Aminews | September 2012
 
 
 
INTRODUCTION TO CYPRUS NON-REGULATED INVESTMENT VEHICLES
 
Cyprus' Companies Act provides for the formation of Limited Liability Companies (LTD), International Fixed Capital Companies, and International Variable Capital Companies. The latter two are used in the formation of Cyprus regulated ICIS funds.
 
The Companies Act does not cater for the formation of any specialized investment vehicle apart from provisions relevant to Cyprus Investment Firms regulated by the Cyprus Securities and Exchange Commission. Nevertheless, relevant regulations of the Act and corresponding amendments to the Memorandum and Articles of Association, allow an otherwise 'ordinary' LTD to be tailored to suit particular investor requirements relating to investment strategy, return objectives, risk profiles and preferred exit routes.
 
The possibilities presented are numerous as the legislation allows for the issue of redeemable shares, preference shares of varying characteristics and rights, convertibles and other hybrid instruments. While remaining legally an ordinary LTD, the entity transforms into an effective non-regulated Investment Vehicle (CIV).
 
In the following memorandum, the usage of a CIV that emulates Protected Cell Company (PCC) characteristics will be explored and relevant legal and taxation considerations analyzed.
 
Protected Cell Company Characteristics
 
Cyprus Companies Law does not cater for the set-up of PCC’s. Companies Act provisions though allow the LTD to emulate –most if not all of– the characteristics of the PCC. To achieve such characteristics, the CIV is organized as follows:
  • its capital is divided into Multiclass Redeemable Preference Shares (MRPS);
  • each investor subscribes exclusively to a particular class of shares to be invested by the CIV according to the subscriber’s wishes; and
  • the MRPS may be dividend paying, exclusively redeemable or a combination of the two according to the particular scenario and investor preferred exit strategy requirements.
As a result, subscribers to a particular class gain:
  • exclusive distribution rights from the assets/investments created from their subscription, both during the CIV’s cycle as a going concern and at the time of its dissolution/liquidation, and
  • effective restriction of leakage of possible losses arising from the investments of one subscriber to another.
Assets and liabilities however are not statutorily ring-fenced as is the case with a classic PCC. Nevertheless, practical ring-fencing can be achieved by placing another corporate entity/Special Purpose Vehicle (SPV), for example a Cyprus LTD or an alternate jurisdiction equivalent, between the CIV and the target asset/investment.
 
Using a CIV: A Practical Example
 
In the example below, Investor A subscribes into Class A shares and Asset A is acquired on his account (correspondingly for investors B and C).

By interposing SPVs between the CIV and the assets, the assets (and liabilities) corresponding to a particular class of shares are ring fenced at the level of the SPV:
  • liabilities cannot flow upwards from the SPVs to the CIV;
  • CIV maximum loss from any asset amounts to its investment in that same asset, and
  • creditors of any asset will not have default recourse over remaining assets.
The MRPS are issued at a low nominal and a high premium (to avail lower issue costs) with a total issue price equaling the investment in the corresponding assets.
 
Consider the diagram above and assume the following:
  • the investment in Class A and Class B shares is €1m (one million Euros) each;
  • the investment in Class C shares amounts to €1 (one Euro);
  • nominal values are low enough (for example, €0.01) to be negligible, therefore all capital is represented practically by share premium, and
  • that Asset A and Asset B suffer an irrevocable impairment in value while Asset C achieves a return of €100.
The situation for the subscribers in the above scenario will be as follows:
  • possible liabilities are ring fenced through interposing the SPV’s, therefore Investor A and Investor B lose only up to the amount invested by each − €1m each, whilst
  • investor C is entitled to a €100 return resulting either through a P&L revaluation of Asset C or through dividend distributions from Asset C or from a disposal of Asset C;
  • the cumulative distributable position of the CIV stands at a net loss position and therefore no dividend distribution is permissible under the Companies Act.
 
 
Nevertheless, by taking advantage of CIV characteristics a distribution to Investor C can be effected equaling his entitlement from Asset C’s €100 return.

The CIV can be effectively used to hold assets/participations in equity positions and other securities in any country around the world but particularly in countries with which Cyprus maintains Double Taxation Avoidance Agreements (DTAA’s).
 
Legal Considerations
 
The CIV is, statutorily, no different from an ‘ordinary’ LTD, subject to the same regulations and compliance requirements:
  • it is legally and may be seen as, a single entity – legal person;
  • it will have appointed a board of directors, a company secretary and a registered qualified auditor;
  • it must maintain proper books and records at the company’s registered office address;
  • it is not subject to any special licensing requirements.
Final consideration relates to the notion of control. Depending on the desires of the investors, control may be vested:
  • directly with the investors, or
  • with some designated group or individual member, or
  • in the hands of a third party administrator/trustee through the issue of management, voting but non-participating, shares.
The latter may be more relevant when the investors are not closely connected and wish to safeguard structure characteristics, the terms of placement of their investments and continuity.
 
Taxation Considerations
 
Structures involving usage of a CIV are designed to achieve tax efficiency. Going back to the example above, the €100 return achieved by Asset C is completely Cyprus tax exempt in the hands of the CIV irrespective of the means through which the CIV will realize the return (P&L revaluation, dividends or share disposal).

Additionally, the CIV, being an ‘ordinary’ Cyprus LTD company, provides access to the wide and ever expanding network of DTAA’s in force between The Republic of Cyprus and more than 45 countries worldwide, thus:
  • lowering withholding taxes applicable on the payment of dividends from investees back to the CIV, as well as
  • achieving tax free disposal of shares in cases where the right to tax such disposals is assigned by an applicable DTAA to the country of residency of the seller.
Finally, distributions from the CIV to the investors are not subject to any withholding taxes in Cyprus.
 
How Amicorp can assist
 
Amicorp, your business & knowledge process outsourcing partner operating in 28 countries globally specializes in providing innovative solutions to customers since 1992.

Once all parameters have been identified and considered, Amicorp assumes in cooperation with globally recognized professional intermediaries CIV structure design, implementation, management and ongoing maintenance on a fully integrated turnkey basis ensuring peace of mind for the investor.

Our experience in providing genuinely unique solutions is long established - similar CIV structures to the above described have been implemented by Amicorp Cyprus, have undergone statutory audit conducted by Big 4’s and are in full operation.

For further information on using Cyprus Ltd companies for your structuring requirements please contact your nearest Amicorp office or Amicorp Cyprus directly.
 
For more information contact:
 
manager Apollon Athanasiades
Amicorp Cyprus
a.athanasiades@amicorp.com
   
 
 
 
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