LAW No. 47(I) OF 1999 AND ITS PROVISIONS.
INTRODUCTION
In May of 1999 the International Collective Investment Schemes Law No. 47(I) of 1999 came into force placing Cyprus, once again, at the forefront of the International Business Centres.
There are a number of Jurisdictions, which offer various types of investment schemes. Cyprus, however, offers various incentives to such schemes. Not only from a tax perspective but also first-class legal, accounting, banking services, accessibility and sophisticated communications facilities make Cyprus the ideal jurisdiction for the establishment of International Collective Investment Schemes.
Basically, a Collective Investment Scheme involves the collection of funds from individual investors for investment. This can be in equities, bonds, commodities, futures etc. One of the major advantages for the individual investor is the creation of a fund large enough to facilitate diversification. Other advantages include the spread of risk and the benefit of the on-going services of a professional fund manager.
Legal Form
An International Collective Investment Scheme can take several forms:
· An International Fixed Capital Company,
· An International Variable Capital Company,
· An International Unit Trust Scheme, and
· An International Investment Limited Partnership.
The sole object of the scheme must be the collective investment of funds of unit holders, the units of which, unless provided otherwise by the Law or any other law applicable thereto or its constitutional documentation, are at the option of unit holders redeemed or repurchased directly out of the assets of the scheme.
Under the Law, a unit holder is the owner of units, which could be a share, participation or an interest in the scheme. A unit holder may be an International Collective Investment Scheme or an offshore enterprise, or a natural person who of course should not be a permanent resident of Cyprus.
As mentioned above, an International Collective Investment Scheme can take one of four possible legal forms. All four may be established with unlimited or limited duration and may be structured in such a way as the promoters may determine, provided however, that adequate protection is afforded to the unit holders.
Moreover, an International Collective Investment Scheme may be designated, according to investment policy and the particular investment objectives as:
· an International Collective Investment Scheme marketed to the general public, or
· one marketed solely to experienced investors.
The criteria set by the Central Bank of Cyprus for a person whether legal or natural, so as to be regarded as an experienced investor, will be whether he is a person who himself provides financial services to the public, or is a person who frequently enters into investment transactions which, on average, are of substantial size and such person, having regard to all relevant facts, can reasonably be expected to appreciate the risks inherent in investment transactions.
Private International Collective Investment Scheme
A Scheme can also be designated as a Private International Collective Investment Scheme. A Private International Collective Investment Scheme is a scheme, where by its constitutional documentation, restricts the right to transfer its units and limits the number of its unit holders to one hundred (not including persons who are in the employment of the scheme, where while in that employment and have continued after the termination of that employment to be unit holders of the scheme.) It also prohibits any invitation to the public to subscribe for any units of the scheme and prohibits the issue of bearer units.
Fund Manager
There is a requirement under the Law that all International Collective Investment Schemes, except for Private International Collective Investment Scheme, to appoint a manager.
Before appointment the manager must be approved by the Central Bank. In order to fulfill the eligibility criteria the manager must on an ongoing basis, satisfy the Central Bank that having regard to the investment policy and the particular investment objectives of the scheme for which it wishes to act as manager, it has sufficient financial and operational resources at its disposal to meet its liabilities and to enable it to conduct its business effectively.
Moreover, it must have sufficient investment expertise at its disposal to conduct its business in accordance with the investment objectives and policy as set out in the constitutional documentation of the scheme. A manager, according to Section 39(4) of the Law, may with the consent of the Central Bank delegate all or any of its functions or duties to any other person or persons.
Trustee
In addition to the requirement to appoint a manager, all International Collective Investment Schemes, unless specifically exempted by the Central Bank or unless designated as Private International Collective Investment Schemes, must appoint a trustee to hold the assets of the scheme.
Under Section 45 a trustee of an International Collective Investment Scheme may be a bank licensed to carry on business in or from within the Republic or in a country which in the opinion of the Central Bank exercises adequate banking supervision in its jurisdiction.
Moreover, a trustee can be any other person other than a bank which provides trustee services to the public at large in or from within The Republic and which is adequately supervised or in a country which in the opinion of the Bank exercises adequate financial regulation.
Lastly, it may be a company incorporated in Cyprus which is a subsidiary of either a bank or a trustee company, provided that its liabilities are fully guaranteed by that person. The trustee will need to demonstrate to the Bank that it has the capability to provide trustee services to a scheme. All officers of the trustee must be persons of integrity and have an appropriate level of knowledge and experience and the significant shareholders, must in the opinion of the Central Bank be fit and proper persons.
An International Collective Investment Scheme, which will take the form of an International Investment Company or an International Investment Limited Partnership may be exempt from the requirement to appoint a trustee, provided that the Central Bank is satisfied that the interest of the unit holders in the scheme will not in any way, be prejudiced by the absence of a trustee.
Audit
Every scheme is required to appoint an auditor who shall audit the information given in the scheme’s annual reports in accordance with International Auditing Standards and who shall prepare a relevant report. The report must be reproduced in its entirety in the annual report of the scheme.
According to Section 65, an annual report must be prepared for each financial year and half yearly reports covering the first six months of the financial year must be submitted to the Central Bank and the unit holders within three months of the end of the financial year and shall contain such information as may be prescribed by the Central Bank.
The financial accounts of the International Collective Investment Scheme must form an integral part of the annual and the half-yearly report. The manager of International Collective Investment Scheme, or in the case of an International Investment Company, which is exempt from the requirement to appoint a manager, its directors are responsible for the preparation of the financial accounts.
The manager or directors, as appropriate, must ensure that the financial statements give a true and fair view of the state of affairs of the International Collective Investment Scheme. The said financial statements should be signed by two directors of the International Collective Investment Scheme or by two directors of the manager as appropriate. The annual report of every scheme must include the report prepared by the trustee of the International Collective Investment Scheme on the conduct of the manager in its management of the scheme.
APPLYING FOR RECOGNITION AS AN INTERNATIONAL COLLECTIVE SCHEME
The Central Bank of Cyprus has been designated under Section 3 of the Law as the competent authority with the responsibility for the recognition, regulation, and supervision of International Collective Investment Scheme.
In order to obtain recognition under section 4,10,18 or 21, (depending on the legal form the scheme will take) an application must be made to the Central Bank of Cyprus. A person, whether natural or legal, submitting an application to the Central Bank of Cyprus in order to be involved with the establishment, management or administration of an International Collective Investment Scheme, must be a ‘fit and proper person’.
In determining whether a person is ‘fit and proper’ the Central Bank takes into account relevant educational and professional qualifications, experience, reputation and capital resources available to it. The applicant company, international trust or investment limited partnership, as appropriate, must submit to the Central Bank the necessary form, together with documentation and the prescribed application fee.
The documentation must include a copy of the Memorandum and Articles of Association of the International Fixed Capital Company or International Variable Capital Company, or in the case of a Unit Trust Scheme, a copy of the trust deed and in the case of an International Investment Limited Partnership, a copy of the partnership agreement.
Personal questionnaires must be completed and submitted as appropriate by all natural persons who are officers of companies seeking recognition as an International Collective Investment Scheme, promoters of companies, unit trusts and partnerships seeking recognition as International Collective Investment Scheme, controlling shareholders and officers of managers, controlling shareholders and officers of trustee.
TAXATION OF THE INTERNATIONAL COLLECTIVE INVESTMENT SCHEME
Taxation of an International Collective Investment Scheme is governed by the Income Tax Law (as amended), which makes provisions for the taxation of all types of profits or gains realized by International Collective Investment Schemes.
Any profits generated by an International Collective Investment Scheme, including a Unit Trust or an International Investment Limited Partnership, are subject to tax at the rate of 4.25%.
However, 90% of profits or gains realized by Schemes through the disposal or sale of securities will be exempt from taxation. As such, gains realized from the sale of securities are effectively taxed at the rate of 0.425%.
Dividend or interest payments will be taxed at the rate of 4.25%. These however, may be subject to applicable credit relief afforded by any of Cyprus’ double taxation treaties. This in effect would serve to reduce or in certain situations eliminate Cyprus tax.
No further tax is imposed on any dividends or other distributions made by an International Collective Investment Schemes to its unit holders. The income of managers and trustees is exempt of income tax.
Cyprus double taxation treaties can offer an additional incentive for the establishment of an Investment Scheme on the island rather than in another Jurisdiction.
With careful planning, the double taxation treaties can be utilized so as to offer the opportunity to an investor in jurisdiction A to invest in jurisdiction B by facilitating capital transfers from A to B without withholding of tax or foreign exchange consequences in the jurisdiction of the Collective Investment Scheme.
Furthermore, the political and economic stability, established and effective infrastructure, coupled with effective and enforced regulation, makes Cyprus the ideal choice for the establishment of International Collective Investment Schemes.
