23 September 2016

Cyprus modernises its fund rules

Regulatory competition is well-established in Europe and, as we have argued before, has been helpful in establishing a legal environment that is more conducive to private equity and venture capital investment – a benefit to the whole European economy, as well as to the innovating country. One such innovator is Cyprus which, in 2014, modernised its legal framework to attract fund business and, more recently (with advice from King & Wood Mallesons), has proposed further measures to make it an attractive destination for fund managers.

The latest set of proposals include amendments to limited partnership law which – perhaps inspired by reforms elsewhere – will now include a list of "safe harbours" for limited partners, giving greater legal certainty to investors regarding the activities they may undertake without undermining their crucial limited liability status.  Similar changes have already assisted the Luxembourg SCSp and, before it, the Guernsey, Jersey and Cayman limited partnerships in gaining traction as common investment vehicles, and there are outstanding proposals to make a similar change in the UK (proposals which the British government should expedite). But Cyprus also aims to go one step further than the UK and, similar to the position in Guernsey and Jersey, allow the general partner to elect upon establishment for the limited partnership to have separate legal personality, while maintaining its tax transparency. This will be particularly helpful for funds of funds managers (who need a fund structure that can itself invest in other limited partnerships).

Aside from focusing on its limited partnership law, Cyprus is also introducing a regime for registered, but not authorised, alternative investment funds (AIFs), to facilitate quick and cost effective fund launches. Similar to its cousin in Luxembourg, the Cyprus RAIF will be able to market to professional investors and/or well-informed investors and will be managed by a fully authorised EU Alternative Investment Fund Manager (AIFM), based in Cyprus or elsewhere in the EU. The regulated external AIFM will be entrusted by the Cyprus Securities and Exchange Commission (CySEC) to provide indirect supervision and ensure compliance.

A relative newcomer as a jurisdiction for private equity, Cyprus hopes to play an important role as a common law, rather than a civil law, jurisdiction within the EU (and a member of the Commonwealth) that is geographically well placed to function as a "bridge" between Europe, the Middle East, Asia and Africa. And to help spread the word, King & Wood Mallesons will be co-hosting a seminar in London with the Cyprus Investment Funds Association on 1 November. If you want to know more about Cyprus as a destination for private equity, and as an answer to "Brexit, Passporting, BEPS and other challenges", please register your interest and save the date in your calendar.

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