The Alternative Investment Funds Law

What is an AIF?

An Alternative Investment Fund is a collective investment undertaking including its investment compartments which   raises external capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors but which has not been authorized as a UCITS. AIF’s, being “non-UCITS” funds, are established under domestic Cyprus fund legislation. Unlike UCITS, they are not harmonised EU funds and do not have an equivalent of the “UCITS Passport” (although a similar distribution permission is possible via the AIFM Directive and Law). However, they are widely recognised internationally and can be sold on a private placement basis to investors subject to compliance with local securities laws.

Entities such as holding companies, social security schemes covered by Law59(I)/2010, entities covered by the law regulating Insurance Business 35(I)/2002, entities for employee savings schemes or employee participation schemes, entities for occupational retirement, securitization special purpose entities and approved investment companies of the CSE (Cyprus Stock Exchange) are excluded from the AIF Law.

The AIF Law sets down the rules for the authorization, ongoing operations, transparency requirements and supervision of AIFs of the Republic of Cyprus. To a certain extent, it also applies to individuals involved in the activities of AIFs such as directors, external managers and custodians.



In the month of July 2014, the House of Representatives approved the enactment of the Alternative Investment Funds Law of 2014 known as the “AIF Law”. This law aligns the Cypriot Investment Funds legal framework with the recent developments in the EU and in particular with the EU Alternative Investment Fund Managers Directive, known as the AIFM Directive, in conjunction with the “AIFM Law” – Alternative Investment Fund Managers Law of 2013.

The purpose of the AIF Law aims to strengthen the funds regime in Cyprus by modernizing and expanding the legal and regulatory product toolbox available to asset managers and promoters of AIFs. Changes introduced in the regime are in line with recent EU directives on asset management, with emphasis given on transparency rules and investor protection.

The AIF Law allows for three different types of AIFs to be registered in Cyprus:

  1. AIF’s available to the public in the form of a Company (with fixed or variable capital), a Common Fund, or a Limited Liability Partnership. All three legal forms allow for legally segregated sub-funds to be created and there are no limits to the number of investors.
  2. AIF’s available to professional and/or well-informed investors in the form of a Company (with fixed or variable capital), a Common Fund, or a Limited Liability Partnership. All three legal forms allow for legally segregated sub-funds to be created and there are no limits to the number of investors.
  3. AIF’s with Limited Number of Persons (the “AIF-LNP”) in the form of a Company (with fixed or variable capital) or a Limited Liability Partnership. Both legal forms allow for legally segregated sub-funds to be created and the maximum number of investors is limited to 75.   In essence, the AIF-LNP is a “light-touch” regulated investment fund, representing the most flexible legal form provided by the AIF Law.  It also most closely mirrors the previously used Private International Collective Investment Scheme -“PICIS”.

It should be noted the enactment of the AIF Law has repealed and replaced the previous  International Collective Investment Schemes Law of 1999 (the “ICIS Law”), with existing ICIS required to convert into any of the above mentioned three categories of AIFs.

Why Choose Cyprus?

It is a well-known fact that Cyprus offers a wide range of legal, regulatory and tax solutions to meet the needs of AIF promoters and investors. Services such as set up and acquisition structuring, fund administration, legal, custody and audit are offered in a customized way at very competitive costs in comparison to other reputable funds jurisdictions.

It must also be noted that Cyprus has one of the lowest corporate income tax rates in the EU at 12.5% along with numerous other benefits such as full exemption from tax on gains from trading in securities and a generous participation exemption regime on foreign dividends, in conjunction with an extensive network of double tax treaties for international tax planning both at a corporate and individual level. Additionally, Cyprus is in line and adheres to the EU and international standards on all anti-money laundering regulations.

Below is a list of the main tax advantages enjoyed by an AIF in Cyprus:

  • Exemption from tax on profits from disposal of shares and other financial instruments;
  • Exemption from tax on foreign dividends received (with some conditions);
  • No withholding tax on interest and dividend payments made to non-residents;
  • No stamp duties on the subscription, redemption, repurchase or transfer of units;
  • Dividends distributed or deemed to be distributed by an AIF to Cyprus tax residents are subject to 3% SDC (compared to 17% that applies to dividends from normal limited liability companies to Cyprus tax residents);
  • No withholding tax on redemption of units;
  • Can obtain a Tax Residency Certificate;
  • Enhanced image and creation of substance. Unlike private companies, an AIF is subject to regulation and monitoring, all Directors are deemed to be “fit and proper”, investment strategy is documented within an Offering Memorandum, and a custodian/depositary and investment manager are typically appointed.
  • In practice most AIFs generate only exempt forms of income, hence are not subject to Cyprus tax.
  • A wide network of Double Tax Treaties is in place with more than 57 countries worldwide, securing tax incentives and encouraging the channelling of funds in other countries with nil or low withholding tax rates.

The Legal Framework of an AIF

Under the applicable Cypriot legislation, namely the AIF Law, the Cyprus Securities and Exchange Commission “CySec” is the regulatory and supervisory authority for AIFs and may, upon a written application, recognise a Company, a partnership or a common fund as an AIF.

The various legal forms in which an AIF-LNP can manifest in are analytically described below:

(i) Fixed Capital Investment Company (FCIC)

  • Incorporated under Cyprus Companies Law and recognised to operate as a fixed capital investment company by the AIF Law.
  • Its share capital cannot vary and remains fixed.
  • Legally segregated sub-funds of the FCIC can be created.

(ii) Variable Capital Investment Company (VCIC)

  • Incorporated under the Cyprus Companies Law and operates as a variable capital investment company by the AIF Law.
  • Its share capital varies according to the participating investors at any given time.
  • The share capital of the company is equal to the net asset value (NAV) of the shares of the company at any time.
  • The VCIC is the most common form of AIF-LNP formed in Cyprus.
  • Legally segregated sub-funds of the VCIC can be created.

(iii) Limited Liability Partnership (LLP)

  • A limited liability partnership registered in accordance with the General and Limited Partnerships and Trade Names Law and recognised to operate as a limited liability partnership under the AIF law.
  • As with all limited partnerships, there must be a General Partner who exercises the management of the LLP and is responsible for the debts and liabilities of the LLP.
  • The limited liability partners are not responsible for the debts and liabilities of the LLP, beyond the amount of their contribution.
  • A limited liability partnership can also have a corporate entities act as partners.


The purpose of an AIF-LNP is the collective investment of funds within a defined investment strategy, by the unit-holders. Such vehicles provide an arrangement that enables a group of investors to add collectively their assets, have these professionally managed and invested by independent managers/entities and, in case of successful investment, extract their profits in a tax efficient manner.

More than 60% of AIF-LNP registered in Cyprus were incorporated in the last six years (under the ICIS regime) and originate from a wide range of countries throughout Europe.

80% of these funds take the legal form of International Variable Capital Companies and 20% are registered as Limited Liability Partnerships.

Listed below are the characteristics of the current AIF industry in Cyprus with focus on the most common form which is the AIF-LNP.

The AIF-LNP can have up to a maximum of 75 investors, who are also known as unit-holders, and must be marketed only to professional and/or well informed investors.

The AIF Law defines a professional investor as an investor who is considered to be a professional client or may, upon the investor’s request, be treated as a professional investor within the meaning of Annex II of the Investment Services and Activities and Regulated Markets Law, as amended.

The AIF Law defines a well-informed investor as being a non-professional investor who fulfils the following conditions:

  1. Confirms in writing that he is a well-informed investor and that he is aware of the risks related with the proposed investment; and
  2. Either invests a minimum of EUR 125,000 in the AIF, or he is successfully assessed as a well-informed investor by either:
  1. A credit institution in Cyprus or the EU;
  2. An investment firm in Cyprus or the EU;
  3. A UCITS management company.

 The main advantages offered to the investors in an AIF-LNP are:

  • No investment restrictions;
  • No investment diversification requirements;
  • No minimum initial capital requirements;
  • The ability to create legally segregated sub-funds.
  • Low setup and maintenance costs;

How can Parparinos Milonas Corporate and Legal help you?

Our qualified team of professionals can cater to all your business needs as it relates to the authorisation and operation of your AIF, as well as compliance with the new legal framework. It also involves other professionals, which must be approved by CySec. Our Services also include the selection and appointment of all professionals required for an AIF-LNP to be licensed, established and operate seamlessly, and our clients have the choice at all times to provide their own Investment Manager, Custodian or Auditor so long as such providers are approved by  CySec.

Our services include among others:

  • analysing the provisions of the AIF Law and their impact on existing ICIS structures
  • advising on the set up and structuring of new AIFs / reorganisation of existing ICIS;
  • preparing the application (including assisting with the constituent documents and offering memorandum) and liaising with CySEC and the Registrar of Companies where applicable)
  • tax, audit and compliance services throughout the life of the AIF.

Write a Reply or Comment