Establishing an investment fund in Cyprus

Cyprus, leveraging its strategic geographic position, serves as a significant international financial center, engaging contributors and entrepreneurs worldwide. This allure stems from its stable economic ambiance, favorable tax policies, and harmonized regulatory structure that aligns with international protocols. Cyprus provides an array of investment potentials, encompassing the establishment of investment funds, making it one of the preferred jurisdictions for estate handling.

The intention of this article is to present a comprehensive overview to launching an investment fund in Cyprus. Aimed at individuals seeking to expand their portfolios with the initiation of an investment vehicle in this jurisdiction, the publication encompasses a detailed overview of key fund forms, legitimate and monetary stipulations, as well as practical steps for fund enrollment and certification.

Understanding Cypriot judicature for investment funds

The Cyprus judicature stands out thanks to its enticing combination of tax stimuli, effective supervision and opportunities to enter European Union markets. These factors make Cyprus an obvious option for the establishment and administration of investment funds.

Laws governing the actions of Cypriot investment funds

The juridical framework, supervising investment funds in Cyprus, comprises an extensive array of both national and European laws and regulations. These rules form the basis for licensing stages, management, and day-to-day activities of funds, while upholding their clarity, depositor security, and financial system integrity.

Essential legislative acts in this area include the EU Directive on Alternate Investment Fund Managers (AIFMD), the EU Directive on Markets in Financial Instruments (MiFID II), and the Cyprus Intercontinental Collective Investment Structures Law (ICIS).

The key act governing the operation and allocation of AIFs in the European Union is the AIFMD, that introduces standard stipulations for AIF executives, involving licensing, risk control, liquidity management, estate valuation, as well as clarity and information responsibilities to depositors.

Fundamental components of AIFMD cover:

• Certification requirement for AIF executives who must turn to the national authoritative body (CySEC - Cyprus Securities and Exchange Commission).
• Delegation of workload. Allowing the outsourcing of certain duties to third parties, means that executives retain ultimate liability for these tasks to regulators and investors.
• Openness instructions contain obligatory disclosure of investment plan, perils, fees and charges, as well as consistent reporting to contributors and the regulator.
• Market. The AIFMD permits AIF operators to market their finances to qualified depositors in all EU countries, subject to conformance with the stipulations of the law.

It controls the stipulations of investment solutions in monetary instruments (shares, bonds, derivatives, etc.) and transactions on financial markets. The directive aims to improve transparency in monetary markets, enhance investor protection, and strengthen competition among trading venues.

Key aspects of MiFID II:

• Permits to function Investment firms in Cyprus should get approval from national regulators to supply investment management services.
• Behavior rules Establishing strict rules of conduct for investment companies with a priority on honesty and clarity in relations with customers.
• Clarity and specifications of reporting Strengthened governing requirements for reporting and payment clarity to improve oversight and inspection mechanisms in monetary markets.

Governing enactments establish the stipulations and phases for the incorporation and activity of ICIS in Cyprus. ICIS are designed to engage investments from a broad audience with the aim of counterbalancing yield and the peril related with managing these investments. The law outlines licensing procedures, structural specifications, management stipulations, and reporting obligations for such schemes.

Key stipulations of the ICIS Act:

• Defines different ICIS structures (e.g. fixed or alterable finances) and their licensing criteria.
• Sets out stipulations for the administration of ICIS, encompassing the election of directors and custodians of assets.
• Requires ICIS to announce key data to contributors, with investment strategy, dangers and fees.

These regulations together offer an extensive juridical structure for the supervision of investment funds in Cyprus, guaranteeing a top level of openness, investor safety and stability of the monetary system.

Upsides of opening an investment fund in Cyprus

Initiating an investment fund in Cyprus presents various perks, encompassing tax benefits, strategic location, top level of confidentiality, and the ability to create trusts for a diversity of goals.

Preferential tax regimes

Cyprus stands out for its tax conditions, which are highly competitive contrasted to other European Union regions, offering:

• Transnational treaties for the avoidance of double taxes with over 60 nations, which diminishes the tax load on international contributions.
• One of the most competitive corporate tax tariffs for companies among EU nations, set at 12.5%.
• Preferred tax treatment for dividends, comprising broad tax exemption for dividend payments for investment funds.
• Full exemption from revenue tax on the sale of securities, bonds and shares in investment pools regarding capital gains tax.

Important strategic location

Cyprus stands at the crossroads of Europe, Asia, and Africa, presenting exclusive strategic advantages for investment enterprises seeking to invest in these locations. This strategic positioning streamlines access to various markets and supplies possibilities for investment diversification.

Top degree of privacy

The Cyprus legitimate and overseeing system presents a top level of confidentiality for depositors and investment fund executives. In Cyprus, data protection and banking secrecy laws are carefully regulated to guarantee the safeguard of clients' personal and monetary information.

Main types of Cypriot investment funds

The primary classifications of investment funds in the Cyprus market consist of:

• AIF - alternate investment funds
• UCITS - organizations for joint investment in stocks
• RAIFs are enrolled alternate investment pools.

In the next sections, we will take a closer look at each of these structures of funds, highlighting their key characteristics and statutory specifications.

Alternate Investment Funds (AIF)

In Cyprus, AIFs represent pooled investment capital vehicles, providing investors with avenues to diversify their contributions across an array of portfolios. These funds are open to both institutional and retail contributors and possess the pliability to invest in a wide array of asset categories such as real estate, equities, bonds, and derivative financial tools.

In Cyprus, they are classified into:

On the island of Cyprus, it is possible to establish an AIF in various legal formats, such as:

• A limited liability company with shareholder or liability status.
• Limited partnership.
• A trust with a fixed or variable composition of assets.

This customizable structure helps investors and managers select the optimal format to suit their investment strategies and development goals.

Cyprus AIFs are subject to regulation and governance by the CySEC. Starting an AIF requires acquiring validation from CySEC, which entails supplying a detailed description of the investment plan, risk assessment policy, governance structure, and other related documentation.

AIFs in Cyprus have many fiscal incentives encompassing:

• Exclusion from taxation of capital gains. Yield from the sale of stocks and other assets is not taxable.
• The tax rate on corporate profits is 12.5%.
• Thanks to treaties with more than 60 nations, Cyprus minimizes the fiscal load on transnational contribution.
• In Cyprus, dividends and interest paid by a fund are generally not subject to tax.

Regulation of AIF functions in Cyprus is executed by licensed administrative entities. Both domestic and transnational administrative entities authorized to run AIFs within the stipulations of the AIFMD directive can function. The responsibility of the CEO encompasses overseeing the investment portfolio, risk control, and confirming adherence with all appropriate regulatory requirements.

Alternate investment funds on the island offer a unique blend of flexibility, favorable tax conditions, and stringent regulation, rendering them an enticing instrument for cross-border investors.

Undertakings for collective investment in securities (UCITS)

UCITS are strictly controlled investment funds designed to offer investors efficient asset security and liquidity. They are tailored for separate contributors and target to offer them with access to diversified portfolios of securities with regular assessment of financial assets and the opportunity of daily redemption. They have access to various financial tools for investment, encompassing equities, bonds, money markets, and derivatives, while adhering to strict rules of diversification and liquidity.

UCITS constitute a foundational component of the retail investment market in Cyprus and across the European Union. They are characterized by stringent supervisory standards, ensuring a top degree of investor security and liquidity, thus rendering them attractive to both separate and corporate investors seeking diversification and investment protection.

Registered Alternate Investment Funds (RAIFs)

RAIFs stand out among other investment products in Cyprus due to their adaptability and simplified regulatory procedure.

Unlike AIFs, RAIFs are exempt from the requirement of direct licensing and supervision by CySEC, offering a fast track to achieving investment project goals. These Cypriot funds require registration and management by a certified Alternate Investment Fund Manager (AIFM), thus combining flexibility in applying alternate investment approaches with the benefits of a reliable regulated environment.

• Minimum assetsWithin the first 12 months of incorporation, the RAIF's assets must reach a minimum assessed price of €500 thousand.
• Qualified investorsRAIFs can only raise funds from qualified and/or qualified investors.
• Management via AIFMA RAIF must be managed by a licensed AIFM manager to ensure a high standard of governance and adherence with overseeing protocols.

1. Simplified regulatory process. RAIFs are exempt from the requirement of obtaining a direct CySEC license, thereby minimizing the time and financial costs associated with launching an investment fund in Cyprus. This makes RAIFs an ideal instrument for quick market access.
2. Flexibility of investment plans. Thanks to the ability to invest in a broad range of assets and employ various investment strategies, RAIFs offer fund managers maximum flexibility in implementing investment ideas.
3. Top degree of investor protection. Despite the streamlined supervisory process, RAIFs ensure a top level of contributor safety through mandatory management via a licensed AIFM, which is liable for accordance with all regulatory and operational requirements.

• RAIFs should nominate a Cypriot AIFM to run the fund.
• A local depository, experienced legitimate counsel and a licensed public accountant are demanded.
• The position of the fund's secretary should be held by a Cypriot, while the stated conditions for the director are advisory.
• A legal address is required for registration in the country.

• RAIFs are obligated to provide annual reports on their activities, even if no activity was carried out during the reporting period.
• All transactions and changes within the fund's organizational structure must be notified to CySEC through the AIFM in a timely manner.

Tax incentives are fully available to RAIFs in Cyprus. These funds can benefit from a reduced business tax rate of 12.5%, exemption from capital gains tax, as well as no taxation on dividends and interest for investors from other countries.

Cyprus-registered Reserved Alternative Investment Funds (RAIFs) stand as an appealing instrument for managers and depositors seeking swift and flexible market entry without the need to undergo intricate direct regulatory procedures.

Cyprus provides a variety of investment fund types, each with its unique characteristics and advantages. Based on specific objectives, regulatory preferences, flexibility requirements, and chosen investment strategy, investors can opt for AIFs, UCITS, or RAIFs. This flexibility and extensive choice make Cyprus one of the most attractive domains for establishing and running investment funds.

It is crucial to clarify that these funds are not eligible to carry out credit and lending operations, as well as provide banking or insurance services in Cyprus.

Juridical stipulations and financial aspects when establishing a Cyprus investment fund

When registering and operating investment funds in Cyprus, there is a range of legitimate and monetary conditions aimed at guaranteeing clarity, stability, and prioritizing contributor protection. These requirements pertain to both the functions of the management company and the investment fund itself.

Enrollment and licensing procedures for investment funds in Cyprus

Acquiring a license from CySEC is obligatory for operating an investment fund in Cyprus. The procedure commences with the delivery of a licensing request, accompanied by a comprehensive set of documentation confirming conformance of both the fund itself and its managerial structure with established guidelines and protocol.

• Preparation and presenting of a business planA document describing a fund's type, investment strategy, risk assessment, and operational and supervisory procedures.
• Juridical documentationConstituent documents, including the fund's charter, management contracts, contracts with the depositary and administrator, and an investment possibility prospectus.
• Evidence of qualifications of administrative and management personnelResume, certificates, evidence of work experience in the asset administration or finance sector.

Asset Handling

The objectives of the operational entity are of strategic importance for the Cyprus investment fund. It is answerable for its strategy, asset management, regulatory adherence and contributor safety.

• The company must be certified by CySEC to run investment funds.
• Directors and key personnel must have an impeccable professional reputation and relevant experience in the field of finance and asset administration.
• Having a clear organizational structure with defined lines of responsibility and control.

Management and staff

A prerequisite for the administration of an investment fund in Cyprus is the presence of seasoned managerial and administrative personnel capable of ensuring efficient fund administration and operational activities.

• Qualifications and experience. Directors and key employees must have appropriate competencies and expertise in investment operation, financial analysis and risk management.
• Clean business reputation. Records must be provided to ensure that key employees and directors have no criminal records or monetary improprieties.

Documentation

The successful creation of an investment fund in Cyprus necessitates the delivery of a comprehensive set of documents to the Cyprus Securities and CySEC, outlining all aspects of the fund's operation.

• Basic legal papers: such as a statute, articles of incorporation, or main contract.
• Business plan: description of investment planning, management structure, risk identification methods and asset valuation.
• Information prospectus: provides comprehensive information about the investment fund, including its objectives, risks, fees and investment terms.
• Agreements with third parties: including contracts with the depository, fund manager, legal and audit services.

Conformance with these legal requirements guarantees that the fund adheres with the juridical and overseeing stipulations of Cyprus, and also reinforces its credibility and attractiveness to potential contributors.

Starting authorized capital

In terms of initial funds, AIFs and UCITS in Cyprus have varying minimum share capital requirements, typically spanning from €125k to €300k, based on the specific fund type and structure.

The registration and controlling of an investment fund in Cyprus necessitate meticulous planning and compliance to a plethora of legitimate and monetary requirements. These prerequisites are aimed at ensuring a top degree of contributor protection, operational transparency, and market resilience for the fund. It is crucial to consider all facets related to licensing, management, and financial obligations for the successful launch and operation of an investment fund in Cyprus.

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Practical steps to open an investment fund in Cyprus

Incorporating an investment pool in Cyprus is a meticulous process demanding careful planning and adherence to a set of rules. Below is a detailed overview of the practical steps required for the successful launch of a fund on the island of Cyprus.

Conditions for opening accounts for investment funds in Cyprus

The process of opening bank accounts to handle the assets of an investment fund in Cyprus is subject to stringent directives and procedures aimed at ensuring transparency of financial transactions and conformance with anti-money laundering norms. Below is a detailed overview of the necessary conditions for opening accounts for investment funds in Cyprus.

Licit documentation:

• Constituent papers of the fund: statute, charter or partnership treaty confirming the legality and type of the fund.
• Resolution on the nomination of CEOs: official papers determining their powers.

Records about the activities of the management organization and its leadership:

• Biographical information, papers verifying the identity and address of CEOs and individuals authorized to sign on behalf of the fund.

Plan of action and investment tactic:

• Description of the fund's performance model with an outlining of the investment plan and the expected sources of funds and the sum of expected costs.

1. Selection of a banking institution, specializing in servicing corporate clients and investment funds in Cyprus, taking into consideration service conditions and fees.
2. Preliminary communication implies initial consultation with the bank manager and discussion of the requirements for creating a current account and arrangement of the necessary papers.
3. Submission a comprehensive set of documentation and requisite data requested by the bank for verification and validation.
4. The bank conducts due diligence procedures, checks papers, analyzes information about beneficial owners and executives, and assesses conformance with AML requirements.
5. After successfully passing all checks and approving the request, the bank opens and activates an account and gives the essential bank details for fund functions.

The procedure of establishing bank accounts for investment funds in Cyprus, necessitates meticulous preparation and strict adherence to licit and monetary norms. It is crucial to select a bank that best aligns with the fund's needs and offers quality services for managing financial assets.

Taxation for investment funds

The lack of tax duties on capital appreciation and earnings, combined with a business tax tariff set at 12.5%, strategically makes Cyprus as a compelling location for investment funds, facilitating streamlined tax planning strategies. Investment companies enrolled in Cyprus adhere to conventional business tax protocols, with a fixed 12.5% tax rate applied to revenue. There are no levies on fund net asset values and dividends for non-resident contributors, amplifying the island's allure for investment endeavors.

Cyprus' double taxation avoidance agreements with over 60 nations considerably minimize the tax load on international transfers of interest, dividends, royalties, and other types of income, supplying investors with more favorable tax conditions. This contributes to increasing Cyprus' attractiveness as a center for transnational investments and asset administration.