OPEN-ENDED UNDERTAKINGS FOR COLLECTIVE INVESTMENT IN TRANSFERABLE SECURITIES (“UCITS”)

1.1 UCITS

The UCITS law 200(1)/2004 (“the Law”) which implements the EU directives provides the legal framework for the registration, regulation and marketing of local and foreign funds in Cyprus.

Under the law UCITS is considered to be an undertaking, the sole object of which is to invest publicly collected capital in transferable securities and money market instruments via stock markets, banking deposits and any other investments and whose operation is based on the principle of risk-spreading and whose units can be redeemed directly or indirectly upon the unit holder’s request using the undertaking’s assets.

1.2 The following are not considered UCITS under the Law:

(a) UCITS which are closed-ended;
(b) UCITS which are in conflict with the investment and borrowing policy set out in the Law;
(c) UCITS which pursuant to the fund rules or Memorandum and Articles can only sell their units to the public of third countries;
(d) UCITS which raise capital without promoting their units to the public of Cyprus or other EU member states;
(e) Investment Companies, the assets of which are invested through subsidiary companies otherwise than in transferable securities.
Two classes of funds comply with the definition of UCITS as set out in the EU Directive.

The “Mutual Funds” which invest in transferable securities and which are similar to Unit Trusts and are managed by a Management Company, while the fund itself, has no legal personality.

The other type is a “Variable Capital Company”, which again invests in transferable securities. This is a limited liability company and it’s issued share capital shall be variable, and equal to the value of the assets of the company after deduction of its liabilities.

The regulation and supervision of Cypriot UCITS, and the Authority issuing permits for distributing Agents for Foreign UCITS and NON-UCITS, is the Cyprus Securities and Exchange Commission (CySEC).

 

1.3 Procedure of establishment and operation of Mutual Funds in Cyprus.

In order to set up and operate a mutual fund in Cyprus permission shall be obtained from CySec. The submission of the application to CySec is made by the management Company which will manage the assets of the mutual fund. The application shall meet the following requirements:

• The fund manager shall be a CySec licenced institution which has sufficient own reserves, sufficient and appropriately experienced and trained personnel and the required technical and constitutional infrastructure to manage the assets of the mutual fund.

• The Custodian must be a bank or a Company based in Cyprus and approved by CySec. The Custodian shall ensure that all activities including buying, selling, settlement and valuation of units are effected in accordance with the requirements set out in the Law, the relevant regulations and the rules of the fund. The Custodian may subcontract certain duties such as the custody of foreign securities to a foreign licenced Custodian.

• The fund rules shall be approved by CySec and shall include inter alia the name of the fund, the fund manager and Custodian, the economic and investment targets of the fund and its investment and borrowing policy, the types of permitted transferable securities, the management fees payable by Unit-holders on purchase or redemption of Units, costs paid by the fund to the Manager of the fund and the Custodian and the permitted expenses that can be deducted from the assets of the fund.

• The name of the Fund and its information memorandum shall be approved by CySec;

• The minimum capital of the fund shall be EURO 1.710.000 (equal to CYP£1.000.000) which must be deposited within three months from the date of obtaining the permit and/or licence of the fund from CySec.

1.4 Procedure for establishment and operation of a Variable Capital Company in Cyprus.

In order to set up and operate a Variable Capital Company in Cyprus a licence shall be obtained from CySec. The application shall meet the following requirements:

• All the requirements stated above for obtaining a licence for a mutual fund and in addition:

• The constitutional documents of the Variable Capital Company (Memorandum and Articles of Association) shall state that the Company is a variable capital investment Company, the investment and economic targets, the investment and borrowing policy of the Company, as well as the types of variable securities, banking deposits and other investments in which the Company may invest its capital.

• The custody of the assets of the Company is assigned to an approved custodian but in certain occasions stated in the Law, CySec may give permission to the Company not to appoint a Custodian.

• The management of the assets of the Company is assigned to a Manager who is duly licenced by CySec although in certain occasions stated in the Law, CySec may give permission to the Company not to appoint a Manager.

 
INTERNATIONAL COLLECTIVE SCHEMES (“ICIS”)
2.1 ICIS

2.1.1 The International Collective Schemes Law (No. 47(1) of 1999) and the rules and regulations made thereunder provide the legal framework for the registration, regulation of the operations and the supervision of ICTS’s.

An ICIS can take the following legal forms:

• International fixed capital Company.
• International Variable capital Company;
• International unit trust scheme; and
• International investment limited partnership.

2.2 Procedure for establishment of an ICIS in Cyprus

ICIS must be approved by the Central Bank of Cyprus which is the regulatory and supervisory authority for the schemes, for their managers and their trustees.
The written application to be submitted to the Central Bank of Cyprus shall be lodged as follows:

• In the case of an International Fixed Capital Company and an International Variable Company the written application must be submitted by or on behalf of the Company.

• In the case of an International Unit Trust Scheme the written application must be submitted by the trustee of the trust.

• In the case of an International Investment Limited Partnership the written application must be submitted by or on behalf of the limited partnership.

2.3 In order, the application to be successful, the following requirements shall be met:

• 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 shall meet the requirements of the applicable laws and the regulations of the Central Bank of Cyprus;

• The trustee shall meet the requirements of the applicable laws and the regulations of the Central Bank of Cyprus;

• The general Partner meets the requirements of a Manager.

 

• The name of the scheme shall be approved.

• The constitutional documentation and the offering memorandum of the scheme contain the information prescribed by the Central Bank of Cyprus and that they are in a form acceptable to the Central Bank of Cyprus; and

• To submit any other documentation and information as requested by the Central Bank of Cyprus.

2.4 Following the approval of the Scheme the Central Bank of Cyprus will designate it as:

• A scheme to be marketed to the general public; or

• A scheme to be marketed to experienced investors; or

• A private international collective investment scheme.

2.5 International Fixed Capital Company (IFCC)

The initial minimum capital requirement (issued and fully paid-up) for an IFCC which will be marketed to the public at large or to experienced investors has been set up at USD 200.000.

IFCC’s which are private ICIS are exempt from the requirement of having a minimum capital.

An IFCC must appoint a manager and a trustee and the procedures for appointing same shall be set out in the Company’s constitutional documents. The directors shall be competent and suitable.

The manager and trustee of ICIS must act independently of one another and must be approved by the Central Bank of Cyprus. A manager must satisfy the Central Bank of Cyprus that having regard to the investment policy and the particular investment objectives of the ICIS for which it acts as manager, must have sufficient financial and operational resources at its disposal to meet its liabilities as well as sufficient expertise to conduct its business effectively.

A trustee can be either:

(a) a bank licenced to carry on business in or from within Cyprus or in a country which in the opinion of the Central Bank exercises adequate banking supervision in its jurisdiction and which has such minimum paid-up share capital as the Central Bank may from time to time prescribed; or

(b) any other person other than a bank referred to above but which meets the requirements set out in clause (a) above, or

(c) a Company incorporated in the Republic which is a subsidiary of a person referred to in clauses (a) and (b) above provided that its liabilities are fully guaranteed by that person.

2.6 International Variable Capital Company (“IVCC”)

The provisions referred to above for IFCC in general apply to the IVCC, however the minimum share capital of the Company must be equal to the net asset value of the shares of the Company at any time in issuance.

2.7 International Unit Trust Scheme (“IUTS”)

The provisions applicable to IFCC and IVCC in general apply also to IUTS. The assets of IUTS are vested in and entrusted to a trustee to be held in accordance with the trusts created under the trust deed and are dealt with by the Manager in accordance with and subject to the trusts contained in the trust deed.

The proceeds of sale of any units of the IUTS which are not distributed to the unit-holders, are assets of IUTS and are subject to and dealt with by the manager in accordance with the trusts created under the trust deed.
 

2.8 International Investment Limited Partnership (“IILP”)

The provisions applicable for IFCC and IVCC in general apply to IILP, taking into consideration however the partnership and the Business Names Law instead of the Company Law. In addition, instead of a Manager, the IILP has a general partner who shall satisfy the same requirements as the manager appointed for IFCC and IVCC. The Limited partner does not have any participation in the management of the IILP and his liability for the debts of the IILP is limited as per the relevant provisions of the Partnership Agreement creating the IILP and the Partnership and Business Names Law of Cyprus.

2.9 ICIS Marketed to the General Public

ICIS’s marketed to the general public do not need to have a minimum subscription. However IFCC’s and IVCC’s have a minimum share capital requirements.

The offering memorandum to be addressed to the public must be approved by the Central Bank of Cyprus.

2.10  ICIS Marketed to Experienced Investors

The minimum subscription by investors in ICIS’s which are solely marketed to experienced investors has been set by the Central Bank of Cyprus to USD 50.000.

A legal or natural person may be regarded as an experienced investor in the following circumstances:

(a) The person who provides financial services to the public; or

(b) A person who frequently enters into investment transactions which, on average, are of substantial size and having regard to the relevant circumstances, such a person can reasonably be expected to appreciate the risks, inherent in investment transactions.

2.11  Private ICIS

A private ICIS means a scheme which by its constitutional documentation restricts the right to transfer its units and limits the number of its unit-holders to one hundred. A private ICIS is prohibited from making any invitation in any part of the world to the public the purchase units in the scheme.

The Central Bank of Cyprus regards a private ICIS as a private arrangement and therefore it exercises less regulation and supervision over private ICIS. The private ICIS is not obliged to appoint a Manager or a trustee neither to have a minimum subscription.

3.  Managers, trustees and custodians for ICIS

All International Collective Investment Schemes (ICIS) must have a manager which company may either be incorporated in Cyprus and regulated by CySEC as a financial services firm, or in an overseas jurisdiction where there is adequate supervision of financial services firms. If the Manager is not based in Cyprus, the ICIS is required to appoint an administrator in Cyprus.

In case of a Unit Trust Scheme, besides a Manager, there is also a need for a Trustee.

4.  Managers and custodians for UCITS

UCITS regulated by CySEC must have a Managing Company registered in Cyprus, with a minimum initial share capital of £450,000 Cyprus Pounds. The capital requirements shall be in accordance with the Markets in Financial Instruments Directive (MiFID) requirements and the capital requirements Directive. The CySEC is the authority which issues permits for the management companies as long as the latter has appropriate shareholders, organisation, personnel, technical infrastructure and know-how, and of course the financial capability to fulfil its obligations. The business of the management company shall be managed by at least two persons who fulfil the requirements of Law 200(I)/2004.

It is also necessary for each UCITS to have an appointed Custodian, responsible for keeping the assets of the fund. CySEC requires that the Custodian must have mechanisms which aim as a minimum to protect the property of the mutual fund under its custody and prohibit use for own account or for the benefit of third parties of the property of the mutual fund under its custody. The Custodian has to be either a Cypriot Bank or a Foreign Bank with an active Branch in Cyprus.

The Managing Company and the Custodian must at all times act independently of each other.

5.  Investment restrictions for UCITS.

UCITS have to comply with the following investment restrictions:

• No more than 10% of the assets may be invested in securities which are not traded in or dealt in (or are expected to be listed within one year) on a market approved by the Cyprus Securities and Exchange Commission either an EU member state or a third country.

• No more than 10% of the assets of a UCITS may be invested in a single issuer provided that the total value of the securities in which it invests more than 5% does not exceed 40% of the value of its assets.

• The above 10% limit may be raised to a maximum of 35% if the securities are issued or guaranteed by a (central or local ) government (of any country) or any public international body accepted by the CySEC from time to time and such securities are not taken into account in applying the 40% limit referred to above.

• The above 10% limit may be raised to a maximum of 25% where the UCITS is investing in securities in the form of bonds issued by a credit institution, which is established in a country which in the opinion of CySEC, provides adequate regulatory and supervisory procedures designed to protect bond holders. If the UCITS invests more than 5% of its assets in these particular bonds issued by one issuer, then the total value of these investments must not exceed 80% of the value of these assets of the UCITS.

• CySEC may authorise UCITS to invest 100% in securities issued or guaranteed by the government or a local authority of a country or by a public international body accepted by CySEC from time to time provided securities are held in at least six different issues and any one issue does not exceed 30% of its total assets and UCITS shall specify in its constitutional documentation and/or its offering memorandum the names of the issuers in whose securities it intends to invest more than 35% of its assets.

• UCITS should notify CySEC and should receive authorisation from CYSEC if it intends to invest in another UCITS or an equivalent scheme set up in another jurisdiction, managed by the same manager or a company linked to the manager by common management or control or a direct or indirect shareholding.

• CySEC may authorize a UCITS to employ techniques for the purposes of efficient portfolio management and providing protection against exchange risks.

• A UCITS may not acquire either precious metals or certificates representing them.

6.  Borrowing restrictions for UCITS.

UCITS in the form of Mutual Funds, and Variable Capital Companies together with their managing companies and custodians acting on behalf of them cannot borrow.

Exceptions

• UCITS and their Managing Companies may borrow through back-to-back loans in foreign currency subject to conditions determined by a Directive of CySEC and provided further than back to back loans are those contracted in foreign currency for the acquisition of UCITS’s securities of foreign issuers, be depositing to the borrower or to another person indicated by the borrower, of an amount in local currency at least equal to the amount of the loan.

• UCITS or the management company acting on behalf of a UCITS can make temporary loans up to 10% of the fund’s net asset value for a maximum period of 3 moths only for the satisfaction of applications for redemption of units, when the sale of securities is considered disadvantageous.

• Managing Companies can borrow up to 15% of their asset value for the purpose of purchasing real property which is essential for the direct pursuit of its activities.

• A UCITS can borrow an amount up to 10% of its asset value for the purchase of real property which is essential for the direct pursuit of its activities.

• There is a restriction that a loan for the redemption of shares and a loan for the purchase of real property together cannot exceed 15% of the value of the Fund’s assets.

7.  Accounts

Accounts are prepared annually and semi-actually, submitted to CySEC and provided to unit holders within 2 months from the end of each period and to any other interested parties free of charge on request. The timestrial summarized statements are submitted to the CySEC and are published in at least two daily newspapers with wide circulation and are provided to unit-holders free of charge.

8.  Prospectus

All Schemes offered to the public must publish a prospectus(Offering Memorandum) and any publicity material must refer to the fact that a prospectus exists and indicate where it can be obtained. The prospectus and any amendments thereto, are subject to prior approval by the CySEC.

9.  Fund ownership

There are no restrictions on the percentage of units which one person or a group of persons may hold in a UCITS.

10.  Supervision of ICIS

The supervisory authority in Cyprus for International Collective Investment Schemes is Central Bank of Cyprus.

11. Supervision of UCITS

The supervisory authority in Cyprus for UCITS and non-UCITS is Cyprus Securities and Exchange Commission.

12.  Accounting of ICIS and UCITS

12. Requirement to produce financial statements

12.1 Requirement to maintain the books and records in the local jurisdiction

12.1.1 International Collective Investment Schemes (ICIS)

All books and records of the schemes as specified from time to time by the Central Bank of Cyprus (“the Bank”) must be maintained in the local jurisdiction.

The Bank, in exercising the powers conferred on it by section 67 of the ICIS Law (No. 47(I) of 1999) (“the Law”), has issued regulations which were cited as “Regulations on books, records and other documents to be kept by the manager of the schemes and/or its trustee” and “Regulations on annual and half yearly reports”.

12.1.2 Undertakings for Collective Investment in Transferable Securities (UCITS). All books and records must be maintained in the local jurisdiction.

12.2 Production of financial statements

12.2.2 ICIS

Every scheme shall be required to produce annual and half-yearly reports. For corporate vehicles, the directors are responsible for the preparation of the financial statements and the directors are required to sign the balance sheet of the annual financial statements.

For unit trusts, the “trustee” takes the responsibility for the preparation of the statements. The directors of the trustee should sign the balance sheet.

The “general partner” in the case of an Investment Limited Partnership undertakes the responsibility. If the general partner is not a corporate body, but is a partnership, the names of the partners and their liability status should be given.

12.2.3 UCITS

UCITS are required to produce annual and half yearly financial statements.

12.3 Choice of period/year

12.3.1 For ICIS the regular year-end is 31 December, however, an ICIS can choose its own year-end.

The first financial report of an ICIS must be for a period not exceeding 18 months from the date of first issue of units. An interim report must be produced for the first 6 months of operation and thereafter half yearly.

 

 

12.3.2 UCITS

The financial year of a UCITS has the duration of a calendar year. The first financial year ends on the 31st December of the calendar year in which the UCITS started their operations.

12.4 Requirement for comparatives

Comparative figures for the previous financial period are required.

12.5 Restrictions on the currency under which financial statements must be prepared.

There is no restriction on the currency under which financial statements must be prepared. Consideration should be taken of the provision of IFRSs’ regarding functional and presentation currencies.

Accounting publications specific to the funds industry (as issued by accounting bodies or the regulators).

12.6 Use of short form accounts

There are no provisions in the legislation for short form accounts.

12.7 Umbrella schemes

For corporate entities, financial statements must be prepared for the company as a whole. Information on each sub fund should be included within the company’s accounts. There is no requirement to produce separate financial statements for each sub fund.

For unit trust umbrella funds, there is also no requirement to produce separate financial statements for each sub fund.

12.8 Classes of shares

Financial statements are required which incorporate all classes of shares.

There is no requirement to produce financial statements for each class of shares.

 

12.9 Requirement to audit financial statements

12.9.1 ICIS

Every scheme has the obligation to appoint an auditor. An auditor means a person qualified to be appointed as an auditor under the Cyprus Companies Law Cap. 113 and approved by the Bank under the Law. The annual financial statements shall be audited. There is no requirement to audit the interim financial statements.

The annual financial statements shall be audited by auditors in accordance with International Standards on Auditing).

Additionally, the scheme’s auditor must undertake to report to the Bank annually on whether the scheme has complied with its obligations under the Law on any administrative act issued under the Law.

12.9.2 UCITS

The Annual reports are audited according to international standard on auditing:

12.10 Publication of financial statements

12.10.1 ICIS

Every scheme shall be required to make available their annual and half-yearly reports within three months of the end of the financial year in the case of the annual report, and within two months of the end of the half-year in the case of the half yearly report. These reports must be sent to the Bank and the unitholders within the periods specified above.

12.10.2 UCITS

The annual and semi annual reports must be submitted to the Cyprus Securities and Exchange Commission (“Commission”) and placed at the disposal of the unit-holders within two months from the end of the period to which they refer.

12.11 Accounting standards

Financial statements (both annual and half yearly) in relation to both UCITS and ICIS shall be prepared in accordance with International Financial Reporting Standards.

 

13.  Taxation of Funds

The income of funds if not residents of Cyprus are completely exempt from any taxation. Resident funds are exempt from taxation on income from trading in stocks and shares and from dividends receivable from local companies. Dividends receivable from abroad are only exempt provided that the holding is more than 1% and at least one of the following two conditions is satisfied.

• The Fund/Company making the distribution/paying the dividend must not engage more than fifty percent in activities which lead to passive income (non-trading income; income from trading in shares is considered as non-investment income i.e. non-passive but active income) OR,

• The foreign tax burden on the income of the fund/company making the distribution/paying the dividend is not substantially lower than the tax burden in Cyprus. (A tax rate of five percent (5%) or more in the country making the distribution/paying the dividend satisfies this condition).

13.1 Taxation of resident unit-holders/investors in a resident fund

The resident funds available in Cyprus are only close-end investment companies. Resident individual shareholders in a close-end investment company are only taxed on distributions at the rate of 15%.

13.2 Taxation of resident unit-holders/investors in a non-resident fund

Cyprus residents may hold an investment in an offshore fund. The taxation of income received by resident untiholders investors in a non-resident fund will depend on whether the offshore Fund is a legal entity at the place of incorporation. If the Fund is a legal entity the payment shall be treated as a dividend and such a dividend received by a resident unitholder will be subject to 15% defence tax. If the resident unitholder is a company the Cyprus Company shall not be subject to tax if the following two conditions are met:

A. The company receiving the dividend must hold directly at least one percent (1%) of the share capital of the company abroad paying the dividend, and

B. The company paying the dividend,

(1) must not engage more than fifty percent in activities which lead to passive income (non-trading income) OR,

(2) The foreign tax burden on the income of the company paying the dividend is not substantially lower than the tax burden in Cyprus. (A tax rate of five percent (5%) or more in the country paying the dividend satisfies this condition).

If the offshore fund cannot be considered as a legal entity any payments will be considered as distribution of profits of a foreign Permanent Establishment and as such will be exempted from tax if any of the following conditions is satisfied:

• The Fund/Company making the distribution/paying the dividend must not engage more than fifty percent in activities which lead to passive income (non-trading income; income from trading in shares is considered as non-investment income i.e. non-passive but active income) OR,
• The foreign tax burden on the income of the fund/company making the distribution/paying the dividend is not substantially lower than the tax burden in Cyprus. (A tax rate of five percent (5%) or more in the country making the distribution/paying the dividend satisfies this condition).

In the even where the above conditions are not satisfied, distributions are taxed at the rate of 15% subject to foreign credit relief.

(No capital gains tax arises either at entity level from the sale of securities or in the hands of unitholders upon liquidation of their units in the fund, unless Cyprus immovable property, is concerned. For any intents and purposes investment income from real estate is deemed to be active.

13.3 Taxation of non-resident unitholders/investors in a resident fund

Non-resident unit holders/investors in a Cypriot resident fund are exempt from taxation (both withholding and income tax) on income received of their investment.

13.4 Taxation of fund management/custodian companies

The income of managers and trustees, if not Cypriot residents, is tax-exempt, whereas the income of managers and trustees if Cypriot residents is taxed at the rate of 10%.

There is no withholding tax on dividends payable to non-resident shareholders or resident companies.

Employees working and residing in Cyprus are subject to the local personal tax rate at the maximum rate of 30% and they have the right to contribute to the social security system of Cyprus.

Furthermore the following exemptions are available:

• The 20% of the emoluments from any employment, which is exercised in Cyprus by an individual who was not resident of Cyprus before taking up employment in Cyprus or CY5.000 whichever is the lowest. This exemption applies for a period of three years commencing from the 1st January of the year following the year of commencement of such employment, and

• Remuneration from rendering of salaried services to a permanent establishment outside Cyprus for an aggregate period of more than 90 days in the year of assessment.

13.5  Entitlement to income

Under Cyprus domestic law a unit holder in a scheme is regarded as in receipt of income on the occasion of the fund making a distribution of income to the unit holders.

13.6  Double tax agreements

1. Collective investment schemes managed and control in Cyprus are entitled to double tax treaty benefits.

13.7  Transfer taxes, stamp duty, capital duty

No transfer tax or capital duty is payable on the purchase, issuance or sale of shares or securities by a Cyprus Fund.

 

[For further information on this topic please contact Mr. Soteris Pittas at SOTERIS PITTAS & CO LLC by telephone (+ 357 25 028460) or by fax (+ 357 25 028461) or by e-mail (spittas@pittaslegal.com)].