Cyprus’ appeal as an EU funds and asset management domicile has been strengthened by the introduction of ground-breaking new legislation, and if current growth rates are sustained, assets under management are expected to rise to an incredible €20 billion in the next five years.
Cyprus has big ambitions and has set its sights on becoming a fund and asset management centre of excellence, and with upgraded legislation and increasing inflows of foreign investments, the country is well on its way. Developing the sector and achieving this goal has been a long journey for the industry, but the vision is set to become a reality. The local funds sector has been gaining momentum, boosting its prospects of becoming a real economic driver of the future.
Assets under Management (AuM) have more than doubled from €2.1 billion in 2012 to €4.8 billion in March 2018 and saw an impressive 68% growth since 2016Q4. The number of funds is steadily growing and currently stands at over 130, with more than 50 new funds pending regulatory approval. Cyprus has also listed more than 35 funds on the Thomson Reuters funds platform, which is visible to more than 20,000 global asset managers and fund professionals, while working on bringing Cyprus funds also directly onto Clearstream – a market leader in the custody of securities and market transaction settlements – a move which would instil further confidence and trust in the jurisdiction. In addition to the increase in launched funds, the number of asset managers establishing presence on the island has grown.
The surge in appetite from investors and fund service providers looking for new and interesting EU- regulated jurisdictions, has proved that Cyprus is on the right track as larger investment funds with increased assets are increasingly being registered. International trends also support the direction Cyprus has taken to diversify its offering through the provision of investment funds. Assets managed in Europe reached a record high of €22.8 trillion in 2016 – a growth trend that has been consistent since 2008 – while global AuM are projected to almost double in size by 2025 from US$84.9 trillion to US$145.4 trillion according to PwC.
Strong and Attractive Regulation
The consistent efforts of Cyprus to modernise and make its regulatory environment more attractive for investment funds, has created a legal framework bearing hallmarks of the regimes in Luxembourg and Ireland, and has raised investor confidence in the jurisdiction. Cyprus offers both EU-regulated Undertakings of Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs). The number of AIFs is seeing consistent growth, and foreign UCITS are now widely marketed in Cyprus, including ones promoted by international financial institutions such as JP Morgan, Merrill Lynch, UBS and Julius Baer.
In July 2018, Cyprus improved its Alternative Investment Funds (AIFs) framework, aligning it with recent EU and international trends and incorporating provisions influenced by other fund jurisdictions excelling in the sector. The upgraded AIF framework has been hailed ‘ground-breaking’ and offers a significantly more time- and cost-efficient means of establishing AIFs in Cyprus, as well as more clarity about the tax treatment of funds. The most anticipated part of the new legislation was the introduction of Registered AIFs (RAIFs), which offers new benefits such as fast-tracking. For example, RAIFs do not require authorisation by the supervising Cyprus Securities and Exchange Commission (CySEC) to commence operations provided they are externally managed by an Alternative Investment Fund Manager (AIFM) based in Cyprus or another EU country. RAIFs can also be converted into an AIF at a later stage for investors wanting a regulated vehicle. A RAIF can also take all available legal forms and is allowed to invest in non-financial assets.
Another significant reform is the possibility to structure an AIF as a limited partnership (LP) with inherent legal personality, resulting in the AIF having a separate legal personality compared to the AIFs structured as traditional limited partnerships. The Cyprus LP has incorporated the best elements of the Anglo-Saxon LP, which is a vehicle that can be used to support private equity investments. Considering the popularity of these types of products in other EU jurisdictions, the industry expects these new structuring opportunities to attract significant interest thanks to both cost and time savings.
There are also upcoming provisions for fund administrators, as well as mini-managers who are allowed to operate below current AIF manager thresholds. The country is now on par with other top fund domiciles and the number of service providers is set to grow exponentially thanks to the upgraded legal framework that provides a winning combination of investor protection and freedom of operation for asset managers.
Cyprus 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. Cyprus’ offering of a European passport of quality and flexibility, its exceptional possibilities for cross-border and global fund distribution, as well as its long-standing investment links into and out of Europe all provide investors with preferential access and solid service expertise through its pool of skilled professionals. In addition, its geostrategic location at the crossroads of Europe, the Middle East, Asia and Africa has also positioned the country as an investment bridge into the MENA region, China, India and other Asian countries.
Competitive Tax Framework
Many industry experts believe that UCITS will remain more of a niche market, while AIFs will continue to dominate the fund business in Cyprus. Evidence of this is the 2018 establishment of the Hanseatic Fund in Cyprus – a new AIF established in Limassol, which is a leading global shipping hub. The new fund was set up to specifically invest in maritime real assets, in particular merchant vessels in the container, dry bulk and tanker segments – providing an alternative investment opportunity compared to other asset classes available in Cyprus today.
The country’s funds framework is now as competitive as those of Europe’s main investment fund hubs like Luxembourg, Ireland and Malta. Cyprus remains an excellent base for international business, with a skilled workforce and wide network of double-tax treaties with 64 countries. In the area of taxation, Cyprus offers one of the most attractive fund tax regimes in Europe – both for the fund manager and investor, as well as at the level of the fund.
2018 also saw the introduction of new provisions to further enhance the already competitive tax regime in place for fund managers. For example, one of the new provisions is a taxation of carried interest or performance fee for AIF and UCITS fund managers. is essentially means that executives of investment fund management companies or internally managed investment funds may opt for a new mode of personal taxation.
Subject to conditions, their variable employment remuneration, which is effectively connected to the carried interest of the fund managing entity, may be subject to Cyprus tax at a at rate of 8%, with a minimum tax liability of €10,000 per annum. The new mode of taxation is available for a period of 10 years in total, subject to the annual election of the individual. Also, according to the law, each compartment of an AIF or UCITS should be treated as a separate taxpayer. is further facilitates the effective operation of Cyprus investment funds via multiple compartments, in accordance with international fund industry norms.
An Efficient Single Regulator
All investment funds regulation in Cyprus is under the aegis of the Cyprus Securities and Exchange Commission (CySEC). The watchdog regulates AIFs, UCITS funds, AIFMs and UCITS Management Companies, as well as MiFID regulated investment rms. The regulator also authorised the set-up of one European Venture Capital (EuVECA) Fund. Access to risk capital for innovation is crucial and the aim of the fund is to invest in innovative Cypriot start-ups to attain a more competitive edge in the global marketplace, and consequently, strengthen the local economy.
Over the last year, CySEC has made changes to its operations to make the application process faster and more efficient. In a bid to further enhance the landscape for financial services, in 2018 CySEC announced the establishment of an Innovation Hub to address and explore the rise of fintech and regtech developments. The Hub will be a place where both super- vised and non-supervised entities in new industries will have ongoing access to the authority to better understand and implement their regulatory requirements. This is a welcome move that will support information and knowledge exchange on the risks and benefits of new investment products and platforms, as well as help develop new solutions for the financial services sector.
Cyprus hosts a number of recognised fund service providers, 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, which is a real benefit for smaller players wanting to launch into the market. In addition, the ‘Big Four’ accounting firms are well-established on the island, as are fund administrators with global expertise, such as Alter Domus, First Names and Vistra. A number of law offices have cooperation agreements with renowned 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 also introduced incentives and tax benefits for high-earning managers and high-net-worth individuals to bring its plans to fruition.
Opportunities and Challenges
The introduction of a new securitisation law in July 2018 will make it easier for banks to securitise or sell loans, allowing the creation of a secondary market which can ultimately help them reduce their stock of non-performing loans (NPLs). The new legislation has simplified asset transfers to special-purpose entities.
At the moment Cyprus does not have the capacity to offer the full range of custody services locally with its banks outsourcing a majority of these services to international players like JP Morgan, BNY Mellon and SGSS. This gap in its service line presents a challenge for future growth, which is why Cyprus is keen to attract a true global custodian to its shores to realise its potential as a fund jurisdiction.
Another development that could facilitate more opportunities also in the investment funds landscape is the Ministry of Finance’s announcement to reform the pension funds framework. The reform includes a plan to unite the two authorities supervising insurance undertakings and pension funds under one independent supervisory authority, which will facilitate better supervision within these areas and help reboot the pension fund market in Cyprus.
With increasing demand from start-up fintech companies, hedge funds and other financial services players, Cyprus is also gaining momentum in the cryptocurrency and blockchain arena. Not only does the University of Nicosia (UNIC) offer world-class courses in these subjects, it was in fact the first university in the world to accept Bitcoin for tuition payments and to offer a master’s degree course in digital currency. With a surge in the number of pioneering blockchain and crypto start-ups and a government supporting digital currency and infrastructure, the talent in this sector is positioning Cyprus as an ideal location for new initiatives in structuring crypto-focused investment funds.
As a further driver of the developing funds industry, Cyprus has seen exceptional economic growth considering it exited recession only a few years ago, reaching just shy of 4% growth in 2017 making the country one of the fastest growing economies in the eurozone. Investor confidence has been boosted on an international level and the country saw a 9% increase in foreign direct investment in 2016, with FDI continuing to ow into multiple sectors in 2017 and 2018.
Determined to build up the funds sector, the industry has also ramped up its promotional efforts and strengthened connections in the US and Asia. The Cyprus Investment Funds Association (CIFA), was set up in 2013 to raise awareness of what Cyprus has to offer international managers, administrators and investors. Today, it has grown to be the voice of the resident industry, spearheading efforts to enhance the country’s fund regime and organising an annual funds summit attracting fund experts from around the world. In 2016, CIFA became a full member of the National Association of the European Fund and Asset Management Association (EFAMA), which served as an important vote of confidence in Cyprus as a serious European fund centre. In 2018, EFAMA also selected Cyprus as the location for its annual general meeting to showcase the country as an emerging fund jurisdiction. CIFA, an associate member of the International Capital Markets Association (ICMA), is a strong supporter of the Capital Markets Union (CMU) welcoming the European Commission view to acknowledge the industry as a key player in the Union, which includes lowering the regulatory costs of setting up funds and facilitating cross-border operations, thus making the European passporting system function better for all types of investment funds.
Cyprus’ competitive cost structure and distribution opportunities to a wide range of markets, including the EU, MENA, Russia and the CIS, have established it as a convenient and secure investment launch pad offering a multitude of advantages for business. The fact that fund managers are increasingly moving to Cyprus demonstrates the rapid development of the sector, and now, armed with a fully upgraded regulatory toolkit, this emerging EU fund centre is ready to capitalise on its full potential. Considering that assets under management in Cyprus are projected to reach an incredible €20 billion in the next five years, provided the current rate of growth continues, the future of this sector looks promising.
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