The Alternative Investment Funds Law enacted in 2018, aims to make Cyprus one of the major destinations for fund establishment in Europe and the licensing of fund management companies, as it provides very flexible structures and cost-efficient opportunities for establishing a fund that can be marketed to the European Union.
Alternative Investment Funds (“AIFs”) are collective investment undertakings which raise capital from a number of investors to invest them based on a pre-defined policy. In certain cases, this policy may include crypto assets, thus this type of Fund may be suitable for raising funds from EU investors with a view to investing them in crypto.
Why establish a Cyprus AIF?
- They may be established to have a limited or unlimited number of investors who may be retail or well-informed and professional investors.
- AIFs may be set with an unlimited number of investment compartments, the sub-funds which are widely known as umbrella funds, each with a separate investment strategy and asset pool.
- AIF’s units can be listed on all recognized stock exchanges.
- AIF managers, which fall below the thresholds provided by AIF Managers Law, are not required to be licensed under the Cyprus Securities and Exchange Commission (“CySEC”) but only required to be registered.
- Ability to register with the Cyprus Securities and Exchange Commission (“CySEC”) a Registered AIF that does not require a license.
Establish an Alternative Investment Fund
There are many forms an AIF may take under the AIF Law, their main features are mentioned below.
AIFs with Unlimited Number of Persons (AIFUNP)
This type of AIF requires a license by CySEC before raising capital from investors. The most important feature of this type of AIF is that it is addressed to an unlimited number of persons, who may be professional investors, well-informed investors and retail investors. We note that there are limitations to the investment policy, subject to CySEC’s Directive on the categorisation of funds for the protection of retail investors.
Form
It can be set up as a fixed or variable capital investment company, a limited partnership (with or without legal personality) or a mutual fund. Please note that an AIFUNP, which is marketed to retail investors, must be open-ended, this means that the investors may repurchase or redeem their units/shares at any time. On the other hand, the units/shares in a close-ended AIF may only be repurchased or redeemed at the liquidation phase or wind-down.
AIF Management
Another important feature is that whereas the AIFUNP is formed as an investment company or as a limited partnership with legal personality, it can be self-managed by its Board of Directors or General Partner. In all other cases, an external AIF manager must be appointed. Please note that whereas the assets under management exceed the threshold of €100,000, the appointment of a licensed external fund manager is required.
Under the Law, the external fund managers may be a management company authorised either under the Cyprus AIF Managers legislation or Cyprus Open-Ended Undertakings in Collective Investments Law, or a European fund management company duly authorised under the relevant authority of another Member State or any third country with which CySEC has signed a cooperation agreement or a Cyprus Investment Firm.
Depositary/Custodian
Pursuant to the Law, an AIFUNP must always appoint a depositary/custodian. The depository/custodian may be a credit institution, or an investment firm, or any other company subject to prudential supervision based in Cyprus, or the EU, or any third country with which CySEC has signed a cooperation agreement.
Units in AIFUNP
One of the benefits of an AIFUNP is the ability to be established with unlimited investment compartments, the sub-funds which are widely known as umbrella funds, each with a separate investment strategy and asset pool. The units of the AIFUNP can be listed on a recognized stock exchange.
Organizational and Capital Requirements
The management body of a self-managed AIFUNP must comprise of at least four persons, two of which should hold an executive position. A self-managed AIFUNP should have in place at all time minimum capital of €125,000. All AIFUNP, within 12 months of authorisation, must raise capital of at least €500,000 from investors. The period in which this amount of capital must be raised may be extended further by 12 months.
AIFs with Limited Number of Persons (AIFLNP)
This type of AIF requires a license by CySEC before raising capital from investors. The maximum number of permitted investors is 50 and the AIFLNP can only be addressed to professional and well-informed investors. There are no limitations imposed by CySEC on investment policy.
Form
They can be set up either as a fixed or variable capital investment company, or a limited partnership with or without legal personality. Whereas an investment company is set with fixed capital it must be close-ended and whereas it is set with variable capital it must be open-ended.
AIF Management
Significantly, whereas an AIFLNP is formed as a limited liability company or as a limited partnership with legal personality, it can be self-managed by its Board of Directors or General Partner. In all other cases, the appointment of an external investment manager is required.
Under the Law, the external investment managers may be a management company authorised either under the Cyprus AIF Managers legislation or Cyprus Open-Ended Undertakings in Collective Investments Law, or a European management company duly authorised under the relevant authority of another Member State, or a Cyprus Investment Firm, or a company incorporated with the sole purpose of managing the investments of this specific AIFLNP.
Depositary/Custodian
The Law provides that in three situations a depositary may not be appointed, (1) where the AIFLNP’s assets are less than €5,000,000 (2) where the maximum number of investors is 5 and (3) where the maximum number of investors is 25, each investment is at least €500,000 and 10% of the assets are subject to custody.
In all other situations, the depository/custodian must be appointed and it may be a credit institution, or an investment firm, or any other company subject to prudential supervision based in Cyprus, or the EU, or any third country with which CySEC has signed a cooperation agreement.
Units in AIFLNP
AIFUNP can be established with unlimited investment compartments, the sub-funds which are widely known as umbrella funds, each with a separate investment strategy and asset pool, however, the number of investors must always be limited to 50. The units of the AIFLNP can be listed on a recognized stock exchange.
Organizational and Capital Requirements
The management body of a self-managed AIFLNP must comprise of at least three persons, one of which should hold an executive capacity and the majority must reside in Cyprus. A self-managed AIFLNP should have in place at all time minimum capital of €50,000. All AIFLNP, within 12 months of authorisation, must raise capital of at least €250,000 from investors. The period in which this amount of capital must be raised may be extended further by 12 months.
Registered AIFs
This type of AIF does not require a license by CySEC before offering its units to the public, but prior registration in CySEC’s relevant Register is required. In this case, the investment manager of the RAIF must within 1 month from establishment, submit the required details of the RAIF for registration. The registration is concluded within one month from submission, that is when the RAIF can commence raising capital from investors. A RAIF can only be addressed to professional and well-informed investors. A Money Market Fund or Loan Origination Fund cannot be registered under this type.
Form and Management
They can be set up either as a fixed or variable capital investment company, or a limited partnership (with or without legal personality) or a mutual fund. They are always externally managed. AIFs may be open-ended or closed-ended and can be established with unlimited investment compartments. The units of the RAIF can be listed on a recognized stock exchange.
Under the Law, the external investment managers may be a management company authorised either under the Cyprus AIF Managers legislation or the Cyprus Open-Ended Undertakings in Collective Investments Law, or a European management company duly authorised under the relevant authority of another Member State, or a Cyprus Investment Firm.
Depositary/Custodian
Pursuant to the Law, n AIFUNP must always appoint a depositary/custodian. The depository/custodian may be a credit institution, or an investment firm, or any other company subject to prudential supervision based in Cyprus, or the EU, or any third country with which CySEC has signed a cooperation agreement.
Capital Requirements
An RAIF must, within 12 months of authorisation, raise capital of at least EUR 500,000 from investors. The period in which this amount of capital must be raised may be extended further by 12 months.
Fees and Timeline of Application for AIF License
Under the Law, CySEC is obligated to reply within 6 months from the submission of the application for an AIF license (other than a RAIF), whether the application is accepted or denied. The cost to apply for an AIF license is €2,000. When there is more than one investment compartment the amount is increased by €400 for each of the first 15 investment compartments and by €250 euro from the 16th investment compartment onwards.
For more information on the fees see the link below:
https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=fd29d969-a7f6-4d2a-a0d7-ef588398174e
Get an AIF Management Company License
External AIF managers are formed as limited liability companies and are licensed under CySEC to perform the management of AIFs set up in European Economic Area, that involves tasks such as the portfolio and risk management, the day-to-day administration of the fund and other related tasks. The AIF Management Company may also apply to perform UCITs management services. In addition, the company may apply to be licensed to provide the following investment firm services:
- Management of portfolios of investments
- Investment advice
- Safekeeping and administration in relation to units in collective investment funds
- Reception and transmission of orders in relation to financial instruments.
When an AIF management company provides the above investment firm services, it must comply with the requirements on organization, initial capital and business operations imposed on investment firms.
The initial capital of AIF manager company must be at least €125,000 provided that the assets under management do not exceed the amount of €250,000. Over this amount, additional capital is required equivalent to 0,02% of the capital in exceed to the above threshold, but the total must not be higher than €1,000,000.
Licensing exemption
Subject to the AIF Managers Law, there is an exemption from obtaining a license whereas a company manages portfolios of AIFs whose assets under management in total do not exceed the amount of €100,000 if assets acquired using leverage are included and €500,000, if the assets are acquired without leverage and the relevant units have no redemption rights which can be exercised within 5 years from the initial investment. However, the management company will still be required to register with CySEC.
Fees and Timeline of Application of AIF Managers
Under the Law, CySEC is obligated to reply within 3 months from the submission of the application for AIF management company license, whether the application is accepted or denied. The cost to apply for the AIF management company license is €2,000 plus additional fees of €1,500 when the management company will provide the services of management of investment portfolios. In addition, the fees increase when the management company will provide the investment firm services of investment advice by €2,000, safe-keeping and administration in relation to shares or units of collective investment undertakings by €500 and reception and transmission of orders in relation to financial instruments by €1,000.
For more information on the fees see the link below:
https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=fd29d969-a7f6-4d2a-a0d7-ef588398174e
Taxation for AIFs
The tax regime in Cyprus is very favourable for AIFs.
- AIFs and Fund Managers which are registered as corporations are subject to corporation tax. Corporate income tax is applicable on the profits at the rate of 12.5%, one of the lowest in the European Union. Additionally, benefits arise from the fact that there is a tax exemption for gains arising from the disposal of titles and dividend income.
- Also, a full exemption applies for dividends paid to non-residents and redemption of units in AIF. There is also a case to be made in applying for return through the Notional Interest Deduction on the capital raised by the Fund, that is a feature introduced in the Cyprus tax regime to incentivise companies who raise capital through equity.
- The Fund Manager companies are exempted from the obligation to register with the VAT.
Simon Zenios & Co. LLC assists you in establishing a Cyprus AIF from A to Z
At Simon Zenios & Co LLC our lawyers have been closely following the developments in the area of investment funds and how they relate to cryptocurrencies with all the regulatory and licensing implications arising. Our lawyers understand the complexities arising from choosing the most suitable structure for your fund and the restrictions and complexities which come with the type of investors they are directed to.
Our team of lawyers will be able to advise and assist you in every aspect of establishing your fund. We provide legal guidance throughout the process which will begin with an introductory call with our team of experts, the point of which is for our team to understand your requirements and objectives. Following this, we can then provide you with a quote for our legal services. If the quote is accepted and you decide to engage our legal services, the next step will be for us to collaborate with your team and come up with a detailed legal services plan.
The legal framework for establishing an AIF in Cyprus provides various options which vary depending on the number and type of investors a project is directed to. Therefore, it is important to study your options closely to choose the most suitable for it.
We offer all the required Legal Services for licensing including:
Alternative Investment Fund Set Up Services
Corporate & Legal Services (Part A)
- Selection of the appropriate corporate/fund structure corporate structure (where applicable) and initial capital requirement.
- Advice and guidance on the restrictions provided by Cyprus Law and European Directives on investment strategies, when the AIF is marketed to retail investors and other issues.
- Draft of appropriate Memorandum & Articles of Association or Fund Rule.
- Company name search & application.
- Company incorporation in compliance with the licensing requirements.
- First minutes and Resolutions.
- Introduction to Cyprus resident, qualified directors (individuals).
- Nominee Shareholder (corporate or individual shareholder).
- Registered office and arrangements for actual and adequate office premises (where applicable).
- Drafting of corporate documents.
- Drafting of corporate documents and Fiduciary Services.
- Assistance in day to day Governance and Administration.
Set Up, Licensing and Compliance (Part B)
- Assistance and consultation in choosing a Depositary and AIF Fund Manager (where applicable) and review of all related contracts for the marketing of the units or other related services (where applicable).
- Consultation regarding delegation to third parties.
- Review and/or preparation of Prospectus and Key Investor’s Information Document (if applicable) and submission for approval by CySEC.
- Preparation of internal operations manual, business plan and organisational structure.
- Consultation on the special organisation measures whereas an AIF has multiple investment compartments.
- Preparation of Anti-Money Laundering and Combating Terrorist Financing risk management and procedures manual.
- Advice on any other documents which may be required according to the AIF type.
- Preparation and submission of the license application with all the accompanying questionnaires and documents.
- Communication with CySEC for all matters relating to the application which may arise after the submission.
- Consultation on AIF Management in accordance with the compliance requirements and the AIF constitutional documents.
- Advice on the reporting requirements for AIF.
- Notification about changes in the regulatory framework and advice on how to implement new requirements.
Accounting and Audit Services (Part C)
- Tax Registration & Services
- Internal & Statutory Audit Services.
Alternative Investment Fund Management Company Set Up Services
Corporate & Legal Services (Part A)
- Selection of the appropriate license features, corporate structure and initial capital.
- Company name search & application.
- Draft appropriate Memorandum & Articles of Association.
- Company incorporation in compliance with the licensing requirements.
- Introduction to Cyprus resident qualified nominee directors (individuals).
- Registered office and arrangements for actual and adequate office premises.
- Drafting of corporate documents and Fiduciary Services.
Licensing and Compliance (Part B)
- Assistance and consultation on the thresholds triggering the licensing requirement.
- Guidance on the procedure of registration or licensing application.
- Consultation on hiring key personnel such as portfolio manager, risk manager, compliance officer, internal auditor if required.
- Preparation of internal procedures manual, business plan and organisational structure.
- Preparation of Anti-Money Laundering and Combating Terrorist Financing risk management and procedures manual.
- Consultation on outsourcing functions to third parties.
- Advice on the reporting requirements for AIFMs.
- Notification about changes in the regulatory framework and advice on how to implement new requirements.
Accounting and Audit Services (Part C)
- Tax Registration & Services
- Audit Services.
For any queries regarding any aspect of Establishing an Alternative Investment Fund (AIFs) license or Alternative Investment Fund Management Company in Cyprus for Europe in general or any other legal matter under the sun, we are always available.
