Cyprus is rapidly developing into a strong contender in the European investment fund landscape, and with assets under management tripling since 2013 the sector is poised for further growth.
The European asset management industry has seen formidable growth in the last few years. Net sales of European investment funds rose to an all-time high of €725 billion in 2015, and assets under management broke through the €12 trillion mark. This upswing has also been evident in Cyprus, where the local funds sector has been gaining momentum and boosting its prospects of becoming a multi-million-euro industry.
The consistent efforts to modernise its regulatory environment for investment funds, has created a legal framework bearing hallmarks of the regimes in Luxembourg and Ireland, and has strengthened Cyprus’ profile as an emerging European funds and asset management domicile.
Assets under management have tripled since 2013 reaching almost €3 billion, and the country has seen a surge of interest and appetite from investors and fund service providers looking for new and interesting EU-regulated jurisdictions. The island offers both EU-regulated Undertakings of Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs), and is confident that it will make significant progress in attracting more fund managers in the foreseeable future.
Strong EU Legislation
The Cypriot regulatory authorities have worked persistently to bring the funds and asset management framework on par with other international jurisdictions. These efforts include the enactment of the Alternative Investment Funds (AIF) Law in July 2014, which replaced in its entirety the ICIS Law. ICIS wishing to continue operations in Cyprus under the new law converted to AIFs.
The 2014 AIF law is set to see another upgrade in 2017, which will introduce new aspects to enhance the attractiveness of the existing framework – such as the introduction of a Limited Partnership (LP) with legal personality to allow for internally managed LPs, the introduction of a de minimis asset management regime for managers below AIFM thresholds and an unregulated AIFs regime under strict conditions. These improvements will create all the necessary preconditions for growing the collective investment sector, which is expected to contribute significantly to the economy and spark a surge in the number of funds.
Cyprus also transposed the UCITS IV Directive in 2012, UCITS V in 2016, and the Alternative Investment Funds Managers Directive (AIFMD) in 2013, becoming the third country in Europe to transpose the latter. The island offers a European passport to the fund management industry, providing exceptional possibilities for cross-border and global fund distribution. This should bring more business to the country and attract both EU and non-EU firms keen to gain the badge of an ‘EU-compliant’ manager and access to European Union investors.
Many industry experts believe that UCITS will remain more of a niche market, while AIFs will continue to dominate the fund business in Cyprus. The country’s AIF laws provide for a framework that is as competitive as those of Europe’s main investment fund hubs like Luxembourg, Ireland and Malta. The new legislation increases Cyprus’ competitive offering by modernising the existing legal framework and opening the market to the registration of new types of funds.
The AIF law also provides for the establishment of funds marketed to professional and retail investors, as well as for the introduction of umbrella funds with segregated investment compartments. It has also expanded the scope of legal forms by introducing the Common Fund together with the existing legal forms of Variable Capital Companies, Fixed Capital Companies, and Limited Partnerships.
Cyprus remains an excellent base for international business, with a skilled workforce and wide network of double-tax treaties. In the area of taxation, the jurisdiction offers one of the most attractive fund tax regimes in Europe – both at the level of the fund manager and investors, as well as the fund.
The Cyprus Securities and Exchange Commission (CySEC) is taking steps to increase Cyprus’ appeal as a fund domicile. Regulatory power was previously shared between CySEC and the Central Bank of Cyprus, but with the implementation of the recent AIF framework, all regulation was brought under the aegis of CySEC, which has resulted in more streamlined procedures further enhancing Cyprus’ attractiveness as a jurisdiction. CySEC now regulates AIFs, UCITS funds, AIFMs and UCITS Management Companies, as well as MiFID regulated investment firms.
There is already a number of recognised fund service providers established in Cyprus, ranging from global names to local independent operators servicing all types of funds at very competitive rates. Set-up costs for a fund in Cyprus are significantly lower than in the more mature fund centres, essentially providing City of London services for a fraction of the price.
In addition, the ‘Big Four’ accounting firms have a presence on the island, while a number of law firms are members of international networks, instilling confidence that Cyprus has the capacity and expertise to help the fund industry expand. Despite having a versatile industry cluster, Cyprus seeks to attract more service providers to the island in order to gain critical mass and to win a bigger share of the global funds business, and has introduced incentives and tax benefits for high-earning managers and high-net-worth individuals.
A Future in Funds
Cyprus has set its sights on establishing itself as a world-class fund jurisdiction, and with its upgraded legislation and increasing inflows of foreign investments, the country is well on its way. Adding to its appeal, the island’s economy is expected to grow by around 3% this year, positioning Cyprus as one of the fastest growing economies in the EU.
The country’s lower cost structure and distribution opportunities to a wide range of markets, including the EU, MENA, CIS and Russia, have rendered it a convenient and secure investment launch pad offering a multitude of advantages for business. Determined to build up this sector, the industry is also increasing its marketing efforts.
The Cyprus Investment Funds Association (CIFA) was set up to raise awareness of what Cyprus has to offer among international managers, administrators and investors. An important milestone for CIFA was achieved in June 2016, when the National Association of the European Fund and Asset Management Association (EFAMA), the representative association of the European investment management industry, approved its full and formal membership. CIFA’s full EFAMA membership also provides a vote of confidence in Cyprus as an important European fund centre.
The local fund industry is also a strong supporter of the Capital Markets Union (CMU) and welcomes the view of the European Commission to acknowledge the industry has a key role to play in this action plan, which includes lowering the regulatory costs of setting up funds and facilitating the cross-border operation of investment funds – and to make the European passport system function better for all types of investment funds.
Cyprus operates within a regulated fund environment that is in tune with the requirements of the modern fund industry, and the continuous upgrading of its framework is expected to attract more players into the market. This type of growth will not happen overnight, but the fact that fund managers are increasingly moving to Cyprus demonstrates the rapid development of the sector.
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Updated: May 2017