INVESTMENT FUNDS

Cyprus offers special advantages to entities which intend to carry out business in Russia and more particularly to Investment Funds investing in various instruments issued by Russian companies and other bodies as well as by issuers in other ex Eastern Block coutries with which Cyprus has an excellent double tax treaty network. 

During the past few years the bulk of the Investment Funds which have been established to invest in the Russian Federation and othe rex Eastern Block countries do so using Cyprus entities as special purpose vehicles.  Already billions of United States dollars are being invested in this way using such entities. 

Under a typical structure an Investment Fund is established in an offshore jurisdiction, such as, the Cayman Islands or the Luxembourg.  Thereafter, the fund entity establishes a subsidiary in Cyprus.  The Cyprus subsidiary in turn proceeds to make the investments into the relevant jurisdiction  taking advantage of the relevant tax treaty. 

There are a number of reasons both legislative and more general that make Cyprus an attractive jurisdiction for establishing such an investment vehicle. 

On the general business environment side one can mention the excellent telephonic communications, the convenient time zone and the generally high level of professional services available with respect to legal, accounting, banking and other matters. Further, the possibility to have corporate and other documents legalised and apostiled quickly is an additional advantage. 

On the legislative side, apart from the general tax advantages enjoyed by Cyprus companies, the tax treaty network of Cyprus provides substantial advantages. Specifically with refernece to Russia, the Double Tax Treaty between Cyprus and Russia, provides for 5% withholding tax in Russia on dividends (if the investment in the capital of the Russian entity is more than US$100.000) and zero withholding tax on interest and royalties received by a Cyprus company from Russia, as well as zero withholding tax in Russia on gains generated by a Cyprus company from the disposal of securities in Russia. 

There are a number of issues to be considered specifically when establishing a subsidiary of an Investment Fund in Cyprus. 

(1) Tax: As of 1 January 2003, all Cyprus companies are subject to a corporate rate of 10%. However, any profits generated by a company resident of Cyprus from the disposal of securities are totally exempy of taxation. More details on the tax position may be found at the section: New Tax System and Registration of Companies 

(2) Directors: There is no legal requirement that the directors of the Cyprus company should be residents of Cyprus.  However, under the tax regime as of 1 January 2003, if the management and control of the company are outside Cyprus, the company is not considered to be a resident of Cyprus and, consequently, is not liable to taxation in Cyprus except for income generated in Cyprus. Thus, to the extent that it is desired that the company takes advantage of the double tax treaty network of Cyprus, at least the majority of the board should be in Cyprus and all board meetings should take place in Cyprus.

(3) Central Bank of Cyprus: In the case of subsidiaries of Investment Funds the Central Bank of Cyprus gets involved also in its capacity as the supervising authority of banking and financial services institutions.  Thus, it will want to be satisfied that the parent is a fit and proper entity to offer financial services in the form of making investments on behalf of third parties.  In that regard the Central Bank will usually require to get in contact with the supervising authorities of the parent and obtain information about its reputation. Further, it will require having sight of the offering document of the parent Investment Fund. 

By way of final comment, one should mention that the Cyprus Government has enacted new legislation, which caters specifically for the establishment of Investment Funds in Cyprus.