Why Cyprus is Europe’s new investment fund hotspot
17 September 2020: Alkis Hajittofis, executive director and head of portfolio management Resolute Investment Management a leading Cyprus-based alternative Investment Fund Manager, shares his insights on benefits and opportunities within the Cyprus funds industry.
As executive director and head of portfolio management Resolute Investment Management, Alkis Hajittofis is predominantly responsible for overseeing the company’s business activities, reviewing any available investment opportunities and updating any existing models where necessary. “Our investment strategy at Resolute Investment Management is focused on Real Estate, so the skills I gained as part of my ACA qualification helped me with the daily preparation and review of models examining the impact of cashflows on forecasts and budgets and the overall profitability of funds.”
The Cyprus fund industry is growing fast. According to the latest figures from the Cyprus Securities and Exchange Commission (CySEC), the local regulator in Cyprus, net assets under management at the end of 2019 were just under €8.5bn.
Hajittofis explains the driving factors in the Cyprus market, its opportunities and challenges.
The funds industry is a growing area in Cyprus, with some experts describing it as Europe’s new investment fund hotspot. Which factors have driven this growth?
There has been a coordinated effort to both implement legislation and promote the industry by government agencies, industry players and other stakeholders such as the Ministry of Finance, CySEC, Cyprus Investment Funds Association (CIFA), Cyprus Investment Promotion Agency (CIPA) as well as lawyers, fund administrators and auditors.
A key milestone was the transposition of specific EU legislation, the Alternative Investment Fund Managers Directive (AIFMD), into local legislation which has given us a modern and flexible regulatory framework to work with.
Furthermore, Cyprus is an established international business centre, with many international companies and groups including the jurisdiction in their structures. Long standing business relationships with local professional service firms have helped attract many international companies or individuals to either invest in or set up a Cyprus fund.
CIFA, CIPA and Invest Cyprus have also undertaken many roadshows which have helped spread awareness of Cyprus funds. Even during lockdown this year, I’ve been pleased to see a number of digital conferences which has helped continued interest from overseas.
We have also seen interest relating to redomiciliation of funds registered in offshore jurisdictions to transfer to Cyprus. Changing regulation and uncertainty over the future in these jurisdictions has meant the benefit of incorporating or keeping a structure elsewhere is reduced, so Cyprus is seen as an attractive proposition.
Cyprus, which joined the EU in 2004 and is on the OECD white list, is an onshore jurisdiction which is fully compliant with all international regulations. Cypriot fund managers may market units of the funds they manage to investors in the EU, as part of their passporting authorisations – following notification to the local regulator.
What are the key trends within the industry you’re seeing at the moment?
One of the major trends we’re seeing is the move towards Registered Alternative Investment Funds (RAIFs) which are indirectly regulated through the license of the manager. The speed and efficiency of registering these funds is a big benefit, as it allows for a fund to be set up within a two to three-month time frame.
Furthermore, there has been a lot of interest from investors. Due to the availability of excess cash in the system, negative interest rates and poor performance from some existing funds, investors have been interested in exploring investment opportunities available through new managers. These investors believe that by investing in new funds, they ensure capital is allocated to projects and set up with a strategy capable of navigating the new norm.
What specifically does Cyprus offer potential investors and asset managers etc in terms of opportunities and benefits?
Cyprus has a very competitive tax framework and there are several incentives in place to attract fund managers, funds or individuals. The benefits for managers include a 50 per cent reduction on personal income tax for individuals on an annual salary of €100,000 or more, an option to be taxed at the rate of 8 per cent on performance-based bonuses for fund management personnel as well as a generally attractive Non-Dom regime. And of course, corporation tax in Cyprus is among the lowest in the EU at 12. 5 per cent.
The benefits to investors include fees charged by a fund manager to the fund are exempt from VAT and there are no Withholding Tax on dividends or Exit Taxes on redemptions which can erodes investor returns. In addition, profits from the sale of shares (except where there is Cyprus real estate involved in the underlying structure) are exempt from Capital Gains Tax.
Furthermore, fees for professional services such as audit, advisory or legal services are substantially cheaper in comparison to other EU fund hubs which leads to a more competitive Total Expense Ratio.
Is it likely that Brexit has had an impact on the growth of Cyprus’ funds industry? If so, in what way?
I think the impact of Brexit will be positive for the growth of the sector. UK managers who wish to reach EU investors may look to set up branches or partner with local managers to market their funds to the EU which will benefit both sides.
UK managers and their staff will also benefit from the tax incentives already discussed. English is the language used for business in Cyprus and is widely spoken. Furthermore, many local professionals are UK-educated and are members of UK professional bodies such as the ICAEW.
Benefits to Cyprus would be the further presence of internationally branded fund managers and additional experienced personnel which would benefit the growth and legitimacy of the local industry.
How sustainable would you say this current growth in the industry is and how much of a contender is the industry on a global scale?
The industry in Cyprus is still small on the global stage. To put things in context, the size of the EU fund industry was around €17 trillion net assets under management as of June 2020.
However, I believe that Cyprus has laid strong foundations for growth with a strong and flexible legal framework, a modern and approachable regulator and professionals willing to go the extra mile to help their clients meet their targets.
Finally, proposed amendments to the EU legislation AIFMD (AIFMD 2) will allow passporting of depository services which will help level the playing field and drive growth.
Alkis Hajittofis is a qualified FCA, BFP and CFA Charterholder and is a member of the ICAEW and CFA institute.