THE CYPRUS ALTERNATIVE INVESTMENT FUNDS (AIFS) AND UNDERTAKINGS FOR COLLECTIVE INVESTMENT IN TRANSFERABLE SECURITIES (UCITS)

The Alternative Investment Funds Law 124(I)/2018, to the extent amended (hereinafter, the ‘’AIF Law’’) defines alternative investment funds as any collective investment undertakings, including investment compartments thereof, which, collectively:

• raise capital from a number of investors, with a view to investing it in
  accordance with a defined investment policy for the benefit of those
  investors, and
• do not require authorisation pursuant to section 9 of Law 78(I)/2012, as
  amended (hereinafter, the ‘UCI Law’), or pursuant to the legislation of
  another member state that harmonises the provisions of Article 5 of the
  Directive 2009/65/EC, as amended.

The AIF Law allows for three types of AIFs to be established in Cyprus which are as follows:

• Alternative Investment Funds with Limited Number of Persons (50) (AIFLNPs)
• Alternative Investment Funds with Unlimited Number of Persons (AIFs)
• Registered AIFs (RAIFs)

The various legal forms in which either type of AIFs can manifest are as follows:

AIFLNP:

• Variable Capital Investment Company (VCIC)
• Fixed Capital Investment Company (FCIC)
• Limited Partnership (LP)

AIF/RAIF:

• VCIC
• FCIC
• Common Fund (CF)
• LP

UCITS:

The UCI Law defines UCITS as undertakings the sole object of which is the collective investment in transferable securities and/or other liquid financial instruments as referred to in section 40 (1) of the UCI Law, of capital raised from the public, which operate on the principle of risk-spreading, and the units of which are, at the request of investors, redeemed or repurchased, directly or indirectly, out of these undertakings’ assets.

UCITS can take the following legal forms:

• CF
• VCIC

Taxation of Funds

Funds which are opaque for tax purposes and which are managed and controlled in Cyprus are tax resident in Cyprus and are subject to the general provisions of the Cyprus tax framework.

In the case of funds which have compartments, each compartment is assessed separately for tax purposes subject to the provisions of the law.

Under circumstances and depending on the legal form of the fund, some funds may be transparent for tax purposes.

Additional key provisions which are relevant to funds are set out below:

Sale of Fund Units

The subscription, redemption, conversion or transfer of a fund’s units should be exempt from Cyprus stamp duty.

No creation of a permanent establishment

Based on the Cyprus tax legislation no Cyprus permanent establishment will be deemed to arise:

i. for non-Cyprus resident investors as a result of investment into Cyprus tax-transparent investment funds, or,
ii. as a consequence of the management from Cyprus of non-Cyprus investment funds.

Management services

The management fee charged for the provision of collective management services to investment funds is exempt from VAT, provided certain conditions are met.

Carried interest / performance fee for AIF and UCITS fund managers

Certain employees and executives of the following investment fund management companies or internally managed investment funds may opt for a different mode of personal taxation:

• Alternative Investment Fund Managers authorised under the Alternative Investment Fund Managers Law 56(I)/2013, as amended (hereinafter, the
  ‘AIFM Law’);
• Internally managed AIFs authorised under the AIFM Law;
• UCITS Management Companies authorised under the UCI Law; and
• Internally managed UCITS authorised under the UCI Law.

Subject to conditions, their variable employment remuneration which is effectively connected to the carried interest of the fund managing entity may, through an annual election, be separately subject to Cyprus tax at the flat rate of 8%, with a minimum tax liability of €10.000 per annum. This special mode of taxation is available for a period of 10 years.