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Regarding Alternative Investments Funds in Cyprus - Interview with Mrs. Yiota Costa @ SOTERIS FLOURENTZOS & ASSOCIATES LLC

Regarding Alternative Investments Funds in Cyprus - Interview with Mrs. Yiota Costa @ SOTERIS FLOURENTZOS & ASSOCIATES LLC

1: What sort of investment funds can be set up in Cyprus and what are the main characteristics of each fund?

Under Cyprus law, there are two distinct types of investment funds: (a) Alternative Investment Funds (“AIF”) and (b) Undertakings for Collective Investment in Transferable Securities (“UCITS”), both of which are regulated by the Cyprus Securities and Exchange Commission (“CySEC”).

An  AIF is characterized as a collective investment fund designated for  raising external capital from several investors with a view to investing  funds in favor of those investors according to a defined investment  policy. The Alternative Investment Funds Law 124(I)/2018 (the “AIF Law”)  provides a framework for the creation of either an AIF with Unlimited  Number of Persons (“AIFUNP”) or an AIF with Limited Number of Persons  (“AIFLNP”), which is limited to a maximum of 75 investors, or a  Registered AIF (“RAIF”), which is registered as an AIF by virtue of the  law without obtaining authorization from CySEC. The AIF may exist in the  legal form of a Fixed Capital Investments Company, or a Variable  Capital Investment Company, or a Limited Partnership, or a Common Fund  (the latter available only as an AIFUNP).

A  UCITS is characterized as a collective investment undertaking whose  sole aim is the collective investment in transferable securities and/or  other liquid financial instruments of capital raised from the public.  The UCITS shall be an open-ended investment undertaking and shall be  marketed to the public in Cyprus or other EU member states in accordance  with the law. Its units shall, at the request of holders, be  repurchased or redeemed, directly or indirectly, out of the assets of  undertakings. There are two legal forms that a UCITS can take; either to  be constituted as a Common Fund or as a Variable Capital Investment  Company.

2. What type of investor does mostly choose Cyprus to set up an investment fund?

There  are three type of investors that mostly choose Cyprus to set up an  investment fund: (a) Professional Investors, (b) Well-informed Investors  or Eligible Counterparties, and (c) Retail Investors.

Professional  Investors are those investors who possess the experience, knowledge and  expertise to make their own investment decisions and duly assess the  risk those investment decisions incur.

Well-Informed  Investors or Eligible Counterparties are those investors who are not  considered as professional investors and must confirm in writing that  they are qualified investors aware of the risks involved with an  investment in the relevant AIF and make an investment of at least  €125,000 or have been evaluated by a licensed bank/credit institution,  an authorised investment firm or an authorised management company as  having expertise, experience and knowledge in evaluating the suitability  of an investment opportunity.

Retail  investors are those investors who do not meet either the requirements  of being categorized as a Professional Investor or as a Well-Informed  Investor/Eligible Counterparty.

3. Why should an investor choose Cyprus and what are the main benefits of Cyprus in comparison to other EU countries?

Cyprus,  being an EU member state and a Eurozone member, compliant with EU laws,  standards, directives and regulations, is one of the fastest growing  centers of investment funds in Europe due to the continuous development  of its legal and financial regulatory framework. Moreover, Cyprus'  thriving financial services sector makes it one of the leading  jurisdictions in Europe in the investment domain, for its extensive  range of excellent legal and accounting services. It is geographically  located between three continents, Europe, Asia and Africa, which allows  Cyprus to act as a footbridge between Europe and the emerging Middle  East and African markets as well as the attractive Asian economies. In  addition, registration and operational cost with respect to the various  types of investment vehicles in Cyprus are among the lowest in the EU.  Investors are offered a quite favorable EU and OECD-approved tax regime  and tax planning opportunities, as there are no specific tax  requirements with respect to the Cypriot AIFs and UCITS. The above  investment funds enjoy all of the tax advantages offered by the Cypriot  tax legislation in comparison to other EU countries, which include, inter alia,  double taxation treaties with over 60 countries worldwide allowing for  tax efficient structuring of investments, Cyprus-based funds and asset  managers benefit from low tax burdens levied on Cyprus-based  corporations and provides incentives and tax benefits for high-earning  managers and high-net-worth individuals.

4. Funds  are traditionally used to finance large scale investments. In which  fields do you mostly see an interest from investors and what’s your role  as a legal advisor?

Funds  are considered as vehicles which operate under more strict and  transparent rules than normal limited liability companies, which give  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.

Operating  a UCITS and an AIF in Cyprus and generally any type of investment fund,  entails significant legal exposure and it is crucial for the UCITS and  the AIF and all the service providers to remain compliant with the  relevant law so that any liability, both corporate and personal, will be  avoided. Legal advisors’ key role is to provide legal advice on  warnings and guidance to safely and effectively navigate the process of  forming and operating a Cyprus fund, and highlighting the obligations of  different key players of a fund, so that any potential liability would  be avoided.

5. How  do you experience the role of The Cyprus Securities and Exchange  Commission (CySEC) as the regulatory authority? Do you experience any  bureaucracy that inhibits the time efficiency or any potential growth of  the alternative investment funds industry?

CySEC  is the independent public supervisory authority who is responsible to  supervise and regulate the investment services market and transactions  in transferrable securities carried out in Cyprus. The CySEC’s role in  supporting financial innovation is to address the risks and  opportunities involved for the end-investor and the overall integrity of  the Cyprus and European financial system and to analyze the potential  areas of supervisory priorities in order to enhance the regulatory and  supervisory treatment of new or innovative financial activities.

CySEC  developed its web portal through which the regulated entities, can  submit digitally signed documents, forms and letters. The regulated  entities are connected in one system for all their document submissions.  In this way, the costs of printing and storing the physical documents  were eliminated since it is not required to be submitted using this  format, decreasing the bureaucracy via the automated document submission  procedure and ensuring the safety and integrity of the correspondence  in total.

In general terms, CySEC’s  role as a supervisory authority is improving through the time making the  alternative investment funds industry in Cyprus to expand rapidly in a  time efficient way.

6. What are the primary capital requirements and what are the risks an investor should be aware of?

The  share capital requirement for a self-managed UCITS is €300,000, whereas  for the third-party managed UCITS the share capital requirement is  €200,000.

The way the AIFUNP is  managed specifies the minimum capital requirements to which the fund is  subject; for externally managed AIFUNP there is no minimum share capital  requirement, whereas for self-managed AIFUNP the requirement is set at  €300.000. This capital requirement applies to each investment  compartment, when the AIF is established as an umbrella fund.

The  AIFLNP must appoint a Depositary, unless its total capital does not  exceed the amount of €5.000.000, or its members are limited to 5 natural  persons, or its portfolio includes assets that can be stored and the  value of which does not exceed 10% of the total value of the portfolio  and the members are capped at 25 natural persons each of whom must have  invested at least €500.00 in the AIFLNP. Any AIFLNP must, within 12  months since the date of its authorisation, have a minimum share capital  of at least €250.000, which shall be raised through investments.

Every  investor has to be aware of the risks involved with an investment.  Investment in any compartment of an AIF involves special risks, and  purchase of investment shares should be considered only by persons who  can bear the economic risk of their investment for an indefinite period  and who can afford a total loss of their investment. The value of the  investment shares and the income from them is not guaranteed and it may  go down as well as up, and investors may not get back the amount  invested. Consequently, there is a potential risk of the loss of the  entire amount of the value of an investors’ investment. Some of the risk  factors that an investor should take into account are: a) Economic  and/or political instability which may result in the imposition of  restrictions on the free movement of capital; b) Market and Acquisition  Risks where in some cases acquisition of some assets may be subject to  delay and during the period of delay it may be difficult to prove  beneficial ownership of the assets; c) Currency risk, where the value of  an investor’s investment may be affected favorably or unfavorably by  fluctuations in the rates of the different currencies; and d) Leverage  risk which creates an opportunity for increased net investment income  dividends for the investors, but also creates risks; it is not  guaranteed that the use of leverage, if employed, will result in a  higher yield on the investment.

 

7. What taxation rules applies on AIF’s in Cyprus?

Corporate  Income Tax is imposed on Cyprus tax resident companies at the uniform  rate of twelve and a half percent (12.5%) for each year of assessment on  all income accrued or derived from all chargeable sources both within  and outside Cyprus (i.e. worldwide income basis), subject to available  exemptions and deductions as per the law. 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.  All relevant expenses incurred wholly and exclusively for the production  of (taxable) income constitute deductible expenses whereas, inter-alia,  dividends, capital gains or profits from the disposal of "securities"  constitute tax exempt incomes. Availability for Notional Interest  Deduction for new equity as of tax year 2015 onwards, may reduce taxable  base up to 80%. No subscription tax on the net assets of the fund is  applied and fund management services provided to alternative investment  funds are not subject to VAT.

8. The  political situation in the island and in the surrounding area is fenced  with lots of turbulences, how does this effect the alternative  investment funds industry in Cyprus and how do you see the AIF’s future  in Cyprus?

In general terms,  political situation in Cyprus and in the surrounding area could lead to  legal, fiscal and regulatory changes or the reversal of  legal/fiscal/regulatory/market reforms. However, 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 center of  the EU funds jurisdictions. With its efficient and up-to date  regulation, which is fully harmonised with the related EU Directives,  provides a framework in which AIFs can operate efficiently. 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 and more specifically of the AIF’s industry.


About the
 
interviewee

Yiota  Costa joined Soteris Flourentzos & Associates LLC in March 2016 as  an Associate Lawyer. Having obtained the LL.B. (Hons) Law from the  University of Leicester, U.K. in 2013, she decided to specialize in  corporate and commercial law. During her studies, she was an ELSA member  (European Law Students’ Association). Yiota Costa deal with a wide  range of corporate and commercial matters, including amalgamations,  cross-border corporate restructurings, re-organizations and mergers  & acquisitions.

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