The Cyprus fund industry is growing steadily, but could attract more fund managers if it takes advantage of the current opportunities arising from Brexit and the positive momentum created by its new AIF and securitisation laws, says EY Law head Charalambos Prountzos.
Could you give a brief overview of your firm?
We established Prountzos & Prountzos LLC in 2010, and have seen success in penetrating niche legal areas, such as EU Law and renewable energy, in which we continue to be the leading local law firm. We have also become one of the fastest growing firms in Cyprus and one of the few that operate on a truly international level. In 2017, we became a member of EY Global and were fully rebranded as EY Law. The relationship with EY is one where we are an independent legal entity and regulated by the Cyprus Bar Association. However, being one of two EY Global member firms in Cyprus, we benefit from the extensive EY Law network of 3,000 lawyers across 80 countries. This is what sets us apart from our local peers, and the fact that we also offer our services outside the borders of Cyprus and have participated in various projects and tenders around the world.
We are a fully-fledged law firm with around 20 lawyers and three operational units. These are the dispute resolution unit, the corporate law unit and the legal consulting unit, which mainly deals with commercial regulated financial services, real estate and construction, and public procurement.
We have also been recognised internationally and rank in the prestigious Legal 500 guide in three areas of law, namely in corporate, commercial and M&A, EU law, and real estate and construction law. As of 2018, we are also expected to be listed and ranked for dispute resolution.
We are strong believers in continuous development, and have invested heavily in technology. We strive to be market leaders in the use of tech from case and time management, to client handling, compliance and privacy protection. We are also implementing artificial intelligence solutions in our due diligence systems and in developing tools to be able to more efficiently process bulk data. Similarly, we invest in our human capital and recently launched the EY Academy with accredited trainers to encourage our staff as well as other professionals to keep developing and updating their skills.
The funds sector has seen consistent growth over the last few years, how would you assess the current funds landscape in Cyprus?
Since the publication of the 2014 law on Alternative Investment Funds there has been increasing interest in the funds industry in Cyprus both by fund managers as well as investors. This interest has peaked over the last couple of months due to the publication of the new AIF Law, which clarified many matters and significantly improved the competitiveness of the Cyprus regime compared to other jurisdictions.
We should be humble in our efforts and acknowledge that Cyprus cannot claim the status of an established and globally recognised funds hub or financial centre. However, I believe that if Cyprus takes advantage of the current opportunities arising from the upgrade of Cyprus’ sovereign rating back to investment grade, Brexit and the positive momentum created due to the recent amendments in the legislative regime – such as the favourable tax regime applicable to fund managers and the new AIF and securitisation laws – this could lead to the relocation of various fund managers to Cyprus, which would have a very positive impact on the industry.
Which fund structures are most popular at the moment, and what type of investors are setting them up?
As a general comment, investors using Cyprus have focused mainly in the formation of AIFs instead of UCITs, which is not the norm bearing in mind the trends in other popular fund jurisdictions. From the information publicly available by the Cyprus Securities and Exchange Commission (CySEC) it is evident that the most popular type of fund utilised in Cyprus has been, at least up until now, the Alternative Investment Fund with Limited Number of Persons (AIFLNP). Such AIFLNPs are formed both as stand-alone funds and as umbrella structures with various compartments. Even though up until now the investors setting up such funds were lacking the sophistication of investors in other popular fund jurisdictions, we have seen that due to the improvement of the knowledge of service providers along with the opportunities arising due to Brexit, there is a shift in attracting sophisticated fund managers considering establishing Alternative Investment Fund Managers structures in Cyprus. There has been an overwhelming focus of funds on real estate underlying investments, however, we see that there is a shift in private equity and hedge fund investments.
Cyprus is emerging as a new and highly competitive EU fund domicile, what type of funds and investors is Cyprus an ideal jurisdiction for?
The aim is to attract sophisticated fund managers who are willing to relocate to Cyprus from other jurisdictions or willing to establish their Alternative Investment Fund Manager structures in Cyprus. The presence of fund managers on the island, operating their structures and investments from Cyprus, will increase the demand for the provision of quality services, which in turn will be the best advertisement for Cyprus’ fund industry.
Furthermore, the presence of fund managers in Cyprus will lead to the increase of assets under management and the undertaking of large scale investments, which will in turn attract a big-name global custodian.
In relation to the nature of the underlying investments, our tax regime is extremely attractive when it comes to investments in securities and bearing into consideration the overall regime we are expecting an increase in private equity and hedge fund investments.
Cyprus upgraded its AIF legislation in July, and introduced a new fund vehicle called the Registered AIF. What was the motivation behind these moves and how will these changes in the framework impact the sector?
Prior to Cyprus introducing its funds legislation there were other markets, such as Ireland and Luxembourg, that were already very well established in the funds sector and most of the fund managers continue to operate through structures established in these jurisdictions. In an effort to attract fund managers to Cyprus, the types of AIFs, the local law, as well as the regulatory regime should resemble the ones of already established fund jurisdictions. The basic principles of Cyprus’ RAIF do not differ to the ones of the Luxembourg RAIF and fund managers would be comfortable to operate through such structures in Cyprus. Even though it remains to be seen how successful this type of fund will be and whether it will end up replacing, in terms of popularity, the local AIFLNP, I believe that due to its main competitive characteristics, such as the fact that it can utilise all available fund forms and does not need to be licensed by the CySEC thus avoiding any delays in being granted authorisation, it is very appealing to fund managers and could therefore act as the gateway for managers to establish such funds in Cyprus.
Amongst the recent reforms was the enhancement of the LP regime, allowing the possibility to structure an AIF as a Limited Partnership with inherent legal personality. What are the key benefits of this new structuring opportunity?
The form of limited partnership (LP) is extensively utilised by fund managers to govern the relationship between the manager and the fund’s investors (the limited partners), since limited partnerships are generally governed by a relatively light statutory and regulatory regime compared to companies.
In a typical limited liability partnership, the general partner or partners responsible for managing the LP have unlimited liability for the LP’s debts and obligations. However, an LP with separate legal personality is considered a body corporate and a legal entity separate from the partners who are considered members, and therefore they are not liable for the LP’s debts and obligations. In an LP with separate legal personality the LP members or partners act as the agents of the LP and in general are liable up to the amount they have contributed to the LP.
I would like to note that from a legal perspective, a drastic overhaul of our Partnerships Legislation is critical in order to fully realise the prospects and the smooth operation of the partnership vehicles.
There are further upgrades coming up, such as the introduction of a new Mini-Manager regime, who can benefit from this and how?
The mini manager concept takes advantage of the flexibility offered by the European Directive 2011/61/EU, which allows Member States to apply a lighter regime for sub-threshold AIFMs. The so-called Mini Managers will be able to manage AIFs whose assets do not exceed the threshold of €100 million, with the use of leverage, or €500 million when unleveraged. In the latter case, the AIF should also have a lock-up period of five years.
The Mini Manager will be a limited liability company with shares and registered office in Cyprus, whose sole purpose is to manage AIFs. It will still be subject to authorisation by CySEC, minimum capital requirements and will also have to fulfil minimum regulatory requirements in terms of for example risk management, compliance and internal audits.
The benefits of the Mini Manager lie in its cost-efficiency compared to the AIFM structure. Therefore the concept can prove to be beneficial to three types of managers. First, to managers that have a targeted investment that is limited to certain asset requirements and are urged by the relevant investors to undertake such investment through a fund vehicle. Secondly, to sophisticated managers who have never operated in or from Cyprus that seek to establish their operations in more cost-efficient jurisdictions compared to other mainstream fund destinations and as a first step, in an effort to ‘test the waters’ and what Cyprus has to offer, they wish to establish a cost-efficient vehicle that will undertake limited investments. And finally, to managers that are not already established in the market and wish to create a fund vehicle and undertake a roadshow towards the raising of capital.
Cyprus has an advantageous tax framework for international business, in terms of the funds sector, what key advantages does the jurisdiction offer on both the fund and investor level? What other incentives are in place to attract more funds and managers to Cyprus?
Cyprus offers a very attractive tax environment, with important tax incentives to funds and their investors. There is no subscription tax on net assets of a fund and no withholding tax on profit distributions to non-Cyprus tax resident unit holders.
In addition, provided that the fund does not hold directly, or indirectly, immovable property situated in Cyprus, profits on the disposal of shares and other financial instruments are tax exempt at the level of the investment fund. At the same time, there is no capital gains tax on any gains arising from the disposal/redemption of units for the unit holders.
The Cyprus tax system features a general corporate tax of 12.5% and avails tax efficient solutions, such as the Notional Interest Deduction regime. Also, access is granted to a wide network of Double Tax Treaties, which is in place with more than 60 countries worldwide.
Following the recent changes in the tax laws, individual fund managers may be subject to certain conditions taxed at a flat rate of 8% on the carried interest to be received. Finally, the tax regime in Cyprus applicable to certain emerging sectors of the island’s economy is also very attractive, such as the tonnage tax regime in the shipping, and an advantageous start-up and IP-box regime.
Significant advantages also stem from recent amendments in the taxation of natural persons and high-net-worth individuals (HNWI) such as the non-domicile tax residence status.
In your opinion what challenges does the Cyprus fund sector still need to overcome in order to ensure future growth and diversity? For example, one issue is the absence of a big-name global custodian – is attracting one crucial for Cyprus?
As mentioned, we have recently experienced a shift in the interest of fund managers of other popular jurisdictions to relocate or establish fund structures and operations in or through Cyprus. It is very common for investors of such fund managers to request that the fund’s assets are deposited with a custodian that is globally known for the provision of these services.
Cyprus’ funds sector would experience a reputational and marketing boost with the establishment of the operations of a big-name global custodian on the island. I am confident that if the amount of assets under management by Cyprus funds increase drastically – which is the ultimate goal towards the establishment of Cyprus as a fund jurisdiction – demand will drive the establishment of a global custodian on the island.
However, our biggest challenge will be the professional culture that is currently under development in the funds sector. In particular, private sector professionals should not pursue quick and easy profitability by aiming at the largest possible number of funds or fund managers, but instead focus on attracting reputable investors and managers with an undisputed track record. We should diversify the geographic origin of attracted clients building on traditional markets, but also investing in long-established financial services jurisdictions.
Another key player in the market is the regulator. Robust supervision and regulation is the foundation for a sustainable and well-respected jurisdiction. Therefore, we should all work with the regulator to ensure the developments of a reputable market. It is of utmost importance to ensure a seamless and timely processing of applications and we should expand the capacity of the regulator to avoid any delays in the anticipated growing volume of requests by interested investors and managers. Last but not least, we should acknowledge that Cyprus is an emerging and not an established fund jurisdiction, and draw best practices from truly global and established financial centres.
If current growth rates continue, assets under management in the Cyprus funds sector are projected to rise to €20 billion in the next five years. Do you think these expectations are realistic?
It is quite often that projections in Cyprus have eventually proven to be rather optimistic, however, I am pleased that today assets under management in Cyprus have reached the €5 billion mark. Bearing in mind the rate of growth during the past three to four years, the projection that assets under management will rise to €20 billion within the next five years could be considered as realistic.
Of course this will depend on the international financial conditions and whether Cyprus will continue to be an attractive jurisdiction for fund managers operating both within and outside of Europe. I believe that if we take advantage of the opportunities arising from the upgrade of Cyprus’ sovereign rating back to investment grade and Brexit, and we further promote Cyprus as a stable and secure jurisdiction with the backing of a global custodian holding investors’ assets, the projected expectation of €20 billion could even be exceeded.
How do you see the sector developing over the next five years?
I am confident about the future of the funds sector. Cyprus is located in the eastern part of Europe providing easy access to other emerging markets such as India, Africa, China and other Asian markets, while being the only common law jurisdiction along with Ireland remaining within the EU and the Eurozone in a post-Brexit era. Further, it offers a very attractive tax regime both from a direct and indirect perspective, which is highly competitive on a global not only EU level. Therefore, the framework is there for Cyprus to thrive as a fund jurisdiction. However, at these embryonic stages it is imperative to avoid any negative incidents either as a market or as a country that could deal a blow to our reputation and credibility as a jurisdiction.
The service providers are now equipped with the required knowledge on the funds sector and have started to think outside the box with respect to the needs of fund managers and towards creating a very attractive framework for such managers to operate in and from the island. I am certain that through political stability in Cyprus and the neighbouring area, the enhancement of the banking sector through the establishment of an international bank offering depositary and custodian services, and Cyprus’ economy as a whole through the implementation of additional reforms, the funds sector in Cyprus will evolve into a mature market that could be attractive to global players.