An Alternative Investment Fund (AIF) is actually a holding company with an undeniable tax residency in Cyprus, effectively regulated by the EU directives. Foreign owners of the AIF enjoy the favorable tax regime of Cyprus, while being reliably protected from any foreign government challenging the residence of the fund. Cyprus is one of the leading centers for the investment funds in the European Union due to its constant efforts to update the legislation and other regulations.
2. Why investors select Cyprus:
- Cyprus is a member of the European Union and Euro zone governed by common (adapted) legislation.
- Favorable tax regime approved by the EU and OECD.
- Availability of the agreements on the avoidance of double taxation with 66 countries, which makes it possible to effectively structure the investments in terms of taxation.
- Cyprus is one of the globally recognized business centers with highly qualified specialists and developed infrastructure.
- Costs of starting and running a business are lower than in most developed EU countries.
- Effective and modern business regulations, fully harmonized with the relevant EU directives.
- Cyprus funds and asset managers benefit from a low tax burden levied on Cyprus corporations.
- Incentives and tax advantages for the high-paid managers and high net worth individuals.
3. Key features and advantages of Cyprus investment funds:
- Any asset can be included in the investment strategy of the AIF, including shares of various foreign companies, regardless of their tax base.
- Cyprus AIFs offer the legitimacy that is difficult to challenge for foreign authorities since the funds are regulated by the EU.
- The corporate tax rate is 12.5%.
- New capital is tax free (NID).
- Establishing and maintaining an AIF in Cyprus is simpler and more cost effective compared to other jurisdictions, like Luxembourg, Ireland and Malta.
- A fund creates simplified inheritance procedures with the least legal obstacles.
4. Structure and activity of a fund:
- Funds can be set up as umbrella structures with multiple investment branches, allowing them to manage different pools of assets through separate investment policies.
- Funds can be close-end or open-end.
- Various statutory reports based on the financial statements (e.g., NAV) should be prepared and submitted to the regulatory body on an ongoing basis.
- The custodian provides monitoring of the cash flows, proof of the ownership, controls investment rectifications, etc.
- The custodian is responsible for the control of the tangible property and assets.
- Annual financial statements are audited by the external auditors.
- The fund manager is responsible for the ongoing monitoring of the business processes and financial products, including due diligence.
- The Board of Directors of the fund provides the oversight of all its activities.
5. Taxation of funds:
- 0% of the capital gains from the profitable sale of the securities (e.g., stocks, bonds, etc.).
- Notional Interest Deduction (NID) for new capital can reduce the tax base for the profit tax by 80% (for the fund created by the type of the company), reducing the effective corporate tax rate to 2.5%.
- No tax on the dividends received, capital gains from the sale of the property abroad, capital gains from the sale of the shares of foreign real estate companies.
- No registration fee for the circulation of the securities on the net assets of the fund.
- Each part of the AIF, although not legally treated as a separate entity, is treated as a separate entity for the tax purposes (i.e. a separate tax payer).
6. Tax incentives for the investors:
- no tax on the dividends;
- no tax on the redemption of the units;
- there are no specific restrictions on the distribution of the assets.
7. RAIF (registered alternative investment fund)
- RAIFs do not require authorization with the Cyprus Securities and Exchange Commission (CySEC), but are registered with the RAIF registry maintained by CySEC.
- RAIFs are indirectly controlled and regulated by CySEC through an external RAIF manager.
- RAIFs act only as externally controlled AIFs.
- RAIFs are intended for the professional and/or well-informed investors only.
- RAIFs can be of any legal form, like AIFs.
- Designation of a custodian for holding RAIF assets is required for all RAIF types.
8. Key advantages of RAIF
- Economical and easy to create, manage and organize activities.
- Can be commissioned in just one month.
- CySEC approval is not required, indirectly regulated through its AIFM.
- No minimum capital requirements.
- No investment restrictions.
- Unlimited number of investments.
- RAIF shares can be bought and sold on the exchange.
- Increased flexibility through the inclusion of a range of asset classes in the RAIF investment strategy.