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.
Following this trend, Cyprus is becoming a strong contender as an emerging European domicile, with its investment fund sector showing potential to develop into a multi-billion euro industry. To achieve this, Cyprus is modernising and continuously upgrading its regulatory framework, with its current funds law bearing hallmarks of the regimes in Luxembourg and Ireland.
These efforts have already begun to bear fruit with assets under management tripling since 2013, and the country seeing increasing interest and appetite from investors and fund service providers looking for new and interesting EU-regulated jurisdictions. Cyprus 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. A New Player Initiated in the late 1990s and with substantial flows only in the past few years, the Cypriot fund sector is a relative newcomer in many respects. In 1999, the country introduced the International Collective Investment Schemes Law that allowed the set-up of private International Collective Investment Schemes (ICIS). There is no doubt that Cyprus’ growth in this sector has been driven by the country’s tax treaty network, rendering it a launch pad for investment funds primarily into Russia and Eastern Europe. However, in the past two years, an increasing number of funds have also been set up for investment into Asia, primarily in debt and equity securities as well as in real estate. At the moment, Cyprus may have only a few custodians and managers compared to other more established fund jurisdictions, but with its large pool of world-class auditors, tax advisers, lawyers, administrators and other specialised professionals, it has the capability to support the development of the industry.
The Cypriot regulatory authorities have worked diligently to bring the funds and asset management framework on par with other international jurisdictions. These efforts include the enactment of the Alternative Investment Funds Law (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 AIF law is set to see another revision in 2016, 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 which will allow among other benefits internally managed LPs, the introduction of a de minimis asset management regime for managers below AIFMD thresholds and an unauthorised AIF 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 Investment Companies, Fixed Capital Investment Companies, and Limited Partnerships.
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.
Strong Service Provision
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. In addition, the ‘Big Four’ accounting firms have a presence on the island while a number of law offices also have cooperation agreements with international law firms, 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.
Going forward, the island’s vision is the development of a world-class fund sector. There is now increasing awareness that diversity provides stability, and the expansion of the funds sector is seen as the natural extension of the island’s finance sector. Cyprus has good prospects to achieve its goals with the introduction of the EU regulatory framework, which places the island on the map as a growing domicile for investment funds and asset management. Cyprus provides a lower cost structure and good distribution opportunities to a wide range of markets, including but not limited to, the EU. The country has a vast network of double taxation treaties with around 60 countries, which offer interesting tax planning opportunities and key advantages for funds following investment strategies in emerging markets. 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. Cyprus operates within a regulated fund regime that is in tune with the requirements of the modern fund industry, and the continuous upgrading of its framework is expected to raise investor confidence in the jurisdiction. This coupled with Cyprus’ attractive fiscal framework, Englishspeaking workforce and its competitive operating environment, will likely increase the island’s ranking as a domicile and servicing centre for both alternative funds and UCITS. 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 funds sector, attracting additional investments for the Cyprus economy