Cyprus – Establishing an alternative investment fund

Time to read: 9 min

Cyprus is emerging as a new investment fund centre in Europe following the efforts for evolving and upgrading the regulatory and compliance framework which was initiated in the late 1990s. The enactment of the Alternative Investment Funds Law, No. 131(I)/2014 (AIF Law) is the latest development which aimed at the creation of an attractive and competitive environment for further enhancement and development of the alternative funds industry in Cyprus. The AIF Law replaced the previous regime under which Cyprus managed to develop into a regional domicile for investment funds and their managers.

The following possibilities for alternative investment funds (AIFs) were introduced by the AIF Law:

  • Umbrella funds with multiple investment compartments/sub-funds which may adopt different investment policies and manage different pools of assets
  • Transferability of shares
  • Public offerings of AIF’s shares or units
  • Listing of securities issued by AIFs

AIFs may be open-ended or closed-ended and may take one of the following legal forms:

  • Fixed Capital Company
  • Variable Capital Company
  • Limited Partnership
  • Common Fund (contractual)

The relevant rules applicable to the respective legal form are based on Anglo-Saxon common law principles which are incorporated in Cyprus law (company law, partnerships law and contract law etc.).

AIFs may have a limited or unlimited duration.

Investor Classification

AIFs may be established either to be marketed to retail investors or to professional and/or well informed investors (see below for the exception applicable to AIFs with limited number of persons). Investor classification is to be made on the following basis:

  • Professional Investor: For an investor to be considered as professional investor the requirements for professional clients under Markets in Financial Instruments Directive 2004/39/EC (MIFID) must be satisfied. A basic characteristic of professional investors is the fact that they possess the experience, knowledge and expertise to make their own investment decisions and to properly assess the risks they incur.
  • Well-Informed Investor: A well-informed investor is not a professional investor within the above meaning but one who:
    • confirms in writing the well-informed investor status and awareness of the risks related with the proposed investment; and
    • makes an investment of at least €125.000 or has been assessed as having the expertise, experience and knowledge in evaluating the suitability of the investment opportunity in the AIF by a credit institution, investment firm or a management company for Undertakings for the collective Investment in Transferable Securities (UCITS Management Company)
  • Retail Investor: A retail investor is an investor who does not fulfil the above requirements so as to be classified as a professional or well-informed investor.

Types of AIFs

The AIF Law allows for the establishment of AIFs to be addressed to an unlimited number of investors as well as for funds addressed to a limited number of persons (maximum 75) who may only be professional and/or well-informed investors.

AIFs to be addressed to an unlimited number of investors must to comply with minimum initial capital requirements i.e. €125.000 if externally managed and €300.000 if self-managed.

AIFs may be subject to investment restrictions depending on the investor type, the category of the assets to be held in their portfolio and the overall investment policy to be adopted. On the other hand, AIFs with limited number of investors are subject to a lighter legal and regulatory framework and are not subject to investment restrictions or investment limits.

Management of AIFs

AIFs may be managed externally by a manager appointed to perform the management of the portfolio of assets and related services. Different entities may undertake this role depending on the type of AIF:

  • For AIFs with unlimited number of investors the external manager may be:
    • An Alternative Investment Fund Manager (AIFM) established under local law or under the Alternative Investment Fund Managers Directive
    • A UCITS Management Company established under local law or under the Undertakings for the collective Investment in Transferable Securities Directive
    • A MIFID Investment Firm established under local law
    • An AIFM established in a third country but complying with the relevant provisions of the local legislation
  • For AIFs with limited number of investors the external manager may be:
    • A MIFID Investment Firm established under local law or the MIFID
    • A UCITs Management Company established under local law
    • An entity established under local law solely for the purpose of managing a specific AIF with limited number of investors
    • An entity established in a third country and licensed to provide asset management services and subject to prudential supervision

In the case of AIFs which are companies, the AIF Law provides the option of self-management whereby the management of the portfolio of assets is performed by the board of directors subject to certain restrictions (cap on value of the assets under management, restrictions on leverage, lock-up periods).


The depositary of an AIF may be a credit institution or a MIFID Investment Firm or other entity which is subject to prudential regulation and ongoing supervision and which is eligible to act as depositary under its home state legislation.

 The depositary must have its registered office in Cyprus or in another member state of the European Union or in a third country, provided that the Cyprus Securities Exchange Commission has signed with the competent authorities of the third country a Memorandum of Understanding for Cooperation and Exchange of Information.

Under certain circumstances it is possible for small AIFs with limited number of persons not to appoint a depositary.

Utilisation of the AIFs

AIFs may be utilised for investments in a wide range of asset classes. Such funds have been established for investments in debt and equity securities as well as real estate and private equity. In a structure with multiple investment compartments/sub-funds, different compartments/sub-funds may invest in diverse asset classes.

Key benefits

  • Cost-efficient and simple set-up process with fees being significantly lower than in the more mature fund centres e.g. Ireland and Luxembourg
  • A single and accessible regulator for the alternative funds and their managers
  • Flexibility as to the asset classes that may be included in the AIF portfolio
  • Transparency, reporting and risk management aiming at investor protection
  • Regulated environment in line with the European Union regulatory framework for Alternative Investment Fund Managers, MIFID Investment Firms and UCITSs
  • Passporting of the marketing of funds in the European Union where the manager is an AIFM
  • Redomiciliation in and out of Cyprus is possible


Cyprus’ growth in this sector has been driven by the country’s tax treaty network, originally rendering it a jurisdiction for launching investments funds with investments primarily into Russia, the former Soviet republics and Eastern Europe but recently also in Asian countries.

Main aspects of tax treatment in Cyprus:

  • Subject to 12.5% flat corporation tax
  • Exemption from tax on dividends received by the AIF
  • Exemption from tax on profits from sale of securities or other instruments (except where the securities are in companies owning immovable property in Cyprus)
  • No subscription tax on assets of funds
  • Exemption on capital gains tax from the sale of immovable property located outside Cyprus
  • No capital gains tax on disposal of shares/units by the holders
  • Benefiting from an extensive network of more than 50 double tax treaties offering interesting tax planning opportunities

In a rapidly changing funds industry, the options and opportunities available for the setting up and operation of alternative investment funds under the Cyprus regulatory regime are worth exploring by fund managers, investors and their advisors.

Christi Kythreotou
  • Corporate
  • Tax
  • Private Equity

Contact Christi Kythreotou

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