Mr. Christos Scordis
Senior Partner

Christos Scordis is a senior partner at Scordis, Papapetrou & Co LLC, having joined the firm in 1998. His main areas of practice include corporate and commercial law (corporate acquisitions, venture capital investments, financing and security arrangement, corporate restructurings), M&A – cross border transactions, funds and investments, with extensive experience in matters of licensing and regulation in financial and banking services. He is a member of the Cyprus Bar Association committee on the companies and regulatory (Cyprus Securities and Exchange Commission and the Stock Exchange) legal framework, and legal counsel on gaming regulatory and compliance matters.

He is a member of the Cyprus Bar Association and Lincoln’s Inn, Inns of Court (Barrister at Law).

Ms. Victoria Economou
Senior Associate

Victoria Economou is a senior associate at Scordis, Papapetrou & Co LLC, having joined the firm in 2016. Her main areas of practice are corporate and commercial law, financial services and investment advisory, Regulatory & Compliance, Financing Transactions, insolvency, Joint ventures and investments. Since 2010, she has been advising on the set-up, licensing, and post authorization regulatory & compliance of alternative investment funds (under the previous regime of investment schemes regulated by the Cyprus Central Bank, and since 2014, alternative investment funds regulated by the Cyprus Securities and Exchange Commission), UCITS and alternative investment fund managers. She was involved in the public consultation of the proposed legislations for alternative investment funds and fund managers. She is a member of the Cyprus Bar Association, and a licensed Insolvency Practitioner.

 The Cyprus funds sector in 2023

I.OVERVIEW

When considering traditional funds jurisdictions, Cyprus was not usually a destination that comes on the top of the list; however, the island nation located in the eastern Mediterranean sea, completely changed its funds regulatory landscape in the mid-2010s by enacting new legislation (including the transposition of the UCITS Directive and AIFMD into local law) and switching regulators from the Central Bank to the Securities and Exchange Commission (the “CySEC”) and the rest as they say, is history. Since 2018, Cyprus investment funds were further enhanced and regulated with the revision and amendment of the 2014 framework on alternative investment funds, the Alternative Investment Funds Law 124(I)/2018 (the “AIF Law”) which also introduced the registered alternative investment fund (the “RAIF”). The sector was thus made more attractive to both local and foreign players whom placed their trust in Cyprus, as evidenced by the total number of management companies and undertakings in collective investments, which has doubled since the overhaul.

According to the CySEC Management Companies and Undertakings of Collective Investments Sector Quarterly Statistics for the third quarter of 2023 (published January 2024), the majority of assets under management are in alternative investment funds (94.4%) with the remaining being in UCITS. Alternative investment funds invest in diverse sectors, with assets under management being primarily invested in private equity and real estate. Other alternative sectors are also popular, with (a) 7.02% of assets under management being invested in shipping, (b) 6.22% in energy, and (c) over 3% in fintech and sustainable investments. 73% of assets under management are invested abroad, with the remaining 27% being invested

locally, conveying the fact that Cyprus is becoming a jurisdiction of choice for cross-border investments, a feature which was traditionally reserved and implemented from funds established in more conventional funds jurisdictions. The investor base for UCITS is retail (99.2%) while for alternative investment funds, investors are predominantly well-informed investors (68.1%) and professional investors (20%), with the remaining 12.7% comprising of retail investors.

In addition, Cyprus is a democracy, a fully-fledged European Union member and a commonwealth country, has a hybrid legal system stemming mainly from common law but also adapting certain continental law aspects, while simultaneously complying with EU legislation and regulations. It follows International Financial Reporting Standards and has a cost-effective tax environment supported by over 60 Double Tax Avoidance Agreements. The result is a flexible system in which legal, accounting and financial practices adapt to and complement each other, to the benefit of the local practices and economy, while simultaneously being attractive to foreigners due to its effectiveness and lack of rigidity and complexity.

II.THE REGISTERED ALTERNATIVE INVESTMENT FUND

It was expected that the RAIF would be a popular choice for fund managers, due to its quick and convenient registration process, as the vehicle does not undergo separate authorisation scrutiny by the regulator. Once the RAIF is registered as an investment company or limited partnership with the Cyprus Registrar of Companies, or if structured as a common fund its common fund rules are drafted, the external manager (the RAIF is always externally managed) submits to CySEC within one month the RAIF documents, and information about its investment strategies, for the purposes of registration of the RAIF in the relevant CySEC register. This has been proven to be true, as since their introduction, registration of RAIFs being on the rise on a year-to-year basis. 2023 was a record year, with the registration of 26.6% of the currently existing RAIFs, while in 2022, 22.2% of the RAIFs were registered.

Entities that can act as an external manager are: (a) a licensed AIFM (of Cyprus, or another EU member state, or of a non-EU state passporting its services in accordance with the AIFMD rules and having determined an EU member state as its state of reference), or (b) a non-AIFM entity, being a UCITS Management Company, or AIF Manager (other than AIFM) licensed in Cyprus or another Member State to manage the investments of an AIF (provided that assets under management do not exceed AIFMD thresholds) or a Cyprus Investment Firm (or MiFID-compliant firm under the relevant national law), only if the RAIF in question is established as a closed-ended limited partnership (with or without a separate legal personality), and with at least 70% of its assets being illiquid.

RAIFs are very flexible in terms of structuring, the investment policies that they can pursue and the assets in which they may invest. They may be set up in corporate form (variable capital or fixed capital investment company), or contractual form (limited partnership, with or without legal personality, and common fund). All forms may be set up as single schemes, or with more than one investment

compartments, each compartment having the ability to pursue different objectives and policies, and to hold different assets. Investment compartments are segregated between them, with investors’ rights deriving only from the assets of the compartment in which they invested. An investment compartment may also issue shares of different classes, with the ability of each such class to have different features or rights or obligations, inter alia with regard to their fee structure, distributions, currency, lock-up period duration, or to be offered to different types of eligible investors for the purposes of compliance with various or specific jurisdiction legislation. Classes will be commonly invested and there is no ring-fencing between them.

Minimum capital requirements apply when the RAIF is managed by an AIFM, as it must raise from investors at least €500,000 worth of capital in the first 12 months following its registration, and in case of multiple investment compartments, such obligation applies to each such compartment.

RAIFs must always have a depositary, which may be: (if the external manager is an AIFM) a Cyprus credit institution, Cyprus investment firm (subject to own funds and capital adequacy requirements, and being authorised to provide ancillary services of safekeeping and administration of financial instruments), or another category of institution which is subject to prudential regulation and falls within the institution categories determined by EU Member States to be eligible depositaries. If the RAIF is classified as closed-ended (meaning that there are no redemption rights for 5 years) and generally invests in assets which are not subject to safekeeping, the depositary may be an entity which carries out depositary functions as part of its professional or business activities in respect of which such entity is subject to mandatory professional registration recognised by law or to legal or regulatory provisions or rules of professional conduct, and which can provide sufficient financial and professional guarantees to enable it to perform effectively the relevant depositary functions and meet the commitments inherent in those functions (the “Eligible Depositary”). If the external manager is not an AIFM, the depositary may be a credit institution, or investment firm, or another category of institution which is subject to prudential regulation and ongoing supervision and further falls within the categories of institution which have been defined by their home state as eligible to be a depositary. If the RAIF invests in assets which are not subject to safekeeping, it may appoint as depositary an entity carrying on business of a depositary within the scope of its activities and is subject to registration and may provide adequate monetary and professional guarantees. Such depositary must have its registered office in Cyprus or another Member State, or a third country provided that the CySEC has signed a memorandum of understanding and exchange of information with the competent authorities of such third country.

Eligible investors of RAIFs are professional investors (as defined under MiFID) and well-informed investors (as defined in the AIF Law).

III. UPCOMING ENACTMENT OF THE LEGAL FRAMEWORK ON INVESTMENT FUND ADMINISTRATORS

In November 2023, the Cabinet of Ministers of the Republic of Cyprus approved the draft bill establishing the legal framework for the set up and regulation of fund administrators. The bill will be brought to the Cyprus Parliament, to be eventually passed into law. The rationale for the enactment is to further enhance the funds industry and market integrity, with a uniform, regulated service which shall further be subject to ongoing supervision. It also aims to provide further security to investors while attracting fund managers, who may, by obtaining services from a licensed and regulated fund administrator, redirect their resources to the amplification of their main activities, such as portfolio and risk management.

Although administrative services may be undertaken by the external manager or the fund itself, they are ancillary, or back-office activities and for such reason they tend to be delegated to a fund administrator. In order for a provider to conduct such activity, especially since certain services are viable to the fund’s operations (such as monitoring liquidity risk, monitoring redemption requests, ensuring fair treatment between investors), the Cyprus funds industry identified the need for legally requiring the providers of such services to have and/or maintain adequate expertise, experience and resources. In addition, an administrator is vital in the proper flow of information and communication between the fund, the administrator, the external manager, the depositary and the investors, and for such purposes there need to be proper systems and controls, and business continuity arrangements in place. There was a degree of regulation of the fund administration service, as the services tend to be offered by persons or firms regulated by their relevant professional bodies or the Administrative Service Providers law (the regulatory body being the CySEC) however the regulation of, and the introduction of clear organisational, operational bespoke rules for fund administration services has been long desired by the sector, as persons operating in the funds industry have identified the lack of regulatory and operating framework for fund administrators as an industry disadvantage.

Under the law, licensed fund administrators will be able to provide services to both AIFs and UCITS, AIFMs, sub-threshold fund managers (both local and foreign). It will also be possible for a fund administrator to obtain authorisation to offer additional services in order to provide the services of a depositary for closed-ended alternative investment funds (with a lock-up period of five years) whose assets are not subject to safekeeping (for example private equity); this being in line with the AIF Law provisions allowing for Eligible Depositaries (as the term is described above) to perform depositary functions.

Minimum capital requirements will apply, in a fixed Euro amount plus an additional professional indemnity insurance and a pre-calculated business continuity cost.

IV.OTHER DEVELOPMENTS THAT INDIRECTLY RELATE TO THE FUNDS INDUSTRY

A.TAX BENEFITS FOR HIGHLY SKILLED INDIVIDUALS

There is no doubt that in Cyprus, personnel is highly skilled and competent, with the majority of the people employed in the legal, accounting and financial sectors having received higher institution education and continuous practice development in their chosen sectors, over the course of their employment.

At the same time, the Cyprus markets and governing bodies are always eager to attract highly trained, educated, experienced persons (and in extent their families) (including both non-Cypriots, and repatriated Cypriots working abroad) to work from Cyprus.

Incentives include certain income tax exemptions on employment income for non-Cypriot individuals (“NCIs”) for relocating to Cyprus for employment. 50% of the remuneration from employment within Cyprus is exempted for 17 tax years, provided that the NCI was not a Cyprus resident for at least 15 consecutive years immediately prior to the commencement of their first employment in

Cyprus and the income exceeds €55,000 per annum. The exemption is granted for any year during which the remuneration exceeds the threshold, irrespective of whether during any year the remuneration fell below the threshold, provided that during the start of their employment, the NCI’s remuneration exceeded the threshold and the Tax Commissioner is satisfied that the fluctuation in income is not the result of an arrangement seeking to avail from the exemption. Additionally, NCIs who were resident outside Cyprus, or were employed outside Cyprus by a non-Cypriot employer for at least three consecutive years before the commencement of their employment in Cyprus, can avail from a tax exemption on 20% or €8,550 (whichever lower) of remuneration from their employment in Cyprus. The NCI will need to commence employment in Cyprus after July 2022, and starting from the tax year following the year of employment, can avail from this exemption for seven years. It needs to be noted that an NCI benefitting from one of the exemptions set out in this paragraph, cannot concurrently avail from the other exemption.

Exemptions may be available from contributing to the Cyprus social insurance scheme for some time, to expatriate EU nationals who commence their employment in Cyprus (starting from 01st January 2024, the social insurance contributions are at a rate of 8.8% of the employee’s gross income, which maxes out on the annual income of €57,408). Employees and employers are also subject to contributions to the General Healthcare System at 2.65%, while employers contribute an additional 2% to the Social Cohesion fund.

A person who is non-domiciled in Cyprus (irrespective of their tax residency status) is exempt from tax on dividend and interest income, any gains arising from the disposal of shares, bonds and other similar financial instruments (including options and rights thereon), subject to contributions to the General Healthcare system at 2.65% for trading income only. Further, Cyprus does not impose any estate duty, wealth tax, gift tax or inheritance tax.

B.DOUBLE TAX TREATIES

Cyprus has a range of double tax avoidance treaties with various jurisdictions, including (but not limited to) Canada, Ireland, Luxembourg, the Netherlands, Saudi Arabia, South Africa, Switzerland, the UAE, the United Kingdom, the USA. Under certain conditions, these can provide for a nil or reduced withholding tax rates on certain aspects.

In December 2023, the double tax treaty between Cyprus and France was updated, demonstrating the intentions of the two countries to further enhance trade and economic ties between them, safeguarding fairness and equitability, and aims at further promoting Cyprus as an international business centre.

V.CLOSING REMARKS

Despite various setbacks in the funds and investments sectors, following recovery from the local pandemic and recent geopolitical unrest, the nation remains committed to strengthen and promote the funds industry, by being at the forefront of the sector’s developments and needs, and adapting to the same at a quick pace. Cyprus’s small size has proven to be working to its benefit as the local sectors and their regulators have a more direct relationship, and each is quick to listen to and respond to the requirements and needs of the other, shown in the surge of registrations of alternative investment funds as well as the upcoming enactment of the fund administrators’ law, a long-standing request from the funds industry. Combined with its flexibly legal system, attractive tax environment and plethora of highly skilled and expert professionals throughout various sectors of the economy, Cyprus has put itself on the map as an attractive destination to structure investment vehicles, investment managers and their service providers.