CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND FOR
LIMITED NUMBER OF INVESTORS (AIFLNP)
2019
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
3
Contents Page
A. INTRODUCTION ............................................................................. 4
B. WHO CAN BENEFIT FROM THE SET UP OF A FUND .......................... 4
C. WHY SET UP A FUND IN CYPRUS .................................................... 5
D. TYPES OF ALTERNATIVE INVESTMENT FUNDS IN CYPRUS ............. 6
E. THE ALTERNATIVE INVESTMENT FUND FOR LIMITED NUMBER OF
INVESTORS (AIFLNP) ..................................................................... 6
1. Authorisation Process.......................................................................................... 6
2. Legal Forms ............................................................................................................ 8
3. Fund Manager ........................................................................................................ 9
4. Depositary Requirements .................................................................................. 9
5. Investment Strategy ......................................................................................... 10
6. Eligible Investors ................................................................................................ 10
7. Limitation on Number of Investors .............................................................. 10
8. Initial Capital Requirements ........................................................................... 11
9. Value of Assets under Management ............................................................ 11
10. Fund Taxation ...................................................................................................... 11
F. FUNDS AT A GLANCE .................................................................... 13
G. THE FUTURE OF FUNDS IN CYPRUS .............................................. 14
H. HOW KINANIS LLC CAN ASSIST ................................................... 15
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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A. INTRODUCTION
Cyprus is dynamically positioning itself as one of the top emerging investment
fund centres in Europe. The fully upgraded and modernised legislative and
regulatory framework, which is in full compliance with the European legislation,
has enhanced competiveness and has placed the country in the league of
important jurisdictions for the Alternative Investment Funds industry.
The Government, the Regulator and the Professionals have firmly committed in
providing their full support in developing further the Funds industry in Cyprus and
there is strong belief that this joint effort will create even more positive results.
B. WHO CAN BENEFIT FROM THE SET UP OF A FUND
Conducting business through a fund, a vehicle which operates under more strict
and transparent rules than normal limited liability companies, gives the ability to
raise capital from private and institutional investors who are not really interested
in being involved in the day to day
management of their investment but
seek a good return on their investment
in accordance with the risk they chose to
undertake.
Funds are traditionally being used as an
alternative method to bank financing and
are used to finance real estate, shipping
and other large scale investments. It is
also one of the most widely used vehicle from Venture Capitalists whose
investments may need extra funding.
FUNDS
ASSET AND TAX
PROTECTION
INVESTMENT AND
FINANCING
VENTURE CAPITALISTS
FAMILY OFFICES
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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The way investment funds operate provide a clear separation between ownership
and the management and control of the underlying investments. This is due to the
fact that the management is not performed by the owners (unitholders) but by
fund managers who are subject to specific rules and supervision. This makes it
appropriate for High Net Worth Individuals seeking to achieve asset protection and
tax optimisation by replacing their traditional holding companies with a more
sophisticated and professionally managed and regulated vehicle, as well as Family
Offices who want to manage the family wealth in a more flexible and transparent
way with specific risk and investment characteristics.
C. WHY SET UP A FUND IN CYPRUS
Cyprus being an EU Member State has a lot to offer in the financial services sector
and the Funds industry in particular. With its efficient and up-to date regulation,
which is fully harmonised with the related EU Directives, provides a framework in
which Fund Managers and Funds can operate efficiently.
Further, Cyprus is an already established International Business Center with years
of experience in servicing international clients. The skills and knowhow obtained
from the experienced lawyers and accountants is now put at work in servicing the
Funds industry in a cost effective manner, keeping the set-up and ongoing
operational costs well below other established EU Fund jurisdictions, without
compromising the quality of the services offered.
The island’s strategic geographic location allows Cyprus to act as a footbridge
between Europe and the emerging Middle East and African markets as well as the
attractive Asian economies.
Why Cyprus
EU Legal Framework
Experienced Professionals
Cost Effective
Strategic Location
Attractive Tax Regime
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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Finally, Cyprus enjoys one of the most attractive taxation systems which is fully
compliant with EU and OECD requirements. Funds set up in Cyprus will have
access to a wide network of double taxation treaties and will be benefited from
low tax burdens levied on Cyprus based entities. In addition, specific incentives
exist for fund managers and high-earning employees making the relocation of
such persons very attractive from a taxation perspective.
D. TYPES OF ALTERNATIVE INVESTMENT FUNDS IN CYPRUS
There are three types of Alternative
Investment Funds that can be set up in
Cyprus. It is the Alternative Investment Fund
of unlimited number of investors (AIF), the
Alternative Investment Fund of Limited
Number of Investors (AIFLNP) and finally the
Registered Alternative Investment Fund
(RAIF). In this publication we provide an
overview of the AIFLNP, which is a type of fund that may be suitable for family
offices and HWNI using the fund as an alternative to a group holding company.
We will identify below its main characteristics and requirements. For more
information on the other types of Alternative Investment Funds you may refer to
our separate publications on each specific fund type.
E. THE ALTERNATIVE INVESTMENT FUND FOR LIMITED NUMBER OF
INVESTORS (AIFLNP)
1. Authorisation Process
The Cyprus Securities and Exchange Commission (CySEC) is the regulatory
authority, responsible under the AIF Law for the licensing and supervision of
Alternative Investment Funds in Cyprus.
AIFLNP
RAIF
AIF
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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The operation of an AIFLNP is subject to the prior granting of authorisation
and notification of authorisation by CySEC, only if CySEC approves:
• The relevant application;
• The AIFLNP’s instruments of incorporation;
• The choice of external manager, or in case of internally managed AIFLNP,
the persons who effectively shall conduct the business of the AIFLNP;
and
• The choice of the depositary, if appointed.
The application for the granting of authorisation for an AIFLNP must be
accompanied by the following data:
• the name of the AIFLNP, its registered address and address of its
headquarters,
• sufficient information and data, including a resume for the people who
effectively direct the business of the internally managed AIFLNP,
• the name and data identifying and certifying the appropriateness of the
external manager, as well as the identity of the person or persons
responsible for the risk management and portofolio management functions,
• a statement by the external manager confirming agreement to perform the
investment management functions of the AIFLNP,
• a statement by the depositary confirming agreement to perform the
depositary functions for the assets of the AIFLNP,
• the identity of the person or persons appointed by the depositary as
responsible for monitoring the activity of the AIFLNP,
• a draft of the AIFLNP’s instruments of incorporation in case of an investment
company or partnership agreement in case of an AIFLNP set up as limited
partnership,
• a draft of the AIFLNP’s offering document,
• a draft of the AIFLNP’s key investor information document
CySEC shall inform the external manager of the AIFLNP or the AIFLNP directly,
if internally managed, within 6 months of the submission of a complete
application file as described above.
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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2. Legal Forms
An AIFLNP may be established and operate as open-ended or close ended fund
and take the following legal forms:
• Variable Capital Investment Company (VCIC)
• Fixed Capital Investment Company (FCIC)
• Limited Partnership
An AIFLNP may operate as an Umbrella Fund structure, with more than one
investment compartments (sub-funds).
According to the AIF Legislation, the Umbrella Fund and the Sub-Funds
constitute a SINGLE legal entity but each Sub-Fund is:
• Ring fenced and fully segregated
from the Umbrella Fund and the
other Sub-Funds.
• Each Compartment’s investors’
rights are restricted to the assets of
the compartment.
• Each Compartment can be dissolved
separately.
• Each Compartment can have its own
investment strategy.
• The set-up and running costs of each
compartment is lower than separate
funds.
Single Legal Entity
Fully Segregated
Separate Investors'
rights
Can be dissolved
separately
Own investment
strategy
Separate tax payer
Reduced Costs
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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3. Fund Manager
AIFLNP’s may be either internally or externally managed.
An AIFLNP which is internally managed, may take the form of an Investment
Company or a Limited Partnership with separate legal personality. The persons
who will be responsible for the internal management and the core functions of
the AIFLNP must meet specific conditions and characteristics in order to be
approved by CySEC.
An externally managed AIFLNP may take the legal form of Investment
Company or Limited Partnership without separate legal personality and can be
managed by:
• a UCITS Management Company (established in Cyprus or the EU)
• an Investment Firm (established in Cyprus or the EU)
• a Sub-threshold manager (in Cyprus or the EU)
• a third country company authorized to provide the portfolio
management service
• an EU or a non-EU company which has the sole purpose of providing the
portfolio management service to the specific AIFLNP
4. Depositary Requirements
The assets of the AIFLNP shall be entrusted to a depositary which has its
registered office in Cyprus, an EU member state or a third country.
The eligible depositaries for an AIFLNP include Credit Institutions, Investment
Firms or an institution under prudential regulation and supervision, and
recognised by the Member State as eligible for custody.
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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There are certain exemptions to the obligation of an AIFLNP to appoint a
depositary if:
• The Total assets under management of all investment compartments is
less than €5.000.000, or
• The total number of investors for all investment compartments is
restricted to 5 persons, or
• The assets eligible to custody do not exceed the limit of 10% of the total
value of the AIFLNP’s portfolio, and
i) the total number of investors for all investment compartments is
restricted to 25 persons and
ii) each of the investors invests at least 500.000 in the AIFLNP
5. Investment Strategy
An AIFLNP is not subject to any investment restrictions. It may invest in any
asset class without any conditions on the combination of assets invested or any
strict ratio requirements.
6. Eligible Investors
A Cyprus registered AIFLNP can only be addressed to professional and well-
informed investors and is not possible to be marketed to retail investors.
7. Limitation on Number of Investors
An AIFLNP can accept a maximum total of 50 investors. Investors are regarded
only the natural persons, therefore, in case of legal entities investing in an
AIFLNP, the number of shareholders of that entity is taken into account. The
limitation of a maximum total of 50 investors applies to all investment
compartments in aggregate.
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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8. Initial Capital Requirements
In the case of an externally managed AIFLNP there are no initial capital
requirements, as such requirements are imposed on the manager.
For self-managed AIFLNP the minimum capital requirements are set to €50.000,
which must be available at any time in the form of cash which is deposited in
the name of the AIFLNP in an approved credit institution in an EU member state
or in the form of assets readily convertible to cash.
9. Value of Assets under Management
AIFLNPs must hold assets of at least €250.000 for each investment
compartment within 12 months from the date of authorisation, through the
means of capital raising from investors
CySEC may extend the 12 month period for up to additional 12 months, if this
is considered as necessary.
Any capital commitments for the acquisition of units as well as the amount of
minimum initial capital as identified in section 9 above, are not taken into
account for the calculation of the AIFLNP’s assets under management.
It must be noted also that the assets under management of an AIFLNP,
cumulatively for all compartments, must always be below the AIFM thresholds.
10.Fund Taxation
Cyprus based funds and their investors can benefit from a favourable tax
environment. An AIFLNP will be subject to Corporation tax at 12.5% on the
resulting net profits without any imposition of taxes on the net assets of the
Fund.
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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It must be noted however that
dividend income as well as any
profit generated from the trading
of titles – such as shares, units of
funds, bonds, options etc, are
exempt from taxation in Cyprus.
Any interest income received from
an AIFLNP is considered as “active”
income and is exempt from Special
Defence Contribution Tax. This
means that interest income is
taxed as normal business income
at 12.5% on any resulting net profits.
Further, the amount of capital raised from investors (unitholders) may be
eligible to receive a Notional Interest Deduction (NID) as per the provisions of
the Cyprus Tax Legislation which can potentially reduce the taxable base of a
company type RAIF by up to 80%.
There are no withholding taxes on dividend payment to foreign investors
irrespective of the percentage of the participation in the Fund and no taxation
applied on the redemption of units of an AIFLNP.
In case of an AIFLNP with multiple compartments, each compartment is taxed
separately (i.e. as a separate taxpayer) despite the fact that each compartment
is not a separate legal entity.
No taxation on profit on
trading in titles
No taxation on dividend
income
Ability to claim NID
Interest income is exempt
from SDC
No tax based on
AuM
No withholding
taxes
Corporation tax at 12.5%
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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F. FUNDS AT A GLANCE
AIF AIFLNP RAIF
Authorisation • Required • Required
• Not Required
• Must be registered to the
RAIF register
Legal Forms
• VCIC
• FCIC
• Limited Partnership
• Common Fund
Can be an umbrella fund with various compartments.
• VCIC
• FCIC
• Limited Partnership
Can be an umbrella fund with various compartments.
• VCIC
• FCIC
• Limited Partnership
• Common Fund
Can be an umbrella fund with various compartments.
Fund Manager
• AIFM (CY & EU)
• UCITS Manager (CY & EU)
• MiFID Investment Firm
• Sub-Threshold Manager
(CY & EU)
• Self-Managed (VCIC.
FCIC, LLP with separate
legal personality.
• UCITS Manager (CY & EU)
• MiFID Investment Firm
• Sub-Threshold Manager (CY &
EU).
• Sole purpose Management
Company.
• Self-Managed (VCIC. FCIC,
LLP with separate legal
personality.
• AIFM (CY & EU)
If Limited Partnership closed ended fund investing in illiquid assets then: • UCITS Manager (CY &
EU)
• MiFID Investment Firm
• Sub-Threshold Manager
(CY & EU)
Depositary
Requirements
• If managed by an AIFM
must appoint a local
depositary.
• If not managed by an
AIFM, depositary can be
from CY, EU or Third
Country.
• Can be from CY, EU or Third
Country.
• Exemption from obligation to
appoint depositary if:
• AuM<€5m
• Up to 5 investors
• No more than 10% of
total assets subject to
custody and with up to
25 investors with
minimum investment per
investor €500k.
• Obligation to appoint a
CY depository if managed
by an AIFM.
• If not managed by an
AIFM can appoint
depositary from CY, EU
or Third Country.
Investment
Strategy
• Restrictions apply for
liquidity and risk
diversification.
• No restrictions
• Some restrictions
(cannot pursue a Money
Market policy, act as a
Loan Origination Fund or
a Fund of Funds)
Eligible
Investors
• Retail (conditions)
OR
• Professional and/or well
informed investors
• Professional and/or well
informed investors
• Professional and/or well
informed investors
Limitation on
Number of
Investors
• Unlimited • Up to 50 • Unlimited
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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AIF AIFLNP RAIF
Initial Capital
Requirements
• If externally managed:- no
capital requirements
• If self-managed fund
€125k or €300k.
• If externally managed:- no
capital requirements
• If self-managed fund €50k
• It must be externally
managed so no capital
requirements
Value of Assets
Under
Management
• Minimum AuM within 12
months €500k
• Minimum AuM within 12
months €250k
• Minimum AuM within 12
months €500k
Fund Taxation
• Profit from disposal of
titles is exempt
• Dividend income is exempt
• Can claim NID on capital
injected
• Interest income exempt
from SDCT
• Corporation tax rate of
12.5% on resulting net
profits.
• No withholding taxes on
dividend payments or
redemptions.
• No tax based on AuM.
• Profit from disposal of titles is
exempt
• Dividend income is exempt
• Can claim NID on capital
injected
• Interest income exempt from
SDCT
• Corporation tax rate of 12.5%
on resulting net profits.
• No withholding taxes on
dividend payments or
redemptions.
• No tax based on AuM.
• Profit from disposal of
titles is exempt
• Dividend income is
exempt
• Can claim NID on capital
injected
• Interest income exempt
from SDCT
• Corporation tax rate of
12.5% on resulting net
profits.
• No withholding taxes on
dividend payments or
redemptions.
• No tax based on AuM.
G. THE FUTURE OF FUNDS IN CYPRUS
The transformation of the investment funds regime in Cyprus in combination with
the island’s strategic geographic position, attractive tax environment and the
experienced professional service sector has made Cyprus the rising star of the EU
funds jurisdictions.
As the value of assets under fund management in Europe is increasing with a
consistent growth rate, Cyprus with steady and important steps to the right
direction, will play a significant role in the future of the global funds industry.
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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H. HOW KINANIS LLC CAN ASSIST
Our dedicated Financial Services team is ready to assist clients with:
• Preparation of Fund authorisation application to CySEC.
• Assistance in drafting of constitutional and other legal documents of the
Fund.
• Consulting in legal, tax and accounting matters of the Fund.
• Directorship services.
• Listing of funds in the Cyprus Stock Exchange.
• Corporate services such as secretary and registered office.
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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Disclaimer
This publication has been prepared as a general guide and for information
purposes only. It is not a substitution for professional advice. One must not rely
on it without receiving independent advice based on the particular facts of his/her
own case. No responsibility can be accepted by the authors or the publishers for
any loss occasioned by acting or refraining from acting on the basis of this
publication.
March 2019
Authors
Charalambos Meivatzis
Partner – Head of Accounting Division
Kinanis LLC
Andri Michael
Partner – Financial Services
Kinanis LLC
Elena Andreou
Associate - Lawyer
Kinanis LLC
CYPRUS ALTERNATIVE INVESTMENT FUNDS
OVERVIEW OF THE ALTERNATIVE INVESTMENT FUND
FOR LIMITED NUMBER OF INVESTORS (AIFLNP)
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Our Firm Kinanis Law Firm, is a Law and Fiduciary Firm with offices in Cyprus and Malta and a representative office in Shanghai China. The Firm advises for over 35 years international investors and private clients offering legal and consulting services since 1983. Experience and practice over the years brought forward the need for transformation from a traditional law firm to a more innovative multidisciplinary firm providing a full range of services combining law and accounting with extensive expertise in corporate, tax and vat advice to ensure that our clients will obtain the best possible spherical advice adopting the principle as to the services offered "All in one place", so that the clients will find a quick, correct and efficient solution to their daily legal, accounting, vat and tax issues in a trustworthy environment. The Firm employs approximately 80 lawyers, accountants and other professionals. Our clients benefit from a complete range of legal, accounting, tax, vat and advisory services from a highly specialized team of professionals. We consider ourselves as ‘traditional pioneers’ and our motto is to foresee and anticipate any issues that may potentially impact our clients’ business and to offer effective advice and solutions proactively. This combination of legal, accounting, vat and tax services through our well qualified personnel and our involvement and participation in international transactions over the years, have established our firm as one of the key players in the field. Our involvement in international financial transactions has also provided us with the extensive expertise in representing groups, corporations, funds as well as the private client. Kinanis LLC Lawyers’ Limited Company 12 Egypt Street, 1097, Nicosia P.O. Box 22303, 1520 Nicosia, Cyprus Tel: + 357 22 55 88 88 – Fax: + 357 22 66 25 00 E-mail: [email protected] – Web site: www.kinanis.com Kinanis Law Firm Kinanis Fiduciaries Limited Suite 20, The Penthouse, 4th Floor, Ewropa Business Centre, Dun Karm Street, Birkirkara, BKR 9034, Malta Tel: + 356 27 54 00 24, Fax: + 356 27 54 00 25 E-mail: [email protected] Website: www.kinanis.com KINANIS LAW FIRM is the service mark through which Kinanis LLC of Cyprus, Kinanis Fiduciaries Limited of Malta and Kinanis,
Civil Partnership, of Malta and their affiliated companies are conducting business each of which is a separate legal entity.