International collective investment schemes
Open-ended undertakings for collective investments in transferable securities
Cyprus offers prospective investors two distinct structures of legal entities for the establishment of investment funds - international collective investment schemes (ICISs) and open-ended undertakings for collective investments in transferable securities (UCITSs).
International collective investment schemes
In May 1999 Cyprus enacted the International Collective Investment Schemes Law (47(1)/99, as subsequently amended), which provides the necessary legal framework and appropriate incentives to encourage the establishment of such international funds. The sole object of an international collective investment scheme (ICIS) is the collective investment of funds to its unit holders.
The regulatory and supervising authority for such funds is the Central Bank of Cyprus (CBC). An ICIS must be approved by the CBC and - depending on the investments objective of the ICIS - by the Cyprus Exchange and Securities Commission (CySec). A written application must be submitted to the CBC. In order to approve the ICIS scheme, the CBC must be satisfied that:
- the directors, promoters, managers and trustees of the scheme are competent, experienced and honest, and the manager, general partner and trustee (as the case may be) act independently of one another;
- the manager, trustee and general partner (as the case may be) meet the necessary legal requirements and the CBC regulations;
- the name of the scheme is not undesirable or misleading; and
- the constitutional documentation and the offering memorandum of the scheme are not undesirable or misleading.
ICISs are classified in three categories, depending on the identity and number of their investors:
- public schemes (ie, those marketed to the general public);
- schemes addressed solely to experienced investors; and
- private schemes.
Under the legislation, an ICIS can take one of the following legal forms:
- an international fixed capital company;
- an international variable capital company;
- an international unit trust scheme; or
- an international investment limited partnership.
All four schemes may be established for limited or unlimited duration.
International fixed capital company
This is an international investment company incorporated under the law that is recognised as an international fixed capital company under the ICIS Law. Its assets and unit holders must be non-residents of Cyprus and the share capital of the company cannot increase or decrease. Initial minimum capital is set at $100,000, which must be marketed to the public or to experienced investors. Private ICIS fixed capital companies are exempt from this requirement.
International variable capital company
This is an international investment company incorporated under the Company Law and recognised as an international variable company by the ICIS Law, and is the most commonly used ICIS legal form in Cyprus. Its assets and unit holders must be non-residents of Cyprus and the share capital of the company may vary according to the investors participating in or exiting the company. The share capital of the company must be equal to the net asset value of the shares of the company at any time in issuance, and may be divided into a specified number of shares without assigning any nominal value.
International unit trust scheme
This is an international trust created under the International Trusts Law, recognised to operate as an international unit trust scheme by the ICIS Law. A 'trust' is legally defined as a relationship created - inter vivos (ie, during the trustor's lifetime) - by a person who places assets under the control of the trustee for the benefit of a third party. These assets are a separate 'fund' and are not part of the trustee's own estate. The title of the trust assets stands in the name of the trustee, who is empowered and bound to manage the assets held in trust in accordance with the terms of the trust agreement. Under Section 2 of the International Trust Law, a trust qualifies for a Cyprus International Trust where:
- the settlor is not a permanent resident in Cyprus;
- at least one trustee is a permanent resident of Cyprus;
- no beneficiaries are permanent residents in Cyprus; and
- the trust property includes no immovable property in Cyprus.
The said law is currently being reviewed for amendments.
International investment limited partnership
This is a limited partnership registered under the Partnership and Business Names Law and recognised as an investment limited partnership by the ICIS Law. The partnership must appoint a general partner who acts as the manager of the fund and who is responsible for any debt and obligations of the scheme that may arise. Limited partners are also members of the scheme and their liability is limited to the amount that they have contributed to the scheme. A legal entity can also be a partner with limited liability. Partners or unit holders of the fund that have limited liability should not take part in the conduct of the business of the scheme or have the power to contract on behalf of the international investment limited partnership. All contracts, deeds, instruments, letters and documents must be entered into, drafted, signed and executed by the general partner on behalf of the international investment limited partnership.
Open-ended undertakings for collective investments in transferable securities
The Open-Ended Undertaking for Collective Investments in Transferable Securities Law (200(I)/2004, as subsequently amended) provides the legal framework for the registration, regulation and marketing of local and foreign funds in Cyprus.
Pursuant to the law, a UCITS is considered to be any organisation whose sole aim is to invest collectively publicly collected capital in transferable securities via stock markets, banking deposits and any other investments, whose operations are based on the principle of risk diversification and whose units can be liquidated by the unit holder on request using the assets of the organisation.
Under this law local, a UCITS may take the form of either:
- mutual funds managed by a management company; or
- a variable capital investment company.
To set up and operate a mutual fund or a variable capital investment company in Cyprus, the permission of CySec is required and the application must meet certain criteria. A mutual funds management company is entitled to issue or redeem fund units through representatives, which may only be banks, investment firms and cooperative credit institutions. A variable capital investment company can manage its own assets only and cannot undertake the management of third-party assets.
A UCITS that has received an operation licence from another member state that has adopted EU Directive 85/611/EEC may be established and carry on its activities in Cyprus. The home member state's authorities must provide notification to the CySec, as well as any relevant information concerning the fund.
Furthermore, a UCITS that is established and licensed in a third country or one that does not apply the EU directive, is subject to a prior authorisation by CySec in order to market its units of shares in Cyprus. These types of UCITS can sell their units in Cyprus, but cannot market them without the prior approval of the CySec. For such approval to be granted, the sale must be carried out by legal entities acting as representatives in Cyprus already approved by CySec.
For further information on this topic please contact Stella Kammitsi at Chryssafinis & Polyviou by telephone (+357 22 67 9760), fax (+357 22 67 9750 ) or email ([email protected]).