Alternative Investment Funds – an Outline of the Set Up and Procedure

The Alternative Investment Funds Law of 2014 was enacted by the Cyprus House of Representatives on 10 July 2014.

The AIF Law updates the regulations regarding funds in Cyprus and brings it in line with the latest EU directives on investor protection, alternative funds management and alternative funds in general(Alternative Investment Fund Managers Directive 2011/61/EU, Commission Delegated Regulation (EU) No 694/2014 supplementing Directive 2011/61/EU etc.). The AIF law replaces the International Collective Investment Schemes Law N47(I) of 1999) (the “ICIS Law”).

According to the Law, the existing ICIS will be able to keep their structure and continue to operate as Alternative Investment Funds with a limited number of persons, or be transformed into an Alternative Investment Fund.

The competent authority for examining the application and issuing the license for the operation of the fund is the Cyprus Securities and Exchange Commission (CySec). The period required for reviewing the submitted application is about4-12 weeks from the date of filing of all the required documents and information. The CySec in granting approval may impose various terms and conditions and amend the same from time to time.

An “Alternative Investment Fund” (AIF) is defined as any collective investment undertaking, including investment compartments thereof, which, collectively:

raises 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; and

does not require authorisationin accordance with section 9 of the Open-ended Undertakings for Collective Investments Law of 2012 or in line with the legislation of another Member State which harmonises the article 5 of the Directive 2009/65/EC.

The purpose of an ICIS is collective investment in property belonging to the members of the scheme i.e. the unit holders.

The Law recognises three categories of AIF, namely schemes:

Open to the public.

Available to the public in the form of: a Company with fixed capital; a Company with variable capital; a Common Fund; Limited Partnership.

All three forms allow for legally segregated sub-funds to be created. There is no limit to the number of investors.

Open to professional and/or well-informed investors.

Can be created in the form of: a Company with fixed capital; a Company with variable capital; a Common Fund; or a Limited Partnership.

All three forms allow for legally segregated sub-funds to be created. There is no limit to the number of investors.

With a Limited Number of Persons (the AIFLNP)(1).

Available in the form of: a Company with fixed capital or a Company with variable capital; or a Ltd. 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 represents the most flexible legal form provided by the AIF Law. The above-mentioned form is the closest form to the previously existing Private International Collective Investment Scheme (“PICIS”).

All three types of AIF are regulated by the Securities and Exchange Commission of Cyprus (CySec). This publication summarises the position regarding AIF LTD only.

AIF’s with a Limited Number of Persons (AIF LNP)

An AIF LNP must not have more than 75 members, be marketed to “well informed” and/ or “professional investors” and maybe a limited or unlimited in time.

The Markets in Financial Instruments Directive 2004/39/EC (“MiFID”) defines a professional investor as any investor who is considered, or may be treated on request, as a professional client. The well-informed investor is defined as an investor not considered to be a “professional investor” who meets the following criteria:

he confirms in writing that he is a well-informed investor and has been notified of the risks associated with investing in the AIF in question,

his investment in the AIF is at least 125.000 euro and he has been evaluated as a well-informed investor either by a banking institution, or a MiFID compliant investment firm, or UCITS management company, or AIFM, and further that he has the appropriate expertise and required knowledge to assess the suitability of the investment.

An AIF LNP is not required to issue a prospectus, no investment restrictions, no formal leveraging restrictions, no formal requirement to appoint local Directors (in reality, Board of Directors can comprise of foreign Directors who regularly meet in Cyprus).

An AIF can be self-managed and there is no requirement to appoint an external investment manager, in case of an AIF-LNP formed as a Company with fixed capital or a Company with variable capital.

An AIF-LNP formed as a Limited Partnership must appoint an investment manager who undertakes the duties and responsibilities of the general partner. If managed internally, the persons carrying out the internal management must be approved by CySec respectively in terms of their investment experience and capacity. The external investment managers who can be appointed to manage an AIF-LNP (depending on the type and size of the investments) are: a UCITS management company, an Alternative Investment Fund Manager (licensed under the AIFM Directive), a licensed Investment Firm (from any part of the world, subject to conditions) or (in limited circumstances) an entity whose sole purpose is the management of the specific AIFLNP.

A custodian (preferably a local bank) needs to be appointed for safekeeping and cash monitoring. The custodian can be in an EU member state or a third country, subject to CySEC’s approval. In case an AIF LNP meets the following criteria: its assets under management are less than €5 million, or there are less than five investors, or all investments are considered not to be subject to custody (i.e. real estate, commodities, etc.), there is no obligation to appoint a custodian.

An AIF is subject to minimum capital requirements. The minimum share capital is expected to be €125.000 or €300.000 (for a self-managed AIF).

Advantages of the AIF

The Alternative Investment Funds Law of 2014 covers various new advantages by no means restricted to the following:

Umbrella Funds.

The new Law introduces structuring options such as multiple investment compartments, enabling the management of different pools of assets in legally segregated sub-funds within a fund, each being subject to distinct policies;

Mutual Fund.

The introduction of a Mutual Fund (or Common Fund) which is a contractual fund structure where investors participate as co-owners of the assets of the AIF, a form extensively used in various suitable circumstances, such as structuring investments of pension funds;


Not only can credit or banking institutions act as a depository according to the new regulations but also other entities (investment firms, etc.);


One exemption from the requirement to appoint a custodian is cases where an AIFs asset is worth under 5 million or the number of investors are limited to 5 or the nature of the assets is not subject to custody, thus allowing for significant cost-efficiency.

AIFs can be listed on the Cyprus Stock Exchange, where applicable, and other recognized stock exchanges in the EU or in a third country.

There is no obligation to use the fund for local or any charity purposes.

No restrictions are imposed on the kind of investment that the AIF will carry out.


The procedure described below must be followed to obtain the required CySec approval and create an AIF (the procedure is the same more or less irrespective of the form of the AIF).

An applicant has to submit an application to the CySecin the required form together with the following documents:

Private Offering Memorandum, listing the strategy of the fund, the expected return for investors, risk management, and identification of all key providers etc.

Questionnaires for all directors and people involved in the management of the fund. Details of all applicants for the position of Director:

Copy of a passport and recent utility bill as evidence of their residential address.

CV with details covering a minimum period of 10 years.

Reference letters from all employers in last 10 years.

Additional bank reference letter and a reference letter from a lawyer.

Copy of all college/university/diploma or professional designations. If not in English, an official translation is required by a sworn translator of the local Ministry of Justice.

Extract form the local penalty registrar indicating that the proposed Director has a clear criminal record, translated by a sworn translator of the local Ministry of Justice.

Other useful information


An AIF may establish another company or companies to be used as a vehicle for a specific investment. This may be advisable if there is a need to take advantage of the Cyprus Double Taxation Treaties or to reduce any potential commercial or other risks by not having the fund itself directly holding the investment.

Low corporate tax rate for the AIF in comparison to others Member States (12.5%)

The gains from the sale of investments are not taxable. Profits realised by way of redemptions from holdings in other companies (including other AIFs) would be entirely excluded from taxation.

Dividends received by a Cyprus AIF from a non-Cyprus tax resident subsidiary will usually be exempt from corporate income tax in Cyprus.

Investors residing outside Cyprus shall, once they have provided documents confirming that they are based in a country party to a double-taxation treaty with Cyprus, benefit from substantial tax relief from any profits received from a redemption or income received on a dividend, which in a plethora of cases results in no tax being imposed.

Non-residents are also entitled to establish a fund in Cyprus. At the same time, investors who meet the necessary conditions can proceed with obtaining Cyprus citizenship by investing in an AIF.

The fund which will be registered as a private limited company can open bank accounts in other countries, including Russia. The fund will be taxed in Cyprus. The way that the money will be used is determined by the way the fund founders will describe in their business plan and the private offering memorandum as approved by CySec.

Money can be transferred in and out of the AIF in Cyprus and abroad. This money is a subject to the normal due diligence procedures and the terms of the investment fund which will be agreed between the fund and the investors.


The cost (including our fees, all registration and other Government duties and fees) of setting up an AIF and applying for and obtaining the required CySec approval, including drafting the required documents, the memorandum and articles of association, the trust deed or partnership deed, preparing, completing and filing the required application form with CySec, attending meetings and other communications with CySec during the review process, the registration and incorporation of the AIF will vary depending on the initial value of the AIF, the complexity of the AIF, the need for any special drafting requirements and other relevant factors. Once we have a complete inquiry by a client and sufficient information in respect of the above, we can give an indication of the total costs.


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