The Asset Management Review: Cyprus

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 European Union, 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) has 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 part 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 (the 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 (the 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 (the 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 (the AIFM Law): the AIFM Law has generally transposed the Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD), as per its minimum requirements. The AIFs and Alternative Investment Funds for a Limited Numbers of Persons (AIFLNPs) 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 (the 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 (the 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 (the AIFM Authorisation Directive);
  3. Open-Ended Undertakings for Collective Investment 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 (the UCITS Directive);
  4. Directive D78-2012-11 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 (the 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 (the Classification Directive); and
  6. Directive DI81-2 on the procedures regarding authorisation of small AIFMs.

Broadly speaking, the AIFMD has generally been transposed as per its minimum requirements laid down. No additional local conditions have been imposed 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 EU directives. Under the provisions of the AIF Law, each AIF must be approved and authorised by CySEC and be registered on application.5 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 Cyprus6 and may be located in another EU Member State. The AIF must raise a minimum of €500,000 within 12 months of its authorisation.7 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.8 This depositary should be a credit institution, an investment firm or a similar institution subject to prudential regulation.9 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.10 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 Law,11 allows the creation of AIFLNPs, where the number of persons does not exceed 50.12 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.13 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 chose to be externally managed. Any AIFLNP must be approved by CySEC.14 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.15

The AIF Law16 also allows for the creation of the 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 by 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 obligations17 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 (1) a company limited by shares, or (2) a variable capital investment company; or
  3. a limited partnership registered subject to the General and Limited Partnerships and Business Names Law.

To date, the most common format of an AIF in Cyprus is that of an investment company and 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.18 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. These 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-end. CFs may be dissolved in accordance with the AIF Law, including in 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.19 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 derogations20 from provisions of the Companies Law, Chapter 113, 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.21 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 must be approved by CySEC.

Key trends

In the present day, it appears that the industry has taken off, and CySEC reports that there has been an increase of 14 per cent in the value of the total assets under management of collective investments, compared to the fourth quarter of 2020, which reached €9.8 billion. As of the first quarter of 2021, there are a total of 284 management companies and UCIs under CySEC's supervision, of which 196 have operations. The total number of companies comprises 173 externally managed UCIs, 52 internally managed UCIs and 59 external fund managers. The total number of management companies comprises 31 AIFMs, 73 sub-threshold AIFMs and 4 dual licence entities (AIFMs and UCITS management companies).

The UCIs managed by management companies had a net asset value of €7.97 billion. Approximately 52 per cent of assets under management (AUM) concern assets managed by AIFMs, 17 per cent by sub-threshold AIFMs, 23 per cent by AIFMs and UCITS management companies, 7 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 (85 per cent), followed by bank deposits (9 per cent). AIFs, AIFLNPs and RAIFs are mainly invested in private equity (36 per cent), whereas 13 per cent of the AUM are invested in real estate. Out of the total 166 UCIs managed by UCI management companies, 123 invest in Cyprus entirely or partially and €2.2 billion (22.8 per cent) is invested directly in Cyprus. Private equity accounts for 54 per cent of the investments, while 14 per cent of the investments are made in real estate. The vast majority of UCITS are retail investors, while in respect of AIFs, AIFNLPs and RAIFs, 38.2 per cent are professional investors, 49.9 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. There has been a recent expansion of the fintech industry, leaving a noticeable imprint in 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 wind farm, in March 2020). Notably, on 25 November 2020, CySEC issued a circular regarding the prudential treatment of cryptoassets and enhancement of risk management procedures associated with them in order to guide CIFs. Among other things, the circular states that when a CIF invests directly in cryptoassets 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 these risks when acting as the counterparty to its clients' trades in cryptoassets or in financial instruments on cryptoassets, or both. The circular also touches upon the assessment of the internal capital adequacy ratio of CIFs and disclosures of any material cryptoasset holdings, and concludes with guidance on the enhancement of risks 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 European Union coupled with the safety Cyprus has to offer and the extremely successful handling of the covid-19 crisis are making investors and professionals look to Cyprus again with a different eye and allowing 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) (the 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 Insurance22 comprise insurance and reinsurance undertakings whose head offices are 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 that 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.23 The prudent person principle essentially requires undertakings to invest assets in the best long-term interests of members and beneficiaries as a whole. Also, assets shall be invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole,24 and shall be predominantly invested on regulated markets. Investment 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.25 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.26 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 interest of policy holders and beneficiaries.27

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 on 1 January 2017 (the 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.28 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 (the 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 to enable retail investors to understand and compare the key features and risks of the PRIIP.29

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.30

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 the 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.31 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.32

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.33

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.34

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.35 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.36

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.37 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.38 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.39 In addition, it is mandatory to insure the immovable property, being the subject matter of the investment.40 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, if 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 of the price at which it has been valued by the independent valuer.41

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,42 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,43 or in mortgaged immovable properties,44 and shall not grant to any person the right to acquire immovable property in its portfolio.45 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.46

Finally, the Classification Directive lists additional information that needs to be included in the prospectus of a real estate AIF addressed to private investors.47

iv Private equity

The Classification Directive,48 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, if 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 are suitable for wealthy individuals and family offices, as they provide for the opportunity for the grouping of 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 and has the third-largest merchant fleet in the EU and among the largest merchant fleet 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.49

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).50

vi Recent developments

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 Cyprus, as well as the general conditions for their operation (including regulations, delegation and organisational requirements).

In addition, based on a press release dated 8 March 2021,51 CySEC reinforced its commitment to fostering compliance with sustainable finance standards. In particular, CySEC announced that, in preparation for the new Sustainable Finance Disclosures Regulation (EU) 2019/2088, which became applicable on 10 March 2021, it has created a section on its website on sustainable finance,52 which, inter alia, highlights the importance of sustainable finance. It is acknowledged that climate change and other environmental, social and governance (ESG) factors present risks to the financial sector and financial stability. ESG factors may also affect the performance of investment portfolios; therefore, taking into consideration these factors when structuring investment portfolios may lead to better results in the long run.

On 16 June 2021, CySEC issued a consultation paper presenting the policy options incorporated in the proposed Law on Investment Fund Administrators. The proposed legislation related to the provision of back-office services in the context of collective portfolio management (i.e., UCIs), and its scope of applicability would extend to govern the operations of those entities that operate in or from Cyprus and offer, pursuant to a validly concluded relevant delegation arrangement, to UCIs established in Cyprus or abroad, services of administration within the meaning of the AIF Law, the UCI Law and the UCITS Directive. Andreas Yiasemides, President of CIFA, recently stated that the paper is close to publication as a final bill and expressed hopes that it would be put to vote in the House of Representatives in the coming months, being 'the final piece of the puzzle' to complete the sector's legislative framework.53

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.54 Given several tax advantages,55 the island is increasingly becoming a destination of choice within the European Union 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 redemption of shares or units by the holders.56 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.57 Moreover, the Cyprus legislation provides that any gain on the disposal of securities is exempt from taxation.58 In addition, there is no subscription tax on the net assets of the AIF.

The interest received by open-ended and closed-ended collective investment schemes is considered 'active' interest income and taxed only at 12.5 per cent corporate tax59 (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.60

In April 2019, Cyprus enacted Law 63(I)/2019, which amended the Income Tax Law61 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: (1) limitation to interest deductibility provision; (2) controlled foreign corporation rules; and (3) 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. These 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.


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 Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations by the Ministry of Finance in India,62 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.'


1 Demosthenes Mavrellis is a partner, Sonia Varnava is a senior associate and Christos Heracleous is an associate at Chrysses Demetriades & Co LLC.

2 See amendments made to the Prevention and Suppression of Money Laundering Activities Laws of 2007 to 2018 (the AML/CFT Law), and in particular the amending Law No. 13(I) of 2018, enacted on 3 April 2018, which transposed in domestic legislation the provisions of the Fourth EU AML Directive, EU Directive 2015/849 of the European Parliament and of the Council of 20 May 2015 in relation to the prevention of the use of the financial system for the purposes of money laundering and the financing of terrorism. Also, in April 2016 'The implementation of the provisions of the United Nations Security Council Resolutions or Decisions (Sanctions) and the European Union Council Decisions and Regulations (Restrictive Measures) Law 58(I) of 2016' was enacted. In July 2017, the Combating of Terrorism Law of 2010 was amended by Law 94(I) of 2017 providing for criminal and pecuniary fines in the event of non-compliance with the EU restrictive measures and UN Council resolutions or sanctions. The Combating of Terrorism Law, provides, among other things, the freezing and confiscation of funds and other financial resources of specific persons or entities, by entities of the financial sector supervised for the purposes of the AML/CFT Law and who have a responsibility to inform their supervisory authority accordingly.

3 On February 2019 the Central Bank of Cyprus (CBC) issued the fifth edition of the Directive on the Prevention of Money Laundering and Terrorist Financing, which makes analytical reference to ways of applying various provisions of the AML/CFT Law. The CBC has also issued guidelines to credit institutions on key thematic areas, such as customer identification procedures and due diligence measures, ongoing monitoring of accounts and transactions, politically exposed persons, fraudulent tax crimes as predicate offences and risk management systems for the prevention and suppression of money laundering and terrorism financing.

4 MONEYVAL completed the fifth round of Cyprus' evaluation in 2019 and published on 12 February 2020 the Mutual Evaluation Report (MER) (

5 Section 12 AIF Law.

6 Section 13(2) AIF Law.

7 Section 14(1)(a) AIF Law.

8 Section 26 (a) AIF Law.

9 Section 26(b) AIF Law.

10 Section 41 AIF Law.

11 Part VII, Section 124 AIF Law.

12 Section 124(5) AIF Law.

13 Section 124(4) AIF Law.

14 Section 126 AIF Law.

15 Section 128(4) AIF Law.

16 Part VIII (Sections 134–142) AIF Law.

17 Section 135(3) AIF Law.

18 Sections 45–53 AIF Law.

19 Sections 54–64 AIF Law.

20 Section 54(3) AIF Law.

21 Sections 65–75 AIF Law.

23 Section 139(1) Insurance Law.

24 Section 139(2)(b) Insurance Law.

25 Section 139(4)(a)–(d) Insurance Law.

26 Section 139(2)(a) Insurance Law. In accordance with Section 46 of the Insurance Law, the 'overall solvency needs' of the undertaking requires taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking.

27 Section 139(2)(d) Insurance Law.

28 See the Policy Benefits Order, at Section 4 – Permitted Links, Paragraphs 1–12 (both inclusive).

29 Article 1 of the PRIIP Regulation.

30 Article 1 of the Regulation (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings and amending Regulations (EU) No. 345/2013, (EU) No 346/2013 and (EU) No. 1286/2014.

31 Investment rules in accordance with the prudent person principle have been briefly described in the 'Insurance' sector above, and apply by analogy to pension schemes.

32 ibid.

33 Section 46 Law 10(I)/2020.

34 Section 47 Law 10(I)/2020.

35 Section 6(1) AIF Law.

36 Section 47 of the Classification Directive. Further it is provided in this section that a percentage up to 10 per cent of the clean value of the assets of the AIF can be composed of assets related to immovable property, which have not been admitted to, or negotiated at such a market, provided that these assets were previously valued by an independent qualified valuer.

37 Section 27(1)(a)(iii) Classification Directive.

38 Section 30(1) Classification Directive.

39 ibid.

40 Section 30(3) Classification Directive.

41 Section 30(4) Classification Directive.

42 Section 48(1) Classification Directive

43 Section 48(2) Classification Directive

44 Section 48(3) Classification Directive. Nevertheless, this restriction does not prohibit the real estate AIF from using the immovable properties that are already in its portfolio as security for taking loans. Additionally, the amount of existing mortgages in immovable property, in which the real estate AIF has invested, shall not represent more than 50 per cent of that property's value.

45 Section 49 Classification Directive.

46 Section 81 Classification Directive.

47 Section 84 Classification Directive.

48 Sections 52–55 Classification Directive, for AIFs addressed to retail investors, Section 75 Classification Directive for AIFs addressed to professional or well-informed investors.

49 Merchant Shipping (Fees and Taxing Provisions) Laws of 2010-2020 (Law 44(I)/2010 as amended by Law 39(I)/2020).

50 CySEC press release, 5 March 2020.

55 CIFA Cyprus Investment Funds Guide 2019, p.46.

56 Investment funds & Asset Management Guide by CIPA.

57 Capital Gains Tax Law (52/1980) as amended.

58 Section 8 of the Income Tax Law (Law 118(I)/2002.

59 Section 25 and Addendum II (Paragraph 2) of the Income Tax Law (Law 118(I)/2002).

60 New amendment introduced in the Income Tax Law, (Law 118(I)/2002).

61 Income Tax Law (118(I)/2002) as amended.

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