Undertakings for Collective Investments in Transferable Securities (“UCITS”) are a type of investment fund, suitable for Blockchain projects looking to market their security crypto assets to a wide range of European retail investors through a medium that is regulated by the Laws of Cyprus in accordance with the European Directives. Because of the extensive regulations, surrounding their license and operations, they are regarded as trustworthy by regulators at an international level.
The process and the cost of achieving the license for the business includes, registration of the business, opening a bank account, submitting of the recommended registration documents to CYSEC, and finally obtaining the operation license. The undertakings for collective investment in transferable securities (UCITS) are applied in the process of obtaining the license where administrative provisions by the law must be applied. There is a different cost incurred in every stage of the process. The brokerage business must follow the full process to acquire the license before starting its operations.
What are UCITs?
UCITS are undertakings which have as their only objective the collective investment of capital raised from the public in transferable securities and/or other liquid financial instruments set by the Law regulating Open-Ended Undertakings for Investment in Transferable Securities. The definition of transferable securities is provided by the Markets in Financial Instruments Directive II and within its scope fall most crypto assets that are securities. Under the Law, UCITs operate on the principle of risk spreading and they can be redeemed or repurchased at the request of the investor, directly or indirectly, out of the undertaking’s assets.
Formats and Requirements
Under Cyprus Law, UCITS may be created by a contractual instrument as a Common Fund or by the incorporation of a Cyprus company as a Variable Capital Investment Company, see their main features below.
Common Fund (CF) is a pool of assets which belong jointly and undivided to all unit holders. Therefore, CFs are formed under the Contract Law of Cyprus. The units must be fully paid up by the unit holders and be deposited with a duly licensed Depository, such as financial institutions. CFs are formed as a contractual relationship that has no separate legal personality and are managed by a Management Company which is licensed and regulated by Cyprus Securities and Exchange Authority (“CySEC”) for this reason.
To establish a CF an instrument called Regulation is drawn by the Management Company and the Depository. In CFs the investors’ role is only advisory. To establish a CF, the initial assets must have a value of at least €200,000 and they are fully paid up in cash. If the CF is comprised of various investment compartments, then every compartment must comply with the initial asset requirement separately and not collectively.
Variable Capital Investment Company
Variable Capital Investment Company (“VCIC”) is formed under Cyprus Company Law as a public company limited by shares governed by its Memorandum and Articles of Association. A benefit of the VCICs is that they can be self- managed by their Board of Directors or managed by a Management Company.
VCIC’s funds are comprised by the fully paid-up share capital of the company. Under the Law, the share capital can be decreased or increased without complying with the formalities imposed by the Cyprus Companies Law. The initial capital requirement to establish a VCIC is €200,000 if managed by a Management Company and €300,000 if they are self-managed.
Share capital in offshore investment companies is usually divided into non-voting participating shares held by investors and a small number of nonparticipating management actions controlled by the investment manager or promoter, with voting rights. In contrast, the voting rights of all the shares or units in UCITS often arise.
VCIC’s funds are comprised of the fully paid-up share capital of the company. Under the law, the share capital can be decreased or increased without complying with the formalities imposed by the Cyprus Companies Law. The initial capital requirement to establish a VCIC is €200,000 if managed by a Management Company and €300,000 if they are self-managed.
The term passporting describes the ability of a UCIT licensed under CySEC to advertise its investment products to investors in the European Union, upon the approval of a notification being sent to the relevant authorities of the Member-State where the UCIT wants to advertise.
Fees and Timeline of Application
Under the Law, the authority that will examine and grant the application is CySEC. CySEC is obligated to reply within 2 months from the submission of the application if the UCIT is managed by a Fund Manager and within 6 months if it is self-managed.
The cost to apply for the CF license is €1,800 without investment compartments plus €400 for 15 investment compartments and €250 from the 16th and afterwards. The cost to apply for the VCIC license is €1,800 without investment compartments plus €400 for 15 investment compartments and €250 from the 16th and afterwards.
Taxation for UCITs
While common funds are a pass through vehicle for tax purposes, VCICs are subject to two types of tax liability, which are the following:
- VCICs 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 income arising from trading in securities. Also, a full exemption applies from tax on incoming dividend income, no withholding tax for dividends paid to non-residents and no capital gains tax.
- Value Added Tax is applicable where the transactions carried out by the VCICs fall within the definition of economic activity and its earnings from abroad exceed the amount of €15.600, in this case it is obligatory to register with the VAT.
Simon Zenios & Co. LLC assists you in establishing a Cyprus Open-Ended Investment Fund 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 Investment Fund in Cyprus provides various structures options which are adjustable to your projects’ requirements. 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:
Corporate Services (Part A)
- Selection of the appropriate corporate/fund structure.
- Company name search & application.
- Company incorporation in compliance with the licensing requirements.
- Appropriate Memorandum & Articles of Association
- First minutes and Resolutions.
- Cyprus resident nominee directors (individuals)
- Nominee Shareholder (corporate or individual shareholder).
- Registered office services.
- Drafting of corporate documents.
- Fiduciary Services.
- Assistance in day to day Governance and Administration.
- Preparation of Common Fund Rule (where applicable)
- Introduction and conveyancing with Depositary
Licensing and Compliance (Part B)
- Preparation and submission of the AIF license application to CySEC with all the accompanying questionnaires and documents.
- Preparation of Know Your Client procedures and Anti-Money Laundering compliance policies
- Advice and guidance on the restrictions provided by Cyprus Law and European Directives on investment strategies.
Accounting and Audit Services (Part C)
- Tax Registration & Services.
- VAT registration & services (where applicable).
- Internal & Statutory Audit Services.
For any queries regarding any aspect of Undertakings for Collective Investments in Transferable Securities (UCITS) License in Cyprus, or any other legal matters under the sun our law firm, Simon Zenios & Co LLC, is dedicated to providing comprehensive assistance and support and we are always available. Whether you need assistance with the establishing a Cyprus Open-Ended Investment Fund or require any other legal advice, our firm is here to help.