Our DS Partners Law Firm lawyers Daniel Sakellariou and Mikaela Kantor provide an overview of the key developments in the funds and asset managementt sectors, focusing on Variable Capital Investment Companies in Cyprus, Crypto-Asset Service Providers, the expected AIFMD II and MiCA Regulation as well as the importance of ESG factors in the asset management sector.

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DS Partners Law Firm_The International Asset Management Investment Funds Review 2023-24

Download the full publication here: The International Asset Management & Investment Funds Review 2023-24 (6mb)

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The amendments have introduced a new Part of the Law dedicated to VCICs (Part XA) and include newly adopted provisions that regulate, among others:

• the required sections that must be included in the Memorandum & Articles of Association in relation to the share capital of VCICs, to be indicated as prescribed in Table E of Annex I of the Law;
• the ability to convert the share capital of a limited liability company to a VCIC without par value through the submission of a relevant notification to the Registrar of Companies (“Registrar”);
• the procedure to be followed for the amendment of the Memorandum of a VCIC in relation to its share capital and/or the rights attributed to different classes of shares; and
• the redemption of shares to take place in accordance with the constitutional documentation of the VCIC.

The Law further provides that registered VCICs are obliged, within a period of 12 months from the date of adoption of the Amendment Law – being 05 November 2021, to submit the required amendments to their constitutional documentation to the Registrar to avoid the imposition of any applicable penalties.

CySEC has further issued a reminder on 01 September 2022 addressed to all applicable entities to proceed with the adoption of the required amendments, ahead of the expiration of the adjustment period (on 05 November 2022).

We prompt all VCICs to proceed with the amendments of their constitutional documentation the soonest possible. Our team stands ready to assist you with any enquiries.

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In light of a shifting international tax landscape, though, through the Base Erosion and Profit Shifting (“BEPS”) action plan, which is adopted by the OECD and G20 countries and has introduced tighter regulation on the international tax system as a whole, as well as unilateral measures adopted by developed and usually high tax jurisdictions, the requirement for ‘substance’ is becoming more and more a matter of relevance and importance. ‘Substance’ is a widely known tax concept, often used in cross-border tax situations. Even though there is no definition as to what ‘substance’ actually stands for, it is a key theme in international structures and tax planning. The matter of ‘substance’ has also been touched upon in courts; the European Court of Justice in its ruling on the Cadbury Schweppes Plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue Case decided that the application of the UK’s Controlled Foreign Companies (CFC) legislation, which required the inclusion of profits of Irish subsidiaries of Cadbury Schweppes Plc to its taxable base in the UK, constituted a restriction on the freedom of establishment and ruled that a restriction would only be justified in relation to ‘wholly artificial arrangements which do not reflect economic reality’; in defining such ‘artificial arrangements’, the Court pointed to a ‘letterbox’ or ‘front’ company. It is also relevant to note that the EU Anti-Tax Avoidance Directive (in force as of 1 January 2019) obliges member states to disregard any non-genuine arrangements which can be viewed as arrangements involving companies that lack ‘substance’.

Even though it has been commonly accepted in corporate structures that the exercise of management and control in Cyprus, in addition to the use of office space and the hiring of employees locally, do indicate the establishment of ‘substance’ on the island, in the funds sector it has been recently claimed that the utilisation of Alternative Investment Funds (the “AIFs”), as these are authorised by the Cyprus Securities and Exchange Commission to engage in investment activities, inherently “guarantees” the existence of ‘substance’ for such entities in Cyprus. This is one of the main reasons for which we are experiencing a high volume of conversions of what would traditionally be a corporate holding structure into self-managed AIFs, which in most occasions take the form of an alternative investment fund with limited number of persons.

In turn, this has led to the paradox that even though there are hundreds of funds being set up in Cyprus the total assets under management remain surprisingly low, while most of the funds established in Cyprus have not opted to obtain passporting license(s) to market their units in other EU member states – which is one of the most important elements for the establishment of such investment vehicles in EU countries -. We are, in a way, experiencing the formation of funds by non-asset managers, which has a negative impact on the island’s reputation as a funds jurisdiction, since sophisticated asset managers identify these irregularities.

It is therefore crucial that we promote Cyprus not only as a funds jurisdiction, but mostly as an asset management jurisdiction. Attracting asset managers that utilise AIFMs for their operation(s), will effectively:

a) increase the assets under management in Cyprus;

b) contribute in the enhancement of the local knowledge, through their sophistication and expertise, in a very crucial timing – where all service providers are going through a learning curve;

c) result in the positive reputation of the island; and

d) assist in making the island an attractive jurisdiction for global custodians/depositaries;

The introduction of the Registered Alternative Investment Funds (the “RAIFs”) by the modernised AIF Law of 2018, which requires a mere registration instead of a long and timely authorisation process, assists tremendously towards this direction. The formation and management of funds in Cyprus by AIFMs in now very competitive and has proven to be very efficient, without unnecessary delays.

In turn, the aforementioned-indicative benefits will be reflected in the local economy and Cyprus’ funds service offering in both the short and long run; attracting AIFMs is an investment towards the formation of a sustainable funds ecosystem.

[As was published in the January 2019 CIFA newsletter]

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