In July 2018, Cyprus further upgraded its legislative framework with a new AIF regime, replacing the 2014 law, reflecting the latest market demands and introducing a new product called the Registered AIF and a new legal form – the limited partnership with separate legal personality.

The new Registered AIF (RAIF) regime, whereby the fund does not require authorisation from CySEC or subsequent monitoring, while being stamped as an ‘AIF’ by virtue of the law, offers new opportunities for a quick and cost-effective fund launch. This new type of fund needs to fulfil the following conditions in particular as detailed further below: the fund manager must qualify as a full-scope Cyprus or EU Alternative Investment Fund Manager (AIFM), and the fund must be targeted to professional investors and/or well-informed investors. Third country AIFMs will be able to submit a request for registration of a RAIF, once the country where these have been established has granted passporting rights pursuant to the AIFMD. CySEC will rely on the regulated status of the AIFM, to ensure compliance and indirect supervision of applicable laws and appropriate standards by the fund. Another key benefit of this fund is the use of the EU marketing passport via its AIFM.

The RAIF may be organised in any legal form available under Cyprus Law (investment company, limited partnership and common fund), and can be open or closed-ended and be established with multiple compartments. It can follow any strategy and invest in any type of assets. However, the set-up of Money Market Funds under the RAIF regime are not permitted and Loan Origination will be permissible subject to conditions. Other key operational features, such as the issue and redemption of units, are similar to the regulated AIF regime. Furthermore, the new AIF framework introduced a licensing requirement and supervision regime for the Cyprus sub- threshold AIFM (‘Mini Manager’), approved in June 2020.

A sub-threshold AIFM can manage the following: AIFs with limited or unlimited number of persons, Registered AIFs taking the form of a Limited Partnership as well as non-Cypriot AIFs (subject to the discretion of competent authorities in the other jurisdiction). The total assets under management of the Mini Managers shall not exceed the threshold of €100 million, with the use of leverage, or €500 million when unleveraged with a lock up of five years. This regime will appeal to fund managers who need a cost-effective vehicle that will undertake limited investment or to those fund managers who may wish to use it as a first step before committing to a more complex set-up. These developments have been a long-awaited and welcome evolution offering expanded structuring possibilities for fund promoters and has further enhanced Cyprus’ status as an attractive jurisdiction and a rising contender amongst European fund and asset management hubs.

AIF Legal Forms 

An AIF can take the following legal forms and may be established with limited or unlimited duration 

FCIC: Fixed Capital Investment Company

VCIC: Variable Capital Investment Company

LP: Limited Partnership*

CF: Common Fund**

*Amendments to the current Partnership Law will allow the General Partner to elect for legal personality of the Limited Partnership upon its establishment

 **Only when established as an AIF with unlimited number of persons 

AIF Regime Highlights

• Introduction of the Registered AIF  

An innovative product providing a fast and cost- effective fund launch through a Registered AIF that does not require licensing

• Introduction of the Mini Manager regime in June 2020, which governs a new type of fund manager and allows for the provision of fund management services for fund managers under the AIFMD thresholds 
• Minimum AuM requirement to be reached within the first 12 months of the launch of the AIF (possible extension to 24 months) 
• Minimum share capital requirement is valid only for internally managed vehicles, irrespective of the category of AIF 
• Additional conditions imposed on AIFs with limited number of persons to avail of the depositary exemption for assets which are not subject to custody 
• Enhancement of Existing Limited Partnership Regime 

- Greater scope for fund structuring though the upcoming introduction of a limited partnership with legal personality. Once in effect, the general partner may elect upon establishment of a limited partnership to have separate legal personality, while maintaining tax transparency status. This is particularly helpful for funds of fund managers who need a structure that can itself invest in other limited partnerships, but also allows the establishment of internally managed Limited Partnerships

- Establishment of a list of non-management safe harbours which give confidence and legal certainty to Limited Partners being admitted to a Cyprus limited partnership regarding the activities they may undertake, without undermining their crucial limited liability status

- The limited partnership may either be internally managed or appoint its general partner or another appropriately qualified entity to act as its external manager

- Disapplication of section 47(3) of the General and Limited Partnerships and Trade Names Law Cap 116 (Partnership Law) to remove the restriction on returning capital during the life of the partnership and thus the obligation to pay the capital back if it is returned

• Tax Law Amendments 

- Among other amendments, an 8% flat rate taxation on performance-based variable remuneration for certain employees

Types of AIFs 

Alternative Investment Fund with Unlimited Number of Persons: 

• may be marketed to retail, or well-informed and/or professional investors
• freely transferable investor shares
• must appoint a Depositary
• can be listed on a recognised stock exchange, and AIFs marketed to retail investors can be traded
• may be internally managed
• minimum share capital requirements of €125,000 are valid for internally managed funds
• may be subject to certain investment restrictions depending on the investor type and the overall investment policy. AIFs addressed to WIPIs shall not be subject generally to investment restrictions, except Loan Origination Funds, Money Market Funds, Venture Capital Funds and Funds of Funds

Alternative Investment Fund with Limited Number of Persons: 

• may be marketed only to well-informed and/ or professional investors (WIPIs)
• maximum number of investors limit shall not exceed directly or indirectly 50 natural persons (look-through provisions apply)
• freely transferable investor shares, with the condition that their transfer does not result in the AIF breaching the above mentioned 50 natural persons’ limit
• may not be required to appoint a Depositary in certain circumstances such as when its total assets do not exceed €5 million (or currency equivalent) including any investment compartments thereof, or its instruments of incorporation limit the number of its unitholders (including any investment compartments thereof) to 5 persons
• for the duration of the life of the AIF, or 90% of the assets are not subject to custody and the number of investors is limited to 25 and provided each investor subscribes a minimum of €500,000
• assets under management do not exceed the AIFMD thresholds of €100 million (including leverage) or €500 million (without leverage, five-year lock-up period for investors)
• may be internally managed
• minimum share capital requirements of €50,000 are valid for internally managed funds

Key Benefits: Cyprus AIF 

• Cost-efficient and simple to set up, manage and operate
• Modern regulatory framework fully in line with relevant EU directives
• Increased flexibility as a number of asset classes can be included in an AIF investment strategy
• Significant tax incentives offered by the country’s advantageous tax framework
• Full transparency through annual audited reports to CySEC and investors, which include financial statements, borrowing information, portfolio information and Net Asset Value
• Supervised by a competent and accessible regulatory authority

Fund Service Provider Requirements 

Investment Manager 

A Variable Capital Investment Company (VCIC) and Fixed Capital Investment Company (FCIC) may be set-up as internally managed, or it may be externally managed. A Limited Partnership (LP)* and Common Fund (CF) must always appoint an external manager.

*Amendments to the current Partnership Law will cater for internally managed LPs, when general partner elects for legal personality upon the establishment of the Limited Partnership

• AIF with Unlimited Number of Persons 

An external manager must fulfil the following licensing requirements:

• Established in an EU member state: must be authorised under the AIFM Directive or the UCITS V Directive or MiFID or EU based sub-threshold AIFM authorised to provide the portfolio management service and subject to prudential regulation regarding the provision of such service
• Established in Cyprus: must be authorised under the Alternative Investment Fund Managers Law or the Investment Services and Activities and Regulated Markets Law or be a Management Company of the Open-Ended Undertakings in Collective Investments Law. Following the introduction of a new fund manager regime may be a sub-threshold AIFM that is the so-called Cyprus Mini-Manager
• Established in a third country: must be an AIFM of a third country complying with the relevant provisions of the Alternative Investment Fund Managers Law (not yet applicable)
• AIF with Limited Number of Persons 

An external manager must fulfil the following licensing requirements:

• Established in an EU member state: an Investment Firm authorised under MiFID, or a Management Company authorised under UCITS V, or EU-based sub-threshold AIFM authorised to provide the portfolio management service and subject to prudential regulation regarding the provision of such service
• Established in Cyprus: a UCITS Management Company authorised under the Open-Ended Undertakings in Collective Investments Law, or an Investment Firm authorised under the Services and Activities and Regulated Markets Law. Following the introduction of a new fund manager regime may be a sub-threshold AIFM that is the so-called Cyprus Mini-Manager
• Established in a third country: the manager must be licensed for portfolio management and have adequate regulation and supervision in its home country
• Established in an EU member state, Cyprus or third country: The externally appointed manager may be a company incorporated solely for the purpose of managing the specific AIF, which does not hold any licence for portfolio management, and which complies with organisational and capital requirements under AIF Law

Administrator 

Fund administration services under the current legal framework are not regulated, as such no licence is required to act as an outsourced administrator* of a fund. Among others administration tasks include:

• Administrative accounting and bookkeeping services
• Calculating Net Asset Value (NAV)
• Registrar services required with the fund’s operations, such as recordkeeping, processing of subscription and redemption requests and maintenance of the shareholder register

*The relevant framework to regulate the provision of Fund Administration services is soon to be put in place 

Depositary 

Funds must appoint a single and independent depositary whose responsibilities include:

• Safekeeping fund’s assets by holding in custody of all financial instruments, which can be registered in the custodian’s books and those that can be physically delivered. Also, for other assets, the Depositary must verify ownership of the fund and maintain an up-to-date record of all assets
• Cash flow monitoring in regard to investors and service providers, ensuring the fund’s cash flows are booked at eligible entities and are accurately monitored
• Oversight functions ensuring compliance with the fund’s rules and instruments of incorporation, valuation procedures and that they comply with applicable law and regulations

There are also possibilities to subcontract safekeeping duties to a foreign licensed custodian acting as sub-custodian. For an AIF with limited number of persons the Depositary obligations are limited to the Safekeeping function described above.

Eligible providers: a credit institution, MiFID investment firm or other entity regulated and supervised as a Depositary, or in case of assets which are not financial instruments within the meaning of MiFID, another entity which carries out depositary functions as part of its professional or business activities.

Location 

• AIFs managed by an AIFM: depository of a Cyprus AIF must be located in Cyprus
• AIFs managed by any other entity: depository must be located in Cyprus or any other EU member state or third country with which Cyprus has signed a cooperation agreement, among some other requirements

Registered AIFs (RAIFs)

 Registered AIFs (RAIFs) are an innovative fund vehicle launched in 2018. They are geared to Professional and Well-Informed Investors only and offer a quick and cost-efficient fund launch of only one month from the date of filling a duly completed ‘notification pack’ to regulator CySEC, which will include the AIF in the list of Registered AIFs.

Similar to the Luxembourg RAIF, the Cyprus Registered AIF is able to market to investors across the EU and is managed by a full scope Cyprus or EU Alternative Investment Fund Manager (AIFM). Although the RAIF is not ‘authorised’, it is indirectly subject to regulatory oversight through its AIFM. In addition to the full scope AIFM, a sub-threshold AIFM which is subject to prudential regulation, a MiFID Investment Firm and UCITS management company established in Cyprus, or any EU Member State may also manage a RAIF, provided it is a closed-ended limited partnership and invests more than 70% in illiquid assets.

The new vehicle also provides structuring flexibility as it may be organised in any legal form available under Cyprus Law (investment company with fixed or variable capital, limited partnership or common fund), it can be open or closed-ended and it can follow any strategy and invest in any type of assets, with the exception that it cannot be established as a Money Market Fund, and if a Loan Origination Fund it will be subject to restrictions.

Key Benefits: Cyprus RAIF 

• No licensing required
• No minimum capital requirements
• No investment restrictions
• Multiple compartments possible
• Can operate as open or closed ended
• Units of RAIFs may be listed
• Requirement to appoint local depository
• Addressed solely to Well-Informed and/or Professional Investors

AIFS at a Glance

* Amendments to the current Partnership Law will allow the General Partner to elect for legal personality of the Limited Partnership upon its establishment

** Additional reporting requirements apply for AIFs with unlimited number of persons which are subject to the AIFM Law and for Registered AIFs, the scope and frequency of which depend among others in the type of AIF managed by the AIFM and the level of AuM

Read the 2024-2025 CIFA Investment Funds Guide

November 2024