Investment Funds - Financial companies- Cyprus International Collective Investment Schemes

Introduction

The ideal location, placed among three continents (Europe, Asia and Africa), the excellent infrastructure and the high level of professional services (banking, consultancy, etc) along with the competitive tax system, make Cyprus the rising star of the European Financial Services sector. Cyprus investment vehicle is suitable both for EU inbound and outbound investments. There are no investment activities that are inappropriate for the Cyprus tax environment. However, there are investment activities which are indeed ideally suited to the Cyprus tax environment such as:

-          Investment funds

-          Financial companies

-          Royalty companies

-          South Europe, Middle East, Russia and Central and Eastern Europe head office operations

The European enlargement and the accession of Cyprus to the EU opens up a window of opportunity to investors who wish to invest in the EU or who wish to invest from the EU.

An IClS can take the following legal forms:

-          International fixed capital company

-          International variable capital company

-          International unit trust scheme, and

-          International investment limited partnership

All four types of ICIS may be established with limited or unlimited duration and may be structured in such a way as the promoters may determine, provided however, that adequate protection is in place for the unit holders. 

Types of ICIS

Taking into account the investment policy and the particular investment objectives, an ICIS may be designated as:

-          An ICIS marketed to the general public;

-          An ICIS marketed solely to experienced investors¹; or

-          A private international collective investment scheme (only 100 or less investors)

International Fixed Capital Company

This is an International Investment Company that is incorporated under the companies law and recognized to operate as an international fixed capital company by the ICIS law. Its assets and unit holders are non residents of Cyprus and the share capital of the company cannot increase or decrease.

Initial minimum capital has been set to US$100,000 which will be marketed to the public or to experienced investors. Fixed capital companies which are private international collective investment schemes (can have 100 or less investors) are exempted from this requirement.

[1] “Experienced investor” is a natural or legal person that provides financial services or frequently enters into investment transactions of substantial size taking into account all the risks involved.

International Variable Capital Company

This is an International Investment Company that is incorporated under the companies law and recognized to operate as an international variable capital company by the ICIS law. Its assets and unit holders are non residents of Cyprus and the share capital of the company may vary according to the investors participating in or exiting the company. That means that the amount of the share capital of the company shall be equal to the net asset value of the shares of the company at any time in issuance; and that the share capital of the company may be divided into a specified number of shares without assigning any nominal value (par value).

International Unit Trust Scheme

This is an International trust created under the International Trusts Law recognised to operate as an international unit trust scheme by the ICIS law.

A trust is legally defined as a relationship created – inter vivos or on death – by a person (the settlor) who places assets under the control of the trustee for the benefit of a third party (the beneficiary). These assets are like a separate “fund” and are not part of the trustee’s own estate.

The title of the trust assets stands in the name of the trustee and the trustee is empowered and duty bound to manage the assets held in trust in accordance with the terms of the trust agreement.

Under section 2 of the International Trust Law, a trust qualifies for a Cyprus International Trust where:

-          the settlor is not a permanent resident in Cyprus;

-          at least one trustee is a permanent resident in Cyprus;

-          no beneficiaries are permanent residents in Cyprus; and

-          the trust property does not include any immovable property in Cyprus.

International Investment Limited Partnership Scheme

This is a limited partnership that is registered under the Partnership and Business Names Law and which is recognised to operate as an international investment limited partnership by the ICIS law.

The partnership must appoint a general partner who acts as the manager of the fund and who is responsible for any debt and obligations of the scheme that may arise. Limited partners are also members of the scheme and their liability is limited to the amount they have contributed to the scheme. A legal entity can also be a partner with limited liability.

The partners or unit holders of the fund that have limited liability should not take part in the conduct of the business of the scheme or have the power to contract on behalf of the international investment limited partnership. All contracts, deeds, instruments, letters and documents whatsoever shall be entered into, drafted, signed and executed by the general partner on behalf of the international investment limited partnership.

Regulatory Framework

Under the law 47(I)/1999 regulating ICIS, the Central Bank has been designated as the regulatory and supervisory authority of ICIS². Other laws which are in force and applicable to the ICIS are the Cyprus Companies Law, the Business Names Law (except from those parts which are specified by the law), and the International Trust Law.

(2) Since May 2002 any ICIS which is intended to be offered to the general public requires clearance by the Cyprus Securities and Exchange Commission.

Licensing Requirements

In order to establish an ICIS the prior approval of the Central Bank of Cyprus (the Bank), as the regulatory and supervisory authority for ICIS, their managers and trustees, has to be obtained.

In order to obtain such approval, the Bank must be provided with such information so as to be satisfied as to the competence of the directors, promoters, managers or trustees, as the case may be, and that their probity is such as to render them suitable to act in their respective capacities.

Taxation

ICIS are subject to tax like any other entity. This translates to the following basic highlights:

-          Unified corporate rate of 10% for both international and local business enterprises.

-          Adoption of the residency basis rather than source basis as the criteria of taxation.

-          Exemption of profits from the disposal of securities

-          Dividend income is exempt in most cases

-          No withholding tax on payments of dividend, interest and royalties to non-residents

-          Capital gains realized on immovable property held outside Cyprus are outside the scope of capital gains tax

In a nutsheII what is significant for ICIS is:

-          Exemption from tax on foreign dividends

-          Exemption from tax on profit from sale of securities

-          No withholding tax on income repatriation by the ICIS

Procedure for the Setting-up of International Collective Investment Scheme

ICIS must be approved by the Central Bank of Cyprus or the Cyprus Securities & Exchange Commission (CySEC), which are the regulatory and supervising authorities for the schemes, for their managers and their trustees. To this end, a written application to the relevant supervising authorities must be submitted as follows:

-          In the case of an international fixed capital company and an international variable capital company the written application must be submitted by or on behalf of the company.

-          In the case of an international unit trust the written application must be submitted by the trustee of the trust.

-          In the case of an international investment Iimited partnership the written application must be submitted by or on behalf of the limited partnership.

In order to recognise the scheme, the supervising authorities must be satisfied that:

-          The directors, the promoters, the managers, and the trustee of the scheme are competent and honest, and that the manager, the general partner, and the trustee (as the case may be) act independently of one another.

-          The manager meets the necessary requirements as per the legislation and the regulations.

-          The trustee meets the requirements as per the legislation and regulations

-          The general partner meets the requirements of a manager.

-          The name of the scheme is not undesirable

Additionally, the supervising authorities must be satisfied that the constitutional documentation and the offering memorandum of the scheme contain the information prescribed by the supervising authorities and that they are in a form acceptable to the supervising authorities.

Finally the scheme will have to submit to the supervising authorities other documentation and information as prescribed. 

Reports

Annual Reports must be prepared by the managers in relation to each ICIS and must contain, as a minimum, the following:

1.      Financial statements

2.      Information on borrowing

3.      Portfolio information

4.      Report by Trustees

5.      Report by Auditors

Half-yearly reports are prepared by the managers in relation to each ICIS and must contain, as a minimum, financial statements consisting of

-          Balance sheet

-          Income & expenditure account

-          Statement of the sources from which the total income of the ICIS has been generated

-          Statement of duties, charges, and fees paid out

-          Statement of income distribution or allocation

We assist with the creation of an ICIS by advising on:

-          The constitutional documentation and the offering memorandum of the scheme

-          The application of the scheme for recognition by the supervising authorities

Our licensed experts and auditors can further assist with:

-          Administrative services to the scheme (calculate net asset value and prepare annual accounts and periodical financial reports in accordance with the laws and regulations)

-          Audit services to the scheme

-          The management of the scheme (fund management software capabilities, investment expertise, ensure compliance with investment strategy of the fund)