As part of The Hedge Fund Journal’s exploration of Cyprus as a centre for hedge fund growth, we submitted questions to Minister of Finance Charilaos Stavrakis concerning a number of key issues. Below we print the Minister’s response to those questions. The overall message is that the Government of Cyprus is carefully focused on providing the regulatory, legal and technical support to build a dynamic and growing funds sector.

Q: Please discuss some of the important developments in the financial sector.

A: Cyprus enjoys a strategic geographical location and historic relationships with countries where alternative investment funds, including hedge funds, have yet to exploit their full potential. Furthermore, Cyprus enjoys a number of additional comparative advantages as an international and regional business centre deriving mainly from being a member of the EU and the Eurozone, the high educational level of its workforce, the satisfactory and continuous upgrading of its infrastructure in airports, ports and telecommunications, the high quality of consultancy services, such as legal, accounting, auditing etc. the modern and transparent legal, financial and accounting systems, modelled to that of Britain, as well as a fully liberalised foreign investment regime, only to mention a number of them. Thus, Cyprus can act as a stepping stone for investment fund managers, including hedge fund managers to reach markets like the CIS countries and the Middle East / North Africa area.

The entry of Cyprus to the Eurozone was a major achievement. Now the Government is focusing on developing the advantages offered by membership. In the funds sector, the possibility of listing funds, and listing rules on the Cyprus Stock Exchange, are constantly evaluated. The Cyprus Stock Exchange was established under the Cyprus Securities and Stock Exchange Law of April 1993 and commenced trading in 1996. Also, since 2006, the Cyprus Stock Exchange has been developing its infrastructure and its regional collaboration with the Athens stock exchange in a forward looking and dynamic step.

Our non-UCITS funds legislation, in force since 1999, provides the current legislative framework. We believe that it constitutes a good basis for the attraction of non-UCITS in Cyprus. However, it is important that we proceed with a comprehensive and fully transparent legislative framework for UCITS and non-UCITS, in full compliance with the relevant acquis communautaire, taking into consideration the latest initiatives at the EU level to regulate alternative investment fund managers. To this end the expertise of successful financial centres will be used.

The Ministry of Finance within the framework of the broader vision of upgrading the role of Cyprus as an international and regional business and financial centre is at the centre of a wider initiative, in close co-operation with the Cyprus Investment Promotion Agency (CIPA), the competent supervisory authorities and the private sector to modernise the institutional and legislative framework that is required so as to offer an appropriate environment that attracts investment funds, including hedge funds to Cyprus.

Furthermore, Cyprus regulation on investment firms focuses on corporate governance including:

a) requirement for an independent risk manager within any trading or investment firm;
b) a requirement for an internal audit function with the responsibility to monitor and report procedural weaknesses;
c) a board of directors with clear compliance responsibilities; and
d) an oversight capability to review and discipline the function of the board with the transparency provided by board meetings.

The focus on corporate governance creates a healthy environment for the financial sector, which not only complements but also strengthens the global regulatory environment that the Cyprus Securities and Exchange Commission (CySEC) registered firms may experience, for example, with the Securities and Exchange Commission in the US.

A fully transparent and comprehensive legislative framework, in conjunction with prudent supervisory authorities and a favourable tax regime, in full compliance with the acquis and the EU Code of Conduct on Business Taxation, will provide the best preconditions for the significant upgrading of Cyprus as a reputable international and regional financial centre. Moreover, it should be noted that Cyprus conforms to the OECD standards on transparency and exchange of information.

Q: How are these actions being coordinated?

A: We have set up a monitoring committee, under the chairmanship of the Ministry of Finance and with the participation of the competent supervisory authorities, CIPA, and the private sector (representatives of professional associations and companies serving the alternative investment fund market, including hedge funds), which convenes on a regular basis to monitor the progress made in the achievement of our objective in upgrading the role of Cyprus as an international and regional financial centre and the progress made with regard to the various measures that have been decided within this overall framework, as well as to tackle additional gaps and bottlenecks that arise.

Q: What is the Finance Ministry levy on corporate tax, personnel income tax and other taxes? How does this compare with Europe? Is world-wide income taxed in Cyprus and are there exceptions that are possible or can be enacted?

A: The Cyprus tax laws were designed to support the development of the country, with a transparent tax regime and low tax rates for the taxation of both factors of production capital and labour, thus contributing positively to the attraction of international investment. The corporation tax rate was set at 10%, whereas for physical persons an income up to €19,500 is taxed with a zero rate, with the highest marginal tax rate set at 30%. Cyprus thus offers one of the lowest rates both for corporations and physical persons in the EU. Note, too, that Cyprus investment firms are not subject to withholding tax on payments of dividends and interest to non-resident investors, while capital gains realised on immovable property held outside Cyprus (or on shares in companies owning property outside Cyprus) are outside the scope of capital gains tax. Moreover, profits from the disposal of securities (shares, bonds, debentures etc.) of companies incorporated in Cyprus or abroad, and options thereon, are exempt from tax. Further, we ensure that investment funds, including hedge funds and their related corporate structures benefit from our wide and beneficial Double-Tax Treaty (DTT) Network. We currently have more than 40 DTTs in force and are negotiating 16 others. We believe that the existence of these treaties combined with the low overall tax regime offer significant possibilities for international tax planning through the island both at corporate and individual levels.

The tax system of Cyprus provides for the taxation of the worldwide income of tax persons being tax resident of the Republic. However, businesses maintaining a permanent establishment abroad and earning income from an active business are exempt from taxation in respect of the profits earned by the permanent establishment. Furthermore dividends received by companies resident in Cyprus from foreign companies, under certain conditions, can be exempt from tax. It should be noted that if tax is paid abroad on income earned abroad, his is allowed as a deduction against tax in Cyprus imposed on the same income either through the application of provisions of DTTs or unilaterally.

Q: Communications infrastructure is key. What part of the Government of Cyprus is overseeing telecoms infrastructure? What is the plan to improve it?

A: The continuous upgrading of the infrastructure constitutes one of the main pillars in our development policy. We fully acknowledge its importance and intend to complement private investment in it. In this regard, Cyprus does have a high quality communication infrastructure, adequately regulated. The sector has been fully liberalised upon accession to the EU, whereas the regulatory authority – the Office of the Commissioner of Telecommunications and Postal Regulation – was established in 2002.

The competition that was achieved via the full liberalisation of the market has contributed, and will continue doing so, to widening the services offered, upgrading their quality and lower prices for the consumer. In this competitive environment, there is a continuous pressure on service providers to upgrade and enrich their services at low cost and offer low prices to the consumer.

Q: What will the Government of Cyprus do to commit the country to developing a hedge fund manager sector? Has it gathered intelligence on what other regimes are doing, such as Ireland, some Swiss cantons, the Channel Islands, etc?

A: We are convinced that the role of the Government should concentrate on the provision of a modern and transparent regulatory framework, a prudent supervisory framework to create an environment conducive to investment funds, including a favourable tax regime. The above in addition to the other comparative advantages of Cyprus as an international and regional business and financial centre will facilitate the embedding of Cyprus as a hedge fund centre. We are working on these areas, building on our strengths and looking to eliminate gaps and bottlenecks, by bringing our hedge fund industry actors together and encouraging the development of the expertise required by our alternative fund industry.

We are aspiring to grow Cyprus’ credibility as a reliable specialist centre for alternative funds. The arrivals of hedge fund management activities of major businesses like the IKOS Group (which operates its sub investment management activities from Cyprus including trading, portfolio management as well as risk management) and hedge fund specialists Albourne Partners, are a testimony to the growing expertise of the sector. With our support, the private sector is responding particularly well to alternative fund requirements and is positioning Cyprus as a fund management services domicile and back office services centre. Several high-profile complex alternative funds are now targeted by our country’s main financial service providers. The Government fully supports these efforts.

Q: Who has the government engaged to advise them on how to develop country as a hedge fund host?

A: The participation of the private sector, including experts from global accounting and auditing companies and experts in the alternative investment fund industry, in the Monitoring Committee set up for the promotion of investment funds constitutes a forum that helps the government to identify the gaps and the bottlenecks in the development of the country as a hedge fund host. Moreover, in the elaboration of a transparent and comprehensive regulatory framework for UCITS and non-UCITS funds, the government will make use of foreign experts as well.