Cyprus Alternative Investment Funds

Dr. Antoine Saliba Haig | 30 Nov 2018

Cyprus Alternative Investment Funds

Cyprus has established itself as one of the most coveted locations to relocate worldwide, with an equally coveted passport. The Cyprus Investment Programme gives investors the flexibility of choosing their preferred method of investing in Cyprus whilst maintaining a residential property with a minimum value of €500,000 for as long as they remain holders of Cypriot citizenship.

Amongst the lesser known options available, one of the investment avenues available to high net worth investors is transferring a minimum of €2,000,000 in capital to an Alternative Investment Fund (AIF). This publication will discuss the nature of AIF in Cyprus, as well as AIF as a route to Cypriot citizenship.

Cyprus Investment programme 

The Cyprus Investment Programme allows investors to obtain Cypriot citizenship by transferring assets to an AIF established in Cyprus whilst maintaining a residential property of a value not less than €500,000. Should an investor pursue this route, he or she must invest a minimum of €2,000,000 in an AIF licensed and recognised by CySEC and supervised by the fund manager. The AIF must be one established in Cyprus, meeting the financial criteria of the Cyprus CIP scheme and approved by the Minister of Finance. Investors may also transfer assets to more than one licenced and recognised AIF, given that the cumulative value is not less than €2,000,000.

Alternatively, the applicant may acquire financial assets in Cypriot businesses or organisations with the same required minimum value of €2,000,000. These assets could include bonds, bills, or securities by companies demonstrating sufficient criteria, including physical presence and generation of significant economic activity. If this investment route is chosen, the assets invested should be maintained for a minimum period of three years.

Whilst each investment route carries its own criteria, the Cyprus CIP Programme offers even more flexibility by not only offering investors various investment choices to qualify financially, but also making it possible for the investor to qualify by investing in a combination of the established avenues. For example, if an investor chooses to invest in establishing a Cypriot company or business, whilst also investing in an AIF and maintaining a residential property, he may do so given that the minimum total investment excluding taxation will amount to not less than €2,500,000.

Alternative investment funds (AIF)

An AIF is a financial mechanism used to raise capital from investors who invest in according to an established investment policy for the benefit of the investors. Such a fund must fall outside the classification of an Undertaking for the Collective Investment of Transferable Securities (UCITS).

The European Union, which Cyprus has been a member of since 2004, legislated on the management of AIFs through Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers. The European Securities and Markets Authority regulates and monitors the implementation of this Directive throughout the EU Member states. Whilst this Directive deals with managers of AIF, AIFs themselves are regulated on a national level, whilst adhering to European set standards.

In Cyprus, the relevant law is Law 131(1) of 2014 regulating the Alternative Investment Funds, known as the AIF law of 2014, with new amendments in the pipeline in 2018.

AIF in Cyprus

There are four legal forms of AIF in Cyprus. These are:

  1. Fixed Capital Investment Company (FCIC) 
  2. Variable Capital Investment Company (VCIC) 
  3. Investment Limited Partnerships (ILP) or 
  4. Common Fund (CF). 

These are the only legal forms which an AIF may take if established in Cyprus. With regards to AIFs with a limited number of investors, the only legal forms which may be used are FCIC, VCIC or ILP.

The Cypriot legal framework also establishes three types of investors which may contribute to AIF. They range from a professional investor, the highest qualified level of investor, to a well-informed investor, and a retail investor, with the lowest level of knowledge in comparison to the other two types. Whilst the general rule is that only professional investors may contribute to an AIF, well-informed and retail investors may also contribute subject to more rigorous conditions and standards. Particular investment restrictions are also established depending on the type of AIF, the type of investor involved, and the investment policy chosen.

Approval by CySEC/Fund Manager

The Alternative Investment Fund Managers Directive (AIFMD) is a 2011 Directive which regulates the management of funds other than UCITS within the EU. The Directive aims to protect investors by establishing strict compliance around how information is disclosed and tackles the systematic risk these funds may pose to the EU economy.

According to the Directive, AIF managers are “legal persons whose regular business is managing one or more AIFs…Managers of alternative investment funds (AIFMs) are responsible for the management of a significant amount of invested assets in the Union, account for significant amounts of trading in markets for financial instruments and can exercise an important influence on markets and companies in which they invest”. 

AIFs established in Cyprus must be approved and licenced by the Cyprus Securities and Exchange Commission (CySEC). However, new amendments to the existing legal framework in Cyprus regarding AIFs are in the pipeline.

The 2018 amendments are expected to shift the legal framework concerning AIFs considerably, particularly concerning minimum capital requirements, a new register for AIFs, and notification of acceptance or rejection of the AIF application within one month of receipt of all required documents in accordance with the AIFMD.

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