After achieving formidable growth in the alternative investment space, Cyprus aims to play a bigger role in global UCITS business.
Although Cyprus is not traditionally associated with UCITS – the EU’s harmonised fund product – confidence in the island’s capabilities is growing on the back of the arrival of a number of UCITS management companies. Undertakings for Collective Investment in Transferable Securities, commonly referred to as UCITS, can be established in one EU member state and sold cross border into other EU countries without an additional authorisation.
Attracted by lower operating costs and driven by the powerful draw of cross-border opportunity, three prominent UCITS Management Companies have already set up on the island. From the perspective of pure numbers, Cyprus is still a small destination for UCITS, and the large majority of investment funds in Cyprus are Alternative Investment Funds. However, eight UCITS funds have already been established, which include one umbrella fund with a total of 17 sub-funds.
Foreign UCITS are also widely marketed in Cyprus, including UCITS whose promoters are international financial institutions such as JP Morgan, UBS and Julius Baer. With a large number of UCITS also being sold outside of Europe, Cyprus has good prospects of leveraging its strategic geographical location to establish and market UCITS to the Middle East, Russia and Asia. The expectation is that Cyprus will find new favour amongst fund managers setting up UCITS structures for export to global markets.
Table of Contents
- Why are there on a few UCITS established in Cyprus thus far?
- Can a Cyprus AIFM manage a UCITS in Cyprus and vice versa?
UCITS in Cyprus: Key Facts
Since UCITS are designed to be suitable for retail investors, UCITS products are generally considered vanilla in nature, incorporating a high level of diversification and investment restrictions. The Cyprus Securities and Exchange Commission (CySEC) regulates and supervises Cypriot UCITS and Management Companies.
RELATED: UCITS at a Glance
UCITS can be set-up in Cyprus either in the form of a Variable Capital Investment Company (VCIC) or as a Common Fund. UCITS aimed at retail investors are traditionally set up as Common Funds, while the VCIC is the legal structure of choice for funds targeting professional investors.
Share Capital Requirements
UCITS established in Cyprus can be either self-managed or third-party managed; for self-managed UCITS the share capital requirement is €300,000, whereas for the third-party managed UCITS the share capital requirement is €200,000. These requirements apply to each investment compartment when the UCITS is established as an umbrella fund.
Asset Categories and Restrictions
The eligible asset categories for a UCITS are: Transferable Securities (TSs), Money Market Instruments (MMIs), open-ended collective investment schemes, deposits with eligible credit institutions and financial derivative instruments.
A UCITS must operate on a principle of risk spreading and as a consequence a UCITS must be properly diversified. There are many individual limits around the areas of asset eligibility and concentration. One of the cornerstones of the UCITS product since its creation has been the imposition of portfolio diversification requirements under what is commonly known as the ‘5/10/40’ rule.
This says that a maximum of 10% of a fund’s net assets may be invested in securities from a single issuer, and that investments of more than 5% with a single issuer may not make up more than 40% of the whole portfolio. However, in some cases there are exceptions to this rule, depending on the fund’s investment strategy. As the principal UCITS focus is on portfolio diversification and liquidity, there are further limits, all with the purpose not to eliminate all risk, but to keep it within bounds suitable for ordinary investors.
Master Feeder Funds
The Master-Feeder structure allows the creation of a structure investing its portfolio into another UCITS, even if located in another EU country. Streamlining the efficiency of the fragmented European industry of investment funds and the search for economies of scale are the driving rationale for the introduction of this investment rule. In a Master-Feeder structure, investor contributions go into a Feeder fund, which invests at least 85% of its assets in the Master Fund and the remaining 15% may be invested in other assets subject to the investment objectives of the Feeder Fund.
Umbrella Funds are established with several investment compartments, commonly called sub-funds, with each one constituting a separate pool of segregated assets not subject to ‘cross-class liability’. The UCITS fund constitutes a single legal entity and each sub-fund has its own separate Net Asset Value (NAV) calculation and issues units corresponding to its assets.
Rights of the unitholders of a specific sub-fund only arise from the assets of that compartment and each compartment is liable for the obligations arising from its constitution, operation or dissolution. A compartment of an umbrella fund may invest in another compartment (target) of the same umbrella fund subject to certain restrictions. Each investment compartment may be dissolved or liquidated separately without affecting the operations of the others.
All foreign UCITS, which qualify under the relevant EU directive, based in another EU member state seeking to market their shares in Cyprus must follow a simple regulator-to-regulator notification process.
Key Benefits Cyprus UCITS
- Full EU passporting rights. Cyprus UCITS can be marketed and sold in other EU member states
- Cost-efficient to set-up and operate in Cyprus
- Low investment risk and internationally regarded as one of the most efficient asset management tools
- Robust legislative framework that protects and promotes investor interests
- Possibility to set up umbrella funds, allowing different sub- funds and share classes
- Investments are fully transparent and easy to monitor through publication of Net Asset Value (NAV) which is made at least every fortnight on the first business day
- Upon request, investors are entitled to repurchase or redeem their units from the assets of the UCITS
- Highly skilled pool of professionals in Cyprus
- Supervised by a competent and accessible regulatory authority
Taxation of UCITS in Cyprus
If formed as an investment company, UCITS can benefit from Cyprus’ low corporate income tax rate of 12.5%. An additional benefit when it comes to fund taxation is that Cyprus offers full exemption from tax on gains from trading in securities. To learn more about the taxation of UCITS in Cyprus, visit the section on taxation.
Management and Administration of UCITS
UCITS established in Cyprus need to appoint a number of fund service providers, which in turn need to fulfil a number of requirements outlined in detail here.
UCITS can either be externally or internally managed. However, for a UCITS to be internally managed, it must be formed as a variable capital investment company (VCIC) managed by a board of directors. In addition, it must have a minimum initial capital of €300,000 and at least two directors who have the necessary integrity and experience in relation to the business undertaken by the company.
If externally managed, a UCITS must be managed by a UCITS Management Company, which has to be authorised in Cyprus (by CySEC) or any other EU member state under the provisions of the UCITS IV Directive.
If the fund management company decides to outsource the fund administration services, the fund administrator must be approved by CySEC and must be of sufficient repute and experienced enough to properly fulfil its obligations.
UCITS in Cyprus: Questions and Answers
Why are there only a few UCITS established in Cyprus, thus far?
Cyprus is a rather late entrant to the investment fund scene, registering strong growth only since 2013. At that time, the country decided to specialise in Alternative Investment Funds (AIFs), as other financial centres, such as Luxembourg and Dublin, had already established their lead in the UCITS segment. However, the expectation is that Cyprus’ UCITS business will expand in the coming years and that in particular the set-up of UCITS management companies will be an attractive option for global fund managers.
Can a Cyprus AIFM manage a UCITS in Cyprus and vice versa?
AIF managers can obtain authorisation to manage UCITS too, however, UCITS only management companies cannot manage an AIF.