Opportunities for Israeli Fund/ Asset Managers in Cyprus - the Cyprus regulatory & legal framework

Interview with Christia Evagorou, Director, Funds Services and Nayia Ziourti, Advocate and Director, Legal Services at PwC Cyprus 

1. PwC Cyprus is one of the main points of contact for international companies  and foreign investors in Cyprus and has been heavily involved in the  promotion of Cyprus’ Investment Fund industry abroad. 

(a)Christia: Please describe your experience in the Asset Management and  Investment Fund Industry as well as any past experience working with  Israel and Israeli Funds and Fund Managers?  

[Christia]: The Asset Management sector is indeed one which has always been at the forefront of change and innovation. It provides a link between investors who seek savings and investment vehicles and the financing required by the real economy. As advisors focusing in the Asset Management and Investment Fund Industry, we have been witnesses, and at times instigators, of the re-shaping of the industry over the years, which has been the result of both pressures faced by the industry but also of boundaries being pushed. One thing that is certain is that to succeed in this space you need to be agile and future-focused. 

The Israeli Asset Management scene is indeed one that places importance on innovation and for this reason it is attracting considerable attention from international investors. This is coupled by the existence of sophisticated and experienced Fund and Asset Managers in Israel, who focus on technology, start-ups, biomedical, pharmaceuticals and infrastructure, all areas that require expertise but that also promote growth and promising returns.

To date, we have seen a number of Funds set up in Cyprus that have Israeli underlying investments, especially venture capital funds and we have also seen interest from Israeli managers choose Cypriot Fund and Fund Manager structures to gain access to EU investors and to enable them to put investors at ease that they are afforded the protections of EU Regulations. 

Recently, we have been witnesses to serious challenges faced by some Fund and Asset Management jurisdictions, outside the EU, which have been favoured in the past by Israeli managers. This is expected to cause a shift in the traditional structures and regimes adopted in the Israeli Asset Management scene. As a result, I anticipate that the Cyprus-Israel cooperation in the sector will see a strengthening bond in the years to come. 

(b)Nayia: Please describe the legal framework and considerations for  Israeli investment Funds and fund-related companies interested in doing  business in Cyprus? 

[Nayia]: Cyprus’ regulatory and legal framework is classed as one of the most flexible in the EU, while maintaining high levels of investor protection. Cyprus legal system which is modelled on the English legal system, is attractive to many investors and managers. 

Cyprus, as an EU Member State has ensured compliance with all EU Directives and Regulations relating to the provision of financial services. As such, Cyprus provides the financial infrastructure for fund managers to establish alternative investment funds (“AIFs”) and/or register with the regulator (the Cyprus Securities and Exchange Commission) (“CySEC”) in order to enjoy the full spectrum of their “EU passporting rights”. 

Cyprus also offers one of the most attractive tax regimes in Europe. Foreign investors and Cyprus’ non-domiciled individuals enjoy no withholding tax on dividend distributions, interest and royalties. The AIFs having the form of an investment company, can take advantage of the wide double tax treaties in Cyprus and the attractive 12,5% corporation tax, constituting one of the lowest corporation tax percentages in Europe. Additionally, there is no stamp duty imposed on the issue of units of AIFs while fund management and administration services provided to investment funds are not subject to VAT. Finally, Cyprus offers a competitive tax regime for fund managers, a taxation of carried interest or performance fee for AIF and UCITS fund managers. This essentially means that key personnel of investment fund management companies or internally managed AIFs may opt for a new mode of personal taxation. 

An Israeli investment fund and fund-related company interested in doing business in Cyprus can therefore take advantage of the flexible legal system, low set-up and maintenance costs, as well as the attractive tax regime and use Cyprus as their getaway to Europe. 

2. The Asset Management and Investment Fund industry in Cyprus is growing  rapidly with total Assets Under Management reaching €8 billion in 2020 and  expected to hit €20 billion soon.  

(a)Christia and Nayia: How can you assist Israeli Funds, Asset and Fund  Managers and other related companies interested in doing business in  Cyprus?  

[Christia]: The Asset Management landscape globally is predominantly driven by investors' demands. Investors are no longer large institutional powerhouses but we can see an influx of smaller, ‘newer’ participants in the sector who invest their own funds and who place a lot of emphasis on corporate governance and reliance on regulations. This will inevitably result in more and more investors favouring Fund Managers who are compliant with generally accepted regulatory requirements and offer peace of mind to the stakeholders that they serve.

Regulators around the world are taking notice of the changing trends and growing need for investor protection and are very swift and smart to respond to the new realities. As such, I expect that the Asset Management industry will be even more dynamic in the years to come and Managers will want support to maintain their competitive advantage while meeting growing regulatory demands.

Within PwC, we have a network of specialists who serve the Asset Management industry and are indeed ahead of the curve in terms of changes in Regulations. This allows us to help our clients be proactively prepared for changes, while maintaining their focus on what they do best, which is to manage portfolios and deliver results to their investors. 

Specifically in relation to our Israeli clients, our attention is now on the creation of AIFM or Mini-Manager structures, given the access this would give Israeli managers to the EU market and the comfort it would afford investors knowing that their managers abide by harmonised EU regulations. This, coupled with the geographical proximity between Cyprus and Israel and the excellent legal and tax relocation  framework of Cyprus, gives the right platform for Israeli managers to expand their reach.

At PwC Cyprus we are able to offer our clients an A-Z service, from assisting to build the right setup, advise on legal, tax, regulatory, employment matters, all the way through to the actual implementation and ongoing support with all business matters that would typically concern our clients. 

[Nayia]: To add to Christia’s response, here at PwC Cyprus we have a multi-disciplinary team of specialists who can assist Israeli Funds, Asset and Fund Managers in all aspects of structuring, setting up and maintaining a fund and/or a fund manager in Cyprus, including assistance with the licensing process and the ongoing administration as well as offering legal, tax and compliance services. 

The funds landscape is changing with pressure for effective supervision, calls for transparency, rapidly evolving technology, increased operational risks and increased competition. Using our specialist Fund Services Department, local workforce from other relevant competencies and our extensive global network, we can tailor our approach to address the individual needs of the managers and provide market insights and added value to their structure. Our dedicated Fund Services Department, comprising qualified accountants, CySEC certified professionals, qualified lawyers and active members of the Cyprus Investment Funds Association, is dedicated to serving the most complex fund structures and providing immediate solutions. 

Our specialised team possesses wide and in-depth knowledge of the applicable legal and regulatory framework and of international market practices and, coupled with their international financial services experience, can assist the Israeli funds and Israeli Fund Managers with any challenges they may face in today’s demanding landscape.

3. Christia and Nayia: What is your final message to our readers regarding  PWC Cyprus Fund Services, and the future of the Asset Management and  Investment Fund industry in Cyprus? 

[Nayia] The Cyprus fund industry is experiencing an impressive growth. The assets under management (AuM) have increased by more than 200% from €2.7bn in 2016 to €8.6bn by Q4 of 2020. Cyprus investment fund sector is a vibrant cluster, providing a  modern regulatory framework which is at par with that of other European fund domiciles.   

The Cyprus Securities and Exchange Commission, our local regulator, is balancing very well the need for investor protection, along with the continuous evolution of the industry in Cyprus. Currently, the following are considered or have already been introduced: 

(a) re-domiciliation incentives for funds and fund managers, 

(b) the further modernization of procedures for setting up and operating in Cyprus and reduction of bureaucracy, and 

(c) substantial reform on the pension funds framework. 

Additionally, it is expected that the evolvement of local banks in relation to services which will accommodate the demands of the growing industry (i.e. depositories and custodians), particularly via the extension of association of local banks with further renowned global custodians and international prime brokers, will particularly assist the needs of asset managers.

Moreover, the Cyprus government is continuously entering into new double tax treaties and renegotiating existing ones, and it aims to do so with the UK (post-Brexit) in order to develop opportunities on a global scale. 

[Christia]: As we consider the many driving forces of tomorrow, especially in the post COVID-19 era, our assessment is that of the most prominent ones will be the increase in regulation, which will continue to put pressure on banks and insurers in continuing to compete in the space of Asset Managers, giving up market share to Asset Managers, but also setting guidelines on better governance and a focus on sustainable financing, which is aligned with the changing investor demands. All in all, the Asset Management space is one which constantly undergoes change, keeping us all on our toes but more importantly playing an important role in economic growth and the promotion of society.

Both the private and public sector are placing a lot of emphasis on making Cyprus one of the most attractive Fund and Asset Management jurisdictions by offering a comprehensive solution to the modern Asset Managers and Investors. Not only are Assets Under Management growing exponentially, which is a good indicator of the momentum that the industry is taking, but we are seeing more and more sophisticated investors and managers choose Cyprus as the most appropriate  but also jurisdiction to set up their vehicles. 

PwC Cyprus is very actively involved in shaping the industry, not only through promoting our clients’ businesses but also as a result of our Funds’ Services Leader, Mr Andreas Yiasemides, holding the presidency of the Cyprus Investment Funds Association, the local association responsible for the advancement of the Funds and Asset Management industry in Cyprus.