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Alternative Investment Funds: An evolutionary “vehicle”

Alternative Investment Funds

The overall assets as well as the number of investment funds in Cyprus have significantly increased, according to newly-issued financial statistics from the Central Bank of Cyprus (CBC). The number of investment funds increased from 114 in December 2017 to 130 in June 2018, while their total assets reached €4,7 billion compared to €4,5 billion on March 2018, recording an increase of 6%.

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Important boost of the Fund industry

The metrics announced by the Central Bank of Cyprus refer to authorised investment funds whilst a significant number of new licensing applications are currently considered by the Cyprus Securities and Exchange Commission (“CySEC”). The interest for Cypriot-registered investment funds is coming from numerous countries around the world.

The enactment of the new AI Law 124(I)/2018 (“AIF Law”) on 31st July 2018, which introduces improvements in the legal and operational framework of investment funds, enhances significantly the international position of Cyprus as a jurisdiction of choice for the creation or transfer of Alternative Investment Funds (“AIFs”) and Alternative Investment Fund Managers. 

The amended legal and regulatory framework

The new law ensures that Cyprus not only remains competitive in the international scene as a funds jurisdiction, but that it also serves in providing even more flexibility to establish Cypriot funds and fund management entities.

The Registered AIF (“RAIF”) is one of the new products introduced by the new AIF Law. The RAIF is not subject to the supervision of CySEC or any other supervisory authority. A RAIF can only be externally managed by an Alternative Investment Fund Manager (“AIFM”) with certain exceptions for RAIFs with illiquid assets. A key benefit of the RAIF is that it reduces significantly the required time for the launching of such fund. Within one month from the date of filing of duly completed “notification pack”, CySEC will proceed to include the AIF in the list of Registered AIFs. The quick and cost efficient launch of a RAIF enhances the suite of type of funds that can be established in Cyprus.

 Furthermore, the new AIF law regulates the minimum share capital requirement that is now only required for self-managed vehicles, irrespective of the category of the AIF. There are also revised requirements imposed on AIFs with limited number of persons to avail of the depositary exception, as well as a requirement for an internal regulatory compliance function for AIFs with unlimited number of persons. Also, for AIFs with limited number of persons, the maximum number of investors is reduced to 50 from 75 and look-through provisions are introduced.

A number of tax changes have also been introduced. For example, no permanent establishment is created by investors for their investments in common funds and partnerships established in Cyprus. As a result, the income of investors acquired from such investments is taxable only in their tax residence country.

Under new provisions introduced in the Special Contribution for the Defence Law, Cypriot tax resident and domiciled individual investors will be subject to deemed dividend distribution at the rate of 17% instead of 3% previously applicable. This amendment has no effect on investors (individuals or companies) that are neither Cypriot tax residents nor domiciled in Cyprus, as such investors are completely exempt from this provision. This applies for funds that are set up in a legal entity form and does not apply for common funds or partnerships.

A key incentive is also introduced through a special method of taxation of the variable remuneration of the executives of a Fund Manager (when remuneration varies in accordance with the profitability of the fund), providing for a flat tax rate at 8% and a minimum payable tax amount of €10.000 per year. As expected, anti-avoidance provisions are in place. In order for the favorable rate to be applied on such variable remuneration, the net asset value of the fund should exceed the amount of the initial investment by the unitholders. The purpose of this additional incentive is to attract and host experienced and prominent fund managers in Cyprus.

Future perspective in the Funds sector

The enactment of these new and revised laws creates a new momentum for the fund management sector in Cyprus. Undoubtedly, these laws serve in further establishing Cyprus as a reliable, efficient and attractive funds jurisdiction. At the same time, the competitiveness of the Cypriot economy increases, with numerous benefits from this industry. For example, new employment opportunities are created for staffing the newly set up funds and fund management entities created and increased taxation contributes to public finances. Generally, the establishment in Cyprus of international firms which are active in this industry increases the confidence in the country and this specific sector. 

© 2019 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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