Cyprus – Joint Ventures in practice

30 January 2018

  • Cyprus
  • Corporate
  • Tax

Like in other jurisdictions, in Cyprus the term ‘joint venture’ connotes business arrangements that involve the pooling of resources, knowledge and experiences of the participants for the purposes of accomplishing or implementing a specific task, whether this is a particular project or business activity. There is no specific statute governing joint ventures yet in practice such arrangements take one of the following structures.

  1. Corporate Joint Venture

The cooperation materialises through the setting up of a legal entity separate from its participants with constitutional documents governing its operation and the relations between the participants and the entity in addition to the statutory provisions of the Cyprus Company Law, Cap 113. A shareholders’ agreement is typically executed operating in parallel. It is possible that further agreements such as licences for use of intellectual property etc. will be signed. This vehicle might be more appropriate where it is expected that the joint venture will need to enter into contractual arrangements with third parties due to the limited liability benefits. The termination is usually addressed in a shareholders’ agreement which specifies events of termination e.g. change of control, insolvency of a participant, attainment of objective etc. as well as the relevant processes e.g. sale of shares among participants, liquidation etc.

Taxation of income occurs at the level of the company. Participants are not taxed on dividends in Cyprus if they are not tax residents or if they are companies. If the company is to be taxed in Cyprus, the management and control will need to be exercised in Cyprus. Any assets, including intellectual property created by the company, become property of the new entity. The setting up of the company might be subject to notification to the competent competition authority under merger control rules. Corporate joint ventures are commonly used by international clients aiming to benefit from the network of double tax treaties maintained by Cyprus. They are also a vehicle often employed to enter the Cyprus market with the assistance of a local participant.

Advantages:

  • Limited liability; liability of participants limited to capital.
  • Participants control the company through the power of appointment of the board of directors.
  • The company is governed by the Cyprus Companies Law, Cap. 113, a statute based on English company law rules, which gives more legal certainty and familiarity for participants as well as the counterparties. The relationship is not purely contractual.
  • Tax optimisation possibilities given the low rate of corporate taxation applicable in Cyprus (at the rate of 12.5%). The numerous double tax treaties maintained by Cyprus may be exploited.

Disadvantages:

  • Less flexibility compared to the other structures due to the applicable legal framework both in terms of operation and compliance.
  • Governance and control questions might need to be addressed e.g. to deal with deadlocks.
  • Restrictions and or conditions for the transfer of shares are typically adopted.
  • Both the corporate profit and the dividends returned to participants might, under certain circumstances, be subject to taxation e.g. where participants are natural persons residing in Cyprus.

  1. Partnership Joint Venture

The relationship is governed by the relevant statute which specifies the liability of each partner depending on whether the partnership would be a general or limited partnership. In the first case, each partner has unlimited liability with the other partners for all debts and liabilities of the partnership. In the second case, only the general partner has unlimited liability; limited partners are only liable for the capital they agreed to invest but should not participate in the running of the business. The relevant statute imposes default and overriding rules governing the arrangement e.g. in relation to the termination or profit sharing. The termination of the partnership will typically be governed by the partnership agreement, but the statute also provides for specified circumstances which would apply unless the parties agree otherwise. Business assets and intellectual property contributed by each party become the property of the partnership (except if agreed otherwise) and should be exploited in accordance with the partnership agreement for the purposes of the partnership.

Partnerships are tax transparent, accordingly, taxation occurs at the level of the participants and profits and losses accrue to them. Partnerships might be subject to competition law rules prohibiting the restriction of competition. Further, the creation of a partnership might be subject to notification to the competent competition authority under merger control rules. Partnership joint ventures are regularly used for economic activities of professionals. They have also been used as a vehicle in the context of tenders (public or other).

Advantages:

  • Relatively fewer formalities apply than in the case of corporate joint ventures.
  • Registration requirements exist but no requirement for disclosure of the actual partnership agreement i.e. the constitutional document.
  • Although the partnership has no legal personality, it may sue and be sued in its own name and may trade under its name.
  • Apportionment of profits and losses on the basis of discretion.
  • Attribution of profits to the partners; not to the partnership.
  • Independent tax planning possibilities for each participant as regards losses incurred and profits earned. Wide options may be available due to the extensive network of double tax treaties maintained by Cyprus.

Disadvantages:

  • Significant powers to unlimited partners. Given the powers of partners to bind the partnership, decision-making process needs to be addressed carefully.
  • Liability comes with involvement in the management/control. Unlimited liability of general partners towards third parties. Solutions alleviating the effect of this may be possible.
  • Tax transparency may not be beneficial where the partners are natural persons as they might be taxed at higher rates. Yet with appropriate structuring this may be avoided.

  1. Contractual joint ventures

The basis of the cooperation of the participants is solely a contractual agreement between them. It is expected that such agreement will include detailed provisions regulating the rights and liabilities of the parties towards each other, the distinct role and input of each, their contributions, their share in the income generated etc. No separate legal personality is created. Business assets and intellectual property remain the property of the participant who contributed or developed them (unless of course the parties agree otherwise).

Profits and losses accrue to the participants and taxation is also incurred at the level of the participants. Such arrangements might be subject to competition law rules prohibiting the restriction of competition. Contractual joint ventures are commonly used in the context of tenders (public or other).

Advantages:

  • Governed solely by contact law thus greater flexibility as to the operation and termination. Contract law in Cyprus is based on common law principles.
  • No registration requirements.
  • Minimal formalities compared to the other possible structures.
  • No joint liability; liability towards third parties limited to own acts or omissions of each participant.
  • Independent tax planning possibilities for each participant as regards losses incurred and profits earned.

Disadvantages:

  • Lack of legal personality might cause difficulties in establishing commercial or contractual relationships with third parties.
  • Need for detailed regulation of all aspects of the cooperation in the agreement due to the lack of legal framework for the relationship; careful and skilful planning is required.
  • Depending on the facts and provisions adopted, risk of classification of the relationship as a partnership by a court with the consequence of joint liability.

  1. European Economic Interest Grouping (EEIG)

A vehicle established and governed predominantly by European law (Council Regulation 2137/85) instead of national law. Specific purposes for EEIGs apply i.e. to facilitate or develop the economic activities of the members to enable them to improve their own results. In that context the activities of EEIGs must be related to the economic activities of the members but not replace them. The purpose is not to make profits for the EEIG itself. EEIGs are governed by a contract between their members and Council Regulation 2137/85. They have capacity, in their own name, to have rights and obligations of all kinds, to contract or accomplish other legal acts as well as to sue or be sued. There is unlimited joint liability of the participants for the debts and liabilities of the EEIG but the exclusion or restriction of liability of one or more members for a particular debt or liability is possible if it is specifically agreed between the third party and the EEIG. EEIGs enjoy tax transparency. Profits or losses are taxable at the hands of the participants.

Advantages:

  • Established under European law; EEGIs might be ideal for alliances of firms in different member states of the European Union for joint promotion of activities.
  • Relatively fewer formalities apply than in the case of corporate joint ventures though there are registration requirements.
  • Tax transparency.

Disadvantages:

  • Managers bind EEIGs as regards third parties, even if their acts do not fall within the objects (unless the third party had knowledge).
  • Unlimited liability of participants.
  • More limited scope for use due to the statutory purposes dictated.

Which option is the most appropriate and or efficient in terms of structuring in a particular case depends on the facts at hand and the actual needs of the participants. The different factors need to be carefully examined with the help of experts so that the most suitable solution is adopted.

Companies are the most common vehicles for business and investment activity whether in Cyprus or abroad.

Types of companies

Under the Companies Law. Cap. 113 as amended (the “Companies Law”), there are two types of companies:

  • Companies limited by shares, and
  • Companies limited by guarantee (with share capital or without share capital)

Companies limited by guarantee are often employed for non-profit or charitable purposes whereas companies limited by shares for business purposes.

The latter may be either private companies or public companies. A private limited liability company must have at least one shareholder but no more than fifty whereas a public limited liability company must have a minimum of seven shareholders and there is no ceiling as to maximum number. The shareholders of a company may be either natural persons or legal persons (Cypriot or foreign). Shares cannot be issued to the bearer.

Liability of shareholders

Companies are separate legal entities distinct from their members. They have a separate corporate personality and are responsible for their obligations and debts. The liability of the shareholders in companies limited by shares (private or public), is limited to the nominal value of the shares agreed to be taken up or to an amount above the nominal value if the shareholder specifically agreed to subscribe to the shares at a premium. In the case of companies limited by guarantee, the liability of the shareholders is limited to the amount each shareholder agrees, at subscription, to contribute towards the debts of the company in the event of liquidation.

Share Capital

There is no restriction as regards the minimum or maximum share capital of a private company. But there is a minimum share capital requirement of €25629.02 in the case of public companies. Information as regards the initial authorised and issued share capital of the company is included in the memorandum of association and any subsequent changes must be notified to the Registrar of Companies.

The share capital may be paid in cash or in kind.

 Transfer and allotment

The transfer of shares in a company is not restricted by law. It is however possible and common for restrictions e.g. right of first refusal to be included in the articles of association of the company. In such cases any transfer of shares must be made in compliance with the relevant provisions of the constitutional documents (see below).

On an allotment of new shares of a public company, the company is obliged to offer shares to existing shareholders pursuant to pre-emption rights provided as mandatory rules in the statute. In the case of a private company there is not such statutory duty and therefore it depends on whether pre-emptions rights and relevant obligations on the part of the company have been provided for in the articles of association.

All allotments of new shares and transfers of shares must be notified to the Registrar of Companies.

 The Directors and Secretary

The directors of the company, acting collectively as a board, manage the business of the company and do all decision making to the extent not reserved for the general meeting of the shareholders.

A private company needs to have at least one director whereas a public company must have at least two. There is no statutory restriction as to the maximum number of directors but the articles of association of the company may provide limitations. The directors of the company may be natural or legal persons (Cypriot or foreign). The proceedings of the board of directors and its composition are very important elements for the tax treatment of the company (see below).

All companies are required to have a secretary. The duties of the secretary are mainly of an administrative nature.

 Registered office

The company must have a registered office in Cyprus. All communications and notices may be addressed to the company at the registered office and any document, whether official or otherwise, may be served to the company at its registered office.

 Incorporation documents

The memorandum of association is the document which sets out important information in relation to the company; such information might be relevant for third parties e.g. potential counterparties, creditors etc.. The memorandum of association must state:

  • the name of the company;
  • the place where the registered office is situated;
  • in the case of a public company, the fact that it is such a company;
  • the objects of the company;
  • a statement that the liability of its members is limited and the amount to which such liability applies;
  • the names of the subscribers to the memorandum of association and the number of shares each of them takes up.

Following the registration of the company, the memorandum of association may be amended with the approval of the court.

The articles of association is the document regulating internal matters as regards the operation and management of the company and the rights of the members e.g. the procedures to be followed in general meetings, requirements for the adoption of resolutions, the voting rights of members, the conditions and manner in which shares are to be transferred, rights and duties relating to put or call options, rights and duties relating to tag and drag along rights, the appointment and removal of directors etc. The articles of association may be amended by a relevant decision of the members of the company.

Together with the memorandum of association, the articles of association form the constitutional documents of the company and constitute basically an agreement between all and each of the members of the company to abide to their provisions.

 Registration

Establishing a company requires registration with the Registrar of Companies, the governmental office competent for matters relevant to the registration of companies and their ongoing obligations with regard to information that must filed pursuant to the Companies Law. The Registrar of Companies is responsible for keeping a relevant file which is available to the public for inspection.

The initial step in the formation of a company is the approval of the proposed name by the Registrar of Companies. Subsequently, the memorandum of association and articles of association of the company must be filed accompanied by the necessary forms which indicate the registered office, the details of the director(s) and secretary and an affidavit of the lawyer in charge of the registration of the company. Usually it takes approximately seven to fifteen working days for the completion of the registration of a company. A shelf company i.e. a ready-made company may be purchased if there is an immediate need for the use of a company. Following registration of the company, the Registrar of Companies issues a certificate of incorporation which constitutes conclusive evidence that all the requirements of the Companies Law, in respect to registration and matters precedent and incidental thereto, have been complied with.

Financial statements

Financial statements must be prepared annually and be duly audited by qualified accountants practising in Cyprus according to the International Financial Reporting Standards. Annual returns containing information as to any changes to directors, secretary, shareholders, authorised, issued or paid up capital, registered office, mortgages/charges and other related matters must be filed with the Registrar of Companies once per year accompanied by a copy of the financial statements.

Tax aspects

In order be eligible to benefit from the favourable Cyprus tax regime and treaty network in place, a company should be considered as resident in Cyprus for tax purposes.

Under Cyprus tax law, a company is considered as tax resident in Cyprus if its ‘management and control’ is exercised in Cyprus. There is no statutory definition of ‘management and control’. In practice Cyprus tax authorities would look at several conditions to determine whether a company qualifies as a resident in Cyprus for tax purposes:

  • strategic management decisions and preferably day-to-day decisions being taken in Cyprus,
  • the majority of the board members being tax residents in Cyprus and exercising their  office from Cyprus,
  • an actual office being maintained in Cyprus,
  • evidence of commercial documentation being stored in the company’s office,
  • accounting records being prepared and kept in Cyprus,
  • bank accounts being operated from Cyprus even if maintained with foreign banks.

Not all of the above must be established in order for the company to qualify a tax resident in Cyprus; the conditions would be considered in light of the nature and level of activities of the company and the country in which transactions or investments are made. For the purposes of the Cyprus tax authorities satisfaction of the first two conditions would normally be adequate for the company to be considered as tax resident.

Tax resident companies are subject to income tax on their worldwide income at the flat rate of 12.5% subject to tax credit for any tax suffered in a foreign jurisdiction on income which is also subject to tax in Cyprus.

Companies ought to submit tax returns, together with their annual financial statements, to the Tax Department in compliance with the applicable legislation.

Re-domiciliation

It is possible for corporations from other jurisdictions to acquire a ‘domicile’ in Cyprus. Effectively this means that the company may change its governing law without going through the process of liquidation where it was firstly established and then fresh incorporation in Cyprus.

A company registered in another jurisdiction is eligible to apply to the Registrar of Companies to be registered as a continuing company pursuant to the provisions of the Companies Law if: the foreign jurisdiction allows the re-domiciliation, its constitutional documents provide for it and the steps required for the decision for the re-domiciliation have been complied with. Such companies must have their registered office transferred into Cyprus.

It is also possible for local companies to “re-domicile” moving their registered office in other jurisdictions.

In both cases of ‘re-domiciliations’ the permission of the Registrar of Companies is required and it is generally given upon certain conditions being met.

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).

Depositary

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

Taxation

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

Practice areas

  • Corporate
  • Tax
  • Private Equity
Contact Christi

Contact Christi





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    Cyprus – Setting up of a company

    6 December 2016

    • Cyprus
    • Corporate

    Like in other jurisdictions, in Cyprus the term ‘joint venture’ connotes business arrangements that involve the pooling of resources, knowledge and experiences of the participants for the purposes of accomplishing or implementing a specific task, whether this is a particular project or business activity. There is no specific statute governing joint ventures yet in practice such arrangements take one of the following structures.

    1. Corporate Joint Venture

    The cooperation materialises through the setting up of a legal entity separate from its participants with constitutional documents governing its operation and the relations between the participants and the entity in addition to the statutory provisions of the Cyprus Company Law, Cap 113. A shareholders’ agreement is typically executed operating in parallel. It is possible that further agreements such as licences for use of intellectual property etc. will be signed. This vehicle might be more appropriate where it is expected that the joint venture will need to enter into contractual arrangements with third parties due to the limited liability benefits. The termination is usually addressed in a shareholders’ agreement which specifies events of termination e.g. change of control, insolvency of a participant, attainment of objective etc. as well as the relevant processes e.g. sale of shares among participants, liquidation etc.

    Taxation of income occurs at the level of the company. Participants are not taxed on dividends in Cyprus if they are not tax residents or if they are companies. If the company is to be taxed in Cyprus, the management and control will need to be exercised in Cyprus. Any assets, including intellectual property created by the company, become property of the new entity. The setting up of the company might be subject to notification to the competent competition authority under merger control rules. Corporate joint ventures are commonly used by international clients aiming to benefit from the network of double tax treaties maintained by Cyprus. They are also a vehicle often employed to enter the Cyprus market with the assistance of a local participant.

    Advantages:

    • Limited liability; liability of participants limited to capital.
    • Participants control the company through the power of appointment of the board of directors.
    • The company is governed by the Cyprus Companies Law, Cap. 113, a statute based on English company law rules, which gives more legal certainty and familiarity for participants as well as the counterparties. The relationship is not purely contractual.
    • Tax optimisation possibilities given the low rate of corporate taxation applicable in Cyprus (at the rate of 12.5%). The numerous double tax treaties maintained by Cyprus may be exploited.

    Disadvantages:

    • Less flexibility compared to the other structures due to the applicable legal framework both in terms of operation and compliance.
    • Governance and control questions might need to be addressed e.g. to deal with deadlocks.
    • Restrictions and or conditions for the transfer of shares are typically adopted.
    • Both the corporate profit and the dividends returned to participants might, under certain circumstances, be subject to taxation e.g. where participants are natural persons residing in Cyprus.

    1. Partnership Joint Venture

    The relationship is governed by the relevant statute which specifies the liability of each partner depending on whether the partnership would be a general or limited partnership. In the first case, each partner has unlimited liability with the other partners for all debts and liabilities of the partnership. In the second case, only the general partner has unlimited liability; limited partners are only liable for the capital they agreed to invest but should not participate in the running of the business. The relevant statute imposes default and overriding rules governing the arrangement e.g. in relation to the termination or profit sharing. The termination of the partnership will typically be governed by the partnership agreement, but the statute also provides for specified circumstances which would apply unless the parties agree otherwise. Business assets and intellectual property contributed by each party become the property of the partnership (except if agreed otherwise) and should be exploited in accordance with the partnership agreement for the purposes of the partnership.

    Partnerships are tax transparent, accordingly, taxation occurs at the level of the participants and profits and losses accrue to them. Partnerships might be subject to competition law rules prohibiting the restriction of competition. Further, the creation of a partnership might be subject to notification to the competent competition authority under merger control rules. Partnership joint ventures are regularly used for economic activities of professionals. They have also been used as a vehicle in the context of tenders (public or other).

    Advantages:

    • Relatively fewer formalities apply than in the case of corporate joint ventures.
    • Registration requirements exist but no requirement for disclosure of the actual partnership agreement i.e. the constitutional document.
    • Although the partnership has no legal personality, it may sue and be sued in its own name and may trade under its name.
    • Apportionment of profits and losses on the basis of discretion.
    • Attribution of profits to the partners; not to the partnership.
    • Independent tax planning possibilities for each participant as regards losses incurred and profits earned. Wide options may be available due to the extensive network of double tax treaties maintained by Cyprus.

    Disadvantages:

    • Significant powers to unlimited partners. Given the powers of partners to bind the partnership, decision-making process needs to be addressed carefully.
    • Liability comes with involvement in the management/control. Unlimited liability of general partners towards third parties. Solutions alleviating the effect of this may be possible.
    • Tax transparency may not be beneficial where the partners are natural persons as they might be taxed at higher rates. Yet with appropriate structuring this may be avoided.

    1. Contractual joint ventures

    The basis of the cooperation of the participants is solely a contractual agreement between them. It is expected that such agreement will include detailed provisions regulating the rights and liabilities of the parties towards each other, the distinct role and input of each, their contributions, their share in the income generated etc. No separate legal personality is created. Business assets and intellectual property remain the property of the participant who contributed or developed them (unless of course the parties agree otherwise).

    Profits and losses accrue to the participants and taxation is also incurred at the level of the participants. Such arrangements might be subject to competition law rules prohibiting the restriction of competition. Contractual joint ventures are commonly used in the context of tenders (public or other).

    Advantages:

    • Governed solely by contact law thus greater flexibility as to the operation and termination. Contract law in Cyprus is based on common law principles.
    • No registration requirements.
    • Minimal formalities compared to the other possible structures.
    • No joint liability; liability towards third parties limited to own acts or omissions of each participant.
    • Independent tax planning possibilities for each participant as regards losses incurred and profits earned.

    Disadvantages:

    • Lack of legal personality might cause difficulties in establishing commercial or contractual relationships with third parties.
    • Need for detailed regulation of all aspects of the cooperation in the agreement due to the lack of legal framework for the relationship; careful and skilful planning is required.
    • Depending on the facts and provisions adopted, risk of classification of the relationship as a partnership by a court with the consequence of joint liability.

    1. European Economic Interest Grouping (EEIG)

    A vehicle established and governed predominantly by European law (Council Regulation 2137/85) instead of national law. Specific purposes for EEIGs apply i.e. to facilitate or develop the economic activities of the members to enable them to improve their own results. In that context the activities of EEIGs must be related to the economic activities of the members but not replace them. The purpose is not to make profits for the EEIG itself. EEIGs are governed by a contract between their members and Council Regulation 2137/85. They have capacity, in their own name, to have rights and obligations of all kinds, to contract or accomplish other legal acts as well as to sue or be sued. There is unlimited joint liability of the participants for the debts and liabilities of the EEIG but the exclusion or restriction of liability of one or more members for a particular debt or liability is possible if it is specifically agreed between the third party and the EEIG. EEIGs enjoy tax transparency. Profits or losses are taxable at the hands of the participants.

    Advantages:

    • Established under European law; EEGIs might be ideal for alliances of firms in different member states of the European Union for joint promotion of activities.
    • Relatively fewer formalities apply than in the case of corporate joint ventures though there are registration requirements.
    • Tax transparency.

    Disadvantages:

    • Managers bind EEIGs as regards third parties, even if their acts do not fall within the objects (unless the third party had knowledge).
    • Unlimited liability of participants.
    • More limited scope for use due to the statutory purposes dictated.

    Which option is the most appropriate and or efficient in terms of structuring in a particular case depends on the facts at hand and the actual needs of the participants. The different factors need to be carefully examined with the help of experts so that the most suitable solution is adopted.

    Companies are the most common vehicles for business and investment activity whether in Cyprus or abroad.

    Types of companies

    Under the Companies Law. Cap. 113 as amended (the “Companies Law”), there are two types of companies:

    • Companies limited by shares, and
    • Companies limited by guarantee (with share capital or without share capital)

    Companies limited by guarantee are often employed for non-profit or charitable purposes whereas companies limited by shares for business purposes.

    The latter may be either private companies or public companies. A private limited liability company must have at least one shareholder but no more than fifty whereas a public limited liability company must have a minimum of seven shareholders and there is no ceiling as to maximum number. The shareholders of a company may be either natural persons or legal persons (Cypriot or foreign). Shares cannot be issued to the bearer.

    Liability of shareholders

    Companies are separate legal entities distinct from their members. They have a separate corporate personality and are responsible for their obligations and debts. The liability of the shareholders in companies limited by shares (private or public), is limited to the nominal value of the shares agreed to be taken up or to an amount above the nominal value if the shareholder specifically agreed to subscribe to the shares at a premium. In the case of companies limited by guarantee, the liability of the shareholders is limited to the amount each shareholder agrees, at subscription, to contribute towards the debts of the company in the event of liquidation.

    Share Capital

    There is no restriction as regards the minimum or maximum share capital of a private company. But there is a minimum share capital requirement of €25629.02 in the case of public companies. Information as regards the initial authorised and issued share capital of the company is included in the memorandum of association and any subsequent changes must be notified to the Registrar of Companies.

    The share capital may be paid in cash or in kind.

     Transfer and allotment

    The transfer of shares in a company is not restricted by law. It is however possible and common for restrictions e.g. right of first refusal to be included in the articles of association of the company. In such cases any transfer of shares must be made in compliance with the relevant provisions of the constitutional documents (see below).

    On an allotment of new shares of a public company, the company is obliged to offer shares to existing shareholders pursuant to pre-emption rights provided as mandatory rules in the statute. In the case of a private company there is not such statutory duty and therefore it depends on whether pre-emptions rights and relevant obligations on the part of the company have been provided for in the articles of association.

    All allotments of new shares and transfers of shares must be notified to the Registrar of Companies.

     The Directors and Secretary

    The directors of the company, acting collectively as a board, manage the business of the company and do all decision making to the extent not reserved for the general meeting of the shareholders.

    A private company needs to have at least one director whereas a public company must have at least two. There is no statutory restriction as to the maximum number of directors but the articles of association of the company may provide limitations. The directors of the company may be natural or legal persons (Cypriot or foreign). The proceedings of the board of directors and its composition are very important elements for the tax treatment of the company (see below).

    All companies are required to have a secretary. The duties of the secretary are mainly of an administrative nature.

     Registered office

    The company must have a registered office in Cyprus. All communications and notices may be addressed to the company at the registered office and any document, whether official or otherwise, may be served to the company at its registered office.

     Incorporation documents

    The memorandum of association is the document which sets out important information in relation to the company; such information might be relevant for third parties e.g. potential counterparties, creditors etc.. The memorandum of association must state:

    • the name of the company;
    • the place where the registered office is situated;
    • in the case of a public company, the fact that it is such a company;
    • the objects of the company;
    • a statement that the liability of its members is limited and the amount to which such liability applies;
    • the names of the subscribers to the memorandum of association and the number of shares each of them takes up.

    Following the registration of the company, the memorandum of association may be amended with the approval of the court.

    The articles of association is the document regulating internal matters as regards the operation and management of the company and the rights of the members e.g. the procedures to be followed in general meetings, requirements for the adoption of resolutions, the voting rights of members, the conditions and manner in which shares are to be transferred, rights and duties relating to put or call options, rights and duties relating to tag and drag along rights, the appointment and removal of directors etc. The articles of association may be amended by a relevant decision of the members of the company.

    Together with the memorandum of association, the articles of association form the constitutional documents of the company and constitute basically an agreement between all and each of the members of the company to abide to their provisions.

     Registration

    Establishing a company requires registration with the Registrar of Companies, the governmental office competent for matters relevant to the registration of companies and their ongoing obligations with regard to information that must filed pursuant to the Companies Law. The Registrar of Companies is responsible for keeping a relevant file which is available to the public for inspection.

    The initial step in the formation of a company is the approval of the proposed name by the Registrar of Companies. Subsequently, the memorandum of association and articles of association of the company must be filed accompanied by the necessary forms which indicate the registered office, the details of the director(s) and secretary and an affidavit of the lawyer in charge of the registration of the company. Usually it takes approximately seven to fifteen working days for the completion of the registration of a company. A shelf company i.e. a ready-made company may be purchased if there is an immediate need for the use of a company. Following registration of the company, the Registrar of Companies issues a certificate of incorporation which constitutes conclusive evidence that all the requirements of the Companies Law, in respect to registration and matters precedent and incidental thereto, have been complied with.

    Financial statements

    Financial statements must be prepared annually and be duly audited by qualified accountants practising in Cyprus according to the International Financial Reporting Standards. Annual returns containing information as to any changes to directors, secretary, shareholders, authorised, issued or paid up capital, registered office, mortgages/charges and other related matters must be filed with the Registrar of Companies once per year accompanied by a copy of the financial statements.

    Tax aspects

    In order be eligible to benefit from the favourable Cyprus tax regime and treaty network in place, a company should be considered as resident in Cyprus for tax purposes.

    Under Cyprus tax law, a company is considered as tax resident in Cyprus if its ‘management and control’ is exercised in Cyprus. There is no statutory definition of ‘management and control’. In practice Cyprus tax authorities would look at several conditions to determine whether a company qualifies as a resident in Cyprus for tax purposes:

    • strategic management decisions and preferably day-to-day decisions being taken in Cyprus,
    • the majority of the board members being tax residents in Cyprus and exercising their  office from Cyprus,
    • an actual office being maintained in Cyprus,
    • evidence of commercial documentation being stored in the company’s office,
    • accounting records being prepared and kept in Cyprus,
    • bank accounts being operated from Cyprus even if maintained with foreign banks.

    Not all of the above must be established in order for the company to qualify a tax resident in Cyprus; the conditions would be considered in light of the nature and level of activities of the company and the country in which transactions or investments are made. For the purposes of the Cyprus tax authorities satisfaction of the first two conditions would normally be adequate for the company to be considered as tax resident.

    Tax resident companies are subject to income tax on their worldwide income at the flat rate of 12.5% subject to tax credit for any tax suffered in a foreign jurisdiction on income which is also subject to tax in Cyprus.

    Companies ought to submit tax returns, together with their annual financial statements, to the Tax Department in compliance with the applicable legislation.

    Re-domiciliation

    It is possible for corporations from other jurisdictions to acquire a ‘domicile’ in Cyprus. Effectively this means that the company may change its governing law without going through the process of liquidation where it was firstly established and then fresh incorporation in Cyprus.

    A company registered in another jurisdiction is eligible to apply to the Registrar of Companies to be registered as a continuing company pursuant to the provisions of the Companies Law if: the foreign jurisdiction allows the re-domiciliation, its constitutional documents provide for it and the steps required for the decision for the re-domiciliation have been complied with. Such companies must have their registered office transferred into Cyprus.

    It is also possible for local companies to “re-domicile” moving their registered office in other jurisdictions.

    In both cases of ‘re-domiciliations’ the permission of the Registrar of Companies is required and it is generally given upon certain conditions being met.

    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).

    Depositary

    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

    Taxation

    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

    Practice areas

    • Corporate
    • Tax
    • Private Equity
    Contact Christi