Nicosia – Cyprus has upgraded the legal and regulatory framework for collective investment funds in an effort to boost its funds industry.
On 10 July 2018, the Cyprus Parliament approved a new legislation which repeals and replaces the previously applicable Law 131(I)/2014 regulating Alternative Investment Funds (AIFs).
The introduction of the new legislation, which will come into force upon publication in the Cyprus Government Gazette, is part of a commitment to modernize the existing regulatory framework pertaining to AIFs, aligning the Cyprus funds industry with recent EU and international developments and trends.
The new legislation constitutes a ground-breaking development for Cyprus AIFs as it incorporates a combination of provisions influenced by the respective legislative frameworks of other jurisdictions exceling within the investment funds industry. The new legislation will open the way for registration and different types of funds that didn’t exist, while all available options are open in all jurisdictions for investment funds. Already, there is a strong interest in registering alternative investment funds in Cyprus from India, China and Israel.
Registered AIFs (RAIFs)
A revolutionary development is the introduction of RAIFs resulting to a drastically time-efficient and more affordable way for establishing AIFs in Cyprus.
RAIFs do not require authorization by the Cyprus Securities and Exchange Commission (CySEC), being the competent authority supervising AIFs, in order to commence operations as long as they are externally managed by an Alternative Investment Fund Manager (AIFM) established in Cyprus or within another EU Member State. Instead, the establishment of a RAIF will need to be notified to the CySEC and be included in a special register that shall be maintained to this end.
In deviation of the above, RAIFs structured as limited partnerships may also be externally managed by managers other than AIFMs (i.e. Investment Firms, UCITS Management Companies). In such event, the RAIF must necessarily be closed-ended and invest in illiquid assets.
Changes in the Legal Framework
The Alternative Investment Organisation Act 2018 essentially replaces previous legislations while modernizing and upgrading the legal and regulatory framework governing investment funds with the ultimate goal of safeguarding the rights of investors.
Additionally, it also regulates the establishment and functioning of Alternative Investment Organizations (AIFs), including self-managed AIFMs and Registered Alternative Investment Organizations, taking into account the best practices of other countries with a tradition in the field of investment funds, particularly in the European area.
The new provisions of the law designed to make the institutional framework of the AIF more attractive, rigorous and safe concern:
- The establishment and operation of the AIFs, which will not be subject to authorization by the Securities and Exchange Commission, but will be supervised by their manager, who must be licensed
- The initial capital of the AIF
- The appointment of a depositary, depending on the form of the AIF
- Assign the management function to the management of the AIF
- The establishment and operation of AIF as a limited partnership with or without a separate legal personality
- The formation of variable capital companies under the provisions of the Companies Law
Under the previous legislation, taxpayers who were Cyprus residents and domiciled and were deemed to receive dividends from collective investment undertakings or other collective investment funds were subject to a special defence contribution of 3% on those deemed dividends.
Under the amended legislation, persons (tax residents and domiciled) who actual receive or are deemed to receive dividends from these bodies are subject to a special contribution at a rate of 17%. In this way, such persons will be treated in the same way as others receiving dividends from companies.
