Open-Ended Undertaking for Collective Investments in Transferable Securities (UCITS)
The UCITS law 200(I)/2004, which implements the EU directives, provides the legal framework for the registration, regulation and marketing of local and foreign funds in Cyprus.
Under this law, a UCITS is an undertaking:
the sole object of which is the collective investment in transferable securities and/or in other liquid financial assets as specified in the law of capital raised from the public, and
- which operates on the principle of risk-spreading and
- the units of which are, at the request of holders, redeemed, directly or indirectly, out of this undertaking’s assets.
In order to establish and operate a UCITS, an establishment and operational licence is required for the undertaking, which is granted by the Cyprus Securities and Exchange Commission (CySEC). CySEC supervises the operation of UCITS and is exclusively responsible for issuing and revoking the establishment and operational licence of UCITS.
Under this law, local UCITS may take the following legal forms:
- Mutual Fund or
- Variable Capital Investment company.
The law clarifies that the following are not considered to be UCITS within the meaning of the Law:
- UCITS which are closed-ended
- UCITS that raise capital without promoting their units to the public in Cyprus or other EU member states
- UCITS that based on their fund rules or Memorandum and Articles only sell their units to the public of third countries
- UCITS which are in conflict with the investment and borrowing policy set out in the law 200(I)/2004, and
- Investment companies the assets of which are invested through subsidiary companies otherwise than in transferable securities
Mutual Funds
Setting up and operating a Mutual Fund in Cyprus
A Mutual Fund is a pool of assets, whose assets belong, jointly and separately, to unit-holders and whose operation is governed by the Mutual Fund’s regulations.
The Mutual Fund is collectively managed by a management company, after an establishment and operation licence is issued by the CySEC. In addition, the Mutual Fund’s assets are compulsorily entrusted for safekeeping to a Depositary, in accordance with the law.
Prerequisites for the issue of license:
The prerequisites for the issue of license include, amongst other, the following:
- CySEC checks the legal composition of Mutual Fund’s assets, whether the management company and the depositary have the know-how required for carrying on their duties
- The Mutual Fund’s regulations are approved by CySEC as long as the latter is satisfied as to its legality and it shall also be examined whether sufficient care is taken through it to safeguard the interests of unit-holders
- The minimum initial assets of the Mutual Fund in cash must have a total value of at least EUR1.700.000
- The share capital of the management company shall be paid in cash and shall have a minimum value of EUR765.000, which shall paid in full with the granting of the operation licence of the management company
Variable Capital Investment company
Setting up and operating a Variable Capital Investment company
The Variable capital investment company is a limited liability company with shares, established in accordance with the provisions of this Law and the Companies Law, by which they are governed.
The main object of Variable capital investment companies shall be the collective investment in transferable securities or other liquid financial assets, in accordance with the law.
Variable capital investment companies shall only manage their assets and cannot undertake the management of third party assets.
Subject to the provisions of law:
- the safekeeping of the assets of an Investment Company shall be assigned to a depositary and
- the management of an Investment Company is assigned to a management company
Conditions for the granting of an operation licence:
The conditions for granting of an operation license, amongst other, the following:
- The Investment Company shall have at its incorporation or in case of conversion from a fixed capital company to an Investment Company fully paid share capital, whose minimum value shall be EUR1.700.000 (which may be increased by a Directive of the Commission)
- The legality of the Investment Company and memorandum and articles of association shall be verified and it shall be examined whether sufficient care is taken through the memorandum and articles of association to protect the interests of shareholders
- The selection of the management company and depositary is not be approved by the CySEC unless they satisfy the conditions of the law
- The operation licence of the Investment Company shall not be issued if its directors or the directors of the depositary or management company do not produce the appropriate character references or do not have the experience required to carry out their duties.
Taxation of UCITSs
UCITSs are subject to tax like any other Cyprus entity. This translates to the following basic tax highlights:
- Taxable profits of all Cypriot companies are taxed at the rate of 10%, the lowest in the EU
- Extensive double tax treaty network leading to the avoidance of double taxation
- Cyprus’ current tax system is in full compliance with the EU and OECD
- Profits from the disposal of securities are tax exempt
- Profits earned from a permanent establishment abroad are fully exempt from corporation tax (under certain conditions)
- Dividend income received in Cyprus from a foreign corporation is wholly exempt from taxes in Cyprus (under certain conditions)
- Interest income earned from trading activities, including interest which is closely related with trading activities, is subject to income tax at 10%
- No withholding tax on dividends and interest paid to non-residents of Cyprus Also no withholding tax on royalties arising from sources outside Cyprus
- Group relief provisions for companies tax resident in Cyprus
- Capital gains are not subject to tax, except on sale of immovable property situated in Cyprus
In a nutshell, what is significant for UCITS is the:
- exemption from tax on foreign dividends received
- exemption from tax on profit from sale of securities as defined
- no withholding tax on income repatriation by the UCITS