The Cypriot RAIF: substance, requirements and taxSalvus Team
The upgraded Alternative Investment Fund (AIF) Law of 2018 was enhanced considerably in July of the same year, with a number of changes aimed at further developing the sector. As we have been doing, we continue the series of articles elaborating on the changes and advantages of the new regime. We also take the opportunity to do so, a few days after the Central Bank of Cyprus has released its latest Investment Funds statistics report indicating another quarter of modest growth.
In an earlier article, we discussed the responsibilities of the depositary and the requirements for the depositary appointment, for the different alternative investment funds. Still, the major advancement in the upgraded framework was the introduction of the – so-called Registered Alternative Investment Funds (RAIFs) – making Cyprus a more attractive and flexible jurisdiction for the investors.
Why are RAIFs attractive? Simply because they significantly reduce the time needed and the costs related to establishing an AIF. This article is dedicated to discussing the new regime and the advantages carried with the establishment of the Registered Alternative Investment Funds (RAIFs).
Substance and the fund manager
The special thing about RAIFs is in their name. Specifically, R for Registered. A RAIF comes into existence by first going through an external fund manager (AIFM), who is supervised by the Cyprus Securities Exchange Commission (CySEC) under the AIFM Directive or in any other EU member state, who in turn provides a European substance for the fund. This AIFM then registers the fund with the regulator. The regulator supervises the AIFM and the AIFM the RAIF. The other way, which previously was the only way, would require the prospective AIF to go to the regulator first, go through the lengthy and costly application procedure and so on.
Therefore a RAIF is the same to an AIF, however, it is under the responsibility of the AIF manager, for all their operational and marketing efforts to be in compliance, as they are conducted under the umbrella of the fund manager as a European fully passported fund management structure.
Effectively, the fund manager is the ultimate liable sponsor of the fund at the eyes of the regulatory authorities. The fund manager is responsible for the application and registration process, while being bound to ensure compliance for the fund by overseeing all reporting and regulatory matters.
Further, the fund manager is responsible for the assignment of;
- the depositary,
- the fund administrator,
- the investment advisor (if any),
- the delegated contracts including the Anti Money Laundering (AML) and compliance of the fund.
As discussed in an earlier article, the authorization for a depositary appointment is not required when applying for the establishment of RAIFs, as the responsibility lies with the fund manager and the depositary is already authorized by CySEC. The appointed depositary must be a Credit Institution located in Cyprus. An exception to this is the closed-ended limited partnerships RAIFs which are externally managed by a UCITS Management Company or an Investment Firm – other than an AIFM – then the depositary can be based in Cyprus, in the EU or in a third country with the provision that CySEC has signed a Memorandum of Understanding and Exchange of information with the competent authorities of the third country and is subject to prudential regulation and supervision, including the minimum applicable capital requirements. Additionally, the third country must not be listed as a non-cooperative country by the FATF.
A closed-ended limited partnership RAIF can be externally managed by a UCITS management company or an Investment Firm if the RAIF invests at least 70% of its funds in illiquid assets such as real estate, ship vessels and aircraft.
The procedure to establish a RAIF
As discussed above, a RAIF is not directly supervised by CySEC but by the fund manager. Thus, the RAIF does not need to go through the application and licensing process with CySEC. The fund manager needs to set up the RAIF and then notify CySEC. In turn, the regulator logs the RAIF in the website’s appropriate registered list.
It is important to note that the RAIF can commence operations only when a notification is received for its inclusion in the register. The whole procedure for the establishment of a RAIF is usually 2 weeks and almost always less than a month’s time.
Specifics of Cyprus RAIFs
Cyprus RAIFs can be open-ended or closed-ended, while they can be structured with one of the following legal forms;
- common fund, or
- variable capital investment company, or
- fixed capital investment company, or
- limited partnership with legal personality, or
- limited partnership without legal personality.
It is worth mentioning that most of the established funds are open-ended variable capital investment company funds – known as VCIC funds.
RAIFs are not subject to any minimum capital requirements or limitations on the number of Assets Under Management (AUM). Although, a RAIF must have a minimum of EUR 500,000 AUM within the first year of establishment.
Lastly, the RAIFs can be addressed ONLY to well-informed and professional investors.
Taxation specifics for the Cyprus RAIFs
Investors who are not Cyprus tax residents will be subject to tax in their country of tax residence for any income derived from the Cyprus RAIF. Now, the Cyprus tax resident investors will be liable to the Special Defence Contribution (SDC) tax of 17% on the dividend income derived from the RAIF, unless they can claim an exemption under a non-domicile status.
RAIFs are considered as Cyprus tax residents and are subject to a 12.5% tax on profits. Dividend income is subject to ZERO tax (subject to certain conditions) and the gains from the sale or trading of financial securities are excluded from taxation.
Taxation of carried interest and performance fee on the variable remuneration (usually a share of a fund’s net profits) is subject to a flat tax rate of 8% for the employees who meet the below special conditions;
- the employee becomes tax resident in Cyprus upon the commencement of employment by:
- a self-managed AIF, or
- an AIFM, or
- a company to which the AIFM has delegated portfolio or risk management activities in relation to the AIF it manages.
- the employee has been delegated the portfolio management or risk activities of the fund and whose professional activities have an impact on the risk profile of the managed fund.
- the net asset value of the fund exceeds the initial investment of the investors.
- the minimum annual tax payable amount is EUR 10,000.
The new mode of taxation is available for a total period of ten years, in one or more employments including the start year and the year of termination of employment.
Concluding, it is evident that the 30 additional entities reporting as Investment Funds in Cyprus, a growth of over 20% year-on year is a positive sign. The upgraded Cyprus AIF law framework and the introduction of the RAIFs have further positively influenced this by reducing the time frame and costs involved to establish funds in Cyprus. The legal framework is expected to continue its enhancement in the months to come – specifically, with the introduction of the mini fund manager and the fund administration law. We will be glad to support you in finding a solution appropriate to your business plans, either through a RAIF, an investment firm or any other structure that suits your objective.
We remain at your disposal.
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.