Industries aren’t built in weeks or months or even a few years. The development of the funds sector in Cyprus is no exception. It is a story of persistent effort by KPMG Cyprus and joined up regulatory supervision involving the Central Bank of Cyprus (CBC), the Cyprus Securities and Exchange Commission (CySEC), and the country’s Ministry of Finance.
Angelos Gregoriades, a KPMG board member and head of tax, began investigating how Cyprus might develop a sector specialising in investment management services in 1995. Among his first ports of call was Elena Ambrosiadou, co-founder and CEO of hedge fund IKOS. Against the backdrop of an asset management conference Gregoriades and Ambrosiadou began discussing how Cyprus could develop an alternatives industry. “I was trying to promote Cyprus in different financial services areas,” says Gregoriades. “The alternatives market took time to develop but those early efforts came to full fruition in 2005 when IKOS, advised by KPMG, gained regulatory approval from CySEC and commenced trading from Limassol, on the country’s south coast.”
He quotes from Elena Ambrosiadou’s recent speech in Paris, explaining the technology behind global operations including trading from Cyprus: “In today’s world, communications technology means we can be part of the information/data highway wherever we are. What does this mean? We at IKOS have already positioned ourselves in order to make the most of a global resource pool within a European framework. In today’s markets electronic connectivity allows you to trade 24 hours a day from anywhere in the world. Now, being close to the market no longer means physical proximity. It means being close to your regulator, your investor and your service provider, all of which happens via electronic media continuously, and in regular patterns via reporting, face to face meetings and due diligence processes. The evolved manager of today is the electronic manager who can navigate away from crowded markets through trading, resource and location independence. Geographical flexibility is not about offshore, unregulated tax havens - IKOS is regulated by five bodies. Geographical and positioning flexibility is about being able to attract the best from around the globe and at the same time be a global player with global infrastructure. Operate locally but manage globally.”
Knowledge gained from experience
“Our knowledge has been built up at KPMG from not only tax professionals but by personnel in legal and auditing who service the investment management firms and their funds” says Gregoriades. “For example some companies or funds, although registered in Cayman, will be audited in Cyprus. KPMG now has more than 50% share of registering and auditing collective investment schemes registered at the Central Bank. Through this experience we are leaders in that field.”
“IKOS was one of the companies which we helped obtain CySEC registration and they have come a long way in their growth and development as an organization and in attracting investors,” says Gregoriades.
“Their business has grown significantly, with 60 strong in Limassol, and key affiliations, offices, execution and/or research sites in London, Vienna, Tokyo and New York. During this process, IKOS has facilitated the repatriation of Cypriot nationals and the employment of foreign professionals, and the company currently employs staff from 20 different nationalities. We are also very pleased that in the context of its social responsibility, IKOS has offered MBA scholarships to Cypriot students at Cranfield University in the UK.”
Cyprus – an alternative EU destination
“Now that Cyprus (since 2004) is a European Union country it has gained a lot of respect in international markets.” Indeed, Cyprus is on the OECD “white list” of jurisdictions that have substantially implemented the internationally agreed tax standard.
If EU membership has changed how the funds business operates in Cyprus, so too has the example of other regulators, notably the UK Financial Services Authority (FSA). “Even before we were part of the EU, the Central Bank – for the fund authorisation process – more or less aligned its directives with the FSA and its procedures.”
Furthermore, now that personal tax rates have increased in the UK, and given the UK’s comparatively higher corporate tax rate, there exists a further opportunity for Cyprus to attract hedge fund managers. “There is evidence of people looking for alternative jurisdictions,” says Gregoriades. “We think there is a place for another jurisdiction and that IKOS is an important example of what can be done. The theme we want to bring forward is for hedge fund managers to consider Cyprus as an alternative jurisdiction.”
Whether large or small the financial benefit of becoming established in the lower tax Cyprus regime is substantial. Taking the example of a small hedge fund firm with $200 million in assets, it is likely that the lower operating costs (personnel, office rent and utilities) of a Cyprus operation would allow the business to be profitable at a holding company level when the same business would not be profitable elsewhere in more expensive European locations. As an example, investment managers might want to develop dual base solutions, separating the types of services being offered in Cyprus and those provided in another location (for instance, a sub-advisory agreement could see back office or marketing services shift to Cyprus).
Turnkey service to setup
KPMG aims to provide hedge fund firms with a turnkey service to setting up in Cyprus. This could be for an entire relocation or might be limited to the setting up of some middle and back office services in a country that will be cheaper to operate in than the UK. KPMG has experience offering a variety of services across numerous disciplines and jurisdictions.
“I think we could provide a good package to a hedge fund manager that may want to come and use Cyprus,” says Ioannis Gaiganis, KPMG’s Senior Manager of Investment Fund Services. “That could include a manager’s personal affairs and setting up a private family trust arrangement. It could also extend to advice on structuring the operation as well as any other activities that need to be set up in Cyprus.”
The first step for a manager wanting to set up in Cyprus is to register with CySEC. A fund can’t do anything until it gets this approval, but the process should take less than six months. KPMG and others are pushing the Minister of Finance to streamline processes to have the procedure done in two to three months. To help a hedge fund firm get the quickest turnaround, KPMG offers a full advisory service to navigate the registration process. “We’ll fill out the necessary forms and give advice based on our previous experience,” says Gaiganis. “We also set up a direct meeting with CySEC and sort out any additional information that may be required. We will advise a firm all the way – we will be the intermediary that assists in the registration process.”
While the registration is being reviewed, KPMG offers an array of other services. This is designed to facilitate a smooth transfer to Limassol’s sea front boulevard, where many of the island’s commercial trading, shipping and investment firms have their offices. “We can offer hedge funds a one stop service,” says Gregoriades. “We can support them in looking for office space and we can screen potential employees. We can give them alternative office space solutions. For setting up their systems, we can advise on risk and IT. We also provide ongoing compliance and tax advice as well as audit services.”
The cost of CySEC and advisory fees for a hedge fund firm to get up and running varies depending on the share capital of a company that is being set up. KPMG estimates the sum at some €30,000 to €50,000. Owing to the 0.6% stamp duty on share capital, firms are generally advised to register capital as a share premium which doesn’t bear stamp duty.
Typically, €1 million of share capital is registered (with the remainder as premium) giving a tax cost of €6,000 plus a further €10,000 to €15,000 to incorporate the company. KPMG can recommend outsource service providers to help new fund management firms get the right service at the right price. It also has a network of experienced professionals from company directors to qualified accountants, which can help the resource requirements of new companies.
CySEC registration is the most important threshold for a new firm to cross. After that there are few other potential pitfalls that a hedge fund firm will face. “We are known to the market,” says Gregoriades. “Our legal and tax system is simple to follow. It is not like going to a country that has very complicated laws in play. It is all based on UK standards. We operate basically on the Company Act 1948. There are updates to bring it up to the level of the EC directives, but it is simple legislation. Because of the size of the market we know the local players and the people to whom you may need to talk to get where you want to go.”
Presenting the package
“Though we know our product is competitive today, the other part of our effort is to ensure that as things evolve it remains competitive and that changes in regulation don’t compromise the competitiveness of the product,” says Gaiganis. He notes that the country’s Collective Investment Schemes Law is very competitive compared to jurisdictions in Luxembourg, Ireland or the Channel Islands – disproportionally so relative to the number of funds attracted to Cyprus so far. “It is a good package,” he says. “It just needs to be presented better.”
To that end, KPMG is helping to take the Cyprus proposition to the next level and promote it. Road trips in the Middle East and London are scheduled for later this year and there are plans for the island to pitch directly to hedge fund managers at a future industry conference. The CSE is backing the initiatives and CySEC is expected to become involved at a future date. “We are trying to bring all of the actors of the industry together and secure their participation in a way that is beneficial to all,” says Gaiganis. Crucially, the Finance Ministry is keen to use legislation and tax treaties to help the financial services industry expand.
As a global network, KPMG International helps backstop the fund services the firm offers in Cyprus. Hedge funds like IKOS are global in nature and KPMG matches their service needs through its entire network. For example, some IKOS Funds are listed on the Irish Stock Exchange (ISE) and their Administrator is in Ireland, so KPMG Ireland acts as the auditor to the Funds. One day, these services may be provided from Cyprus.
KPMG’s Fund Services Group is made up of professionals from all jurisdictions who contribute to the firm’s services and provide the relevant information to clients about what is happening in other jurisdictions. At KPMG Ireland, for example, there is a benchmarking function that monitors what is happening in all jurisdictions with fund management practices. It details accounting issues that relate to fund managers as well as tax and the various compliance requirements in each country.
“There is a wealth of knowledge there that we rely on and use whenever it is needed by a client,” says Gaiganis. “That network gives us access to regulatory information and market behaviour that we try to interpret for the development plans we have for Cyprus.”
KPMG Cyprus employs eight lawyers across tax and legal with half having experience helping funds on the legal requirements to set up. This provides a thorough proposition for advice on the prospectus, promotional materials, agreements that relate to the fund manager and the fund itself as well as the structuring of the share capital and the management shares that are created. “With each and every requirement of the client, we have to adapt to what is needed,” says Gregoriades. “This also brings us back to the one stop service we offer. Whatever we can do, we do in house, but we can also get assistance from other service providers.”
The firm will also help with marketing and advice on raising assets.
“When we help a fund set up we don’t just help by sending the information from the fund to the regulator,” says Gaiganis. “We try to understand it and see if there is any value we can add in the structuring of the fund. We’ve had cases where we have suggested changes to make the fund more competitive. We end up with a fund that is likely to be competitive and if we believe in the product we can suggest which doors an asset manager can knock on to present its product. We can definitely recommend houses where you should go and if they like the product it will certainly help that they know we are assisting in setting up that product.”
Angelos Gregoriades, a KPMG board member and head of tax, began investigating how Cyprus might develop a sector specialising in investment management services in 1995. Among his first ports of call was Elena Ambrosiadou, co-founder and CEO of hedge fund IKOS. Against the backdrop of an asset management conference Gregoriades and Ambrosiadou began discussing how Cyprus could develop an alternatives industry. “I was trying to promote Cyprus in different financial services areas,” says Gregoriades. “The alternatives market took time to develop but those early efforts came to full fruition in 2005 when IKOS, advised by KPMG, gained regulatory approval from CySEC and commenced trading from Limassol, on the country’s south coast.”
He quotes from Elena Ambrosiadou’s recent speech in Paris, explaining the technology behind global operations including trading from Cyprus: “In today’s world, communications technology means we can be part of the information/data highway wherever we are. What does this mean? We at IKOS have already positioned ourselves in order to make the most of a global resource pool within a European framework. In today’s markets electronic connectivity allows you to trade 24 hours a day from anywhere in the world. Now, being close to the market no longer means physical proximity. It means being close to your regulator, your investor and your service provider, all of which happens via electronic media continuously, and in regular patterns via reporting, face to face meetings and due diligence processes. The evolved manager of today is the electronic manager who can navigate away from crowded markets through trading, resource and location independence. Geographical flexibility is not about offshore, unregulated tax havens - IKOS is regulated by five bodies. Geographical and positioning flexibility is about being able to attract the best from around the globe and at the same time be a global player with global infrastructure. Operate locally but manage globally.”
Knowledge gained from experience
“Our knowledge has been built up at KPMG from not only tax professionals but by personnel in legal and auditing who service the investment management firms and their funds” says Gregoriades. “For example some companies or funds, although registered in Cayman, will be audited in Cyprus. KPMG now has more than 50% share of registering and auditing collective investment schemes registered at the Central Bank. Through this experience we are leaders in that field.”
“IKOS was one of the companies which we helped obtain CySEC registration and they have come a long way in their growth and development as an organization and in attracting investors,” says Gregoriades.
“Their business has grown significantly, with 60 strong in Limassol, and key affiliations, offices, execution and/or research sites in London, Vienna, Tokyo and New York. During this process, IKOS has facilitated the repatriation of Cypriot nationals and the employment of foreign professionals, and the company currently employs staff from 20 different nationalities. We are also very pleased that in the context of its social responsibility, IKOS has offered MBA scholarships to Cypriot students at Cranfield University in the UK.”
Cyprus – an alternative EU destination
“Now that Cyprus (since 2004) is a European Union country it has gained a lot of respect in international markets.” Indeed, Cyprus is on the OECD “white list” of jurisdictions that have substantially implemented the internationally agreed tax standard.
If EU membership has changed how the funds business operates in Cyprus, so too has the example of other regulators, notably the UK Financial Services Authority (FSA). “Even before we were part of the EU, the Central Bank – for the fund authorisation process – more or less aligned its directives with the FSA and its procedures.”
Furthermore, now that personal tax rates have increased in the UK, and given the UK’s comparatively higher corporate tax rate, there exists a further opportunity for Cyprus to attract hedge fund managers. “There is evidence of people looking for alternative jurisdictions,” says Gregoriades. “We think there is a place for another jurisdiction and that IKOS is an important example of what can be done. The theme we want to bring forward is for hedge fund managers to consider Cyprus as an alternative jurisdiction.”
Whether large or small the financial benefit of becoming established in the lower tax Cyprus regime is substantial. Taking the example of a small hedge fund firm with $200 million in assets, it is likely that the lower operating costs (personnel, office rent and utilities) of a Cyprus operation would allow the business to be profitable at a holding company level when the same business would not be profitable elsewhere in more expensive European locations. As an example, investment managers might want to develop dual base solutions, separating the types of services being offered in Cyprus and those provided in another location (for instance, a sub-advisory agreement could see back office or marketing services shift to Cyprus).
Turnkey service to setup
KPMG aims to provide hedge fund firms with a turnkey service to setting up in Cyprus. This could be for an entire relocation or might be limited to the setting up of some middle and back office services in a country that will be cheaper to operate in than the UK. KPMG has experience offering a variety of services across numerous disciplines and jurisdictions.
“I think we could provide a good package to a hedge fund manager that may want to come and use Cyprus,” says Ioannis Gaiganis, KPMG’s Senior Manager of Investment Fund Services. “That could include a manager’s personal affairs and setting up a private family trust arrangement. It could also extend to advice on structuring the operation as well as any other activities that need to be set up in Cyprus.”
The first step for a manager wanting to set up in Cyprus is to register with CySEC. A fund can’t do anything until it gets this approval, but the process should take less than six months. KPMG and others are pushing the Minister of Finance to streamline processes to have the procedure done in two to three months. To help a hedge fund firm get the quickest turnaround, KPMG offers a full advisory service to navigate the registration process. “We’ll fill out the necessary forms and give advice based on our previous experience,” says Gaiganis. “We also set up a direct meeting with CySEC and sort out any additional information that may be required. We will advise a firm all the way – we will be the intermediary that assists in the registration process.”
While the registration is being reviewed, KPMG offers an array of other services. This is designed to facilitate a smooth transfer to Limassol’s sea front boulevard, where many of the island’s commercial trading, shipping and investment firms have their offices. “We can offer hedge funds a one stop service,” says Gregoriades. “We can support them in looking for office space and we can screen potential employees. We can give them alternative office space solutions. For setting up their systems, we can advise on risk and IT. We also provide ongoing compliance and tax advice as well as audit services.”
The cost of CySEC and advisory fees for a hedge fund firm to get up and running varies depending on the share capital of a company that is being set up. KPMG estimates the sum at some €30,000 to €50,000. Owing to the 0.6% stamp duty on share capital, firms are generally advised to register capital as a share premium which doesn’t bear stamp duty.
Typically, €1 million of share capital is registered (with the remainder as premium) giving a tax cost of €6,000 plus a further €10,000 to €15,000 to incorporate the company. KPMG can recommend outsource service providers to help new fund management firms get the right service at the right price. It also has a network of experienced professionals from company directors to qualified accountants, which can help the resource requirements of new companies.
CySEC registration is the most important threshold for a new firm to cross. After that there are few other potential pitfalls that a hedge fund firm will face. “We are known to the market,” says Gregoriades. “Our legal and tax system is simple to follow. It is not like going to a country that has very complicated laws in play. It is all based on UK standards. We operate basically on the Company Act 1948. There are updates to bring it up to the level of the EC directives, but it is simple legislation. Because of the size of the market we know the local players and the people to whom you may need to talk to get where you want to go.”
Presenting the package
“Though we know our product is competitive today, the other part of our effort is to ensure that as things evolve it remains competitive and that changes in regulation don’t compromise the competitiveness of the product,” says Gaiganis. He notes that the country’s Collective Investment Schemes Law is very competitive compared to jurisdictions in Luxembourg, Ireland or the Channel Islands – disproportionally so relative to the number of funds attracted to Cyprus so far. “It is a good package,” he says. “It just needs to be presented better.”
To that end, KPMG is helping to take the Cyprus proposition to the next level and promote it. Road trips in the Middle East and London are scheduled for later this year and there are plans for the island to pitch directly to hedge fund managers at a future industry conference. The CSE is backing the initiatives and CySEC is expected to become involved at a future date. “We are trying to bring all of the actors of the industry together and secure their participation in a way that is beneficial to all,” says Gaiganis. Crucially, the Finance Ministry is keen to use legislation and tax treaties to help the financial services industry expand.
As a global network, KPMG International helps backstop the fund services the firm offers in Cyprus. Hedge funds like IKOS are global in nature and KPMG matches their service needs through its entire network. For example, some IKOS Funds are listed on the Irish Stock Exchange (ISE) and their Administrator is in Ireland, so KPMG Ireland acts as the auditor to the Funds. One day, these services may be provided from Cyprus.
KPMG’s Fund Services Group is made up of professionals from all jurisdictions who contribute to the firm’s services and provide the relevant information to clients about what is happening in other jurisdictions. At KPMG Ireland, for example, there is a benchmarking function that monitors what is happening in all jurisdictions with fund management practices. It details accounting issues that relate to fund managers as well as tax and the various compliance requirements in each country.
“There is a wealth of knowledge there that we rely on and use whenever it is needed by a client,” says Gaiganis. “That network gives us access to regulatory information and market behaviour that we try to interpret for the development plans we have for Cyprus.”
KPMG Cyprus employs eight lawyers across tax and legal with half having experience helping funds on the legal requirements to set up. This provides a thorough proposition for advice on the prospectus, promotional materials, agreements that relate to the fund manager and the fund itself as well as the structuring of the share capital and the management shares that are created. “With each and every requirement of the client, we have to adapt to what is needed,” says Gregoriades. “This also brings us back to the one stop service we offer. Whatever we can do, we do in house, but we can also get assistance from other service providers.”
The firm will also help with marketing and advice on raising assets.
“When we help a fund set up we don’t just help by sending the information from the fund to the regulator,” says Gaiganis. “We try to understand it and see if there is any value we can add in the structuring of the fund. We’ve had cases where we have suggested changes to make the fund more competitive. We end up with a fund that is likely to be competitive and if we believe in the product we can suggest which doors an asset manager can knock on to present its product. We can definitely recommend houses where you should go and if they like the product it will certainly help that they know we are assisting in setting up that product.”
