Assets under management in Cyprus have tripled in less than three years to €3.3 bn and will reach €20 bn in another five years if the current rate of growth is sustained.
Driving this remarkable performance are reforms that Cyprus has made to its regulatory framework in the past four years to meet the requirements of the modern fund industry.
The changes have raised investor confidence in Cyprus as a domicile and servicing centre for both AIFs (Alternative Investment Funds) and UCITS (Undertakings of Collective Investment in Transferable Securities).
Cyprus now has a fully EU-compliant and business-friendly regime that strikes a balance between freedom of operation for the asset manager and protection of the investor.
Primed to compete with the likes of Ireland and Luxembourg, Cyprus offers a European passport of quality and the flexibility that comes with being a small jurisdiction. It is also a sunny, comfortable and cosmopolitan place to live for the growing number of fund managers that are now moving to the island.
LOCATION, LOCATION, LOCATION
The island’s location as a bridge between Europe, the Middle East and beyond, Cyprus provides remarkable distribution opportunities to a wide range of markets. Cyprus was already a well-established link for investments into and out of Europe with easy access to Russia and Central and Eastern Europe. It is now increasingly playing a similar role for investment into Indian, Chinese and other emerging Asian markets.
Other attractions have long been in place. These include a legal system based on English common law, a largely English-educated professional services sector, and low operating costs.
The island adopted the EU’s Alternative Investment Funds Managers Directive (AIFMD) in 2013 and the UCITS IV Directive the previous year. In July 2014, Cyprus enacted an Alternative Investment Funds Law to allow new structuring options and improvements that is helping the island to compete with more established fund jurisdictions. The law operates in full compliance with EU, OECD and FATF rules on anti-money laundering, terrorist financing and insider trading. The legal reforms also brought the fund business under a single regulator, the Cyprus Securities and Exchange Commission (CySEC), which allows for more streamlined procedures.
The ongoing reform process is largely overseen by the Cyprus Investments Funds Association (CIFA), which was established four years ago to promote the island as an investment funds jurisdiction. In 2015, CIFA engaged a prestigious multinational law firm, King & Wood Mallesons, to help increase the attractions of the fund landscape, in particular for private equity funds.
Together, they forged an action plan whose provisions are due to be passed into law in mid-2017. These include:
- Enhancing the Limited Partnership Vehicle An amendment to the limited partnership law allows general partners to choose whether the fund partnership is set up as a separate legal personality or not, while retaining tax transparency. This is a key consideration for structuring funds of funds and establishing internally managed Limited Partnerships. The law will also include a “safe harbour list”, setting out the activities that a Limited Partner can undertake without jeopardising limited liability status.
- Introduction of Cyprus Registered AIFs Cyprus will unveil its own version of a registered AIF, designed to facilitate a cost-efficient fund launch on the market within just 15 days to one month. It will not have to be authorised by CySEC provided it is managed by a Cyprus or EU Alternative Investment Fund Manager (AIFM.) The registered Cyprus AIF can be organised in any legal form available under Cypriot law, such as an investment company with fixed or variable capital, a limited partnership, or a common fund.
- The “Mini Manager” (Sub-threshold AIFM) Cyprus is introducing a licensing and supervision regime for AIF asset managers whose assets under management do not exceed the AIFMD threshold. So-called Mini Managers will therefore be able to manage assets of up to €100 mn, including those acquired through leverage, or up to €500 mn when the AIF is unleveraged with a lock-up of five years. This set-up will be cost-effective compared to the AIFM structure as it will allow the combination of certain functions under the proportionality principle.
ATTRACTIVE TAXATION AND DOUBLE TAX TREATIES
Currently, funds are effectively taxed only on interest at just 12.5 per cent. “The vast majority of other sources of income like profit on sale of securities, capital gains of properties situated abroad, and all other sorts of gains are not taxable, says Christos Vasiliou, deputy managing director of KPMG in Cyprus. Investors are not subject to withholding tax and no VAT is charged on management services for funds operating in Cyprus. Cyprus has double taxation treaties with some 60 countries, many of which are emerging markets.
Cyprus – Ready to Support Britain’s Fund Industry after Brexit
Modernised and reformed, the Cyprus fund sector is ready to play a major supporting role for British-based investment funds and managers once Britain leaves the EU and if the EU decides to withdraw Britain’s passporting rights.
Cyprus, a member of the EU and eurozone, can offer British-based firms the flexibility to maintain their current operations without having to relocate staff post-Brexit to a jurisdiction within the bloc. By contracting a company in Cyprus, investment managers in the UK would have a fully-compliant UCITS/AIFM platform with a European passport to market their funds in the EU. The Cypriot company would delegate the portfolio management back to the UK manager but be responsible for risk management and compliance.
Other fund jurisdictions eyeing post-Brexit business, such as Ireland and Luxembourg, are more established than Cyprus and geographically closer to Britain. But as a former British colony, Cyprus has close ties with Britain and its legal system is based on English common law. Cyprus also has worked very closely with the relevant authorities in Britain, as well as British law firms and consultants, when drawing up the legal framework for its financial services regimes.
The British manager would benefit from the Cyprus platform’s pre-existing structure in terms of sharing costs, existing middle and back office operating models, tried and tested systems, and speed to market.
Angelos Gregoriades, CIFA’s president, says: “In terms of investment funds and financial services, we can be a strategic partner of Britain.”