporation tax at 12.5% on the

resulting net profits without any imposition of taxes on the net assets of the

Fund.




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It must be noted however that

dividend income as well as any

profit generated from the trading

of titles – such as shares, units of

funds, bonds, options etc, are

exempt from taxation in Cyprus.

Any interest income received from

an AIFLNP is considered as “active”

income and is exempt from Special

Defence Contribution Tax. This

means that interest income is

taxed as normal business income

at 12.5% on any resulting net profits.

Further, the amount of capital raised from investors (unitholders) may be

eligible to receive a Notional Interest Deduction (NID) as per the provisions of

the Cyprus Tax Legislation which can potentially reduce the taxable base of a

company type RAIF by up to 80%.

There are no withholding taxes on dividend payment to foreign investors

irrespective of the percentage of the participation in the Fund and no taxation

applied on the redemption of units of an AIFLNP.

In case of an AIFLNP with multiple compartments, each compartment is taxed

separately (i.e. as a separate taxpayer) despite the fact that each compartment

is not a separate legal entity.

No taxation on profit on

trading in titles

No taxation on dividend

income

Ability to claim NID

Interest income is exempt

from SDC

No tax based on

AuM

No withholding

taxes

Corporation tax at 12.5%




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F. FUNDS AT A GLANCE

AIF AIFLNP RAIF

Authorisation • Required • Required

• Not Required

• Must be registered to the

RAIF register

Legal Forms

• VCIC

• FCIC


• Common Fund

Can be an umbrella fund with various compartments.

• VCIC

• FCIC



• VCIC

• FCIC


• Common Fund


Fund Manager

• AIFM (CY & EU)

• UCITS Manager (CY & EU)

• MiFID Investment Firm

• Sub-Threshold Manager

(CY & EU)

• Self-Managed (VCIC.

FCIC, LLP with separate

legal personality.

• UCITS Manager (CY & EU)


• Sub-Threshold Manager (CY &

EU).

• Sole purpose Management

Company.

• Self-Managed (VCIC. FCIC,

LLP with separate legal

personality.

• AIFM (CY & EU)

If Limited Partnership closed ended fund investing in illiquid assets then: • UCITS Manager (CY &

EU)


• Sub-Threshold Manager

(CY & EU)

Depositary

Requirements

• If managed by an AIFM

must appoint a local

depositary.

• If not managed by an

AIFM, depositary can be

from CY, EU or Third

Country.

• Can be from CY, EU or Third

Country.

• Exemption from obligation to

appoint depositary if:

• AuM<€5m

• Up to 5 investors

• No more than 10% of

total assets subject to

custody and with up to

25 investors with

minimum investment per

investor €500k.

• Obligation to appoint a

CY depository if managed

by an AIFM.

• If not managed by an

AIFM can appoint

depositary from CY, EU

or Third Country.

Investment

Strategy

• Restrictions apply for

liquidity and risk

diversification.

• No restrictions

• Some restrictions

(cannot pursue a Money

Market policy, act as a

Loan Origination Fund or

a Fund of Funds)

Eligible

Investors

• Retail (conditions)

OR

• Professional and/or well

informed investors


informed investors


informed investors

Limitation on

Number of

Investors

• Unlimited • Up to 50 • Unlimited




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AIF AIFLNP RAIF

Initial Capital

Requirements

• If externally managed:- no

capital requirements

• If self-managed fund

€125k or €300k.

• If externally managed:- no

capital requirements

• If self-managed fund €50k

• It must be externally

managed so no capital

requirements

Value of Assets

Under

Management

• Minimum AuM within 12

months €500k


months €250k


months €500k

Fund Taxation

• Profit from disposal of

titles is exempt

• Dividend income is exempt

• Can claim NID on capital

injected

• Interest income exempt

from SDCT

• Corporation tax rate of

12.5% on resulting net

profits.

• No withholding taxes on

dividend payments or

redemptions.

• No tax based on AuM.

• Profit from disposal of titles is

exempt

• Dividend income is exempt


injected

• Interest income exempt from

SDCT

• Corporation tax rate of 12.5%

on resulting net profits.



redemptions.


• Profit from disposal of

titles is exempt

• Dividend income is

exempt


injected

• Interest income exempt

from SDCT

• Corporation tax rate of

12.5% on resulting net

profits.



redemptions.


G. THE FUTURE OF FUNDS IN CYPRUS

The transformation of the investment funds regime in Cyprus in combination with

the island’s strategic geographic position, attractive tax environment and the

experienced professional service sector has made Cyprus the rising star of the EU

funds jurisdictions.

As the value of assets under fund management in Europe is increasing with a

consistent growth rate, Cyprus with steady and important steps to the right

direction, will play a significant role in the future of the global funds industry.




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H. HOW KINANIS LLC CAN ASSIST

Our dedicated Financial Services team is ready to assist clients with:

• Preparation of Fund authorisation application to CySEC.

• Assistance in drafting of constitutional and other legal documents of the

Fund.

• Consulting in legal, tax and accounting matters of the Fund.

• Directorship services.

• Listing of funds in the Cyprus Stock Exchange.

• Corporate services such as secretary and registered office.




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Disclaimer

This publication has been prepared as a general guide and for information

purposes only. It is not a substitution for professional advice. One must not rely

on it without receiving independent advice based on the particular facts of his/her

own case. No responsibility can be accepted by the authors or the publishers for

any loss occasioned by acting or refraining from acting on the basis of this

publication.

March 2019

Authors

Charalambos Meivatzis

Partner – Head of Accounting Division

Kinanis LLC

Andri Michael

Partner – Financial Services

Kinanis LLC

Elena Andreou

Associate - Lawyer

Kinanis LLC

[email protected] [email protected] [email protected]

mailto:[email protected]






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Our Firm Kinanis Law Firm, is a Law and Fiduciary Firm with offices in Cyprus and Malta and a representative office in Shanghai China. The Firm advises for over 35 years international investors and private clients offering legal and consulting services since 1983. Experience and practice over the years brought forward the need for transformation from a traditional law firm to a more innovative multidisciplinary firm providing a full range of services combining law and accounting with extensive expertise in corporate, tax and vat advice to ensure that our clients will obtain the best possible spherical advice adopting the principle as to the services offered "All in one place", so that the clients will find a quick, correct and efficient solution to their daily legal, accounting, vat and tax issues in a trustworthy environment. The Firm employs approximately 80 lawyers, accountants and other professionals. Our clients benefit from a complete range of legal, accounting, tax, vat and advisory services from a highly specialized team of professionals. We consider ourselves as ‘traditional pioneers’ and our motto is to foresee and anticipate any issues that may potentially impact our clients’ business and to offer effective advice and solutions proactively. This combination of legal, accounting, vat and tax services through our well qualified personnel and our involvement and participation in international transactions over the years, have established our firm as one of the key players in the field. Our involvement in international financial transactions has also provided us with the extensive expertise in representing groups, corporations, funds as well as the private client. Kinanis LLC Lawyers’ Limited Company 12 Egypt Street, 1097, Nicosia P.O. Box 22303, 1520 Nicosia, Cyprus Tel: + 357 22 55 88 88 – Fax: + 357 22 66 25 00 E-mail: [email protected] – Web site: www.kinanis.com Kinanis Law Firm Kinanis Fiduciaries Limited Suite 20, The Penthouse, 4th Floor, Ewropa Business Centre, Dun Karm Street, Birkirkara, BKR 9034, Malta Tel: + 356 27 54 00 24, Fax: + 356 27 54 00 25 E-mail: [email protected] Website: www.kinanis.com KINANIS LAW FIRM is the service mark through which Kinanis LLC of Cyprus, Kinanis Fiduciaries Limited of Malta and Kinanis,

Civil Partnership, of Malta and their affiliated companies are conducting business each of which is a separate legal entity.


http://www.kinanis.com/


http://www.kinanis.com/

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