Having recorded impressive growth over the past few years, the Cyprus funds sector is becoming a real economic driver of the future and a truly modern European fund hub.
The Cyprus fund management industry is fast becoming one of the most promising sectors of the economy. Recording formidable growth over the last few years, the country is strengthening its status as a convenient European gateway for investment funds. The volume of funds and assets under management have hit record highs proving that interest in Cyprus as a business and investment base runs strong, as assets under management (AuM) have more than tripled from €2.1 billion in 2012 to €7.7 billion in the third quarter of 2019. And if current growth rates are sustained, AuM could reach €20 billion in the next five years.
As an emerging EU funds jurisdiction, Cyprus is increasingly on the radar of market players thanks to its cost-effectiveness and flexible legislation, its proximity to the Middle East and Africa, and longstanding preferential access to Eastern Europe, post-Soviet states and Russia. There has been growing interest from funds around the world, but most notably from Europe, Asia and the Middle East. In addition, Cyprus is attracting funds from countries that do not traditionally have strong economic ties with Cyprus, such as China, India and Japan, to establish a base on the island to access and invest in the wider European market. At the same time, the jurisdiction is a credible alternative for UK-based asset managers seeking to expand or relocate due to Brexit.
A further boost of confidence in the sector was the 2018 announcement that Cyprus funds will be eligible to list on Clearstream’s Vestima fund processing platform – following the initial listing of more than 40 Cyprus-domiciled funds on the Thomson Reuters platform (now Refinitiv), which is visible to more than 20,000 global asset managers and fund professionals. International trends also underline the importance of the European funds sector. Total AuM in Europe increased by 10% in 2017 to €25.2 trillion, which shows consistent growth since 2008, while in Q1 2019 total net assets of European investment funds increased by 7.2% and reached €16.2 trillion.
The local industry is set to develop and expand further making the island a serious contender in the international funds landscape with its continuously upgraded regulatory regime, vast pool of service providers, and attractive tax incentives for both funds and asset managers.
Upgraded and Flexible Regulation
The consistent upgrades of Cyprus’ regulatory framework have boosted investor interest and the image of the jurisdiction. Bearing similar characteristics to the regimes of Luxembourg and Ireland, the country’s legal framework is one of the most flexible in Europe while maintaining a high level of investor protection – an important aspect for small and medium-sized fund managers that Cyprus is seeking to attract. It offers both EU-regulated Undertakings of Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs). The number of AIFs has seen consistent growth, and foreign UCITS are also widely marketed in Cyprus, including ones promoted by international heavyweights such as JP Morgan, Merrill Lynch, UBS and Julius Baer.
Many industry professionals expect UCITS to remain more of a niche market, while AIFs will continue to dominate 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 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 industry has experienced a real growth spurt over the last five years with the transposition of the latest European regulatory frameworks – UCITS Directive, AIFMD and MiFID II – into national legislation. In July 2018, Cyprus further improved its Alternative Investment Funds (AIFs) framework, aligning it with international trends. The upgraded AIF framework 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 offer new benefits such as fast-tracking. These specialised funds are registered by already authorised alternative investment fund managers and do not require authorisation by the supervising Cyprus Securities and Exchange Commission (CySEC) to commence operations. As a result, instead of a three to four-month registration process, these investments can be brought to market in only two to three weeks, providing a faster turnaround at a substantially lower cost. RAIFs can also be converted into an AIF at a later stage for investors wanting a regulated vehicle.
There is no minimum share capital requirement for a Cyprus RAIF, and there is legal form flexibility in terms of structuring, including the option to be open-ended or closed-ended. For many investors, including unregulated investor groups such as family offices, the Cyprus RAIF represents an attractive investment vehicle from a legal, regulatory and tax perspective. Investor protection is provided by the requirement to appoint an authorised and regulated AIFM that is responsible for ensuring AIFMD compliance.
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, 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 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. Cyprus is now entering the global stage with other top fund domiciles thanks to its upgraded legal framework providing a winning combination of investor protection and freedom of operation for asset managers.
Investor-Friendly Tax Regime
The robust business infrastructure and competitive regulatory and legal framework has long made Cyprus an ideal environment for doing business. Part of this success has been its investor-friendly and advantageous tax regime, with double tax treaties with 65 countries.
Today, Cyprus offers one of the most attractive fund tax regimes in Europe – for the fund manager, investor, and the fund. 2018 also saw the introduction of new provisions to further enhance the already competitive tax regime for fund managers. One of the provisions is a taxation of carried interest or performance fee for AIF and UCITS fund managers. This essentially means that executives of investment fund management companies or internally managed investment funds may opt for a new mode of personal taxation.
All investment funds in Cyprus are regulated and supervised by the Cyprus Securities and Exchange Commission (CySEC). The watchdog regulates AIFs, UCITS funds, AIFMs and UCITS Management Companies, as well as MiFID regulated investment firms. CySEC has streamlined its operations to help make the application process faster and more efficient. 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 supervised 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.
Whether in private equity, hedge funds or mutual funds, the strong talent pool and broad spectrum of services in Cyprus can help investors capitalise on opportunities and provide specialised knowledge and insight into a wide range of operational, technological and regulatory issues.
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 tangible 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, IQ-EQ and Vistra. A number of law offices have cooperation agreements with renowned international law firms, instilling confidence that the local industry can grow and create an attractive environment for the establishment of funds, fund management and servicing companies.
Funds operating in Cyprus will continue to require comprehensive banking, custody and depositary services, and the main local providers continue to invest and further improve their global custody and depositary business offering. Over the past few years, local banks have developed services to accommodate the demands of the growing industry through strategic relationships with renowned global custodians and international prime brokers in order to meet the needs of asset managers and funds.
Opportunities and Challenges
Despite the positive developments and impressive growth witnessed in the last few years, a key challenge for Cyprus is attracting larger funds. Currently the jurisdiction is ideal for regional players, start-up funds, alternative funds, as well as larger entities looking to diversify into new asset classes with minimum risk and cost.
Cyprus is also benefiting from de-offshorisation measures in other parts of the world and seeing increasing interest from those seeking new EU-regulated jurisdictions. For example, once highly popular domiciles such as the Cayman Islands and the British Virgin Islands have developed a controversial image in the wake of tightening compliance and transparency requirements – resulting in many asset managers moving to better regulated markets such as Europe to operate on a global scale. With a solid legislative framework, relatively low-cost operating environment, EU passporting capability, professional service providers and efficient tax regime, Cyprus is an ideal domicile for these types of managers to find a firm foothold to expand their business.
Following the 2013 financial crisis, Cyprus has created new and interesting opportunities for investors by transforming a debt-driven economy into an investment-driven one – and AIFs in particular pose a promising prospect to tap into the potential of this new economy. Investment opportunities in real estate, shipping, infrastructure, non-performing loans, oil and gas, renewable energy, start-ups and private equity projects can all be accommodated through Cyprus fund vehicles in an EU-compliant manner.
In addition, the introduction of a new securitisation law in July 2018 has made 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. The new legislation has simplified asset transfers to special-purpose entities. Also, plans to reform the pension funds framework by uniting the two authorities supervising insurance undertakings and pension funds under one independent supervisory authority, will help reboot the pension fund market in Cyprus.
Innovation has become the buzz word for Cyprus over the last year and government backed initiatives will bring more opportunities into this arena. With increasing demand from start-up fintech companies, hedge funds and other financial services players, Cyprus is also making a name for itself in the cryptocurrency and blockchain arena. 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- and tech-focused investment funds.
Cyprus has seen exceptional economic growth reaching just shy of 4% growth in 2018, making the country one of the fastest growing economies in the eurozone. A further driver has been the developing funds industry, and increasing inflows of FDI into multiple sectors.
The industry has also ramped up its promotional efforts and is represented by the Cyprus Investment Funds Association (CIFA). CIFA is a full member of the European Fund and Asset Management Association (EFAMA) and an associate member of the International Capital Markets Association (ICMA). The status of the jurisdiction was further bolstered in 2019 when Cyprus was awarded full membership of the International Investment Funds Association (IIFA), underlining the fact that the country operates within a rigorous legal framework that promotes transparency and protects investors.
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 skilled professionals. In addition, its geostrategic location at the crossroads of Europe, the Middle East, Asia and Africa has also positioned the country as a natural investment bridge into markets worldwide. The fact that fund managers are increasingly moving to Cyprus demonstrates the rapid development of the sector, and is testament of the country’s determination to capitalise on its full potential of becoming a key EU fund centre.
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