FUND SERVICES Cyprus - Alternative Funds Handbook€¦ · financial statements based on IFRS, ... Cyprus - Alternative Funds Handbook investors to make an informed judgment of the

FUND SERVICES

Cyprus - Alternative

Funds Handbook

kpmg.com.cy

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Contents

Page

Introduction – Choosing Cyprus 1

Choosing a Cyprus Vehicle 2

Involving Professionals 4

Approval and Reporting 6

Taxation 8

Conclusion – Choosing KPMG 11

This publication intends to provide information on Cyprus alternative fund vehicles as well as a summary of the key characteristics of structuring solutions for private and venture capital.

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Introduction

Choosing Cyprus

Directives and OECD requirements. In conjunction with an extensive double taxation treaty network this gives significant possibilities for international tax planning through the island both at corporate and individual levels

• Strong economy and stable policyCyprus operates a modern, dynamic and open economy with a close working relationship between the business community and the Government

• Strategic geographical locationIn the middle of three continents namely Asia, Europe, Africa and a gateway to the Middle East

• Continuous upgrading of the infrastructure in airports, ports and telecommunications

• Rigorous anti- money laundering laws and regulations, attributing to Cyprus the status of a fully FATF compliant jurisdiction

• Competitive modern and transparent legal, financial and regulatory framework modeled to that of the UK.

The accession of Cyprus to the European Union in May 2004 and its subsequent membership to the Euro zone has considerably enhanced the island’s long standing reputation as an international business centre. Cyprus is now firmly established as a key gateway for EU inbound and outbound investments. However, it is not only the strong link of investments in and out of Europe, it is also an easy access to Russia, China, India and other emerging markets. Furthermore, Cyprus enjoys a number of additional comparative advantages as a regional and international business centre such as:

• International expertiseCyprus service providers have highly skilled, educated and multilingual teams specialized in servicing the fund industry and today offer a wide range of customized services in fund and acquisition structuring, fund administration, custody and audit services. Also professional services fees are highly competitive compared to other mature fund jurisdictions

• Advanced and attractive tax environment Cyprus offers full exemption from tax on gains from trading in securities and has one of the lowest tax rates in the EU for other trading activities while fully complying with the EU

©2011 KPMG Limited, a Cyprus limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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• Private equity fund investment objectives, i.e. a scheme acquiring controlling participations in companies of a particular sector or of a particular geographical area, which are either newly constituted or on listing route. These schemes aim in particular to achieve tax free capital gains

• Funds of funds investment objectives, i.e. schemes investing in other funds

• Master/ feeder structure investment objectives. Such a scheme invests between 85%- 100% of its assets (the feeder investment fund) in a foreign fund (the master investment fund)

• Experienced investor fund investment objectives. Experienced investor funds are those funds that are reserved to institutional, other professional investors and high net worth individuals.

Legal structure and typeThe Law provides for four different legal forms for setting- up an ICIS in Cyprus namely:• International Variable Capital Company • International Fixed Capital Company• International Investment Limited

Partnership• International Unit Trust

ICIS bearing one of these forms may be currently designated as:• Marketed solely to experienced

investors • A private ICIS: It is defined by

the CBC as a scheme which by its constitutional documentation limits the number of its unitholders/ shareholders to one hundred (100). Any invitation to the public to subscribe for any units/ shares of such a scheme is prohibited.

Legal and regulatory frameworkThe Alternative (non- UCITS funds) in Cyprus are governed by the International Collective Investment Schemes Law 47(I)/ 1999 (ICIS Law) supplemented by rules and regulations issued from time to time by the Central Bank of Cyprus (CBC), which is the competent regulatory and supervisory body. ICIS (also referred to in the text as scheme/schemes respectively) are geared for private equity and venture capital investments, demonstrate Cyprus’ commitment to attract the industry and are characterized for their flexibility and simplicity in setting them up.

Clients and investment objectivesClients who set up and operate ICIS include fund managers, investment firms and groups of high net worth individuals with a common investment goal.

The schemes may have the following investment objectives:• Real estate fund investment

objectives, i.e. a scheme with a portfolio comprising mainly of investments in securities offered by real estate- related companies but may also include direct property and other property- related interests. There is a wide variety of different types of real estate funds, from specialist funds to general commercial property funds. Most of the commercial property funds have a wide commercial property base, thus offering investors a sufficient variety of underlying assets to build a diversified portfolio of property investments especially in Central Europe, Russia and other CIS countries

Characteristics of the four different legal forms in brief:

International Variable Capital Company (IVCC). This is an investment company that is incorporated under the Cyprus Companies Law and recognized to operate as an international variable capital company (IVCC) by the ICIS Law. The share capital of an IVCC is at any time equal to its net assets. Upon a shareholder’s request, the IVCC must redeem its own shares directly or indirectly out of its assets. The redemption must take place in accordance with the provisions of the Articles of Association of the IVCC, which provide amongst others that:

- The share capital of the company shall be at any time equal to the net assets of the company

- The share capital may be divided into specified number of shares without assigning any nominal value thereto (par value)

- The actual value of the paid- up shares of the company shall be at all times equal to the value of the assets of the company after the deduction of its liabilities.

Choosing a Cyprus Vehicle Overview of available structures



International Fixed Capital Company (IFCC). This is an investment company that is incorporated under the Cyprus Companies Law and recognized to operate as an international fixed capital company (IFCC) by the ICIS Law. IFCCs which operate as private ICIS are exempt from the requirement of having a minimum capital. IFCCs are used for the set- up of closed- ended investment funds.

International Investment Limited Partnership (IILP). This is a limited partnership registered under the Cyprus Partnership and Business Names Law and which is recognized 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 scheme and is fully responsible for any debt and obligations of the scheme that may arise. The investors, i.e. the Limited Partners which can be both natural and legal persons, have their liability limited to the amount of their commitment to the scheme. The Limited Partners of the scheme are not allowed to determine the conduct

of the business of the scheme or to contract on behalf of it. All contracts, deeds, instruments, letters and documents whatsoever shall be entered into, drafted, signed and executed by the General Partner on behalf of the IILP.

International Unit Trust (IUT). Such a scheme is created under the provisions of the Cyprus International Trusts Law 69(I) 1992. It is constituted by a written instrument under seal (the “Trust Deed”) made between the investment manager of the IUT and a corporate trustee. The Trust Deed is also binding on the unitholders. The deposited property of the Unit Trust consists of the proceeds from the issue of units to investors. The property of the IUT is held by the Trustee (responsible for the safe- keeping) for the benefit of the unitholders (beneficiaries), which participate in the IUT, in proportion to the units owned by them. Cash and registrable assets must be registered in the name or to the order of the Trustee. Monies from the deposited property of the IUT shall be invested from time to time by the Trustee on behalf of the IUT in accordance with the Trust Deed and

under the direction of the investment manager. The investment manager has the executive responsibility for the scheme, in that it manages the investments, performs the valuations and determines the prices.


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Involving Professionals

Launching an ICIS in Cyprus will require the involvement of multiple players, under the supervision of the relevant regulatory authorities

Investment manager The ICIS may be managed:

(i) internally through the executive directors appointed on the Board (where the ICIS takes the form of an IVCC/IFCC) or by the General Partner (where the ICIS takes the form of an IILP). In this case, the investment manager is approved by the CBC for exclusively managing this particular scheme

(ii) externally, through a management company registered in Cyprus or in any other EU or non- EU jurisdiction, where there is adequate supervision of collective portfolio management, and is approved by them to act as investment manager of collective investment schemes such as the targeted ICIS. If the investment manager is a Cyprus entity providing collective portfolio management services, it shall have the relevant approval from the Cyprus Securities and Exchange Commission (CySEC)

The CBC requires the investment manager to satisfy the “fit and proper person test”. It will take into account the relevant educational and professional qualifications, the experience and the reputation of at least two individuals managing the business of the investment manager or the ICIS itself (if internally managed).

Custodian: The ICIS must appoint a Cyprus licensed Bank or a foreign Bank with an active branch in Cyprus as its custodian, unless the ICIS has been specifically exempt by the CBC.

The custodian shall be responsible for holding and safe- keeping the securities/ assets owned by the ICIS. There are possibilities to subcontract certain duties such as the custody of foreign securities/assets to a foreign licensed entity which shall be acting as sub- custodian.

Administrator: Schemes which do not have a physical presence in Cyprus, must appoint a company to carry out the administration work of the scheme. The said company must be based in Cyprus and be approved by the CBC. The administrator will usually provide in respect of the scheme accounting, net asset value calculation, unit/share issue, registrar, transfer and redemption services.

Auditor: The auditor, which must be a Cyprus based audit firm, needs to be approved by the CBC. The auditor’s duties include: The annual audit of the financial statements based on IFRS, the review of the activities and of the compliance of the ICIS with the relevant Cyprus laws and the carrying out of specific reporting duties towards the CBC.


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investors to make an informed judgment of the investment proposed to them.

TimingThe overall process of the authorisation will take 4-8 weeks assuming that all required documentation has been submitted.

Reporting

On-going supervision: ICIS are submitted to continuous supervision by the CBC. Regular information has to be provided to the CBC as well as any changes to the documents or the information contained in the application file.

Approval

Minimum capital requirementsThere is no minimum capital requirement for private ICIS. Investors- minimum subscriptions Private ICIS do not require a minimum subscription by investors. Investment diversification rulesICIS may not operate on the principle of risk spreading, so that concentration of investments on a single asset/issuer can be possible. An ICIS which has been designated as private is not required to apply any of the investment restrictions as set out in the regulations issued by the CBC pursuant to section 67 of the ICIS Law.

Approval process: The CBC must be provided with such information, so as to be satisfied as to the competence of the directors/promoters/investment managers as the case may be and that their probity is such as to render them suitable to act in their respective capacities. In other words they must satisfy the “fit and proper” test (relevant educational and professional qualifications, experience, reputation and capital resources).

Information and documentation requirements for supporting the application of an ICIS:• A Standard Application (SA) form

(including but not limited to the name of the scheme, statement of the general nature of the investment

Approval and Reporting

objectives of the scheme, maximum level of the main charges to be borne by the scheme etc)

• Personal Questionnaire (PQ) to be completed and signed by the natural persons acting as directors or significant shareholders in either the applying ICIS or its manager accompanied by CV, police clearance certificate, passport copy and references from previous employers and business associates during the past 10 years (at least 3 referees)

• Questionnaire for legal persons (LP) to be completed by legal persons which are significant shareholders in either the applying ICIS or in its manager (for IVCC/IFCC/IILP) or in the trustee of the applying ICIS (for IUT)

• Questionnaire (M) to be completed by the manager of the scheme

• Questionnaire (T) to be completed by the trustee (for IUT)

• Relevant documentation (Copy of the Memorandum and Articles of Association/ Partnership Agreement or Trust Deed and all material agreements)

• Private Offering Memorandum or alternatively a summary of the investment objectives (including any restrictions as well as any imposed limits on the type and amount of investments, the body determining the investment strategy and the strategic asset allocation. Furthermore investment risks should be analyzed)

• Application fee.

Documents are examined in order to ascertain that they contain all information needed by potential



Accounting requirements and financial reportsAnnual report every ICIS must prepare an audited annual report which must be sent to the CBC and the unit/shareholders within three months of the end of the financial year.

The annual report must contain as a minimum:• Audited financial statements• Information on borrowing• Portfolio information• Report by trustee (if applicable)• Report by auditors.

Semi - annual reportEvery ICIS must prepare a semi- annual report which must be sent to the CBC and the unit/shareholders within

two months from half year’s end. It 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 allocation.

Regulatory fees• Application fee USD$ 500- or the

equivalent amount in Euros for private schemes

• Annual supervisory fee equivalent to the application fee indicated above.



Taxation

Corporate Tax

Significant tax considerations:• No subscription tax on the net assets

of the fund • No corporate income tax on revenue

and capital gains tax from trading in securities

• Exemption from tax on foreign dividends

• Exemption from tax on profit from sale of securities

• No withholding tax on income repatriation by the ICIS

• Zero tax if management and control is outside Cyprus

Cyprus Tax Laws have been amended to provide further tax incentives for the set up and operation of ICIS.• Interest received by open and closed-

end collective investment schemes is considered ‘active’ interest income and taxed only at 10% corporate tax (hence, no defence tax);

• There is no minimum participation on inbound dividends to qualify for tax exemption;

• The liquidation of open and closed-end collective schemes is not taxable if the unit holders are not tax residents of Cyprus; and

• To the extent where Cypriot tax resident investors have invested in an ICIS there is a 3% defence tax on deemed dividend distribution on 70% of the collective investment scheme accounting profits within a two-year period from the tax year to which the profits relate, pro-rated to those profits attributed to the Cypriot investors

• Adding to the above, Cyprus has concluded more than 40 treaties for the avoidance of double taxation. For ICIS, Cyprus’ double tax treaty network can provide substantial attractions as ICIS can collect dividend and interest from Cypriot treaty partners at the withholding tax rates provided under the DTT. Also important for the ICIS is the fact that in most of the treaties, profit generated from the sale of securities is only subject to tax in Cyprus, and hence tax exempt.

VAT

• Fund management services offered to the alternative funds approved by the CBC are not subject to VAT.


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Conclusion

Choosing KPMG

KPMG Cyprus is the leading practice in the area of financial services. For alternative funds the firm offers a wide range of services with the ambition to provide our Clients with a ‘one stop service’ for all the investment vehicles in order to facilitate, accelerate and simplify the process of setting up such vehicles through a streamlined and coordinated process.

KPMG operate through fully integrated teams that include professionals across our Audit, Tax and Advisory practices who combine a wide range of skills and experience tailored to meet the individual requirements of our clients.

Our Services to the ICIS and /or fund Manager include:

Regulatory, compliance and Advisory services• Fund set up and structuring• Fund listing and re-domiciliation• Regulatory and compliance• Transactions and restructuring• Internal Audit, Risk and Compliance• IT Advisory.

Audit and regulatory reporting services• Audit of the statutory annual financial

statements based on International Financial Reporting Standards

• Review half yearly reports as required by the CBC.

Tax Services• Tax Compliance• Tax structuring advice and

optimisation.

Other services providers We can also assist you in introducing, evaluating and selecting other service providers required for your fund for the provision of the following services:

• Shareholder/Investor services• Fund accounting and valuation• Depositary banks• Paying Agents• Office, Director and secretary

services• Prime Brokers• Registrars / Transfer agents• Investment management and

advisory solutions• Capital raising solutions.

More information on the KPMG services may be found in our Fund Services publication.


Main Contacts

REGULATORY & COMPLIANCE

Angelos GregoriadesBoard MemberHead of Tax and Corporate Services T: +357 22 209 245E: [email protected]

Marie-helene AngelidesAssociate, Legal AdvisorT: + 357 22 209 227E: [email protected]

Christiana LoizouAssociate, Legal AdvisorT: + 357 22 209 235E: [email protected]

TAX

George MarkidesBoard MemberT:+357 22 209 297E: [email protected]

Sylvia LoizidesBoard MemberT: +357 25 869 138E: [email protected]

Michael HaliosBoard MemberT: +357 24 200 222E: [email protected]

Tassos YiasemidesSenior ManagerT: +357 22 209 156 E: [email protected]

AUDIT

Christos VasiliouBoard MemberService line leaderT: +357 22 209 113E: [email protected]

George SavvaBoard MemberT: +357 24 200 205E: [email protected]

Costas KaliasBoard MemberT: +357 22 209 133E: [email protected]

ADVISORY

Iacovos GhalanosBoard MemberT: +357 22 209 029E: [email protected]

George TziortzisBoard MemberT: +357 22 209 292E: [email protected]

Marios LazarouBoard MemberT: +357 22 209 107E: [email protected]

SECTORS AND THEMES

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kpmg.com

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©2011 KPMG Limited, a Cyprus limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Cyprus.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International Cooperative (“KPMG International”) or KPMG member firms.

KPMG in Cyprus contact details:

NicosiaT: +357 22 209 000F: +357 22 678 200E: [email protected]

LimassolT: +357 25 869 000F: +357 25 363 842E: [email protected]

LarnacaT: +357 24 200 000F: +357 24 200 200E: [email protected]

ParalimniT: +357 23 820 080F: +357 23 820 084E: [email protected]

PaphosT: +357 26 943 050F: +357 26 943 062E: [email protected]

Polis ChrysochousT: +357 26 322 098F: +357 26 322 722E: [email protected]

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