Cyprus is a prominent location for the activities of International Collective Investment Schemes.

ICIS’s established in international jurisdictions such as the Cayman Islands or Luxembourg have utilised Cyprus extensively in the last 10 years, investing billions of US Dollars into Eastern European Countries, especially Russia and more recently India.

Legislation passed in May 1999 provides for the establishment and regulation of ICIS’s in Cyprus.

ICIS’s established in international jurisdictions

An ICIS established in an international jurisdiction such as the Cayman Islands or Luxembourg can establish a Cyprus wholly owned International Business Company. The Cyprus IBC invests on behalf of its parent entity mainly into countries that Cyprus has a double tax treaty with.

Such a structure is known as a “Feeder Fund” or a “Two-tier Fund”. The Cyprus investing company enjoys the tax benefits and the access of Cyprus to the European Union Directives.

A variation to the Feeder Fund can be established where the Cyprus IBC can act as the trustee or custodian for the overseas ICIS. This possibility is covered under the section on International Trusts in Cyprus.

ICIS’s established in Cyprus

The law on International Collective Investment Schemes passed in May 1999, provides for the establishment and regulation of ICIS’s in Cyprus. Under the law the authority to supervise such entities is with :

• The Central Bank of Cyprus for the Private ICIS’s, and
• The Cyprus Stock Exchange commission for the Public ICIS’s.

1. Nature of entities that could be established:

There are four main types of entities that are envisaged by the law in ICIS’s in Cyprus:

• Fixed Capital Companies
• Variable Capital Companies
• Unit Trusts
• Limited Partnerships
  
  The ICIS’s are classified under three categories depending on the identity and number of their investors:
• Public Schemes
• Schemes addressed to experienced investors
• Private Schemes

2. Establishment of an ICIS in Cyprus

The guide for the establishment of an International Collective Investment Scheme in Cyprus can be provided in electronic format on request. This includes:

• The Policy, Principles and Definitions
• Applications Questionnaires
• Specimen Letters and Minutes
• Objects Clauses

To receive the guide please contact us directly.

Advantages of establishing a Feeder Fund in Cyprus

There are a number of tax and other advantages in establishing a Feeder Fund in Cyprus. These may include:

1. Tax Advantages

Cyprus International Business Companies pay income tax at 4.25% on their net profit while capital gains are exempt from tax.

In the case of IBC’s which buy or sell securities and other similar instruments, the issue arises as to whether the gain generated from the disposal of such securities is of a capital nature (tax exempt) or whether it is of an income nature (taxable at 4.25%).

The Cyprus tax authorities view the activities of a typical feeder fund as trading in securities and tax any gain generated from the disposals of such securities at 4.25%.

However, the taxable profit of a Feeder Fund can be reduced in a number of ways, including:

• the funding of the IBC by interest bearing loans from its parent as opposed to capital. Such interest is tax deductible.
• putting in place management charge agreements to reflect the fact that the Cyprus entity has, in effect, no expertise on its own to carry out the investments.

A number of ICIS’s have identified the possibility of completely avoiding both capital and income tax on their activities.

This is achieved by setting up a Feeder Fund Company for each security or portfolio invested in. The ICIS sells the shares of the Cyprus subsidiary as opposed to the underlying assets of the investment of the Feeder Fund.

Such a transaction is considered of capital nature and exempt from tax. The additional advantage of this set up arises from the fact that there is no change of ownership of the securities invested in by the Feeder Fund, avoiding in such a way transaction costs on the change of effective control.

2. Other Advantages

• Convenient time zone for dealings in Central and Eastern Europe
• Excellent telecommunication facilities in Cyprus
• Efficient services for the legalisation of documents 
•  Wide network of double tax treaties enabling sophisticated tax planning structures