Spotlight: recent developments in asset management in Cyprus

All questions

Overview of recent activity

A few years ago Cyprus would not have figured as a fund jurisdiction in any serious conversation. Although Cyprus was a known domicile for holding and other companies that benefited from the membership of Cyprus in the EU, its extensive network of double tax treaties, the plentiful supply of educated personnel with high international qualifications and a tested common law justice system, the funds industry was just beginning to take shape.

Following the Cypriot financial crisis of 2013, significant action was taken to increase transparency and regulation throughout the financial system, including the adoption of serious and enhanced Anti Money Laundering (AML) procedures² across the board, the adoption of prudent banking and financial practices³ and generally the cultivation of a culture of appreciation of the significance of enhancing the reputation of the system as a white list domicile for financial institutions.⁴

The development of the non-banking financial sector has significantly benefited from the recent banking crisis of the eurozone, and the decreasing interest rates (recently leading to negative depositary rates) have led investors to stop thinking that maintaining bank deposits not required for cash flow purposes would be a prudent way to manage their excess capital. Furthermore, the excessive and reckless borrowing practices of the past have made banks extremely cautious in their lending practices, thus diminishing the available liquidity from classic bank borrowing. With these factors in mind it became quite evident that alternative investment funds (AIFs) would have a much larger role to play in both attracting and supplying liquidity. As a result, Cypriots have clearly understood that investing in properly managed AIFs and developing the Cypriot fund industry as an alternative to other more established fund jurisdictions, such as Ireland and Malta, would be a venture worth developing.

General introduction to the regulatory framework

In 2018, Cyprus further upgraded its legislative framework with a new AIF regime, reflecting the latest market demands and introducing a new product called a registered AIF that does not require licensing, and the new legal form, the limited partnership with separate legal personality, which allows for greater scope for fund structuring.

i Regulator

The Cyprus Securities and Exchange Commission (CySEC) is the independent public supervisory authority responsible for the supervision of the investment services market, transactions in transferable securities carried out in Cyprus and the collective investment and asset management sector. CySEC is the regulator of most parts of the financial industry, including Cyprus investment firms (CIFs), undertakings for collective investment in transferable securities (UCITS), AIFs and alternative investment fund managers (AIFMs). In parallel to the development of the regulatory system the industry itself organised by creating the Cyprus Investment Firms Association (CIFA), which is the body that comprehensively represents the fund industry, working in tandem with the Cyprus Investment Promotion Agency (CIPA), a quasi-governmental organisation set up to assist and provide information about investment to and through Cyprus.

ii Key legislation

The key statutes regulating asset management in Cyprus are outlined below:

1. Law 73(I)/2009 Regulating the Structure, Responsibilities, Powers, Organisation of the Securities and Exchange Commission and Other Related Issues (CySEC Law): the law that establishes the creation and regulates the operation of CySEC, including its constitution, tasks and responsibilities, rights and powers;
2. Open-Ended Undertakings for Collective Investment (UCI) Law 78(I)/2012 (UCI Law): UCITS funds in Cyprus are governed by the UCI Law transposing the UCITS IV Directive into national law;
3. Law 124(I)/2018 Providing for the Alternative Investment Funds and Other Related Matters (AIF Law): The AIF Law is one of the main statutes that governs, among other things, the incorporation, operation, organisation and licensing requirements of AIFs registered and domiciled in Cyprus, being the vast majority of regulated entities in the island at present;
4. Law 56(I)/2013 on Alternative Investment Fund Managers (AIFM Law): the AIFM Law has generally transposed the Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD), as per the minimum requirements of the same. The AIFs and AIFLNPs⁵ Directive (as defined below) sets outs the procedure that applies when marketing and selling via the private placement regime; and
5. Law 81(I)/2020 on the Small Alternative Investment Fund Managers Law (Mini Managers Law): the Mini Managers Law creates a regime for the regulation and licensing of small alternative investment fund managers by removing undue regulatory burdens while introducing new safeguards that uphold best practice standards of investor protection.

iii Secondary legislation

CySEC has issued the following directives, which are the main secondary pieces of legislation regulating asset management in Cyprus:

1. Directive DI131/56/02 regarding the procedure and conditions for the marketing of units of AIFs and AIFLNPs in Cyprus, the organisation of the marketing network, the obligations of the persons that participate in the marketing network, as well as the conditions for the marketing of units of AIFs established in Cyprus, in another Member State or in a third county (AIFs and AIFLNPs Directive);
2. Directive DI56-2013-01 regarding the procedures and conditions for granting authorisation to an AIFM Company and the submission of an application for granting authorisation to an AIFM Company (AIFM Authorisation Directive);
3. Open-Ended Undertakings for Collective Investment (UCI) Law of 2012 Directive DI78-2012-01 as regards the procedures and conditions for granting a management company operation licence and as regards the submission of an application for granting a management company operation licence (UCITS Directive);
4. Directive D 78-2012-11 regarding the terms and the procedure for the marketing network of UCITS units in Cyprus, the organisation of the marketing network and the obligations of the persons participating in the network (UCITS Marketing Directive);
5. Directive 131-2014-03 regarding the classification of the AIFs of the Republic of Cyprus and other relevant matters – Administrative Act No. 471/2015 (Classification Directive); and
6. Directive DI 81-2 on the procedures regarding authorisation of Small AIFMs.

Broadly speaking, the AIFMD has generally been transposed as per the minimum requirements laid down in the same. No additional local conditions have been imposed in order for an AIF to be marketed and sold into Cyprus via the private placement regime or via the AIFMD marketing passport.

Common asset management structures

The funds industry, as previously mentioned, is regulated by CySEC and is subject to the aforementioned laws that have transposed the relevant European Union directives. Under the provisions of the AIF Law, each AIF must be approved and authorised by CySEC and be registered on application.⁶ The AIF may be externally or internally managed (in which case there is a minimum capital requirement of €125,000). The external manager of any AIF need not be registered in Cyprus⁷ and may be located in another EU Member State. The AIF must raise a minimum of €500,000 within 12 months of its authorisation.⁸ The assets of the AIF must be entrusted to a depositary who may be established in Cyprus, another EU Member State or, under certain circumstances, a third country.⁹ This depositary should be a credit institution, an investment firm or a similar institution subject to prudential regulation.¹⁰ AIFs marketed under the AIFM Law, being allowed to market to retail and non-retail investors, may be marketed in Cyprus and any other EU Member State or third country, subject to notification, where appropriate.¹¹ An AIF that has been incorporated in the form of a variable or fixed capital investment company addressed to retail investors can be listed on a stock exchange and have its units traded.

Regarding AIFs directed only to professional investors, the AIF Law¹² allows or the creation of AIFs for a limited number of persons (AIFLNP) where the number of persons does not exceed 50.¹³ The main characteristic of an AIFLNP is that it is not required to be managed by an AIFM and is not subject to the AIFM Law.¹⁴ Thus it may be set up as internally managed (in which case it is subject to a minimum initial capital requirement of €50,000) or choose to be externally managed. Any AIFLNP must be approved by CySEC.¹⁵ An AIFLNP is also required to raise €500,000 within 12 months of its incorporation, and in certain circumstances it may not be required to appoint a depositary.¹⁶

It has to be mentioned that the AIF Law¹⁷ also allows for the creation of registered alternative investment funds (RAIFs), which are addressed exclusively to professional and well-informed investors and always externally managed by an AIFM. RAIFs also need to be specifically registered with CySEC to commence trading, however the registration process is simpler than the approval of an AIF and the notification may be undertaken by the AIFM under a set of stated obligations¹⁸ that are imposed on the AIFM. No investment restrictions apply to the RAIF, and there is an option for an umbrella structure, but it may not operate either as a money market fund or loan origination fund.

AIFMs are regulated by CySEC under the provisions of the AIFM Law, which comprehensively lists the requirements for authorisation of AIFMs, remuneration policies, risk policies, liquidity provisions, disclosure obligations, delegation and marketing requirements, to name but the most important.

The AIF Law and AIFM Law in general terms lay out all the best practices that are required by any regulated AIF and describe in detail all the systems, procedures and policies necessary to protect the integrity of the financial system and mitigate risks.

i Legal forms

Section 4 of the AIF law allows AIFs to be established in one of the following legal forms:

1. a common fund (CF);
2. an investment company registered either as a company limited by shares or a variable capital investment company; or
3. a limited partnership registered subject to the General and Limited Partnerships and Business Names Law.

It has to be pointed out that as of today the most common format of an AIF in Cyprus is that of an investment company and that to date there are not many common funds or partnerships.

ii Common funds

CFs are regulated subject to Part 1 of Chapter 8 of the AIF Law.¹⁹ A CF is managed collectively for the benefit of its unitholders, who jointly own its assets and whose liability is limited to the value of those assets. It is legally separated from its manager and its unitholders. The operation of the CF needs to be authorised by CySEC. The CF is managed by an external manager who represents the CF as the CF lacks legal personality. The proportional holding of each unit in the assets of the CF is expressed by their percentage of units as to the total units. Such units shall be freely transferable and may be pledged as security. A CF must have a set of rules that require approval by CySEC. The CF rules must contain, inter alia, the name of the CF, its investment objectives, the category of investors to which it is addressed and the conditions pertaining to the issue, marketing and cancellation of its units. CFs may be open-ended or close-ended. CFs may be dissolved in accordance with the AIF Law, including at an instance where CySEC withdraws its authorisation for its operation. The unitholders may not dissolve the CF.

iii Investment companies

Investment companies (ICs) may be of fixed capital or variable capital. They are covered by Part 2 of Chapter 8 of the AIF Law.²⁰ ICs may be either internally or externally managed and require CySEC authorisation. The main difference between a fixed capital IC (FCIC) and a variable capital IC (VCIC) is that the AFI Law allows certain derogations²¹ from provisions of the Companies Law,²² and allows for the procedure of the increase and the reduction of the VCIC's capital to be set in the IC's instruments of incorporation, without the procedure mandated for a normal company. Any company registered under the Companies Law may convert to a VCIC if so approved by CySEC. FCICs are governed by the ordinary provisions of the Companies Law, with some exceptions, as well as the AIF Law. ICs are treated for the purposes of convening general meetings in the same way as listed companies are. If the assets of an IC are reduced and fall below the two-thirds of any minimum assets requirement, then the manager shall call a meeting for the dissolution of the IC where the approval of half of those present shall suffice. The IC is also dissolved if CySEC withdraws its authorisation. The IC instruments of incorporation must contain, inter alia, the name of the IC, its investment objectives, the category of investors to which it is addressed and the conditions pertaining to the issue, marketing and dissolution procedures.

iv Limited partnerships

Limited partnerships (LP) are covered by Part 2 of Chapter 8 of the AIF Law.²³ If an LP has a separate legal personality it will be managed by an internal manager or an external manager appointed by its general partner, whereas if the LP lacks separate legal personality it will always be managed externally. Generally, a limited partnership shall be managed by the general partner of the partnership. All the functions of the LP shall be set out in the partnership agreement that is required to be approved by CySEC.

Main sources of investment

Key trends

Based on a press release by CySEC on 12 July 2022, there has been a 3.9 per cent decrease in value of total assets under management (AUM) of collective investments in the first quarter of 2022, compared to the fourth quarter of 2021. In particular, the value of total assets reached €11 billion. Nevertheless, we note that there has still been an increase in value of total AUM when comparing to the first quarter of 2021, where the value of total assets was at €9.8 billion. As of the first quarter of 2022 there are a total of 322 management companies and undertakings of collective investments (UCIs) under CySEC's supervision, of which 235 have operations. The total number of companies comprises 206 externally managed UCIs, 44 internally managed UCIs and 72 external fund managers. The total number of management companies concerns 41 AIFMs, 66 subthreshold AIFMs,²⁴ four UCITS management companies and five dual licence entities (AIFMs and UCITS management companies).

The UCIs managed by management companies had a net asset value of €9.6 billion. Approximately 56 per cent of AUM concern assets managed by AIFMs, 12 per cent by sub-threshold AIFMs, 23 per cent by AIFMs and UCITs management companies, 8 per cent by UCITS management companies and only 1 per cent by regulated UCIs that are managed by foreign fund managers.

Regarding the sectoral segmentation of the investments, CySEC reports that UCITs invest mostly in transferable securities (84.6 per cent), followed by bank deposits (8.1 per cent) and investments in UCITS and UCIs (5.8 per cent). AIFs, AIFLNPs and RAIFs are mainly invested in private equity (39.1 per cent),, while the investment in hedge funds represents 11.4 per cent of the AUM. Out of the total 203 UCIs in operation, there are 184 UCIs domiciled in Cyprus. There are 156 UCIs that invest in Cyprus entirely or partially and €2.5 billion (22.5 per cent) is invested directly in Cyprus. Private equity accounts for 66.3 per cent of the investments, while 12.4 per cent of the investments are made in real estate. It is interesting to note that the vast majority of UCITs are retail investors (99.2 per cent), while in respect of AIFs, AIFNLPs and RAIFs, 30.7 per cent are professional investors, 57.4 per cent are well-informed investors and only 11.9 per cent are retail investors.

Other areas that are currently included in CySEC statistics are shipping, energy, fintech, sustainability and cryptocurrencies. One can see there has been a recent expansion of the fintech industry, leaving a noticeable imprint on the economic landscape, whereas major international funds have invested in the area of renewable energy (acquisition of one of the largest wind farms in Cyprus, the Orites windfarm, in March 2020). Notably, on 25 November 2020 CySEC issued a circular²⁵ regarding the prudential treatment of crypto-assets and enhancement of risk management procedures associated with the same in order to guide CIFs. Among other things, the circular states that when a CIF invests directly in crypto-assets on a non-speculative basis, it should treat these investments as a direct capital deduction from own funds, while on a speculative basis, it should treat these as investments in a derivative product subject to counterparty credit risk and market commodity risk. A CIF would also be subject to such risks when acting as the counterparty to its clients' trades in crypto-assets or in financial instruments on crypto-assets, or both. The circular also touches upon the assessment of the internal capital adequacy ratio of CIFs and disclosures of any material crypto-asset holdings, and concludes with guidance on the enhancement of risk management procedures.

The positive assessment of the Cypriot financial system with regard to transparency and sound practices, Brexit leading various London-based funds to seek an additional or alternative base within the EU coupled with the safety Cyprus has to offer and the successful handling of the covid-19 crisis²⁶ are making investors and professionals to look to Cyprus again with a different eye and allow cautious optimism for the future of the industry.

Sectoral regulation

i Insurance

The Law on Insurance and Reinsurance Business and Other Related Issues (Law 38(I)/2016) (Insurance Law) has been introduced to harmonise the national legal framework that governs the insurance and reinsurance business in Cyprus with the Solvency II Directive and various other EU directives. The competent authority for supervision of the insurance sector in Cyprus is the Superintendent of Insurance, who is the head of the Insurance Companies Control Service.

The regulated entities that fall within the supervision of the Superintendent of Insurance²⁷ comprise insurance and reinsurance undertakings whose head office is in Cyprus, as well as branches of insurance or reinsurance undertakings domiciled in a third non-EU country. In addition, the Superintendent supervises the activities of Cypriot insurance and reinsurance undertakings who are conducting business in the European area.

The Insurance Law expressly provides that investment decisions of insurance and reinsurance undertakings (collectively, undertakings) shall be made in accordance with the prudent person principle.²⁸ The prudent person principle essentially requires undertakings to invest assets in the best long-term interests of members and beneficiaries as a whole. In addition, assets shall be invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole,²⁹ and shall be predominantly invested on regulated markets. Investments and assets that are not admitted to trading on a regulated financial market shall be kept to prudent levels, assets shall be properly diversified, and undertakings should avoid excessive reliance on, and exposure to, excessive risk concentration.³⁰ It is further provided that undertakings shall only invest in assets and instruments whose risks can be properly identified, measured, monitored, managed, controlled and reported. These risks need to be taken into account in the assessment of the undertaking's overall solvency needs.³¹ In the event of a conflict of interest, undertakings, or the entity that manages their asset portfolio, shall ensure that the investment is made in the best interests of policy holders and beneficiaries.³²

Most commonly, insurance investment funds are investment plans provided by insurance undertakings that are linked to life insurance for which a client or investor usually pays a monthly premium. The Superintendent issued an Order titled 'Restrictions concerning assets to which policy benefits are linked', which took effect as of 1 January 2017 (Policy Benefits Order). The Policy Benefits Order applies to undertakings offering unit-linked insurance contracts, to assets or reference values to which the policy benefits may be linked and where the investment risk is borne by the policyholder, who is a natural person. The scope of these links is limited to certain categories of assets.³³ In general, undertakings must ensure, inter alia, that the values of these links are determined fairly and accurately, and that the assets held are capable of being realised in time for it to meet its obligations to linked policyholders.

Regulation (EU) No. 1286/2014 on key information documents for packaged retail investment and insurance-based investment products (PRIIPs Regulation) has direct effect in Cyprus's legal framework. The PRIIPs Regulation lays down uniform rules on the format and content of the key information document to be drawn up by PRIIP manufacturers and on the provision of the key information document to retail investors in order to enable retail investors to understand and compare the key features and risks of the PRIIP.³⁴

Additionally, Regulation (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings was introduced, to establish uniform rules on the publication of national provisions concerning marketing requirements for collective investment undertakings and on marketing communications addressed to investors, as well as common principles concerning fees and charges levied on managers of collective investment undertakings in relation to their cross-border activities. It also provides for the establishment of a central database on the cross-border marketing of collective investment undertakings.³⁵

In light of Brexit and the impact of the covid-19 pandemic, the global economy appears to be extremely volatile at the moment. The heightened uncertainty stresses the significance of choosing a flexible investment strategy and embracing diversification. Whereas bank deposit rates are currently negative or close to zero, insurance investment funds that invest in varied portfolios of assets can be described as a way out for depositors who seek to achieve a return on their capital.

ii Pensions

On 12 February 2020, Cyprus integrated the provisions of EU Directive 2016/2341 (known as IORP II) in the Cypriot legal order by introducing the Law on the Establishment, Activities and Supervision of Institutions for Occupational Retirement Provision (IORPs) (10(I)/2020) (Law 10(I)/2020).

Based on the provisions of Law 10(I)/2020, registered IORPs are required to invest in accordance with the rules embraced under the prudent person principle.³⁶ In addition, IORPs should draw up a statement of investment principles within 12 months of the start of their operation; this statement needs to be reviewed every three years. Subject to certain exemptions, IORPs need to detail in their statement of investment principles the methods of risk assessment and risk management and information on the strategic distribution of assets. They are also required to take into account the potential long-term impact of investment decisions on environmental, social and governance factors.³⁷

Registered IORPs may entrust any activities including key functions and their management, in whole or in part, to service providers operating on their behalf via a written agreement. Additionally, for the management of their investment portfolio, IORPs may designate an investment manager who is established in another Member State and possesses the required licence.³⁸

For every occupational pension scheme, the IORP may appoint one or more depositaries to hold custody of the assets or exercise supervisory duties, or both, according to whether the members and beneficiaries of the scheme bear the entire investment risk or not.³⁹

It is worth mentioning that a special type of scheme was introduced in the Cypriot market in 2015, known as the Class VII fund. A Class VII fund is typically provided by insurance undertakings and is similar to traditional provident funds but more flexible and adaptable to the particular needs of each employee in any type of organisation. Essentially, Class VII funds provide depositors an investment opportunity while catering for the future social insurance pension.

iii Real property

It is expressly established by law that AIF management includes, inter alia, real estate administration activities.⁴⁰ These activities are generally governed by legislative provisions found in the AIF and AIFM Laws, but are regulated in more detail by CySEC's directives.

In particular, the Classification Directive categorised AIFs according to their investment purpose and structure of investments. The Classification Directive, inter alia, sets out the rules on investment policy according to the type of investors to which the AIF appeals. A real estate AIF means an AIF that invests in immovable property or assets related to immovable property that have been admitted to or are negotiated at a market, which is mentioned in the constitutional documents or regulations of the AIF.⁴¹

Regarding AIFs addressed to private investors, real estate AIFs are expressly exempted from the general rule that prohibits AIFs from acquiring units that will enable them to exercise substantial control over the issuer's management.⁴² Real estate AIFs addressed to professionals and well-informed investors are permitted to grant loans or to guarantee third-party obligations. Additionally, the general rule that the AIF and its external manager cannot acquire units that grant voting rights allowing them to exercise substantial control on the issuer's management does not apply to real estate AIFs.

Without prejudice to the special rules that apply with respect to real estate AIFs, every AIF is allowed to invest up to 20 per cent of its assets in immovable property.⁴³ Where AIFs invest in immovable property and other collective investment schemes, the total of these investments shall not exceed 25 per cent of the assets of the AIF.⁴⁴ In addition, it is mandatory to insure the immovable property being the subject matter of the investment.⁴⁵ Prior to the AIF's investment in immovable property, the property has to be valued by an independent qualified valuer, and it needs to be evident from the valuation report that, in the event that the AIF makes the investment, it will be able to sell that property at the valued price within a reasonable time period. In particular, the AIF's investment in the immovable property has to occur within six months of the date of the valuation report and at a price that cannot deviate more than 5 per cent from the price at which it has been valued by the independent valuer.⁴⁶

The Classification Directive further provides for special rules that apply to real estate AIFs that invest 60 per cent or more of their assets in immovable property. As to real estate AIFs addressed to private investors, subject to specific exemptions,⁴⁷ the value of each immovable property being the subject matter of investment shall not exceed – at the time of acquisition – a third of the value of its total assets. Additionally, a real estate AIF is not allowed to invest more than 25 per cent of its assets in plots,⁴⁸ or in mortgaged immovable property,⁴⁹ and shall not grant to any person the right to acquire immovable property in its portfolio.⁵⁰ For the valuation of immovable property – which is carried out in the end of each calendar quarter – the last report of an independent valuer is considered to have binding effect. This report is amended based on the valuation carried out by the board of the external manager of the real estate AIF to accommodate any changes that may have taken place in between.

Moreover, a lock-up period may be set in the regulation or constitutional documents of the real estate AIF during which investors are not allowed to acquire or pay off their shares. This provision also applies to real estate AIFs that are addressed to professionals or well-informed investors.⁵¹

Finally, the Classification Directive lists additional information that needs to be included in the prospectus of a real estate AIF addressed to private investors.⁵²

iv Private equity

The Classification Directive⁵³ provides various restrictions on the types of investments and the investment limits of an AIF that participates in venture capital. For example, at least 60 per cent of the assets of the aforementioned AIFs shall be invested in the investments listed in Section 52 of the Classification Directive (e.g., in shares or transferable securities or other forms of participation in companies that are not traded on a regulated market or multilateral trading facility or other third country market), and a maximum of 40 per cent of the same shall be invested in any other means. Furthermore, in the event the constitutional documents of the AIF set a lock-up period for investors that exceeds five years, the investors should be allowed to redeem their units every three years in an amount up to 10 per cent of the total assets of the AIF.

The structure of private equity AIFs is suitable for wealthy individuals and family offices, as they provide for the opportunity to group assets under an umbrella structure with no cross liability between the sub-funds while the investment objectives and restrictions are being determined by the promoter of the AIF. Furthermore, such a structure provides for a dedicated method of valuation of all the family assets at regular intervals, whereas money may be withdrawn through flexible redemption procedures.

v Other sectors

Cyprus is among the top three ship-management centres globally, has the third-largest merchant fleet in the EU and is among the largest merchant fleets worldwide. Considering the above, Cyprus provides an ideal place for alternative finance for ships using capital markets. The tonnage tax system, which is currently in force in Cyprus, enhances the already very favourable taxation framework of AIFs. The fund assets will be registered predominantly under the Cyprus flag, and taxed automatically under the tonnage tax system. Hence, the fund will be totally exempt from taxation on its operating profits from qualifying activities, on any capital gains realised (i.e., relating to profits from the disposal of a vessel or interest therein, profits from the disposal of shares in a ship owning entity) and on dividends paid (directly or indirectly) out of such profits.⁵⁴

In the fourth quarter of 2019, the total assets under management in shipping amounted to €22.8 million (0.28 per cent of total AUM).⁵⁵

vi Recent developments

The Small Alternative Investment Fund Managers Law of 2020 (known as the Mini Managers Law) came into force on 3 July 2020 and provides for the establishment and operation of small or sub-threshold AIFMs (small AIFMS). A small AIFM is defined as an AIFM whose assets under management, including any assets acquired through use of leverage, in total do not exceed €100 million or €500 million when the portfolios of AIFs that are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each AIF. The main provisions of the Mini Managers Law concern the steps for authorisation of the small AIFMs of the Republic, as well as the general conditions for their operation (regulations, delegation, organisational requirements, etc.).

On 18 October 2021, Cyprus transposed Directive (EU) 2019/1160 (Marketing Directive) into the local regime by amending the AIFM Law and the UCI Law. In particular, amending Law 134(I)/2021⁵⁶ amended the UCI Law to introduce the obligation on UCITS authorised in a Member State other than Cyprus during the marketing of their units in the Republic to make available certain facilitations for the performance of certain tasks. It has been clarified that for such purposes, UCITS need not have a physical presence or appoint a third party in Cyprus. In addition, it is now required that the notification made to CySEC by a local UCITS that proposes to market its units in another Member State to also include the details necessary, including the address, for the invoicing or for the communication of any applicable regulatory fees or charges by the competent authorities of the Member State where the UCITS will market its units and information on the facilities for performing the tasks referred to above. In the event of a change to the information in the aforementioned notification or a change regarding share classes to be marketed, the UCITS shall give written notice thereof to CySEC and the competent authority of the UCITS host Member State at least one month before implementing that change. In addition, amending Law 134(I)/2021 raised the 10 per cent limit that UCITS may invest of its assets in transferable securities, or money market instruments issued by the same body to a maximum of 25 per cent where the bonds were issued before 8 July 2022 and met certain requirements. Where, however, a UCITS invests more than 5 per cent of its assets in such bonds that are issued by a single issuer, the total value of investments shall not exceed 80 per cent of the value of its total assets. The other significant amendment relates to the ability of Cypriot UCITS to de-notify and cease the arrangements made for marketing as regards units in a Member State in respect of which it has made a notification, where certain conditions are fulfilled.

The key changes to the AIFM Law brought about by the aforementioned amendment include:

1. the introduction of a definition of pre-marketing. Pre-marketing is now defined as the 'provision of information or communication, direct or indirect, on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential professional investors [. . .] in order to test their interest in an AIF or a compartment which is not yet established, or which is established, but not yet notified for marketing [. . .] and which in each case does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF or compartment';
2. the introduction of conditions under which an AIFM of the Republic of Cyprus may engage in re-marketing activities; and
3. the introduction of a notification requirement for AIFMs of the Republic to CySEC within two weeks of having started pre-marketing.

Tax law

Cyprus offers one of the most favourable tax regimes in Europe, and has an extensive network of double tax treaties (DTTs) with 65 countries.⁵⁷ Given several tax advantages,⁵⁸ the island is increasingly becoming a destination of choice within the EU for fund managers and management companies. Cyprus' tax regime was further amended in 2018 to provide more tax incentives for the set up and operation of funds, aiming to boost the island's position as an up-and-coming hub in the global fund industry. Significantly, there is no withholding of tax on income repatriation or dividends paid to foreign unitholders, and there is no tax on redemptions of shares or units by the holders.⁵⁹ Additionally, capital gains that arise from the disposal of immovable property held outside of Cyprus or shares in companies that may have as an underlying asset immovable property situated outside of Cyprus are exempt from capital gains tax.⁶⁰ Moreover, the Cyprus legislation provides that any gain on the disposal of securities is exempt from taxation.⁶¹ There is also no subscription tax on the net assets of the AIF.

The interest received by open and closed-end collective investment schemes is considered active interest income and taxed only at a rate of 12.5 per cent corporate tax⁶² (no defence tax). Fund managers may opt for a new mode of personal taxation so that their variable employment remuneration, which is effectively connected to the carried interest of the fund managing entity, may be subject to Cyprus tax at the flat rate of 8 per cent, with a minimum tax liability of €10,000 per annum, provided certain conditions are met.⁶³

In April 2019, Cyprus enacted Law 63(I)/2019, which amended the Income Tax Law⁶⁴ and transposed the provisions of the EU Anti-Tax Avoidance Directive (Directive 2016/1164 EU) (ATAD) of July 2016 into domestic legislation. Law 63(I)/2019 introduced the following three anti-avoidance measures under ATAD, with effect as of 1 January 2019: limitations to interest deductibility provisions, controlled foreign corporation rules and a general anti-abuse rule. Rules on exit taxation and to tackle hybrid mismatches are expected to be transposed into Cypriot law this year, with effect as of 1 January 2020. The said anti-avoidance rules apply to all companies as well as other entities that are subject to tax in Cyprus in the same manner as companies, including entities that are not Cyprus tax residents but that have a Cypriot permanent establishment.

Outlook

As a general conclusion, we believe that the fund industry in Cyprus is evolving at a sustainable and constant pace and that Cyprus has great potential to develop as a European funds jurisdiction. The recent classification of Cyprus as a Category I country for the purposes of the SEBI (Foreign Portfolio Investors) Regulations by the Ministry of Finance in India⁶⁵ is only a recognition of the island's status as a competitive entry point to EU-regulated fund management solutions and a signal of novel opportunities for further growth for its fund industry. In the words of the President of CIFA: 'The fund sector in Cyprus has the highest growth rate in Europe. With a combination of an excellent legal and regulatory framework, tax incentives, excellent supporting environment, and low setup cost – we have created an extremely favourable climate for funds, and word is getting around.'