Undertakings for Collective Investment in Transferable Securities (UCITS) are investment funds that have been established and authorised under a harmonised European Union (EU) legal framework under which a UCITS established and authorised in one EU Member State can be sold cross border into other EU Member States without a requirement for an additional authorisation. This so-called “European passport” is central to the UCITS product and enables fund promoters to create a single product for the entire EU rather than having to establish an investment fund product on a jurisdiction-by-jurisdiction basis.
Regulatory Authority and Laws in Force
The Undertakings for Collective Investments in Transferable Securities Law 200(I)/2004 provides the legal framework for the registration, regulation and marketing of local and foreign funds in Cyprus.
The administrative supervision of the implementation of the provisions of the Law has been assigned to the Cyprus Securities and Exchange Commission (“CySEC”). The CySEC shall supervise the operation of UCITS and Management Companies, as well as, to the extent that this Law applies to them.
Legal Nature of UCITSs
A UCITS shall be an undertaking the sole object of which is the collective investment in transferable securities and/or in other liquid financial assets 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
Distinction of UCITSs
UCITS may be divided into sub-categories on the basis of terms, conditions and criteria, including their continued obligations concerning the structure of their assets in the various types of transferable securities or other liquid financial assets in which they invest; these terms, conditions and criteria, including their continued obligations, shall be defined by the CySEC.
Legal Form of UCITSs
A local UCITS can take one of the following legal forms:
- Mutual Funds;
- Variable Capital Investment Companies
The mutual fund is a pool of assets which may be comprised by transferable securities, money market instruments and cash in the form of bank deposits. The assets of the mutual fund belong to the unit holders of the fund and its operation is defined by a regulation. The fund is managed by a mutual fund management company. The assets of the mutual fund are kept under a custodian. The mutual fund has no legal personality and is represented by the management company in any case of dispute.
Variable Capital Investment Companies
Variable Capital Investment Companies are limited liability companies whose issued share capital is variable and equal to the value of the assets of the company after deduction of its liabilities. These companies have the exclusive purpose of investment of their pooled assets in transferable securities, money market instruments, and cash in the form of bank deposits. The company may manage its own assets but not the assets of other companies. The assets of the company are kept under a custodian.
Supervision of UCITS in Cyprus
To set up and operate either a Mutual Fund or a Variable Capital Investment Company in Cyprus the permission of the CySEC is required. Also, the permission of the CySEC is required for all foreign UCITS that are based in another EU member state and wish to market their units or shares in Cyprus.
UCITS to operate must have received in advance official authorization from the competent authorities of the Member State in which they are established or from the member state of origin. The authorization is a passport for all Member States.
Time to the market
The Management Company must be notified within two months from the submission of the application about the authorisation or rejection of the application. If the Variable Capital Investment Company hasn’t designated a Management Company, then the CySEC notify the relevant parties within six months from the submission of the application about the approval or rejection of the application. In both circumstances the CySEC must explain the reasons for the possible rejection.
The Management Company for each Mutual Fund managed, and the Variable Capital Investment Company shall submit to CySEC and make available to the investors the following:
- A prospectus containing essential elements set by CySEC which must be kept up to date.
- An annual report for each financial year.
- A semi-annual report (for the first six months of year).
- A summarised statement of assets and expenses at the end of the first, second and third quarter of the year.
- A summarised statement of assets and expenses by the end of the last quarter of the financial years which also must contain an additional profit and loss account and information about the profit-sharing throughout the year.
- Publication in the daily local press of the net value of the assets, the number of outstanding shares and the units’ net value and issue and redemption price.
Investors must have the opportunity to watch easily the course of their investment, without having specialised knowledge. The regulation provides a series of informative papers to be available for investors such as the document named as “Basic information for investors”, and other information referred above to the reporting section that the Management Company or the Variable Capital Investment Company obliged to prepare. All these and especially the prospectus and the basic information for investors are presented precisely and in an easily understandable way in order to allow investors evaluating the company, determine whether they would redeem their shares or not, and assess their risks. Therefore, transparency for the real condition of the UCITS will be achieved.
The assets must be held by a depositary independent of and distinct from the management company. Depositary services may be provided by either:
- Banks or co-operative credit institutions both:
- licensed for the purpose by CySEC;
- based in Cyprus or operating there through a branch.
- Cyprus companies authorised by CySEC which have provided adequate financial and professional guarantees.
Safekeeping of the following can be delegated to an officially authorised depositary abroad:
- Foreign transferable securities.
- Other liquid financial assets.
- Shares in Cyprus companies listed overseas.
This delegation must be notified to the management company and does not release the depositary from liability for the assets concerned. CySEC can replace a depositary if it:
- Finds a serious violation of its obligations.
- Considers replacement necessary for the protection of investors’ interests.
UCITS can only invest in the financial instruments set out in Directive DI200-2004-01, which include:
- Transferable securities, money market instruments and financial derivative instruments, which are admitted to:
- or traded on a regulated market in a member state;
- or traded on a regulated market which constitutes a controlled market of a member state;
- listing on a stock exchange in a third country.
- This is provided the choice of stock exchange or market:
- is provided for in the fund rules, memorandum or articles of association, or the articles of association of the investment company; and
- has been approved by CySEC.
- Financial derivative instruments dealt in over-the-counter (OTC derivatives), subject to certain safeguards.
- Units of both:
- UCITS authorised in member states under the UCITS Directive;
- other collective investment undertakings that are subject to a comparable level of regulation and provide comparable investor protection.
- Deposits with credit institutions which are repayable on demand or which mature in no more than 12 months, provided that the credit institution either:
- has its registered office in a member state;
- is subject to prudential accepted by CySEC as equivalent to those in Cyprus.
- Money market instruments issued by regulated issuers and underwritten by an appropriate body such as a central bank or state or local authority.
A UCITS cannot:
- Invest in precious metals.
- Invest more than 10% of its assets in newly issued securities.
- Have an aggregate exposure under financial derivatives contracts that exceeds its NAV.
- Invest more than 10% of its assets in transferable securities or money market instruments issued by the same body.
- Invest more than 20% of its assets in deposits made with the same body.
The investment company, the management company and the depositary acting on behalf of a UCITS cannot contract loans, unless the loans are back-to-back (that is, where companies in different countries borrow offsetting amounts from each other in each other’s currency).
The following may also apply:
- An investment company or management company acting on behalf of a UCITS can borrow, for a period up to three months, up to 10% of the UCITS net assets to satisfy applications for redemption of units (if the sale of securities is considered disadvantageous).
- An investment company can borrow up to 10% of its net assets to acquire immovable property essential for the direct pursuit of its activities.
- A management company can borrow up to 15% of its own funds, provided that the loan is to acquire immovable property essential for the direct pursuit of its business.
In addition, the loans referred to in the first two bullet points above must not exceed 15% of the investment company’s net assets in aggregate.
Tax Treatment of UCITS in Cyprus
UCITS are subject to taxation under the Income Tax Law of 2002, the Special Contribution for the Defence of the Republic Law of 2002, the Capital Gains Tax Laws of 1980 to 2002 and the Immovable Property Tax Laws of 1980 to 2002.
The following main rules apply:
- companies are subject to tax on profits at 10%. Profits include interest received by collective investment schemes, after deduction of any costs (including financing costs) of earning it;
- there is no taxation of capital gains in Cyprus, apart from gains on disposal of real property in Cyprus and on disposal of shares in companies holding that property;
- gains on disposal of securities are exempt from tax. The definition of securities includes units in collective investment schemes. Gains from the redemption of units or other participations in UCITS constitute a sale or disposal of securities, and are subsequently tax exempt;
- dividend income is exempt from corporate income tax. It is also exempt from special defence contribution (SDC tax), unless:
- more than 50% of the paying company’s activities result directly or indirectly in investment income;
- the foreign tax is significantly lower (that is, 5% or less) than the tax burden in Cyprus.
In addition, if a Cyprus-resident UCITS does not distribute a dividend within two years from the end of the tax year, both:
- 70% of accounting profits are deemed to have been distributed;
- SDC at 3% is imposed on that part of the deemed dividend distribution which applies to shareholders or unit-holders who are Cyprus residents.
If a Cyprus-resident UCITS is wound up, both:
- any profits earned in the five years before dissolution which have not been distributed or deemed to have been distributed are considered as having been distributed on dissolution;
- the proportion attributable to Cyprus-resident shareholders or unit-holders are subject to SDC tax at 3%.
Dissolution under a qualifying reorganisation scheme is entirely tax exempt.
Application for the recognition of UCITS
The application for the recognition of a UCITS is mainly two stages procedure:
Stage 1: Application
For a licence to be granted to local and foreign funds, a duly completed application form and supporting documentation must be submitted to CySEC.
Stage 2: CySEC Review
CySEC must determine the application within six months of submission of a complete application. Failure by CySEC to reach a decision within this time limit is subject to judicial review before the Supreme Court under Article 146 of the Cyprus Constitution. CySEC can request further clarifications or additional information as it deems appropriate to allow it to fully evaluate the application and ensure that the applicant complies with the Investment Services and Activities and Regulated Markets Law of 2007 (Law 144(1) of 2007) (Investment Services Law) and any Directives issued under it.